McTear & Anor v Engelhard & Ors (Rev 1) [2016] EWCA Civ 487

Case No A3/2014/1466[2016] EWCA Civ 487
IN THE COURT OF APPEAL (CIVIL DIVISION)
Case No HC12C00705
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR RICHARD SPEARMAN QC SITTING AS A DEPUTY JUDGE OF THE HIGH COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 24/05/2016
Before
LORD JUSTICE MOORE-BICKLORD JUSTICE RYDERLORD JUSTICE VOS
Between
(1) Andrew Ian McTearClaimants/Christopher Kenneth WilliamsRespondents
Ms Lexa Hilliard QC and Mr Jonathan Lopian (instructed by Hansells) for Defendants/AppellantsMr Simon Davenport QC and Mr Richard Samuel (instructed by Isadore Goldman) for Claimants/RespondentsHearing Hearing dates: 10 th May 2016
Judgment

Introduction

[1]This is another case concerning the proper application of the principles concerning the grant of relief from sanctions following this court’s decisions in Mitchell v. News Group Newspapers Ltd [2013] EWCA Civ 1537, [2014] 1 WLR 795 (“Mitchell”), and in Denton v. TH White Ltd [2014] EWCA Civ 906, [2014] 1 WLR 3926 (“Denton”). In this case, however, the judge decided the issue before Denton had been decided. The particular context concerns the circumstances in which a party, who serves witness statements late and alongside freshly discovered documents, will be debarred from calling those witnesses to give evidence at the trial.[2]Before dealing, however, with the circumstances of the applications for relief from sanctions, it is important to recite briefly the details of the underlying claims.

The underlying claims

[3]The background is relatively straightforward despite the mass of detail that the case has generated. In broad outline, by a deed dated 20th September 2011 the claimants took an assignment of certain alleged causes of action from a company subject to a Company Voluntary Arrangement (“CVA”) called Broadland Wineries Limited (“BWL”). These causes of action included claims against the 1st, 3rd, 4th, 6th and 7th defendants (the “appellants”) for a sum of £412,739.17 (the “Sum”) allegedly loaned by BWL to a company which then owned some 90% of its shares, the 7th defendant, Engelhard Holdings Limited (“EHL”). There were originally other claims against the appellants and the other defendants, but these were resolved before the eventual trial. In the remainder of this judgment, I shall refer to the “defendants” as meaning the “appellants”. The claimants were originally the administrators of BWL, and subsequently the supervisors of its CVA, and the assignment was for the benefit of BWL’s creditors.[4]The claimants contended that the Sum had been advanced by BWL to EHL in the year leading up to their appointment as administrators of BWL on 10th March 2006. EHL’s position was that the Sum reflected payments on account of ongoing agreed management charges payable by BWL to EHL in the ordinary course of BWL’s business to enable EHL to pay BHL’s directors’ salaries and other administrative expenses. EHL had for many years, as BWL’s parent company, discharged these expenses for BWL, and been duly reimbursed by BWL.[5]After BWL had gone into administration, on 27th April 2006, Mr Richard Coleridge (now deceased), who had been employed by BWL before its administration, emailed the claimants’ staff member Mr Chris McKay saying that he wished to make “adjustments to the figures” including the accrual of a management fee of £424,109.58 for the period up to 10th March 2006 (the date of the administration) by debiting BWL’s profit and loss account, and crediting EHL’s account. The amended defence pleaded that the credited sum of £424,109.58 (the “Credit”) represented the annual management charge of £450,000 payable by BWL to EHL pro-rated from 31st March 2005 to 10th March 2006. The monthly management charge of £37,500 (£450,000 divided by 12) was not, according to the defendants, recorded on the profit and loss account on BWL’s SAGE system as it could have been. Had it been, it would automatically have been set off against the Sum. But the monthly management charge had been recorded on BWL’s monthly management accounts, which were pleaded as having been maintained in spread sheet form and as being part of BWL’s accounting records. The adjustment in the 27th April 2006 email was, therefore, according to the defendants, simply an exercise in tidying up the accounts. The Sum was not paid by BWL to EHL as a loan but as money paid against accruing management charges. The defendants also alleged an estoppel by convention based on the claimants’ adoption of the account balances now complained about, and a common assumption that such balances were correct and taken into account in determining the amount due to EFL as BWL’s creditor and in determining that EHL was not a creditor of BWL and therefore did not receive any dividend payments in BWL’s CVA.[6]In the alternative, therefore, to their claim that the Sum was a loan, the claimants alleged that the Credit was improper and invalid, because it was made after the appointment of the administrators and in breach of paragraph 64(1) of schedule B1 to the Insolvency Act 1986 (“IA 1986”) which provides that “[a] company in administration or an officer of a company in administration may not exercise a management power without the consent of the administrator”. It was also alleged that the Credit had the effect of repaying EHL in full where other creditors of BWL were not similarly treated. In effect, therefore, it could be inferred that the claimants were alleging the Credit was a voidable preference under sections 239-241 of the IA 1986. Finally, it was alleged that the Credit was:- i) A breach of fiduciary duty and negligent mismanagement by the directors of BWL. The directors against whom this was alleged were the 1st defendant, Mr Michael Engelhard (“Michael”), the 3rd defendant, Mrs Anna Engelhard, who was Michael’s elderly and infirm mother (“Anna”), the 4th defendant, Mrs Sylvia Engelhard, who was Michael’s ex-wife (“Sylvia”), and the 6th defendant who was Anna sued as the personal representative of her husband, Mr Paul Engelhard (“Paul deceased”), who died on 2nd December 2006. Michael, Anna, Sylvia and Paul deceased (together the “Directors”), and EHL itself are the appellants in this case. ii) A breach of the Directors’ duty to act in the best interests of BWL, when BWL’s financial fortunes had deteriorated significantly in 2005/2006.

The procedural run-up to the trial

[7]It is not necessary to recite the entire procedural chronology. This is recorded in detail in paragraphs 28-56 of the reserved judgment of Mr Richard Spearman QC dated 14th March 2014 dealing with the relief from sanctions issues (the “2nd judgment”). Unusually, the judge delivered first a substantive ex tempore judgment on these issues on 7th March 2014 (the “1st judgment”) and then the 2nd judgment which dealt with those issues in greater detail. The judge’s third judgment dealt with the outstanding substantive issues (the “3rd judgment”). That was delivered on 10th April 2014 after the trial on 7th and 10th March 2014, which had taken place immediately following the 1st judgment.[8]The proceedings were issued at the end of the 6-year limitation period on 24th February 2012. Standard disclosure was ordered by lists by 4pm on 22nd April 2013, and witness statements were initially ordered to be exchanged by 4pm on 28th June 2013. When the defendants were given permission to amend their defence on 24th January 2014 (some 5 weeks before the trial window beginning on 4th March 2014), Master Bowles ordered disclosure relating to the amendments by lists by 4pm on 7th February 2014, and the earlier order for witness statements was amended so that they were to be served by 4pm on 21st February 2014.[9]7 days after the 24th January 2014 order, the defendants appointed new counsel, Mr Jonathan Lopian. He seems to have advised a search for further documents, which resulted in Michael finding a number of new relevant documents at his home on Saturday 15th February 2014. It is not clear that the documents were relevant only to the amendments, but seem to have been thought to be disclosable in relation to the issues in the case generally. It will be recalled that, by that stage, the time for the additional list had already passed and witness statements were due 6 days later on Friday 21st February 2014.[10]On 21st February 2014, the claimants served their witness statements before the 4pm deadline. The defendants’ solicitors served the statements by hand on the claimants’ solicitors at 4.50pm. There was a 12-page statement from Michael, exhibiting 700 pages of documents including all or most of the new documents that had been found on 15th February 2014. The new documents were not, however, at that stage specifically identified or formally disclosed. In addition there were 2-page statements from Sylvia and from Mr Steven Scarlett, an accountant at BWL’s erstwhile auditors. Finally, there was a 4-page statement from another accountant, Mr Philip Needham.[11]A heated email correspondence between solicitors preceded the exchange of witness statements and continued thereafter. We were shown that exchange in detail, but it was unedifying. Each accused the other of inappropriate behaviour in the conduct of litigation and of failing to answer the other’s questions. The argument seems to me to have had at its root the question of whether the documents that the defendants were disclosing late were in fact all or mostly documents that the claimants, as administrators and supervisors of BWL, ought themselves to have disclosed earlier in the litigation. There were, however, in addition, numerous satellite salvos about what relief from sanctions the defendants required, and numerous other ancillary matters.[12]On 25th February 2014, the defendants’ solicitors served a supplemental list of documents disclosing 27 categories of documents including EHL journal entries, EHL cash book entries, BWL nominal journal entries, BWL monthly management accounts, EHL and BWL bank statements for the relevant period between 2005 and 2006, and 16 emails post-dating BWL’s administration.[13]On 28th February 2014, the defendants first issued an application notice seeking an order pursuant to CPR 3.1(2)(a) extending time by one hour for the service of the defendants’ witness statements, alternatively relief from sanctions under CPR 32.10 pursuant to CPR 3.9 (the “1st application”). On 3rd March 2014, the defendants issued a 2nd application notice seeking an order extending time for service of their further disclosure by list to 27th February 2014 and/or relief from sanctions related thereto (the “2nd application”). On 6th March 2014, the defendants issued their 3rd application notice seeking an order permitting them to serve a re-amended defence (the “3rd application”). The substantive re-amendments were as follows:- i) In the alternative, the Sum was automatically set off against the accrued sum of £424,109.58 (the Credit) which was due and owed from BWL to EHL as at 10th March 2014 in respect of management charges. The set off arose from the terms of the CVA that BWL had entered on 18th October 2006, alternatively by way of equitable set off. ii) In any event, the true amount of the inter-company account on the SAGE account as at 10th March was not the Sum, but rather £267,311.17 (some £145,428 less).[14]These 3 applications, together with a strike out application issued by the claimants, were heard and determined by the judge between 2pm on 5th March and 2pm on 7th March 2014. The claimants’ evidence in the trial was heard on the afternoon of 7th and on 10th March 2014.

The 1st and 2nd judgment on the procedural issues

[15]I shall not attempt to summarise the judge’s lengthy 1st and 2nd judgments. I should, however, say that I would not endorse the practice of delivering one detailed judgment ex tempore and then delivering another judgment in writing in different terms. If the judge was not happy that he was going to be able to deliver a full judgment on the day, he could simply have told the parties the outcome and reserved his reasons for a later occasion when he was ready to deliver the full reasons. It gives rise to the risk of real confusion if a judge delivers two judgments in different terms, but to the same effect. In this case, it has been necessary to refer to both the 1st and 2nd judgments to understand the judge’s full reasons, which should not be necessary either for the parties or for the court hearing an appeal.[16]The judge plainly took a very dim view of the defendants’ conduct of the proceedings after Master Bowles’s order giving tight directions to trial on 24th January 2014. He concluded that the defendants had not provided any satisfactory explanation as to why they had not disclosed the new documents before standard disclosure on 22nd April 2013, and still less immediately after they were found on 15th February 2014. He said that the defendants had “decided, quite deliberately, to wait until 21 February 2014 to spring those documents on the Claimants, without identifying them …, instead by including them in a bulky exhibit to a witness statement which made repeated reference to them”. At the same time, the defendants had served expert evidence from Mr Needham that they had no permission to adduce and “waited until the trial to apply to re-amend the defence to plead new matters”.[17]After a series of pejorative sub-paragraphs in paragraphs 9 and 10 of his judgment, which accuse the defendants, in effect, of deciding to follow their own rules so as to disrupt the trial, he concluded that their conduct was unacceptable and should not be endorsed. Having set out the relevant provisions of the CPR and the authorities on relief from sanctions (including Mitchell, but not of course Denton, the latter having, as I have said, not yet been decided), the judge dealt with each of the defendants’ three applications refusing each of them.[18]In relation to the 1st application relating to the defendants’ witness statements, he said that if all that had happened was that the defendants had been 50 minutes late in serving their statements, he would have had little hesitation in concluding that the delay was trivial, but that the court was not constrained to consider the period of delay alone. He held that the merits of the application in relation to the witness statements could not be properly considered separately from the merits of the 2nd application relating to the disclosure of documents.[19]The judge then cited some of the defendants’ solicitor’s evidence concerning the task involved in finding the new documents so long after the events in question and in preparing the witness statements. He criticised this evidence strongly on numerous bases, particularly as to the absence of evidence of prior searches. Nonetheless, the judge took into account that the solicitor had had to attend his father’s funeral on Thursday 20th February 2014, commenting that he ought to have delegated the necessary work and that it provided no good reason for the delay. He criticised the defendants’ counsel’s submissions that only a few of the 27 items on the new list were actually new, but seems to have accepted that the new documents comprised only:- i) Items 1, 2 and 3 comprising 140 pages of EHL’s manuscript journals, cash book entries, and posting sheets. ii) BWL’s management accounts for June 2004 to March 2005. I might comment that these were for the period prior to the relevant period, and were presumably in the claimants’ possession, as the defendants had assumed in their pleading in relation to the relevant management accounts (for March 2005 to April 2006). iii) 30 pages of EHL’s bank statements that mirrored entries on BWL’s bank statements already disclosed. iv) 8 pages of emails all of which ought, the defendants said, to have been disclosed anyway by the claimants, but in respect of which the judge formed no view.[20]The judge held that the subject matter of the disclosure application was not trivial, and that no good reason had been made out for the delay and default, so that the application should be rejected. He refused the defendants’ counsel’s fall-back proposals including one that the defendants should be able to give evidence excising reference to the new documents, because the defendants had rejected a similar suggestion made by the claimants’ solicitors in correspondence. He said that there had been no submissions distinguishing between the witness statements, so he would deal with the matter on an all or nothing basis. That said, he refused to allow Mr Needham’s evidence on the basis that it was wholly or partly expert evidence for which no permission had been obtained, and that he dealt with the new factual issue concerning the alleged additional credit due to EHL in the sum of £145,428.[21]In relation to the 3rd application for permission to re-amend the defence, he said that no real explanation had been given for why the application was made late. He said that the new arguments appeared to be based on the evidence of Mr Needham, and rejected the suggestion that the new points could be tried after the other issues. He accepted the claimants’ submission that the new pleas raised difficult questions of law and fact that the claimants needed time to consider and respond to. He rejected the application for permission to re-amend, but refused to strike out the amended defence itself.

The 3rd judgment

[22]There is only one ground of appeal concerning the substance of the 3rd judgment, so I can deal with it briefly.[23]The judge held that the amended defence contained no adequate pleading of an express or an implied contract for the payment of the alleged management charge nor for an entitlement of EHL to a quantum meruit. In any event, there was no evidential basis to assess a quantum meruit even though EHL had provided some services to BWL. Even if such a case were available, no document supported the case. There was nothing in the amended defence or the documents to outweigh inter-company ledger entry D176 that recorded the Sum as an asset of BWL. Put shortly, having not recorded any agreement as to what the companies were doing, the defendants could not complain if the court took the accounting records at face value. The entries in the BWL management accounts did not support the existence of an agreement to pay management charges. Even if BWL had entered into binding obligations to EHL, the defendants faced formidable obstacles in justifying such payments, when 3 of the Directors had conflicts of interest as directors of both companies (only Sylvia was not a director of EHL), the agreement was not made at arm’s length, and BWL had declining economic fortunes. Accordingly, the allegations of breach of fiduciary duty and duty of care were made out. The Credit on 27th April 2006 was an improper exercise of management power contrary to paragraph 64 of schedule B1 to the IA 1986. It sought to achieve that EHL took the benefit of the Sum when it had no right to do so. All the Directors were responsible.[24]The plea of estoppel failed because there was no agreed or even common assumption that the Credit was a correct statement of the true account between BWL and EHL, and the claimants made no representations. BWL’s statement of affairs was the responsibility of the Directors, not the claimants.

The grounds of appeal

[25]The main grounds of appeal relied upon by the appellants in their two appellants’ notices were as follows:- i) The judge wrongly and unjustly applied Mitchell to the facts of this case, leading to the denial of a fair trial for the defendants. ii) The judge wrongly decided that the late service of the witness statements was not a trivial breach, taking into account factors that were not relevant, namely the facts relating to the additional disclosure, and the inclusion of the new documents in the exhibits to Michael’s witness statement. iii) The judge wrongly failed to countenance other options including allowing the witnesses to give evidence without reference to the new documents, or allowing the other witnesses (apart from Michael) to give evidence. iv) The judge was wrong to find that there were no good reasons for the delay of 50 minutes in serving the witness statements, taking no proper account of the solicitor’s bereavement and his consequent absence the day before the statements were served, and wrongly finding that other fee earners should have been found to undertake the work instead. v) The judge reached conclusions on the substantive claim that he would not have reached had he not excluded the defendants’ evidence, bearing in mind that Mr Scarlett was a wholly independent auditor who had been responsible for the companies’ accounts at the material time. vi) The judge was wrong to refuse to allow reliance on the new documents, because there were breaches of the disclosure orders of 22nd April 2013 and 24th January 2014, and because an adjournment of the trial would otherwise be inevitable. In fact, had the judge looked at the new documents, he would have found that no such adjournment was necessary. vii) The judge was wrong not to allow the amendment to plead the set-offs, when they were points of law, did not need pleading, did not necessitate an adjournment of the trial, and did not raise any new issues. viii) The judge was wrong not to allow the new pleading on the true account balance, when it had only just come to light in the new documents and it went only to quantum, and did not prejudice the claimants. ix) The judge was wrong in his findings on the plea of estoppel in finding there had been no representations by the claimants in the CVA proposal, and in finding that there had been no dealings between the claimants and Michael in his capacity as a director of both BWL and EHL.[26]In oral argument, Ms Lexa Hilliard QC, leading counsel for the appellants, accepted that the central issue in the appeal was whether the judge had properly excluded the defendants’ witnesses from giving evidence. The judge had done so on the basis of an inference that the defendants had sought to manipulate the proceedings by the way they had disclosed the new documents, and the question was whether that inference was justified on the evidence and, if so, whether it was a good enough reason to exclude all the defendants’ evidence.[27]Before dealing with these essential issues and the more detailed grounds of appeal, it is necessary to consider in a little more detail the evidence that the judge excluded, if only because Mr Simon Davenport QC, leading counsel for the claimants, submitted that, even if the judge had not been justified in excluding the defendants’ evidence, there still did not need to be a retrial because the exclusion of the evidence made no difference to the outcome. In short, Mr Davenport said that there was no material evidence in the witness statements that were excluded.

The evidence that the Defendants served late

[28]The primary statement served by the Defendants on 21st February 2014 was that of Michael. He provided 10 paragraphs of background concerning the EHL group of companies, before dealing in paragraphs 11-17 with the management charge. These paragraphs did not expressly say that BWL and EHL had a documented agreement as to the management charge, but did say that in return for the services that EHL provided to BWL “it levied a management charge”, and “[f]or many years, since at least 1998, the amount of the management charge levied by EHL was £450,000 per annum”. He denied that BWL’s practice was only to approve the management charge after each year end, saying that it was “automatically applied every year”, and was in an amount that had been agreed with the Inland Revenue as an allowable business expense for BWL by a Mr Blackburn (who had died two years earlier). Michael dealt also with the accounting treatment of the management charge, concluding that the management services had been provided, and that “the monies transferred to EHL’s bank account by BWL during [2005-2006] were paid on account of the accruing management charge”. Michael also gave an explanation of the management charges from an accounting point of view based on what Mr Needham had told him, bearing in mind that the previous financial controllers were either dead or unavailable. He referred in this section to a number of the newly discovered documents. He then dealt with his dealings with the claimants and their staff in relation to the Credit and BWL’s statement of affairs and the alleged common understanding as to the correct accounting position. This latter section was, of course, relevant to the estoppel defence.[29]The statement of Mr Scarlett, BWL’s auditor, confirmed that the management charge was in line with what had been applied in BWL’s and EHL’s accounts for many years, and that his firm had no concerns about including the pro rata management charge in EHL’s accounts for the year ended 31st March 2006.[30]Sylvia’s statement confirmed the accuracy of Michael’s statement, making clear her own limited involvement in financial or accounting matters.[31]Finally, Mr Needham’s statement, the exclusion of which is not actually appealed, produced an analysis of the make-up of the Sum, and explains how the additional credit of £145,428 due from BWL to EHL in addition to the management charge had to be ignored if the Sum were to be found due from EHL to BWL. Towards the end of the statement, he undoubtedly went further than simply identifying specific account entries (which I would not regard as providing an expert opinion), and gave his view on the nature and effect of certain accounting entries (which I would be inclined to regard as providing an expert opinion).

The applicable principles

[32]The principles applicable to applications for relief from sanctions are now too well known to require repeating. They have been definitively set out in Denton, in clarification of what had already been explained in Mitchell.[33]Mr Davenport submitted that paragraph 27 of the majority judgment in Denton should be construed as meaning that other breaches of rules or orders should be taken into account at the first stage of the three stage test for the grant of relief from sanctions. That was not what was intended by the words:
“[t]he assessment of the seriousness or significance of the breach should not, initially at least, involve a consideration of other unrelated failures that may have occurred in the past”
. Paragraphs 75-79 of the majority judgment in Denton, which dealt with the facts of Utilise TDS Ltd v. Davies & others, made this clear. That case concerned a 45-minute delay in filing a costs budget, which was obviously neither serious nor significant, and did not disrupt the course of that or any other litigation. The court made it clear that, in those circumstances,

the judge should only have considered the effect of an additional breach at the third stage:

“they were wrong to think that this later breach … which was itself neither serious nor significant, turned what was neither a serious or significant breach into something worse”
. Of course, at the third stage the court will consider “all the circumstances of the case, so as to enable it to deal justly with the application” giving particular weight to factor (a) (the need for litigation to be conducted efficiently and at proportionate cost) and factor (b) (the need to enforce compliance with rules, practice directions and orders). But that is the correct and only stage for the consideration of other alleged breaches to be undertaken.[34]The second point that needs to be underlined in this case is that one cannot see every aspect of every case in terms only of relief from sanctions. Disclosure of documents is a case in point. CPR Part 32.11 provides that “(1) [a]ny duty of disclosure continues until the proceedings are concluded” and “(2) [i]f documents to which that duty extends come to a party’s notice at any time during the proceedings, he must immediately notify every other party”. These obligations do not excuse the breach of an order for disclosure that is limited in time, but in considering the extent of any permitted usage of documents that are found after such an order has expired, the court does have to take these duties into account.

The first main issue: did the judge properly exclude the defendants’ oral evidence?

[35]The judge’s approach in both his 1st and 2nd judgments was to consider the late service of witness statements and the late disclosure together. He concluded, as I have said, that the defendants had deliberately followed their own rules and, as he put it in the 1st judgment, decided “to deploy the new material as part of the exhibits to [Michael’s] witness statement” without separating out the new material. He then considered the question of whether to allow the defendants’ witnesses to give evidence in terms of CPR Part 32.10, alongside the 2nd application to extend time for further disclosure and for relief from sanctions in that regard. Part 32.10, of course, simply provides that a witness whose statement is served late cannot be called without the court’s permission.[36]The problem here was that the documents that had been disclosed late were, in fact, of limited, if any, relevance to the pleaded issues in the case. There was no dispute in the pleadings about how the management charge had been utilised by EHL. None of the documents, therefore, seem to have been of particular importance. The judge said that he was not actually asked to read any of them, but had he been, he would have been able to ascertain their relevance to the issues in the case. They included BWL’s management accounts for June 2004 to March 2005, which ought to have been available to the claimants as administrators and supervisors of BWL in any event. It was not disputed that BWL had paid EHL the monthly management charge for those periods. The emails that were included simply finished off a sequence of disclosed communications with the claimants’ staff in 2006, most of which must have already been in the claimants’ possession. There was then a series of EHL bank statements showing the receipt of the monies paid by BWL to EHL that the claimants complained that BWL had paid. The pleadings disclosed no dispute about the existence of such payments. A large number of pages of EHL’s cash books, receipts and ledger entries showed how EHL had used the monies it claimed, but there was seemingly no dispute about that. What was disputed was only whether EHL had a legally enforceable right to the management charge for the relevant period.[37]It may be assumed that the documents in question were actually sufficiently relevant to require disclosure under CPR Part 32. But even on that assumption, if they were either largely confirmative of other documents that were already disclosed or already in the possession of the claimants, it is hard to see how the judge was justified in inferring a deliberate plan by the defendants to subvert the litigation process.[38]All that said, it is quite clear in my judgment that the defendants ought, immediately after the documents were found, to have notified the claimant’s solicitors in accordance with CPR Part 31.11. The most sensible and pragmatic solution so close to trial would have been for the defendants’ solicitors to have sent the claimants’ solicitors copies of the documents themselves on Monday 17th February 2014, the first working day after they were found, saying that they would provide a list so soon thereafter as possible. I somehow doubt that the case would have got to this unfortunate stage, had they done so.[39]Instead, the solicitors on both sides engaged in an aggressive and uncooperative correspondence that served only to heighten their mutual suspicion to newly raised levels. Paragraph 41 of the majority judgment in Denton makes clear the undesirability of both a lack of cooperation between litigating parties and of seeking to take inappropriate advantage of the other party’s mistakes.[40]In my judgment, therefore, the judge was not justified in inferring that the method chosen to disclose the new documents was intended to disrupt the litigation process. It was obviously inappropriate and wrong, but a proper reading of the correspondence demonstrates that it was done in a misguided attempt to fit the new disclosure into the old and to give explanations of those documents in the witness statements. There was in fact no need for any exhibits to the witness statements. The disclosed documents could have been referred to without being exhibited, and the new documents should have been disclosed before they were referred to in witness statements.[41]It would be wrong to say that there was no proper connection between the 1st and 2nd application, but that connection ought to have been limited to the stage at which all the circumstances were being considered. As both the judge and Mr Davenport implicitly recognised, the 50-minute delay in serving the statements was trivial (in the old language) and neither serious nor significant (in the new language). The judge should then have gone on to consider the excuse for the delay that was offered. That excuse was poor, but not non-existent. Mr Eagle, the solicitor concerned, had lost his father and attended his funeral the day before that fixed for exchange. That was indeed an excuse for some delay, even if it was not really the reason for the 50-minute delay. The 50-minute delay was apparently caused by the inappropriate decision to exhibit hundreds of pages to Michael’s statement, and by the tetchy email correspondence that had started even before 4pm on Friday 21st February 2014.[42]It was appropriate then to consider the third stage, particularly including factors (a) and (b). But there was no evidence that the delay had been part of a deliberate plan to subvert the litigation process for these or other litigants. And the other defaults were not in themselves as serious as the judge thought them to be. They did not disrupt the course of the litigation, and, had the judge properly analysed the new documents, he would have realised that an adjournment of the trial could not possibly have been required to allow the claimants a fair opportunity to deal with them.[43]The judge seems to have ignored the most important factor at the third stage in this particular case, which was the question of whether it was proportionate and just to exclude the defendants from giving their evidence as a result of their 50-minute delay in serving witness statements. In my judgment, it was not. This was a case in which the allegations of breach of fiduciary duty and voidable preference, whilst not actually requiring proof of dishonesty, did impugn the Directors’ integrity and good conduct. In those circumstances, it is hard to see how a fair trial could have been undertaken without hearing their explanations for what had occurred. I do not think the claimants were right to submit that the evidence of the Directors could have made no difference to the outcome of the trial. Since there will need to be a re-trial of the substantive issues, it is better that I say no more about that at this stage.[44]In these circumstances, had the judge undertaken the process of considering the application for relief from sanctions in respect of the service of witness statements properly, he could, in my judgment, only have concluded that relief was appropriate. In short, the defendants’ 1st application ought to have succeeded, and the defendants ought to have been permitted to call the witnesses, whose statements they served. In my judgment, the defendants ought also have been permitted to call Mr Needham insofar as he did not give expert evidence, which seems to me to make up the greater part of his statement. But I understand there is no appeal from that part of the judge’s decision, so I need say no more about it.

Was the judge right to dismiss the 2nd application concerning the new documents?

[45]I turn now to consider the 2nd application concerning the new documents. The defendants ought, as I have said, to have made the new documents available to the claimants as soon as they were found. It is, I think, rather less clear that they needed to seek an extension of time for the service of the new list, since the documents concerned were not disclosed in response to Master Bowles’s order of 24th January 2014 requiring disclosure relating to the original amendments. The documents did not specifically relate to the amendments that had already been made, though they might on one analysis have been disclosable in response to them. This was not the subject of argument before us, so I shall say no more about it. The documents ought anyway to have been disclosed in the original list, but it is not as if the defendants failed to serve any list in response to the original order. All they failed to do was to include some documents in their possession which they had not then found.[46]Undoubtedly, the safest course would have been to apply for an extension of time for compliance with both disclosure orders, if necessary for relief from sanctions, and for permission to rely on the new documents. That application ought, as the judge said, to have been supported by an explanation of why the documents had not been disclosed in the first place.[47]The judge relied on CPR Part 31.21 which only provides that a “party may not rely on any document which he fails to disclose … unless the court gives permission”, but by the time of the hearing the defendants had not failed to disclose the new documents; they had served a list in respect of them.[48]The question, therefore, is whether the judge was right to treat the application in relation to the new documents as purely one for relief from sanctions. I do not think that he was. The important question was whether, in all the circumstances, the defendants were to be permitted to rely upon them at the forthcoming trial. That depended, amongst other things, on considerations including whether the claimants would have wished to rely on them, the circumstances in which they had not been disclosed before, and their relevance to the issues.[49]I accept also that the failure to produce the documents at the initial disclosure stage was a significant breach. Parties must take seriously the need to conduct proper searches for documents in response to an order for standard disclosure by a fixed date. But here there was an excuse, albeit one that was not very well explained in the 2nd application. The documents had been thought to have been destroyed, but were discovered when new counsel emphasised the need to look for them. In these circumstances, the most important question was whether the claimants could properly deal with them at the forthcoming trial. In my judgment, they could have done so. They were not very important, had probably already been for the most part in the possession of the claimants, and did not require any significant work for accountants to digest. In my judgment, the documents ought to have been admitted. I emphasise, however, that if the judge had been justified in thinking that the defendants had been trying to “bury” or disguise significant documents by exhibiting them to a witness statement rather than openly disclosing them, he might have been justified in excluding them. In my judgment, however, the judge was not right to infer impropriety from the defendants’ conduct. They did not behave correctly as I have explained, but that is a different matter.[50]The judge’s error was to regard the applications concerning the statements and the disclosure as inextricably linked. They were connected but the issues ought to have been considered separately. I have no doubt that the appropriate course was to consider the statements first. Had the judge concluded that the defendants’ witnesses should have given evidence, as I think he ought, he would also have concluded that the new documents should be admitted for the reasons I have given.

Ought the judge to have allowed the defendants permission to re-amend?

[51]The parties wisely addressed almost no oral argument to this issue. That was, I think, because if there is going to have to be a re-trial, the question of whether the defendants ought to be permitted to re-amend their pleadings should be decided by the first instance court well in advance of that re-trial.[52]The arguments addressed by the parties to this aspect of the appeal concerned the substantive merits of the 3rd judgment, including the judge’s treatment of the alleged set-off. I would only say two things about set off; first, it is generally a matter of law, albeit a notoriously difficult one; and secondly that I was somewhat surprised by the view that set off had not already been pleaded when the amended defence alleged that, as a necessary consequence of the Credit, the cash balance in the amount of the Sum was “extinguished”. I accept that the formulation is inelegant, but it is hard to see how a debt (the “cash balance” in the amount of the Sum) could be extinguished except by payment or an effective set off.[53]When the matter comes to be tried again, all the issues should be considered afresh without regard to the findings or determinations of the judge who had proceeded on the inappropriate basis that he could decide the matter without hearing the evidence that the defendants sought to call.

The other grounds of appeal

[54]In the circumstances, there is no need for me to deal with the remaining grounds of appeal. I would, however, comment that I found it very hard to see how the claimants could submit that the evidence of the defendants could have made no difference to the estoppel defence. But the relevance and importance of that evidence is a matter that can be left to the judge hearing the new trial.

Conclusions

[55]For the reasons I have sought to explain, I would allow the appeal so as to permit the defendants to call the evidence of Michael, Sylvia and Mr Scarlett, and to rely on the new documents. I would order a re-trial of all the substantive issues before a new judge, and leave the matter of whether the defendants should be permitted to re-amend their defence to be decided as a case management issue when directions are given for the new trial.[56]I agree.[57]I also agree.

Cited in 8 later judgments