Smailes & Anor v McNally & Anor [2015] EWHC 1755 (Ch)

Case No 3878[2015] EWHC 1755 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF Atrium Training Services Limited
AND IN THE MATTER OF Kimberly Scott Services Limited
AND IN THE MATTER OF The Insolvency Act 1986
Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A 1NLDate 22/06/2015
Before
HIS HONOUR JUDGE PELLING QCSITTING AS A JUDGE OF THE HIGH COURT
Between
ROBERT DEREK SMAILESApplicantsSTEPHEN BLANDFORD RYMANApplicantJOHN McNALLYRespondentsGEORGE MACLEANRespondent
Mr Alan Steinfeld QC and Mr Andreas Gledhill QC (instructed by Isadore Goldman) for ApplicantsMr Jonathan Crow QC and Mr Stephen Robins (instructed by Mishcon De Reya) for RespondentsHearing Hearing dates: 9-10 June 2015
JudgmentHH Judge Pelling QC:Introduction
[1]This is the hearing of an application by the Applicants (“the Liquidators”) for relief from the sanction imposed by an Order made by Henderson J on 7 June 2013 (“the Default Order”) by which he had directed that unless the Liquidators: “(1) … comply with paragraph (2) below, the Liquidators claims against the Respondents in proceedings No 3878 of 2011 and No 3879 of 2011 (“the Atrium proceedings”) shall be struck out without further order of this Court and the Respondents shall be at liberty to enter judgment for their costs, such costs to be subject of a detailed assessment if not agreed. (2) In the Atrium Proceedings, the Liquidators shall by 4.00pm on 28 June 2013: i) conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7; and ii) provide Mr McNally and Mr MacLean and Mr Dick with a list of documents identifying the documents located as a result of the search described above, in compliance with the requirements set out in CPR 31.10. (3) Requests for inspection (or copies) of documents shall be made by 4:00 pm on 5 July 2013 and complied with by 4.00pm on 12 July 2013” i) conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7; and ii) provide Mr McNally and Mr MacLean and Mr Dick with a list of documents identifying the documents located as a result of the search described above, in compliance with the requirements set out in CPR 31.10.[2]The Liquidators are the joint Liquidators of Atrium Training Services Limited (In Liquidation) (“ATS”) and Kimberley Scott Services limited (In Liquidation) (“KSS”) (collectively “the companies”) and the respondents are respectively a former director, and the former company secretary, of the companies.[3]These proceedings were commenced on 13 May 2011 and relate to events that are alleged to have occurred between 2003 and 2005 (so far as the respondents are concerned) and have been brought almost exclusively for the benefit of HMRC, who have funded and are funding the proceedings. In these proceedings the Liquidators claim approximately £50 million pursuant to s.213 of the Insolvency Act 1986 (“IA”) on the basis that to the knowledge of each of the respondents the companies failed to pay the correct amount of tax due to HMRC in the years 2003 – 5 inclusive. In addition, there are claims for lesser amounts under IA s.214 and under IA ss 212, 238 and/or 423. The respondents strenuously deny the allegations. For reasons that will become apparent, the proceedings have not yet progressed further than the disclosure exercise which the respondents contend has even now not been completed satisfactorily by the Liquidators. If relief from sanctions is given, a number of major steps remain to be taken including the preparation of witness statements and the preparation and exchange of expert evidence. Neither party considers that the trial will take less than six weeks. A combination of the steps that remain to be taken and the inevitable wait for a trial of that length means that neither party considers that a trial much inside two years from now is possible – that is in excess of 6 years after these proceedings were started.[4]By an order made on 30 July 2014, the Court of Appeal held that the Liquidators had not complied with the Default Order and that in consequence these proceedings had been automatically struck out. The foundation for the appeal was an order made by Birss J on 17 September 2013, on an application by the respondents for judgment, by which he had held that the Liquidators had sufficiently complied with the Default Order. In consequence Birss J did not determine an application issued by the Liquidators on 15 August 2013 by which they sought relief from sanctions if necessary. The Liquidators did not challenge this approach either before Birss J or in the appeal proceedings. The failure to do so is itself the subject of criticism by the respondents before me (though not before the Court of Appeal) as being one of many causes of delay for which the respondents allege the Liquidators are responsible.[5]On 18 August 2014, the respondents issued the applications now before me – being applications for relief from the sanction imposed by the Default Order whether by restoring for hearing the application for relief from sanctions on which Birss J made no order or by way of fresh application. The delay that has occurred since then (just short of 10 months) is shocking particularly when viewed in the context of the procedural history of this case. However, a significant part of that time is attributable apparently to the non-availability of counsel for both parties. I question whether the non-availability of counsel (other than perhaps in periods measured by a few days) can justify not listing an application of this sort. It certainly cannot justify the delay that has occurred in this case. However, since the respondents either caused this delay, or acquiesced in it, I do not consider that they are entitled to rely on it.[6]The parties are agreed that the applicable principles are those set out by the Court of Appeal in Denton v. TH White Limited [2014] EWCA Civ 906 [2014] 1 WLR 3926 (“Denton”). I consider the effect of this authority further below but in summary the Liquidators’ case is that the application for relief ought to succeed at each of the three stages identified in Denton whereas the respondents contend that on proper analysis the breach by the Liquidators of the Default Order is both serious and significant, that there is no excuse for the breaches that have occurred and that in all the circumstances relief ought to be refused, in particular because, the respondents contend, there is a long history of delay and incompetence in the conduct of this litigation by the Liquidators and their advisors, the events with which these proceedings are concerned took place between 10 and 12 years ago and the prospects of a fair trial against increasingly elderly respondents have reduced and are reducing steadily with the passage of time.[7]The Liquidators maintain that whether relief should be granted should be judged by reference to the single breach upon which the Court of Appeal focussed when reversing Birss J’s decision whereas the respondents contend that the manner in which the Henderson Order had been breached went much further than that identified by the Court of Appeal and that this application should be determined by taking into account the whole scope of the breach that occurred. For the reasons that I give below in Paragraph 41 and following, I consider that the respondents’ approach is the one that I should adopt in determining this application.

Relevant Background

[8]As might be imagined from the volume of material lodged for this hearing (16 lever arch files of evidence, one lever arch file of authorities and two lengthy skeletons), these proceedings have a long and unhappy procedural history. Given the nature of the application, I intend to limit this section of this judgment to the minimum necessary in order to determine the application before me. I intend to set out the relevant background (which is almost entirely procedural) as far as possible by quoting from the previous judgments in particular of Henderson J since no useful purpose will be served, and some unnecessary confusion could be caused, by me summarising what has happened previously in alternative language.[9]The substantive merits of the claims and the defences to the claims are immaterial for present purposes beyond saying that the principal case against the respondents is that very substantial sums should have been but were not paid to HMRC by way of PAYE and NIC for workers placed by the companies (who carried on business as employment agencies) with employing businesses. Schemes had been devised which enabled workers to offer their services through companies and be paid by way of dividends rather than salaries. These schemes are alleged to have failed as a result of implementation errors by the companies. The respondents maintain that these errors were the errors of the Finance Director of the companies (Mr English) (who has admitted liability for a claim of £3.9 million in his IVA) not them. The Liquidators’ case is that it is to be inferred from the position that each occupied in the organisation of the companies that the respondents knew of the errors, knew that the schemes were ineffective as a result and thus that tax and national insurance should have been but was not being paid as it should have been. The case against the respondents is entirely inferential. It is common ground between the parties that both have realistically arguable cases.[10]I should record at this stage that the respondents submit and I accept that disclosure has a particular importance in this case for two reasons. The first is because the case against them is an inference case and thus what appears in the documents that were passing between the various officers of the companies at the time will have particular importance. The second is that disclosure is particularly important in this case given the time that has elapsed since the events with which the claims are concerned. The respondents resigned as officers of the companies in 2005. Although there are periods of delay that occurred following the commencement of these proceedings that I consider are neutral in terms of culpability, the events with which this claim is concerned took place many years ago and the respondents cannot realistically be expected to have anything other than patchy recollection of detail although this point is of less substance in relation to the fundamentals of the case.[11]Although it was suggested by the respondents that there had been three missed dates by which disclosure should have been but was not given prior to June 2012, those missed dates were driven first by the delay in service of the Particulars of Claim, then by the failure of the Liquidators to serve a response to a Request for Further Information served by the respondents even though in the end they consented to the provision of the information sought and then by the failure of the respondents to file their defences – a failure that led ultimately to an order being made against them debarring them from further defending these proceedings unless their defences were served by the date fixed by that order. In the end the respondents complied with that order. I am satisfied that the causes of these delays were driven by errors and omissions by both sides to this dispute and that in consequence the whole of it cannot sensibly be prayed in aid by either in relation to the application before me. It does mean however that all parties were under a heightened obligation by reason of their duty to deliver the overriding objective to comply with all future disclosure obligations in particular timeously.[12]The first material date by which the Liquidators should have but failed to provide disclosure in accordance with CPR Part 31 was 8 June 2012. On that date the Liquidators served a disclosure list (“the 2012 List”) that had attached to it 4 schedules being Schedules A, B, C and D. Schedule A included all of the documents relied on by the Liquidators in support of their claims against the respondents. It included a class of documents known in these proceedings as the “scripts”. These documents are of particular importance for reasons that I explain below. They were defined in paragraph 21 of the judgment of Lewison LJ, in the Court of Appeal judgment in these proceedings, as being:
“ … weekly reports of the amounts paid to individual operatives, setting out gross pay for each operative and where the individual was an employee, giving details of the deductions for PAYE and NIC; and, when the individual was billed through a service company, details of gross pay and deductions of VAT and corporation tax. These were secondary documents, in the sense they had been complied from expenses claims, time sheets and load sheets. Since the underlying claim in the action is based on an allegation of under payment of tax documents showing what tax was paid in respect of what are obviously vital.”
[13]Henderson J described the effect of 2012 List in Paragraph 9 of his judgment delivered on 28 November 2012 (“Henderson J’s first judgment”) in these terms:
“The contents of the list and the methodology employed by Howes Percival were explained by them in a covering letter of the same date to Mishcon de Reya. They explained that the disclosure fell into four schedules: schedule A, detailing documents held by the joint Liquidators at their offices and by their representatives, with the exception of documents held on the hard drive of Mr English's computer; schedule B, which detailed the documents held on that hard drive; schedule C, detailing the documents stored by the Liquidators in off-site storage; and schedule D, giving further details in respect of those documents stored off-site - in relation, at any rate, to those contained in the first 167 boxes.”
[14]It is contended by the Liquidators that Schedule A complied in all material respects with the requirements of CPR Part 31. The Liquidators maintain that the scripts had been fully and properly disclosed from the outset and thus that no prejudice could have been suffered by their failure (in admitted error) to refer to them again in the list served in purported compliance with the Default Order – the omission that led the Court of Appeal to conclude that in breach of the Default Order the Liquidators had failed to carry out a reasonable search for disclosable documents because they had failed to find these documents as a result of the search that was carried out prior to service of the list served in purported compliance with the Default Order. The Liquidators maintain that their advisors could simply have cut and pasted the contents of Schedule A (or at least that part of it concerning the scripts and bank statements) into the list that was served in purported compliance with the Default Order, and disclosure of the scripts and bank statements in these terms would have been fully compliant with CPR Part 31.[15]This is disputed by the respondents on the basis that(a) all Schedule A did was to list documents located at a particular identified location,(b) Schedule A did not attempt to identify what was relevant and what was irrelevant for disclosure purposes and(c) Schedule A can be shown to have been inaccurate even in the way that it listed the scripts. Although the Liquidators offer no answer in relation to these points, I consider they lack significant weight. The documents that are relevant for present purposes are the scripts and bank statements not anything else within Schedule A, there is no dispute between the parties that all the scripts are disclosable documents and the level of inaccuracy between the scripts disclosed in Schedule A and those disclosed in the supplemental list served in an attempt to correct the errors in the list served in purported compliance with the Default Order is a difference between 104 scripts disclosed in Schedule A and 102 disclosed in the supplemental list.[16]It is common ground that the remaining schedules in the 2012 List were plainly not compliant with the requirements of CPR Part 31. In summary Schedule B consisted of a list of documents but no attempt had been made to identify whether the documents listed were documents that were disclosable applying the criteria for standard disclosure set out in CPR r. 31.7, and Schedules C and D consisted merely of identifying boxes of documents by the description appearing on the outside of the box without any attempt being made to identify the documents within the boxes much less whether they were disclosable applying the CPR r.31.7 criteria.[17]Ultimately, the respondents’ solicitors wrote to the Liquidators’ then solicitors on 19 June 2012 in terms described in Henderson J’s first judgment in these terms:
“Mishcon de Reya and their clients were unhappy about the disclosure offered and they set out their concerns in a long letter of 19th June. … The letter concluded by saying that the Liquidators had failed to comply with their disclosure obligations, and that the shortcomings to which the letter had drawn attention were deeply troubling in the context of a substantial claim alleging fraud and seeking to recover more than £45 million. An express warning was given that, if the matter could not be dealt with satisfactorily, an application would be made to the court; and the view was expressed that, in order to remedy the deficiencies, the only realistic course would be for the Liquidators to start the entire process all over again.”
Without notice to the respondents’ solicitors, the Liquidators’ then solicitors embarked on a further very large search exercise. It was described in paragraph 17 of Henderson J’s first judgment in these terms:
“The gist of the explanation given by Mr Smailes is that the further search exercise began as long ago as 8th August 2012, and in the course of that month Howes Percival assigned up to six fee earners to the task on a full-time basis, with two more being added later. The exercise has been in progress since that date and, as of the present time, that is to say in November 2012, Howes Percival are continuing to employ eight fee earners on a full-time basis to carry out the work, and indeed are paying them overtime, as they had done in October, to ensure that momentum is not lost. The present position is that they have looked at 165 out of 167 boxes of documents relating to Atrium or KSS, and 40 out of 140 boxes containing documents relevant or relating to other group companies. It is clear, and it is stated in evidence, that considerable further time will be needed to complete the task. It is further clearly accepted that the search has already produced a very large volume of relevant documents, and it is said that it will take approximately one month simply to prepare a list of those documents in accordance with CPR 31.10. That is quite apart from the search that still needs to be carried out of a further 140 boxes, which it is thought are likely to contain rather less relevant material, and should take considerably less time to search, but that is still a task which remains to be performed and a further list of documents will be necessary to set out the results.”
The implications arising from this exercise were described in paragraph 19-20 of Henderson J’s first judgment in these terms:
“the conduct of Howes Percival and the Liquidators does, to my mind, implicitly recognise that the disclosure given in June in relation to, at least, schedules C and D was insufficient and inadequate, and I gain the impression that they hoped to get the necessary remedial work completed before the return date of the application. In the event, that did not prove to be possible, but that may be - and this is speculation - one reason why no information was provided about the exercise until very shortly before the forthcoming hearing date. … For whatever reason, it seems to me that the conduct of Howes Percival and the Liquidators since July of this year has departed from the principles of cooperation and reasonable discussion between the parties and their solicitors which the court rightly expects in the context of preparation for trial, and which Howes Percival themselves had quite rightly espoused in the correspondence in March to which I have referred earlier in this judgment. In my view this is a case where actions speak louder than words, and the actions of the Liquidators since August do appear to me to evince a recognition of wholesale inadequacy in the way in which schedules C and D had previously been dealt with.”
[18]In the result the terms of the order made on 28 November 2012 (“the November Order”) dealing with disclosure and other procedural matters were agreed between the parties. In relation to disclosure in these proceedings it provided that the Liquidators should by 4 p.m. on 2 April 2013:
“(1) conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7; and (2) provide Mr McNally and Mr MacLean and Mr Dick with a list of documents, identifying the documents located as a result of the search described above, in compliance with the requirements set out in CPR 31.10.”
As will be apparent from its terms, the effect of this Order was to require the Liquidators to start the disclosure exercise afresh rather than seeking to augment or remedy the exercise started by the 2012 List. This was the fifth date by which the Liquidators had been required to give disclosure and the second effective date. The issue of costs remained live between the parties. It was that issue that Henderson J’s first judgment was concerned with. He directed that the Liquidators should pay the costs of the application made by the respondents for disclosure for the reasons that he set out in paragraph 22 - that is:
“… if Howes Percival had continued to adopt a cooperative and bilateral approach to the disclosure exercise after issue of the present application, it should have been possible to reach agreement on the extra time that would be needed for the exercise to be completed and a consent order could have been made, or, at the very least, there would only have needed to be a brief hearing with junior counsel instructed. As it is, the position remained almost wholly obscure to Mr McNally and Mr Maclean and those advising them until, effectively, Thursday of last week. I am, therefore, satisfied that the Liquidators should pay the costs of the present application.”
[19]The Liquidators changed solicitors to their current solicitors very shortly before the hearing leading to Henderson J’s first judgment and the November Order. The change of solicitors, coupled with a change in approach to the disclosure process to which I turn in detail below, meant that the dates fixed by Henderson J in the November Order could not be met and an application was issued by the Liquidators’ solicitors for an extension of time in which to comply down to 4 p.m. on 28 June 2013. The application was issued before expiry of the time fixed for completion of the disclosure directions contained in the November Order. It was met with a cross application seeking orders either striking out these proceedings or imposing a sanction providing for an extension with the proceedings to be struck out in default of compliance.[20]These applications came before Henderson J on 7 June 2013. On that date Henderson J delivered a full judgment (“Henderson J’s second judgment”) granting the extension sought in the terms set out at the start of this judgment but imposing a sanction that in the event of a failure to comply the proceedings “… shall be struck out without further order of this court and the Respondents shall be at liberty to enter judgment for their costs …”. This was the sixth date by which the Liquidators had been required to give disclosure and the third effective date.[21]The reasons why the extension was required was described in paragraph 9 of Henderson J’s second judgment in these terms:
“Isadore Goldman then set to work, the solicitor with day to day conduct of the matter on behalf of the Liquidators being Mr David Gibbs. As I shall explain in more detail later in this judgment, he contacted Howes Percival in early December, but it was only on 3 January that the lists produced by Howes Percival were received in incomplete form, and it was not until 14 January that the boxes of documents were delivered. On 23 January, Mr Gibbs conducted an initial review of the boxes, and on 25 January a meeting took place with Mishcons at which Isadore Goldman put forward two methodologies for consideration, their preference being for one whereby an e-disclosure provider would be engaged to scan and upload the documents into a database, or “e-disclosure platform”
. There is a dispute, which I cannot resolve, whether agreement to proceed in this way was reached at the meeting, but it is at least clear that no objection was raised by Mishcons, and it was they who suggested the use of a company called Unified as the e-disclosure provider. Mr Gibbs then obtained quotations from three providers, including Unified, and on about 4 February 2013 Unified were selected.” However, as is explained in paragraph 33 of Henderson J’s second judgment:
“The companies approached by Mr Gibbs made it clear to him that the work of scanning and coding the documents could not be completed by 2 April, “due to the sheer number of pages which numbered in the millions”
. Accordingly, on 7 February Mr Gibbs drafted a letter to Mishcons which proposed the removal from disclosure of 103 boxes on the ground that their contents were irrelevant, and that the rest of the documents should be scanned and coded. The draft continued:
“This will not be a small task and it is envisaged by the companies that we have approached for the disclosure platform, such work will not be ready in a period of 3 to 4 months from commencement of the work. We therefore ask whether or not you would consent to a variation of the directions timetable … ” … Unfortunately, for some unexplained reason this letter was never sent, and there is a gap in the correspondence until 1 March 2013 when Mishcons wrote again to Isadore Goldman.”
This was corrected by a letter of 7 March 2013, where the Liquidators’ solicitors identified the need for a further extension for reasons and in terms identified in paragraph 38 of Henderson J’s second judgment:
“In the final section of the letter, headed “Directions”, Isadore Goldman said they had been advised (presumably by Unified) that the scanning and coding exercise could be completed in not more than three months. They therefore asked Mishcons to agree to a variation of the directions timetable to provide for disclosure to take place by 30 June 2013. The point was made that the trial had now been listed in a window starting on 29 April 2014, so: “… it is clear that an additional three months for the completion of disclosure in a way agreed by both parties (thereby removing the possibility of further procedural disputes) can be accommodated without any prejudice to either party.” “This will not be a small task and it is envisaged by the companies that we have approached for the disclosure platform, such work will not be ready in a period of 3 to 4 months from commencement of the work. We therefore ask whether or not you would consent to a variation of the directions timetable … ” “… it is clear that an additional three months for the completion of disclosure in a way agreed by both parties (thereby removing the possibility of further procedural disputes) can be accommodated without any prejudice to either party.”
[22]Henderson J concluded that the further extension should be granted for the reasons that he set out in paragraph 55 of his second judgment in these terms:
“I consider that the balance comes down in favour of granting the Liquidators the extension which they request. The crucial points, as it seems to me, are these. First, the Liquidators’ new legal team were inevitably starting from scratch on 28 November 2012 and they faced the difficulties which I have already mentioned in paragraph 7 above. Secondly, the sheer scale of the hard copy documentation in the two sets of proceedings is such as to make it overwhelmingly desirable, in the interests of the parties and (in due course) the court at trial, that disclosure should be effected through the use of an e-platform. Thirdly, there is no suggestion that Unified were an unsuitable e-provider to instruct for this purpose, or that they ought to be able to complete the task in less time than they say is needed. Indeed, it was Mishcons who suggested that Unified should be instructed. Fourthly, Mr Robins has not been able to point to any significant additional prejudice that would be caused to Mr McNally or Mr MacLean if time were to be extended until 28 June, bearing in mind that the trial will not start before 29 April 2014 at the earliest. Fifthly, if I were to refuse to grant any extension, the result would in my judgment be disproportionate and unfair. The Liquidators would in effect be compelled to abandon their claims, brought on behalf of the respective creditors whom they represent, in cases where very large sums are at stake and allegations of serious misconduct are made. The issue whether a fair trial is still possible is a separate matter, which forms the subject matter of the adjourned cross-application to strike out the claims. If that application succeeds, the extension of time which I am now considering will become an irrelevance. If, however, the application to strike out fails, it would not serve the interests of justice if the claims were nevertheless to be frustrated by the Liquidators’ failure to meet the disclosure deadline in the November order.”
However, Henderson J concluded that the order should contain a strike out sanction in the event of non compliance for reasons set out in 62-64 of his second judgment in these terms:
“I consider that Isadore Goldman should have displayed more initiative and urgency in getting a grip on the situation, in chasing Howes Percival, in arranging a meeting at the earliest opportunity (and certainly before Christmas) with Mishcons, in selecting and instructing Unified (or some other suitable e-provider) and in winnowing out the huge number of apparently irrelevant documents from the boxes. The need for urgency should have been all the more apparent, given the lamentable history of the disclosure exercise in the Atrium proceedings to date, and the fact that four deadlines for disclosure had already been missed. Mr Gibbs does not say in evidence how many people at Isadore Goldman were working on disclosure apart from himself, and it may well be that insufficient resources were devoted to the task. Further, the unexplained failure to send the letter of 7 February 2013 does not inspire confidence, and the delay in arranging the spot check until the end of February, in order to suit the diaries of Mr Gibbs and Mr Lewis, is again unfortunate. The end result is that the relevant boxes of documents did not actually reach Unified until 12 March 2013, only three weeks before the expiry of the four month extension granted in November. ... I accept that an unless order should normally be regarded as one of last resort, or perhaps more accurately as one of penultimate resort, since even after an unless order has taken effect it is always open to the party in default to seek relief from sanctions under CPR 3.9 … I consider, however, that the stage has been reached in the present case where it is appropriate to make such an order in the Atrium proceedings, and that the sanction for non-compliance should be for the claims in those proceedings to be struck out, subject to the right of the Liquidators to apply (if they can) for relief from sanctions. The main factors which have weighed with me in coming to this conclusion are: (a) the long and unsatisfactory history of disclosure in the Atrium proceedings before November 2012; (b) the deficiencies to which I have drawn attention in the Liquidators’ attempts, through Isadore Goldman, to comply with the November order; and (c) the increased emphasis which the court is now obliged to accord to compliance with court orders under the amended overriding objective.”
[23]The disclosure exercise was completed and a disclosure list was served in purported compliance with the Default Order. The respondents’ solicitors considered that the list provided was not compliant with the requirements of CPR Part 31 and the Default Order ultimately in two respects being first that two categories of documents that it is common ground were in the possession of the Liquidators and were disclosable documents had not been disclosed. The categories of document that had not been disclosed were firstly the scripts and secondly some bank statements. The other alleged failure relied on at that stage was that the list served by the Liquidators’ solicitors failed in a number of respects to comply with the requirements of CPR r.31.10. This led the respondents to conclude that the proceedings had been struck out by operation of the Default Order and accordingly they sought judgment. The Liquidators maintained that they had complied and so resisted that application but issued a cross application for relief from sanction in the event that they were wrong on their primary contention. Birss J heard those applications on 17 and 18 September 2013. On 27 September 2013, Birss J delivered judgment concluding that the Liquidators had sufficiently complied with the Default order and in consequence he dismissed the respondents’ application and in relation to the relief from sanction application concluded that there was no need to consider it.[24]In relation to the missing categories of documents, Birss J described what happened in these terms:
“The first problem relates to missing documents. There are two categories of documents which are plainly relevant and which were in the liquidators’ possession but were not in the list. These can be referred to as scripts and bank statements. … There is no question that the scripts and bank statements are relevant. Indeed the fact they were to be disclosed had been discussed in correspondence two weeks before the list was served. Isadore Goldman explained that a supplementary list would be provided and that was done on 10th September. It consists of a further 628 documents, including the missing scripts and bank statements. Mr Gibbs explained in his evidence on this application how the scripts and bank statements came to be missing from the original list. The liquidators always intended to disclose these documents and recognised their importance from the outset. The reason they were not included in the list was because of an error. Although it was not realised at the time, the scripts and bank statements were not in the documents used as the sources of documents to upload onto the Unified database. Thus the review of that database did not pick them up. That is why they were not listed. If they had been in the database they would have been picked up and listed. Their absence is not an indication that the database review itself was flawed. Once the problem had been identified Mr Gibbs worked out what had happened. The documents uploaded onto the Unified database were taken from the documents held by Howes Percival and the documents at the liquidators’ storage facility known as TDM. Mr Gibbs ascertained that the scripts and bank statements were not in either collection. He also checked that they were not amongst the seemingly irrelevant documents which had been weeded out at an early stage. The scripts had been disclosed in the original Howes Percival list and it was thought that all such documents were in the possession of Howes Percival (and therefore would have been passed to Isadore Goldman) and so would have gone on to Unified. However the scripts were not there. Mr Gibbs double checked with Howes Percival and they did not have any further relevant documents. Mr Gibbs also inquired at the liquidators’ offices to see if anything could be found there. Copies of the scripts and bank statements were located and they were scanned and uploaded to the e-disclosure database. The supplementary list was produced, including the missing scripts and bank statements. The reason that the documents held at the liquidators’ offices had not been reviewed in detail was the following. Mr Gibbs had discussed whether any relevant documents were being held at the liquidators’ office early on in the process. He spoke to Mr Meadows, an administrator at the office, on 25 January 2013 to enquire if they had any documents there. Mr Gibbs was told that the only documents held there were selected copies of certain originals held by Howes Percival or TDM. That was consistent with Mr Gibbs’ understanding of the information provided by Howes Percival and so there was no reason to think it was worthwhile uploading or reviewing the documents at the office. Mr Meadows’ evidence confirms this. Now that it has emerged that some documents at the offices were in fact the only copies of certain relevant documents which the liquidators actually possessed, they have now been disclosed in the supplementary list. Mr Gibbs explained that the omission from the list was an oversight and an innocent mistake.”
Birss J summarised the respondents’ case concerning the alleged defect in the list served in purported compliance with the default Order in these terms:
“The list itself was produced by Unified’s e-disclosure software. It consists of a table with a series of headings. After some columns of disclosure list numbers there are five columns of information: Subject/Filename; From/Author; Email To; Email CC; Document Type. Mr Shobbrook of Mishcon de Reya explains the problem in his witness statements. For 55% of the documents in the list, the “Subject/Filename” field is blank. For 421 documents the “author” field is blank and 238 have no date. Indeed two documents have nothing in any of the fields at all and are unidentified. Moreover a number of documents are identified with a single word: “spreadsheet” for 44 documents, “transcript” for 60 documents, “accounts” for 52, “report” for 29 and “table” for 23. The supplementary list served in September has the same problems …. Mr Alexander submitted that with such limited information the June list and the September list are of no practical utility because they are insufficient to enable his clients or their solicitors to select documents for inspection… .”
[25]In relation to the non inclusion of the scripts and bank statements, Birss J dismissed the respondents’ application on the basis set out in Paragraph 43 of his judgment in these terms:
“I can see no justification for saying that it was not a reasonable search. It was very extensive. It was plainly carried out in good faith. It was explained in detail in advance to Mishcon de Reya and indeed was based on a methodology which had been ventilated in court before Henderson J when the unless order was made. It was completed within the time specified by the order. It is true that two classes of relevant documents were missed but there is no suggestion that this was the result of bad faith and I am satisfied that the fact these two classes were missed does not support an inference that the exercise itself was not a reasonable search. In my judgment the liquidators are not in breach of the order of 7th June 2013 on that ground.”
Birss J rejected the respondents’ case as to the defective description of classes of document for reasons that he summarised at paragraphs 59-60 of his judgment in these terms:
“Although I think the argument that the lists are of no practical utility is seriously exaggerated, I can see that for some of the documents in the Atrium list, the information provided in some of the fields for some documents is sparse. Indeed for two documents there is no information at all although Mr Gibbs explained that has been remedied. Given that the source documents for the Atrium list were almost entirely uploaded hard copy documents (the only other source was the hard drive of Mr English), the disclosure data is the product of the manual coding carried out by paralegals at Unified. Mr Gibbs explained that the limited descriptions in the list were the result of the fact that the information available to the Unified paralegals was itself limited (e.g. a hard copy spreadsheet with no title or author). In paragraph 87 of his third witness statement Mr Gibbs explained that the “subject/filename” field was only filled in if the document was originally in electronic form and the subject/filename was taken from the document’s metadata. In addition to the point about the two documents with no information at all, Mr Gibbs witness statement dealt with three other minor points of detail and explained that for the remainder when information was not provided, he had been informed by Unified that that was because the relevant document did not contain the information or that the information was not legible in the document. As far as the Atrium list is concerned, there is no basis on which to say that Mr Gibbs’ evidence or his information from Unified is wrong. The requirement to identify a document within r31.10(3) is not intended to require a party to create information which does not exist or cannot reasonably be ascertained. I conclude that the liquidators have taken reasonable and proper steps in good faith to identify the relevant documents in the list and I reject the submission that the Atrium list does not satisfy CPR r31.10(3).”
[26]Having dismissed the respondents’ application, Birss J concluded that it was not necessary for him to consider the alternative application for relief from sanctions. There was some criticism of this approach in the course of the hearing before me but in my judgment it was misplaced. For reasons that will be apparent from the summary of applicable principles that I set out below, relief applications are highly fact sensitive and generally are not the sort of application that can be resolved on a hypothesis where it is alleged that there has been more than one breach of the order rule or direction in issue, or where there has been a breach of more than one rule direction or order, because what might be the correct response if one alleged breach is established may not be the correct response if a different breach or other breaches are established. I note that Birss J’s decision in relation to relief was not challenged in the Court of Appeal nor was it the subject of criticism or indeed any comment at all by either leading counsel for the respondents or the Court of Appeal at the hearing of the appeal.[27]The respondents sought and obtained permission from the Court of Appeal to appeal the decision of Birss J. The appeal was heard, and the Court of Appeal delivered judgment, on 30 July 2014. Lewison LJ, with whom Rimer and Clarke LJJ agreed, gave the only judgment. In paragraph 1 of his judgment Lewison LJ recorded that the Court of Appeal was not concerned with relief from sanctions. That conclusion necessarily followed from the fact that Birss J had not had to rule on the application for relief. Mr Crow QC suggested on behalf of the respondents that the Liquidators were at fault for not filing a respondents’ notice seeking relief from sanctions in the event that the Court of Appeal considered that the Default Order had been breached. In my judgment this submission is mistaken. It is almost inevitable that the Court of Appeal would have refused to determine the application for relief as if it was a first instance court and would have directed that any application for relief be determined by a first instance judge. It would have done so(a) to preserve the right of any party not satisfied with the outcome to seek permission to appeal to a higher court other than the Supreme Court, and(b) because the issue was not one that had been considered by the lower court and thus whether relief should be granted was not something that could be determined by the Court of Appeal proceeding in accordance with CPR r.52.11.[28]There were three grounds of appeal relied on by the respondents being(1) that Birss J had erred in concluding that the Liquidators had conducted a reasonable search as required by CPR r.31.7,(2) that the judge had been in error in holding that the Liquidators had disclosed documents located as a result of the search and(3) that the Judge was wrong to have held that the Liquidators’ disclosure list complied with CPR r.31.10. At the conclusion of Mr Crow’s argument in relation to Ground 1, the court stopped him and directed submissions from the Liquidators’ then leading counsel limited to Ground 1 – see page 25 of the transcript of the hearing before the Court of Appeal.[29]The focus of attention for the Court of Appeal was whether a reasonable search had been carried out having regard to the omission of the scripts from the list served in purported compliance with the Default Order. The reason for this was that both the November Order and the Default Order had required the Liquidators to embark on the disclosure exercise afresh rather than rectifying the non-compliant parts of the 2012 List. The Court of Appeal held that the effect of CPR rr.31.6, and 31.7, and Paragraph 1.2 of Practice Direction 31A, was to require a disclosing party to make a reasonable search for documents falling within CPR r.31.6. It was common ground that the scripts were documents that fell within CPR r.31.6(a). This led the court to focus on Schedule A of the 2012 List as is apparent from pages 28-29 of the transcript of the appeal hearing. The Court asked the Liquidators’ leading counsel whether Schedule A contained a reference to the scripts. He confirmed that it did, whereupon the Court observed:
“so somebody looking at the list would have known that the scripts were held by the joint Liquidators at their offices”
. There was no answer directly to that point but it was the fulcrum point on which the appeal was decided.[30]The Court of Appeal allowed the appeal on Ground 1 and did not consider any of the remaining grounds. It concluded that the scripts had been omitted from the list served in purported compliance with the Default Order because they had not been delivered to Unified for inclusion in the scanned database of documents that were to be disclosed and thus were not listed in the disclosure list. Lewison LJ said at Paragraph 38 of his judgment:
“Mr Gibbs [the Liquidators’ solicitor] knew about the importance of the scripts and knew that their disclosure had been promised to Mishcon de Reya, yet he had failed to check that they had been delivered to Unified. That they had not been uploaded was apparent on checking the database; and that should have alerted him to the need to find them. In my judgment he made no search for these critical documents let alone a reasonable search.”
This led the Court of Appeal to conclude that there had not been a search that complied with CPR Part 31, that good faith was not material to the issue of whether there had been such compliance (though it might be for an application for relief from sanctions) and thus that the appeal should be allowed. In the result the Court of Appeal’s Order recited that the Court had heard leading counsel for the parties “… on the first ground of appeal …”, that it was giving judgment “… on the first ground of appeal without hearing argument on the second ground of appeal or the third ground of appeal”, and that it allowed the appeal. The Court of Appeal Order further declared that the Liquidators had failed to comply with the Default Order by failing to conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7 and, in consequence, that the proceedings had been struck out automatically at 4 p.m. on 28 June 2013.[31]There was an application made by the respondents to the Court of Appeal to adduce additional evidence in relation to a further failure on the part of the Liquidators to carry out a reasonable search. This concerned an issue that had became apparent to the respondents only after judgment had been given by Birss J and relates to the mechanism by which documents that had been listed in the list served in purported compliance with the Default Order had been identified.[32]This issue (“the OCR Issue”) is technically complex but reduced to its essentials comes down to this. As explained above, the decision was taken by the Liquidators’ current solicitors with at least the tacit consent of the respondents’ solicitors and approval of Henderson J to carry out disclosure by creating an electronic database consisting of all the documents that had been identified in the 2012 List by scanning each of the relevant documents. From this it was intended that potentially relevant documents would be identified by the Liquidators’ solicitors carrying out a key word search. This could be expected to produce a reduced number of documents, which would then be reviewed by lawyers who would then decide whether the document was a document that was disclosable as falling within CPR r.31.6 or whether it was a “false positive” – that is a document that contained a key word or key words but which was not disclosable. Those documents considered to be disclosable would then be made available for inspection by uploading them onto a further database to which all parties would have access.[33]Scanned documents cannot of themselves be interrogated by a key word search because they are in effect photographic images and not electronic documents. In order to make them capable of interrogation the scanned documents have to be converted into an electronic format. The method adopted by Unified OS Limited (“Unified”) (the outside contractor engaged by the Liquidators’ solicitors to carry out the disclosure task in the manner I have described) was to apply OCR software to the scanned documents.[34]What became apparent to the respondents after Birss J had delivered his judgment referred to above is that this process had resulted in electronic versions of the documents that were seriously inaccurate in numerous respects. This became, and could only become, apparent to the respondents’ advisors when they examined the database consisting of the documents that had been disclosed by the list served in purported compliance with the Default Order. As I explain below, the Liquidators denied access to that database to the respondents without explanation until after an Order had been obtained from Norris J requiring access to be given. That Order was made on 15 November 2013 and required access to be given by 18 November 2013.[35]The nature of the problem is illustrated by the document referred to in Paragraph 69 Mr Crow’s written submissions where he sets out a disclosed document in its scanned and OCR form. The scanned form of the document is as follows:
“REPORT TO THE ADMINISTRATOR OF ATRIUM TRAINING SERVICES LTD (in administration) … We report to the Administrator of Atrium Training Services Ltd in relation to circumstances leading up to the administration of the company with particular regard to contractor schemes used and payments due thereon to HM Revenue & Customs. Firstly we investigated the scheme; secondly we investigated the history and interaction between Atrium Training Services (referred to as OEGL for convenience) and Kimberly Scott Services Ltd (KSSL); thirdly we considered the operation of the scheme and lastly we drew some conclusions. The Principals: Mr J McNally Director of OEGL & KSSL from 09.09.00, resigned 21.10.05 Mr G S MacLean Secretary of OEGL & KSSL from 08.09.00, resigned 25.10.05 Mr J Dick Director of OEGL & KSSL from 25.10.05 Mr J English Director of OEGL & KSSL from 20.04.05 and secretary from 25.10.05 The managed service company arrangements operate what are known as ‘dividend remuneration systems’. In very general terms, such systems operate in the following way. An employment agency recruits an individual to undertake an assignment. A management company incorporates a company and arranged for the individual to hold one or more shares in the company (the service company). The contract between the employment agency is assigned by the operative to the service company, or written directly with the service company for the operative’s services. The operative then enters into an employment contract with either the service or management company. The fee for the services rendered is paid to the service company.”
The OCR version of this material is as follows:
“ATEIUIV[ TRAINT-NG SERVICES LTD ([= a~r~n[~tratton) … ~e~ A~u'm Training ~e~ Le~ (~ e~ed ~ aa OE~ ~ convenient) ~d remu~v]L-'atton syste~IS"_ In" very general ~e~ns, such syste!na operate .iu. ~he following .m~a~men~ ~mpany ~co~ora~ a ~mp~y ~d :~ges ~r ~ ~u~ ~ hold ~n~ o~ mo~ s~cS ~ ~he ~mpan~ (~he ae~ce ~mp~y)~ ~e ~n~aet be~een the”
In the course of the argument, I was taken to a number of other examples that show the same basic point. The example set out above is entirely typical. It will of course be appreciated that since the respondents do not have access to documents that have not been disclosed, they are unable to provide examples of documents that contained keywords but which were not picked up by the keyword searches that were done by Unified as a result of the garbled way in which the OCR process converted scanned documents into electronic format. The point which is made is that on the evidence available it is a matter of chance whether a document containing a key word would have that key word correctly converted by the OCR process so that it could be picked up by the keyword searches that were undertaken. The Principals: Mr J McNally Director of OEGL & KSSL from 09.09.00, resigned 21.10.05 Mr G S MacLean Secretary of OEGL & KSSL from 08.09.00, resigned 25.10.05 Mr J Dick Director of OEGL & KSSL from 25.10.05

Mr J English Director of OEGL & KSSL from 20.04.05 and secretary from 25.10.05

[36]The Liquidators maintain that the issue is one without substance because the OCR version of the documents were sufficient for identification purposes as long as one of the key words was reproduced somewhere in the scanned version of the document concerned. The human examination of the document identified electronically would be of the scanned version not the OCR version and thus the overall quality of the OCR scan is immaterial as long as at least one of the keywords was reproduced correctly in the course of the OCR scan.[37]The respondents’ submit that this entirely misses the point because the only documents they have been able to examine are those that have been disclosed. The very poor quality of the OCR versions of those documents means that there can be no confidence that there are not a number, and perhaps a large number, of disclosable documents that have not been identified (because all the documents on the database have not been examined by a lawyer as I have explained) and thus that there has not been a reasonable search as required by CPR Part 31 and the Default Order. The Liquidators maintain that this is not a point available to the respondents as a matter of law because it was not an issue that formed the basis of the application before Birss J and was not an issue on which the Court of Appeal considered, much less made findings about. They maintain that the only breach on which the respondents can rely is that relied on by the Court of Appeal. I turn to this point of law at paragraph 41 below.

The Applicable Principles

[38]I turn first to the provisions within CPR Part 31 and its practice directions that are material to the issues that arise on the application before me. CPR rr.31.6 and 7 respectively provide: Standard disclosure – what documents are to be disclosed 31.6 Standard disclosure requires a party to disclose only–(a) the documents on which he relies; and(b) the documents which – (i) adversely affect his own case; (ii) adversely affect another party’s case; or (iii) support another party’s case; and(c) the documents which he is required to disclose by a relevant practice direction. Duty of search 31.7 -(1) When giving standard disclosure, a party is required to make a reasonable search for documents falling within rule 31.6(b) or (c). (2) The factors relevant in deciding the reasonableness of a search include the following – (a) the number of documents involved; (b) the nature and complexity of the proceedings; (c) the ease and expense of retrieval of any particular document; and(d) the significance of any document which is likely to be located during the search. (3) Where a party has not searched for a category or class of document on the grounds that to do so would be unreasonable, he must state this in his disclosure statement and identify the category or class of document.” The relevant parts of CPR r.31.10 provide:
“Procedure for standard disclosure 31.10 (1) The procedure for standard disclosure is as follows. (2) Each party must make and serve on every other party, a list of documents in the relevant practice form. (3) The list must identify the documents in a convenient order and manner and as concisely as possible”
. CPR r. 31.10(3) provides that the list referred to in CPR r.31.10(1) mustidentify the documents in a convenient order and manner and as concisely as possible. These provisions are augmented by Practice Direction 31A, paragraph 3.2, which is in these terms:
“In order to comply with rule 31.10(3) it will normally be necessary to list the documents in date order, to number them consecutively and to give each a concise description (e.g. letter, claimant to defendant). Where there is a large number of documents all falling into a particular category the disclosing party may list those documents as a category rather than individually e.g. 50 bank statements relating to account number _ at _ Bank, _20_ to _20_; or, 35 letters passing between _ and _ between _20_ and _20_”
. Standard disclosure – what documents are to be disclosed

Duty of search

[39]The Liquidators rely on the CPR Part 31 Practice Direction concerning e disclosure (Practice Direction 31B) because Birss J applied it by analogy and they maintain that I should follow this approach as a matter of “judicial comity”. The respondents maintain that Practice Direction 31B is of no application on the facts of this case, that Birss J erred in applying it on the facts of this case and that the Liquidators are mistaken in attempting to rely on it before me, because the Court of Appeal set aside Birss J’s Order, and thus no issue of judicial comity arises. I resolve these issues in paragraph 41 and following below. The provisions within Practice Direction 31B that are relevant to the argument are: i) Paragraph 5(2), which defines “Disclosure Data” as being “data relating to disclosed documents, including for example the type of document, the date of the document, the names of the author or sender and the recipient, and the party disclosing the document” ii) Paragraph 5(3), which defines “Electronic Document” as meaning: “ … any document held in electronic form. It includes, for example, e-mail and other electronic communications such as text messages and voicemail, word-processed documents and databases, and documents stored on portable devices such as memory sticks and mobile phones. In addition to documents that are readily accessible from computer systems and other electronic devices and media, it includes documents that are stored on servers and back-up systems and documents that have been deleted. It also includes Metadata and other embedded data which is not typically visible on screen or a print out.” and iii) Paragraph 31, which provides: “Provision of Disclosure Data in electronic form 31 Where a party provides another party with Disclosure Data in electronic form, the following provisions will apply unless the parties agree or the court directs otherwise –(1) Disclosure Data should be set out in a single, continuous table or spreadsheet, each separate column containing exclusively one of the following types of Disclosure Data – (a) disclosure list number (sequential) (b) date (c) document type (d) author/sender (e) recipient (f) disclosure list number of any parent or covering document;(2) other than for disclosure list numbers, blank entries are permissible and preferred if there is no relevant Disclosure Data (that is, the field should be left blank rather than state ‘Undated’);(3) dates should be set out in the alphanumeric form ‘01 Jan 2010’; and (a) disclosure list number (sequential) (b) date (c) document type (d) author/sender (e) recipient (f) disclosure list number of any parent or covering document;(4) Disclosure Data should be set out in a consistent manner[40]Applications for relief from sanctions are governed by CPR r.3.9 which is to the following effect:
“Relief from sanctions 3.9 - (1) On an application for relief from any sanction imposed for a failure to comply with any rule, practice direction or court order, the court will consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need – (a) for litigation to be conducted efficiently and at proportionate cost; and (b) to enforce compliance with rules, practice directions and orders. (2) An application for relief must be supported by evidence”
As I have noted already, it is common ground that the principles by reference to which this application has to be determined are those set out by the Court of Appeal in paragraph 24 of its judgment in Denton, which is in these terms:
“A judge should address an application for relief from sanctions in three stages. The first stage is to identify and assess the seriousness and significance of the “failure to comply with any rule, practice direction or court order” which engages rule 3.9(1). If the breach is neither serious nor significant, the court is unlikely to need to spend much time on the second and third stages. The second stage is to consider why the default occurred.

(a) and (b)]”

.

(b) In relation to the first stage:

“… the court should concentrate on an assessment of the seriousness and significance of the very breach in respect of which relief from sanctions is sought. ” - see paragraph 27 of the judgment in Denton. The effect of the outcome of the first stage enquiry was explained in paragraph 28 of the judgment in these terms: “ … if a breach is not serious or significant, then relief from sanctions will usually be granted and it will usually be unnecessary to spend much time on the second or third stages. If, however, the court decides that the breach is serious or significant, then the second and third stages assume greater importance”
In relation to the third stage the effect of factors (a) and (b) are of: “… particular importance and should be given particular weight at the third stage when all the circumstances of the case are considered. That is why they were singled out for mention in the rule. It is striking that factor (a) is in substance included in the definition of the overriding objective in rule 1.1(2) of enabling the court to deal with cases justly; and factor (b) is included in the definition of the overriding objective in identical language at rule 1.1(2)(f). If it had been intended that factors (a) and (b) were to be given no particular weight, they would not have been mentioned in rule 3.9(1). In our view, the draftsman of rule 3.9(1) clearly intended to emphasise the particular importance of these two factors.” (a) for litigation to be conducted efficiently and at proportionate cost; and (b) to enforce compliance with rules, practice directions and orders. The First Stage The Scope of the Enquiry

The First Stage

[41]As I indicated at the start of this judgment there is a difference of principle between the parties concerning how I should approach the first stage exercise. It is submitted by Mr Steinfeld QC on behalf of the Liquidators that the only category of breach that I am entitled to consider is that which was identified by the Court of Appeal as the basis on which the appeal from the Order of Birss J should be allowed – that is the omission from the list served in purported compliance with the Default Order of any reference to the scripts. Mr Steinfeld argued that the effect of the judgment of Birss J was that the Default Order had not been breached in any of the ways alleged before him and that in consequence the only breach the respondents were entitled to rely on was that relied on by the Court of Appeal. Mr Crow argues that this approach is wrong in law, that I should consider each of the breaches that were being relied on before Birss J, and the OCR Issue. I am not able to accept Mr Steinfeld’s submission for the following reasons.[42]The only authority that each of the parties relied on in relation to this issue is P & O Nedlloyd BV v. Arab Metals Co and others (No.2) [2006] EWCA Civ 1717 [2007] 1 WLR 2288 (“Nedlloyd”). In summary in that case Colman J had refused permission to amend Particulars of Claim so as to allege an alternative contract to that which had been pleaded originally on the basis that the new claim was statute barred. The claimants appealed that decision to the Court of Appeal. That court allowed the appeal on the basis that even if the new claim was statute barred it arose out of the same facts and matters as the original claim and so the court had jurisdiction to give permission to amend and permission was given to amend the Particulars of Claim. Subsequently, the Defendants met a claim for specific performance of the alternative contract with a defence of Laches. The Claimant applied for summary judgment on its specific performance claim and failed. The issue on appeal was whether it was open to a defendant to rely on Laches in relation to a claim that was (as Colman J had held) the subject of a statutory limitation period - a conclusion that had not expressly been overturned by the Court of Appeal, when it had set aside Colman J’s Order.[43]The Court of Appeal held that the order of a first instance judge ceased to have any effect once it was set aside by the appeal court, regardless of the grounds on which it was set aside, and, therefore, the first instance judgment was incapable of giving rise to an issue estoppel once it had been set aside. The Court of Appeal’s judgment was given by Moore-Bick LJ who at paragraphs 26 to 29 said:
“When the matter came before it on appeal this court approached the question from a different direction. At the outset of the hearing, as is reflected in para 11 of the judgment of Thomas LJ, the court directed that it would hear argument first on the question whether the new claims arose out of the same, or substantially the same, facts as the existing claims and on the exercise of its discretion. In the event the court was satisfied that the new claims did arise out of the same facts as the existing claims and exercised its discretion in favour of permitting the amendment. Thomas LJ, with whom Carnwath and Tuckey LJJ agreed, concluded his judgment with these words [2007] 2 Lloyd's Rep 148 , para 25: “For these reasons, therefore, I consider that, on the assumption that the claims are time-barred, they arise out of the same facts as originally pleaded and the court should exercise its discretion to allow the amendments. In the circumstances, therefore, the issues on limitation so carefully and clearly considered by the judge do not arise. We have heard no argument on the issues and I express no view upon them.” 27 There can be no doubt, in my view, that the court was concerned to make it clear that it was neither endorsing nor disapproving the decision of Colman J on the limitation question. It did not need to do so because, having concluded that the new claims arose out of the same facts as the existing claims, it was satisfied that it had jurisdiction to permit the amendment, whether the claims were time-barred or not. In the event, it set aside Colman J's order and substituted its own. 28 Mr Rainey was quite right in saying that this court did not overturn the judge's decision on limitation, but despite that I am unable to accept that his judgment is any longer capable of giving rise to an estoppel in relation to that issue. The effect of the order made on appeal is to avoid entirely the order made by the court below. In Spencer Bower, Turner & Handley, at para 60, the matter is put as follows: “When a tribunal with original jurisdiction has granted, or refused, the relief claimed and an appellate tribunal reverses the judgment or order at first instance, the former decision, until then conclusive, is avoided ab initio and replaced by the appellate decision, which becomes the res judicata between the parties.” 29 … As a matter of principle, when an appellate court sets aside the order of a lower court that order ceases to have any effect and the decision of the appellate court alone is determinative of the issue between the parties. That is sufficient to determine the present case. Although the decision of Colman J was originally capable of giving rise to an issue estoppel, it could no longer do so once it had been set aside on appeal, regardless of the grounds on which this court made its order… .” “For these reasons, therefore, I consider that, on the assumption that the claims are time-barred, they arise out of the same facts as originally pleaded and the court should exercise its discretion to allow the amendments. In the circumstances, therefore, the issues on limitation so carefully and clearly considered by the judge do not arise. We have heard no argument on the issues and I express no view upon them.” “When a tribunal with original jurisdiction has granted, or refused, the relief claimed and an appellate tribunal reverses the judgment or order at first instance, the former decision, until then conclusive, is avoided ab initio and replaced by the appellate decision, which becomes the res judicata between the parties.”
[44]In my judgment, the reasoning in Nedlloyd is of limited relevance to the question between the parties before me namely whether the decision of the Court of Appeal limits the respondents to reliance on the failure by reference to which the Court of Appeal concluded that the obligation to carry out a reasonable search contained in the Default Order had been breached. The issue before Birss J and the Court of Appeal was different from the issue I have to decide. The Court of Appeal and Birss J were concerned only to determine whether the Default Order had been breached, not to determine the seriousness or significance of the breach of that Order – an issue that is material only to the relief from sanctions application. That application was not determined by either Birss J or the Court of Appeal. That is undoubtedly why the Court of Appeal approached the appeal in the manner that it did.[45]The effect of the reasoning in Nedlloyd on the facts of this case is only to preclude the Liquidators from denying that they have breached the default order in at least the manner identified by the Court of Appeal and also from relying on the ground that Lewison LJ expressly stated he had not based his judgment on. Birss J’s Order could only be relevant if it created some form of issue estoppel in relation to the issues considered by him and not considered by the Court of Appeal. It does not because Birss J’s Order ceased to have effect for all purposes once it was set aside. Thus no estoppel could arise in relation to either the issue concerning the form of the list, which Birss J had resolved against the respondents, or the OCR Issue, which could not have been considered by Birss J and was not considered by the Court of Appeal.[46]Although Mr Steinfeld argued that Nedlloyd could be distinguished on the ground that Lewison LJ did not express himself in the way that Thomas LJ had in Nedlloyd as described in the quotation set out above, in my judgment that submission is mistaken. The presence or absence of express wording such as that used by Thomas LJ is not determinative of the point I am now considering, which follows as a matter of law for the reasons given by Moore-Bick LJ in Nedlloyd. Mr Crow also suggested that this was also the case because the Court of Appeal’s Order expressly records that the appeal had been determined only by reference to Ground 1 and not any of the other grounds. In my judgment that point assists in part on the issue I am now considering. Ground 1 concerned whether there had been a reasonable search and thus Mr Crow’s point begs the question I am now considering – that is whether the respondents are confined to the ground on which the Court of Appeal concluded there had not been a reasonable search. I accept however that this point is a valid one in relation to the alleged failure to comply with CPR r.31.10.[47]The conclusion that Birss J’s Order ceased to have effect for all purposes once it was set aside also enables me to resolve the related submission made by Mr Steinfeld, namely that it is not open to me as a matter of judicial comity to reach a different conclusion from that reached by Birss J concerning the applicability of Practice Direction 31B. In my judgment the effect of the Court of Appeal’s Order in this case is that Birss J’s Order was avoided ab initio and with it the reasoning that led to that Order.[48]In the result, in my judgment the respondents are fully entitled to contend that the Default Order had been breached in each of the ways they assert and are not confined to the single ground on which the Court of Appeal allowed the appeal from Birss J’s Order.

The Alleged Breaches of the Default Order

[49]The Scripts Issue The respondents allege that the failure to disclose the scripts was illustrative of a failure to carry out a reasonable search (the basis on which the Court of Appeal reached its conclusion) but was also a failure to disclose documents that were required to be disclosed on standard disclosure. Whether what occurred is characterised as a breach of both the obligation to carry out a reasonable search and/or as a failure to disclose relevant documents does not add materially to the seriousness or significance of the omission, which in reality depends on the seriousness and significance of the omission of the scripts from the list served in purported compliance with the Default Order.[50]The primary facts relating to this issue are set out above in the sections of the various judgments that I have quoted from. Mr Steinfeld’s argument was that this breach was technical and one that could not in any relevant way have prejudiced the respondents because the existence of these documents or at least this class of documents had been apparent to the respondents from a very early stage. He drew attention to the fact that the documents had been referred to in the evidence filed in support of the application for a freezing order made against the respondents at the commencement of these proceedings and thus were disclosed within the meaning of CPR r.31.2 at that stage. Mr Steinfeld submitted that the respondents had been entitled to call for copies of the scripts from that stage pursuant to CPR r.31.14 but had never done so, which he said was illustrative of the reality – that the documents were not considered to be of significance so far as the respondents’ own case was concerned. He also maintained that the documents (and the bank statements) had been fully disclosed in the 2012 List and thus inspection of the scripts (and/or the bank statements) could have been sought at any stage thereafter. He accepted that the scripts and bank statements should have been supplied to Unified for inclusion in the disclosure database, and should have been included in the list served in purported compliance with the Default Order but maintains that the failure to do so was human error and the omission was neither serious nor significant in all the circumstances.[51]The scripts were plainly important documents. They were used as the evidential basis for obtaining freezing relief against the respondents. That of itself is not sufficient to make this failure either serious or significant given that they had been disclosed before, referred to in the evidence filed in support of the application for a freezing order and that the respondents could have but did not seek inspection of these documents at any stage.[52]What makes the failure to include the scripts serious is that, as the Court of Appeal pointed out, the scripts were secondary documents and the decision to omit from the disclosure process all the documents that supported the figures within the scripts was taken (and agreed to by the respondents’ solicitors) only on the basis that the scripts would be uploaded on to the database and disclosed in compliance with the Default Order. As Lewison LJ put it at Paragraph 38 of his judgment:
“Mr Gibbs knew about the importance of the scripts and knew that their disclosure had been promised to Mischon de Reya, yet he failed to check that they had been delivered to Unified. That they had not been uploaded was apparent on checking the database; and that should have alerted him to the need to find them. In my judgment he made no search for these critical documents let alone a reasonable search.”
Given this analysis, it is difficult to avoid the conclusion that the omission of the scripts from the list served in purported compliance with the Default Order was a serious breach of that order and of the obligation to carry out a reasonable search imposed by CPR Part 31.[53]Although the scripts had been referred to in Schedule A to the 2012 List, Mr Crow maintained that that schedule was inaccurate and in truth was no more than an inventory of documents located at a particular place. Mr Crow says, and it is not disputed, that what is listed in Schedule A are 104 scripts not the 102 items that in the end were listed in the supplemental list served by the Liquidators in part to correct the omission of the scripts from the list they had served pursuant to the Default Order. That is a discrepancy that is not explained but in my judgment has no real impact on the issue that I am now concerned with. It is a discrepancy that could have been dealt with reasonably and proportionately by a short exchange of correspondence between solicitors. It is the sort of omission that ought to lead readily to relief from sanctions because it is neither serious nor significant.[54]Whilst I am satisfied that the omission of the scripts was a serious breach of the default Order, it was not of itself significant. This is not a case of highly material documents that supported the respondents’ case or damaged the Liquidators’ case being concealed. The respondents and their solicitors were fully aware of the existence of the documents, their importance in the matrix of these proceedings and that other documents had been omitted on the basis that the scripts would be included within the list that was to be served in purported compliance with the Default Order. I conclude that the fact that the documents had not been called for by the respondents at an earlier stage is a relatively unimportant point. I say that because the documents were likely to be much more important to the steps that followed completion of discovery than to the steps in the proceedings that preceded it. What is more important is the point made by Lewison LJ in another context – namely that once the omission was pointed out it was the work of a few phone calls to establish what had happened and the omission was easily resolved, and was in the end resolved, by service of a supplemental list that was compliant so far as the scripts were concerned. Had this been the sole difficulty, then in my judgment whilst the omission was serious, it had limited if any real significance.[55]Had this been the only breach complained of, and given that the omission was the result of human error alone, it is difficult to see why it would not have been appropriate in all the circumstances to grant conditional relief in relation to it – that is relief from sanction conditional upon the scripts (and bank statements) being uploaded onto the disclosure database and a supplemental list served by a short fixed future date coupled with a debarring sanction for default. However given my conclusion that I must also consider all other ways in which the Default Order was allegedly breached, I postpone reaching a final conclusion on that point until after reaching conclusions about the other alleged ways in which the Default Order was breached, not least because Mr Steinfeld conceded that if I conclude that the OCR Issue shows that there has been a serious and significant breach of the duty to make a reasonable search then the Liquidators could not seek relief in relation to that breach by reference to any findings I might make in relation to the second and third stages of the Denton enquiry.[56]Non Compliance with CPR r.31.10 The essential facts relating to this issue are those set out in the judgment of Birss J that I have quoted from above. In summary, the respondents complain that the list served in purported compliance with the Default Order failed to comply with CPR r.31.10 by failing sufficiently to identify the documents disclosed because it described 44 documents as “Spreadsheet”, 60 documents as “Transcript”, 52 documents as “Accounts”, 29 documents as “Report” and 23 documents as “Table” in each case without further identification or description. It was submitted that some 555 of the documents disclosed had no file name, 421 had no author and 238 had no date. It was submitted that this breach was serious and significant because it meant that the list served in purported compliance with the Default Order was “… so vague as to be of no practical utility”.[57]In response to this submission the Liquidators make two points. First, they say that they are entitled to rely on Practice Direction 31B either because on proper construction the exercise being undertaken is e disclosure because of the methodology adopted with at least the tacit agreement of the respondents’ solicitors and the approval of Henderson J or was so close to such an exercise that it ought to be considered by analogy with the requirements of Practice Direction 31B but secondly and in any event the problem has been grossly exaggerated because in practice access to all the documents can be obtained by the respondents’ solicitors at the click of a button on a mouse so as to enable a check to be undertaken of what the document consists of.[58]Birss J rejected the submission that Practice Direction 31B was applicable to the exercise being undertaken by the Liquidators and I agree with him for the reasons that he gives at paragraph 56 of his judgment – that is:
“… the Practice Direction is concerned with electronic documents. A document which is held in the control of a party as a piece of paper is not an electronic document. Thus the Practice Direction would not ordinarily apply to the bulk of the disclosure in the Atrium case. ”
That is so because as he said in the previous paragraph, when summarising a submission from leading counsel for the respondents:
“… the documents being disclosed were hard copy documents which were scanned into the database for the purposes of carrying out the disclosure exercise.”
Birss J considered that this position was altered by the agreement of the respondents’ solicitors to this methodology. On this point I find myself in respectful disagreement. In my judgment what was agreed was that disclosure would be given by scanning the hard copy documents and then identifying documents to be disclosed using a key word search methodology. They did not as far as I can see either expressly or impliedly agree to the application of Practice Direction 31B to the product of that activity. Birss J considered that such agreement was implicit from what the respondents’ solicitors say in their letter of 1 March 2013, that is:
“We understand and accept that it is your desired intention to upload the documents referred to in Schedules C & D (excluding the obviously irrelevant documents) onto an E-disclosure platform in order to perform such a search using the E-disclosure tools and presumably working within the terms of the PD 31B and treating these documents as documents in electronic form for that purpose.”
I am not convinced that this was a reference to anything other than the search methodology that was being adopted, particularly because the solicitors had said in an earlier part of the letter that:
“ … although we welcome your approach to discuss with us the issues in relation to disclosure we cannot validate your clients’ disclosure or indeed any proposed approach to disclosure any more than the Court can, until your clients’ disclosure is complete and their list served.”
[59]In those circumstances, I am satisfied that the Liquidators failed strictly to comply with the obligations imposed by the Default Order – that is the obligation to provide to the respondents a list that was “… in compliance with the requirements set out in CPR 31.10 …”. In my judgment, for this requirement to be complied with there had to be provided a list that was prepared in conformity with the requirements imposed by paragraph 3 and in particular paragraph 3.2 of Practice Direction 31A. In my judgment the list served by the Liquidators did not comply with that requirement for the reasons given by the respondents.[60]The question remains however whether this breach of the Default Order was serious and significant. Had the assertion made on behalf of the respondents that the list was of no practical utility been correct, then obviously the breach would have been both serious and significant. On this issue however I agree with Birss J’s comment that “… the argument that the lists are of no practical utility is seriously exaggerated …”. I am in agreement with that view for the following reasons.[61]First, the impact of a failure of this sort will depend on how disclosure is given. If disclosure was given by list with inspection to follow either by the recipient of the list calling for photocopies or carrying out a physical inspection exercise at the premises of the disclosing party or its solicitors then the omission of the material required by paragraph 3 of Practice Direction 31A is potentially both serious and significant. Depending on the circumstances, it could affect very significantly the amount of time that had to be spent on inspection and thus the cost of that exercise for the inspecting party. It would mean that every document with a generic description would have to be examined to see whether it might be relevant or not, when, if properly described, at least some could safely have been ignored. Whilst this additional work might not take very long for each document it could easily become very significant if there were a large number of documents within each inadequately described category that had to be inspected for potential relevance. The time needed would be increased in the case of physical inspection by the need to locate each document. All of this could add significantly but unnecessarily to the costs incurred by the inspecting party. If inspection by provision of copies was being undertaken, it would be necessary to call for far more copy documents than might otherwise be the case (thereby adding significantly to the copying costs, which almost invariably is borne in the first instance by the party asking for the copies) as well has having to make time available to examine the copy documents concerned.[62]In my judgment however, the impact of this sort of problem was significantly mitigated (though not eliminated) in this case by the fact that the inspection process was to be undertaken by giving the respondents’ solicitors access to a searchable database of scanned disclosed documents. Thus, for example, it would have been the work of a moment to pull up a transcript in order to identify who was being interviewed by or on behalf of the Liquidators and when. That sort of preliminary examination is all that we are here concerned with. The detailed review of any document thought to be relevant would be undertaken in any event. All that arises in this case is the effect of failing to provide the concise descriptive material in the list, which would enable a judgment to be made as to whether the document needed to be inspected at all. The use of a disclosure database eliminated much of the additional work that such a failure would have caused where inspection was to be conducted in the traditional manner.[63]I conclude that the omission of an appropriate concise description in breach of the Order and CPR Part 31 was serious and significant because the failure to comply would have added significantly to the time needed to carry out, and therefore the cost of carrying out, a competent inspection exercise. The seriousness and significance of this omission was mitigated but not eliminated by the fact that inspection was to be carried out by access to a database of electronically scanned documents so that the task of initial examination of generically described documents could have been accomplished in less time than would have been the case if inspection had to be undertaken in a conventional manner. As with the Scripts Issue, I postpone considering whether relief ought to be granted until after I have considered the OCR Issue.[64]The OCR Issue In my judgment this is, at least potentially, the most serious and significant breach of the Order. Indeed, Mr Steinfeld accepted, entirely realistically, that if I am persuaded that the deficiencies of the OCR scanning were as alleged by the respondents then by definition there will have been a failure by the Liquidators to carry out a reasonable search at a level that is both serious and significant and that the application for relief could not succeed by reference to the second and third stages identified in Denton.[65]I have described already the nature of the OCR Issue. I need not repeat or expand upon that description. Mr Steinfeld submitted that on a proper analysis of the disclosure process I could not conclude that there had been a breach of the obligation to make a reasonable search by reference to the OCR Issue. What follows is a summary of what Mr Steinfeld says the disclosure process consisted of. He argues that these submissions are supported by the witness statement of Mr Kilby, who describes himself in his witness statement in these proceedings as “one of the owners and Chief technology and Operations officer of Unified OS Ltd”. He maintains that once this is understood then it becomes clear that the OCR Issue is simply another attempt by the respondents to take advantage of a difficult situation in order to avoid this claim.[66]Mr Steinfeld submits that the disclosure process undertaken by the Liquidators’ solicitors involved six stages. Stages 1 and 2 involved eliminating obviously irrelevant material from the material that had been disclosed originally as Schedules C and D to the 2012 List. This largely consisted of primary accounting material either consisting of or including the material that it had been agreed would not be disclosed because the scripts were to be disclosed. Stage 3 involved the delivery of what was left (180,302 documents) to Unified for scanning onto the master database. It was this material that was at this stage subjected to OCR scanning in order to enable key word searching then to take place.[67]Stage 4 consisted of exclusionary word searching. Exclusionary word searching was designed to filter out irrelevant or privileged material by using words such as the names of the Liquidators’ solicitors. What was then left was subjected to the stage 5 process, which involved using inclusionary key words to identify potentially disclosable documents. The effect of these two processes says Mr Steinfeld was to reduce the 180,302 documents first to 94,247 documents (being those left after completion of stage 4) and then to 28,686 documents (being the documents left after stage 5). These documents were then examined in their non-OCR scanned format by lawyers for disclosability and 5,535 documents were identified for disclosure by this process. It follows from this that 53% of the documents that were scanned by Unified responded either to exclusionary or inclusionary key word searches but the balance of the documents (86,055 documents) did not respond to either of the key word searches.[68]The only evidence that has been filed by the Liquidators going to this issue (which it should be remembered was first raised by the respondents well before the hearing of the appeal from Birss J’s order and was the subject of the Ladd v. Marshall application to the Court of Appeal that was stood over to be heard with the appeal but in the end was never determined because it was unnecessary for the reasons already identified) is the evidence of Mr Kilby.[69]Mr Steinfeld concedes in his supplemental written submissions that Mr Kilby’s evidence does not “… provide an evidential basis … for reaching conclusions about the number of disclosable documents that might have been picked up by a manual (i.e. non key word led) disclosure review of the remaining …” 86,055 documents. He acknowledges that this is so because it is unknown whether the remaining documents were unresponsive to the key word searches because their scanned images were so compromised that keyword searches were ineffective or because the remaining documents did not contain any of the keywords. He maintains however that on proper analysis of the evidence, I can safely conclude that these remaining documents did not respond to key word searches because they did not contain key words not because the OCR conversion process failed to identify key words that were present.[70]It is necessary that I now summarise what Mr Kilby says in his statement in order to test whether it supports Mr Steinfeld’s submissions. At paragraph 17 of his statement Mr Kilby confirms that the total number of “hardcopy” documents that were supplied to Unified was 180,302 and it was these documents that were first scanned and then had OCR technology applied to them. He distinguishes the hardcopy documents from some electronic documents being the contents of the hard drive of a lap top computer used by Mr English.[71]Mr Kilby then says that of the 180,302 hardcopy documents “… 28,686 were responsive to the search terms.”. He does not describe the exclusionary and then inclusionary searches that Mr Steinfeld refers to in his submissions. Mr Kilby then says at paragraph 22 of his witness statement:
“22. The responsive hardcopy documents were then reviewed for relevance, however given the understanding that there were limitations to OCR technology …. Isadore Goldman undertook an individual review of a considerable number of additional hardcopy documents to assure themselves of the validity of the search responsiveness and the reasonableness of the search. In total 94,247 hardcopy documents were reviewed. That is to say over 3 times more hardcopy documents were reviewed than those which were returned as responsiveness to search terms. This represents over half of all the hard copy documents in the database. 23. Of the hardcopy documents that were reviewed, 5,535 were identified as relevant and falling to be disclosed. This represents 3% relevance rate of the hardcopy documents …”
[72]I am bound to say that I read this material as saying that 28,686 documents were responsive to the keyword search, that a further very substantial number of documents were reviewed by the Liquidators’ solicitors (whether the 94,247 included or excluded the 28,686 is not clear, though I suspect it is the former rather than the latter) and that in the aggregate 5,535 documents were identified as disclosable. What the evidence does not say is how many of the documents that were physically examined but which had not been identified by keyword search in fact contained key words, or how many of the 5,535 documents were revealed by the OCR search and how many were not but were found as a result of the individual review of the documents other than the 28,686 that responded to the keyword search. What the evidence also does not elaborate on is whether the additional documents selected for physical review that had not been identified by keyword search were selected at random or whether there was some method to the selection process. Assuming the selection process was a random one then it would seem a reasonable working hypothesis that up to 3% (or about 2,500) of the 86,055 documents that have not been examined may be disclosable.[73]The omissions from Mr Kilby’s evidence are significant since if either the documents that had been physically inspected had been selected other than randomly and/or none of those physically inspected had either contained keywords or were disclosable, it can safely be assumed that Mr Kilby would have said so since that evidence would have provided powerful support for the Liquidators’ case concerning the OCR Issue. These omissions are all the more significant because(a) of the lapse of time that has occurred since this point first became in issue between the parties – that is significantly before the appeal was heard on 30 July 2014,(b) that no further evidence has been served going to this issue notwithstanding that the Liquidators have been represented throughout by experienced solicitors and leading and junior counsel, or, in the case of counsel, had the funding to enable them to obtain advice from leading or junior counsel, and(c) no application was made on behalf of the Liquidators either to adduce additional evidence going to these issues or for an adjournment to allow such evidence to be adduced. This last point is important because it is difficult to see how a short adjournment of a few days necessary to adduce evidence going to a point as critical as the one I am now considering could sensibly have been refused even allowing for the delay that has occurred in this case over the years and is all the more so in the light of the concession made by Mr Steinfeld that I was bound to refuse relief if I concluded that the OCR Issue demonstrated that there had been a serious and significant breach of the obligation to carry out a reasonable search.[74]Notwithstanding these points, Mr Steinfeld submits that the onus rests on the respondents to establish the failure for which they contend. He submits that they have plainly failed to discharge the evidential burden that he says rests upon them. In summary his submissions as to why I should conclude that the failure for which the respondents contend has not been made out are as follows.[75]First, he submits that the number of documents identified using keyword search of the OCR converted hardcopy documents was a 16% response rate whereas the electronic documents when searched using keywords produced a 15% response. This he submits shows that it is likely that the keywords search of the scanned hard copy documents was effective at identifying all the relevant documents within the 180,302 hardcopy documents.[76]Aside from its speculative nature, there are a number of obvious difficulties about that submission. i) First, it ignores the fact that the evidence is entirely silent as to how many of the 5,535 hardcopy documents that were ultimately disclosed were documents that were not part of the 28,686 documents that were revealed by the keyword search or how many of the physically examined documents that had not been identified by keyword search contained inclusionary keywords; ii) Secondly, it ignores the fact that, if correct, it would mean that all the relevant documents had been identified in the documents physically inspected even though(a) 48% of the hardcopy documents have not been examined,(b) the documents that were physically examined appear to have been selected at random since the contrary is not asserted in Mr Kilby’s evidence and(c) inferentially at least some of the documents ultimately disclosed were identified by physical inspection but not by keyword search since the contrary is not asserted in Mr Kilby’s evidence either; iii) Thirdly, I accept Mr Crow’s submission that this is a false point because it is not comparing like with like. The electronic documents all come from a lap top formerly belonging to Mr English the former finance director of the companies that postdates the insolvency of the companies and the retirement of the respondents. By definition therefore it is to be expected that the electronic database would provide fewer documents that respond to the relevant keywords not more and thus if any party is to obtain support from this it is the respondents not the Liquidators; and iv) Finally this submission ignores the fact that if either no or no significant number of documents that contained keywords, or which were disclosable, had been disclosed by the physical examination of documents not identified by the keyword search process, then Mr Kilby could and would have said so, thus rendering unnecessary the speculation that this submission requires.[77]Mr Steinfeld’s next submission relies on Mr Kilby’s evidence at paragraphs 26-28 of his witness statement concerning what Mr Kilby calls “Fuzzy Searching methodology”. Mr Kilby explains what this is at paragraph 9 of his statement in these terms:
“This technology will instruct the search engine to return documents that have an agreed level of discrepancy, at the character level, from the search terms. This can assist in returning documents that have characters incorrectly recognised by the OCR engine. This approach does not add substantially to cost or timescales as it is incumbent in most industry standard search engines. It is however likely to return many “false positives” – that is documents that do not respond to the search terms but that had character differences to the search terms not caused by the misinterpretation of characters by OCR. Fuzzy searching is extremely common in most litigation support scenarios.”
[78]Mr Kilby says at paragraphs 26-28 of his statement that a fuzzy search has been carried out. He describes that examination in these terms:
“On conducting a fuzzy word search test of +1 on the entire document population (hardcopy and electronic combined), it is apparent that the results are not only similar in terms of percentage hits (hardcopy 49% and electronic 57%) but that the electronic documents return a greater number of “hits” than the hardcopy. Again this indicates to me that the results of searching are not compromised by the quality of the OCR.”
He does not make clear when this test was carried out but inferentially it was not as part of the disclosure exercise but some time later, probably sometime after the issue I am now considering first surfaced. Mr Kilby says that misrecognition cannot be a factor with electronic documents, and thus that the closeness of return suggests that misrecognition is not an issue.[79]This seems not to be addressing, or to be avoiding, the real issue because it fails to distinguish between those documents that were not identified by keyword search which were examined physically, and those that were not identified by keyword search and to date have not been examined physically. If (as by implication appears to be the case from Mr Kilby’s evidence) there were documents not identified by key word search that the physical examination of documents had revealed(a) to contain keywords and(b) to be disclosable, then I do not see how comparing the outcome of a fuzzy words search of all the hardcopy scanned documents on the one hand and all of the electronic documents that come from Mr English’s lap top on the other demonstrates that there is not an issue.[80]It strikes me that the one thing that might have helped – a fuzzy word search of the documents that had not been physically examined at the time of the disclosure search compared with a similar search of the documents that were physically examined but which had not been identified as a result of the keyword search – has not taken place. Had such an examination taken place it might have been possible to arrive at some statistical conclusions as to the probability of disclosable documents being amongst the documents that have not been physically examined and which have not been identified by keyword searches, particularly if Mr Kilby had identified how many disclosable documents had been identified amongst those that had been physically examined but had not been identified by the keywords search.[81]Thus in the result the court is being invited to accept that no documents or no significant numbers of documents or no significant number of documents containing keywords or which are disclosable would be revealed from amongst the documents that have not so far been examined physically on the basis of a statistical analysis that does not support such a conclusion.[82]The final point that Mr Steinfeld makes is to argue that “the fact that the Respondents have not been able to point to any specific documents which they would have expected to see disclosed but which have not been …” strongly supports the inference that in truth there are no potentially disclosable documents within the 86,055 documents that have not been physically examined. In my judgment this point lacks reality.[83]First I do not accept that the respondents can sensibly be expected to recall the existence of documents that have not been disclosed that relate to events that took place in 2003 to 2005. Aside from the effect of the passage of the years, the sheer volume of documentation that has been scanned makes this proposition inherently unlikely. The businesses operated by the companies were substantial as is apparent not merely from the volume of documentation generated but from the sums being claimed. The respondents are not alleged to have had any direct responsibility for the day to day activity that is alleged to give rise to this claim thereby making it even more unrealistic to suppose that they could identify particular documents that should have been but have not been disclosed.[84]Secondly, the solicitors acting for the respondents have attempted to identify the categories of documents that they say are missing from the disclosure exercise. They did so in paragraph 14 of their letter to the Liquidators’ solicitors dated 5 July 2013, which was the formal response to the lists served on behalf of the Liquidators in purported compliance with the Default Order. Whilst not all the categories there referred to are material to the point I am now making two stand out. The first concerns operating manuals. These are likely to be of obvious potential significance to a case where a claimant seeks to infer knowledge of wrong doing on the part of a director and company secretary, neither of whom were involved in the activity that is said to have been wrongful. The sole response to this issue from the Liquidators’ solicitors was that the manuals “… did not appear in the pleaded case …” and so there was no obligation to disclose. It is unclear to me whether the Liquidators are asserting that the manuals were scanned and did respond to the keyword search or not.[85]The other category concerns management accounts. These are known to exist because they are referred to in the evidence filed in support of the application for freezing relief at the start of these proceedings. However they did not appear anywhere in the list served in purported compliance with the Default Order. The response from the Liquidators’ solicitors was that all relevant management accounts had been disclosed. This response does not answer the point I am now considering. Unanswered, this problem suggests either that the management accounts were not scanned or the keyword search failed to pick up the management accounts.[86]Thirdly, the reason why disclosure is important in a case like this is because the respondents need to have access to documentation that by definition they have not seen before – that is the material generated by those with direct responsibility for the wrongful acts that it is said gives rise to this claim. Since the respondents deny knowledge of what is relied on by the Liquidators, demonstrating that material generated by those with direct responsibility for what happened was not addressed, copied or disclosed to them at the time these events were occurring is of potential importance.[87]Finally this point is an artificial one in this sense. By a letter dated 26 May 2013, the Liquidators’ solicitors informed the respondents solicitors that by 5 July 2013, access would be provided to the respondents’ solicitors to(a) the database containing the documents that appeared in the list to be served in compliance with the Default Order and(b) “…all non-listed documents, except those subject to privilege”. Not merely did the Liquidators’ solicitors not give access to the disclosed documents database on 5 July 2013 or at any time until a further order had been obtained from Norris J at the end of November 2013, but they have not given access to the non listed documents database at all. If and to the extent that there was any doubt about what the respondents’ solicitors expected, that was eliminated by their letter of 20 November 2013. All this notwithstanding, access has never been given to the non-listed documents. It is thus in my judgment unreal for the Liquidators to submit as they do by paragraph 6 of Mr Steinfeld’s supplemental Note that if the respondents “… were able to show actual problems with the disclosure (i.e. by identifying specific disclosable documents that have not been disclosed) they would have done so by now”.[88]There is one point that Mr Steinfeld made that has given me pause for thought. It was that if in truth there are potentially disclosable documents within the 86,055 documents that have not been examined then their existence would have become apparent from the documents that have been disclosed because they would have been referred to in those documents. To an extent that is a fair point but in my judgment is not one that ultimately assists in resolving the issue I am now considering. Whilst non disclosed disclosable documents might be referred to in documents that have been disclosed, whether that is so is a matter of chance and does not sensibly lead to the conclusion that because there are no such references (assuming that to be the position) there are no disclosable documents within the 86,055 documents that have not been examined.[89]I return now to the issue that at this stage I am considering – namely whether the defects referred to in this section of the judgment constitute a failure to carry out a reasonable search. The relevant factors are those identified in CPR r.31.7(2) that is “(a) the number of documents involved;(b) the nature and complexity of the proceedings;(c) the ease and expense of retrieval of any particular document; and(d) the significance of any document which is likely to be located during the search.” (c) the ease and expense of retrieval of any particular document; and (d) the significance of any document which is likely to be located during the search.”[90]In considering this issue when this case was before the Court of Appeal, and in relation to the question whether there had been a reasonable search in relation to the scripts, Lewison LJ said in relation to (b):
“The claim is one for £50 million or thereabouts, based on allegations of dishonesty and fraud arising out of events that are a decade old. The liquidators had already been criticised for the previous failings and disclosure. There had been a number of slippages in the timetable and they were under the shadow of an Unless Order, so it was obviously important to make sure that the disclosure list was accurate. ”
In relation to the other factors identified in CPR r.31.7(2): i) As to (a), the volume of documents that have not been examined number 86,055. The evidence suggests by implication that a number of documents were not identified using the keywords search method and that a number of documents containing keywords which were disclosable were identified as a result of the physical examination of a number of documents that had not been identified using the keyword process and are not part of the 86,055 documents that have not been physically examined. The number of documents that should have but have not been disclosed is unknown. It might have been possible to extrapolate if the relevant information had been provided by Mr Kilby but it has not been; ii) As to (c), it would not have been any more expensive or difficult to carry out a physical examination of the 86,055 documents than it was to carry out an examination of the 94,247 documents that were physically reviewed. It would have taken a significant amount of time, or more people, to carry out the exercise but once it was appreciated that there was a problem, the Liquidators’ solicitors could have informed the respondents’ solicitors of that fact and sought consent (subject to the approval of the court) to an extension or applied to the court for an extension. If the application had been made before the time for giving disclosure under the Default Order had passed it is likely that an extension necessary in order to overcome the effects of an unanticipated technical problem would have been granted – see CPR rr. 3.1(7) , Tibbles v. SIG Plc [2012] EWCA Civ 518 [2012] 1 WLR 2591 and Mitchell v. NGN [2013] EWCA Civ 1537 [2014] 1 WLR 795, unaffected on this point by Denton. It is not suggested that the Liquidators did not have the financial resources to carry out this exercise. As I have said the Liquidators were and are the beneficiaries of an indemnity from HMRC. It is not suggested that the necessary human resources were not available or could not have been recruited. In any event, the task is not uniquely demanding. Whilst not common place it is certainly not unusual for disclosure exercises of similar magnitude to be carried out in commercial litigation. The scale of the task that had to be completed was obvious from well before the date when the Default Order was made; and iii) As to (d), the significance of any document that is likely to be located during the search is necessarily unknown for the reasons already explained but given the nature of the allegations made by the Liquidators against the respondents – which invites the court to infer fraud on the part of each in circumstances where neither had a direct involvement with the wrongdoing that is the foundation of the claim – it is difficult to conclude that there is no realistic prospect of material helpful to the respondents’ defence are not contained within the 86,055 documents that have not been physically examined. All this leads me to conclude that a reasonable search has not been carried out. It further leads me to conclude that this breach was both serious and significant. Mr Steinfeld accepted (correctly and realistically) that the only question that could arise in relation to this issue was whether in the circumstances there has been a failure to carry out a reasonable search for disclosable documentation. If the mechanism that had been devised has not worked correctly then there could not have been a reasonable search and that would be both serious and significant because even today the disclosure exercise will not have been completed correctly and what remained to be done would take significant further time.

The Second and Third Stages

[91]I can take each of these stages in relation to each of the ways in which the Default order has been breached rather more quickly than my consideration of the first stage.

The OCR Issue – Stage 2

[92]Mr Steinfeld accepted (with respect both correctly and realistically) that if I concluded that there had been a breakdown of the mechanism for searching for relevant documentation that was serious and significant, then this could only be because inadequate care had been taken to ensure that the documents that were subjected to OCR scanning produced electronic versions of the documents that were of sufficient quality to enable a key word search to be undertaken. I agree but would go further. Once it became apparent to the Liquidators’ solicitors that the OCR scan was defective (as must have been the case at the latest once physical examination of the documents that had not been identified by keyword search started to reveal documents that contained keywords which were disclosable) then that was the time to increase the resources being made available to complete a physical examination of the documents that have so far not been physically examined and/or approach the respondents’ solicitors and/or the court for a variation to the terms of the Default Order relying on the principles that I refer to earlier in this judgment. That was not done. There is thus no satisfactory explanation for the failure that has occurred.

The OCR Issue – Stage 3

[93]Mr Steinfeld accepted that he would have great difficulty in these circumstances in persuading a court for stage three purposes that relief ought nonetheless to be granted. I agree for the following reasons, which I set out in summary terms in the light of the concession that has been made.[94]The court is required to consider all the circumstances of the case. In my judgment those factors include the gravity of the allegations made against the respondents, the sums claimed, the length of time that has elapsed since the commencement of these proceedings, the fact that the Liquidators sought and obtained freezing orders at the commencement of these proceedings (that were4 later replaced by undertakings in equivalent terms) which of itself imposes an obligation to prosecute the claims efficiently, and the serial failures in the disclosure process that led to the Default Order being made. The reasons why Henderson J considered that it was necessary to impose the sanction that he imposed are highly material to an assessment of whether relief ought to be granted in relation to the failure to carry out a reasonable search that I am now considering. Those are set out in the quotation in paragraph 22 above but in particular include what Henderson J characterised as the lamentable history of the Liquidators’ disclosure exercise down to the date when he made the Default Order.[95]There is no excuse for any of this, particularly having regard to the fact that throughout the Liquidators have been represented by experienced and well resourced firms of solicitors with substantial experience of major litigation that have been funded in effect at the tax payers’ expense throughout. Although in the course of his submissions in relation to the other failures relied on by the respondents, Mr Steinfeld suggested that there ought to be weighed in the balance in favour of granting relief the facts that the sums claimed were large and that the proceedings were brought primarily to make good losses suffered by the Crown, quite rightly Mr Steinfeld did not seek to rely on these points in relation to the issue that I am now considering. The reality is that proceedings brought on behalf of the Crown and funded by the tax payer ought to be conducted throughout to best practice standards. These proceedings have not been. The other ways in which the Liquidators have breached the default Order demonstrate a failure to approach this litigation appropriately. The failure to include the scripts in the list and the failure to ensure that categories of documents were appropriately described shows that even when operating in the shadow of the Default Order insufficient care was taken to ensure that appropriate resources were applied to ensuring compliance.[96]In any event, the errors that have occurred to date show that as a result of the failures of the Liquidators, these proceedings have not been conducted efficiently or at proportionate cost. On the contrary they have been conducted in a manner that has exposed the respondents to unnecessary or substantially increased costs that could have been avoided. A perusal of the index to the hearing bundle shows that there have been no less than 10 Orders made in these proceedings leaving out of account consent orders. This is obviously disproportionate when it is remembered that disclosure has not yet been completed satisfactorily. A particular example of the way in which these proceedings have not been conducted efficiently or at proportionate cost is the failure of the Liquidators’ solicitors to give access to the disclosure database until ordered to do so by Norris J in November 2013. This caused delay, expense and also incidentally meant that further court time was avoidably taken up by these proceedings. Indeed, a similar point can be made in relation to the hearings leading to both the November Order and the Default Order and to the proceedings before Birss J and the Court of Appeal.[97]In those circumstances I consider it is inappropriate to grant relief from the sanction imposed by the Default Order. That is sufficient to dispose of this application. In those circumstances, I set out my conclusions in relation to the remaining issues shortly below.

The Scripts Issue

[98]Had the only ways in which the Default Order been breached been the failure to include the scripts within the list served in purported compliance with the Default Order then I make clear that I would have granted relief from sanctions. As I have explained the failure was serious in the sense that a substantial number of primary documents had deliberately been omitted from disclosure on the basis that the scripts would be included within the disclosure database. The documents were not included in the list served in purported compliance with the Default Order as they should have been and there was no explanation for this failure other than error on the part of the Liquidators’ solicitors. However, the impact of this error was limited for the reasons that I have explained and easily rectifiable and as far as I can see was rectified by the service of a supplemental list.

The CPR r.31.10 Issue

[99]The failure to comply with CPR r.31.10 was serious and significant but for reasons already set out above was much less significant than it would have been the case had a conventional disclosure exercise been undertaken. So far as stage 2 is concerned, there is no exculpatory explanation offered for this breach. It is therefore necessary to turn to stage 3 and consider all the circumstances.[100]With some hesitation I would have granted relief in respect of this failure as well but would have done so only on condition that the Liquidators used their best endeavours to supply the information missing in relation to the generically described documents by service of an amended list to be served by a short fixed future date with a sanction in similar terms to that imposed by the Default Order applying in the event of default. All the circumstances includes the ease with which the default can be remedied. The reality is that assuming the Liquidators complied with an Order in the terms I have mentioned (assuming that they have not complied with Birss J’s directions to similar effect) the problem could have been eliminated speedily and at minimal expense, and without any significant additional inconvenience or expense for the respondents. My hesitation in reaching this conclusion is caused by the factors summarised in paragraphs 94-96 above, by the serial failures that have occurred and the particular requirements to enforce efficient conduct of litigation at proportionate cost and compliance with rules and orders. Weighing those factors against the fact that this default is at a relatively low level of seriousness and significance, that it can be corrected easily and at minimum expense and that correction would have minimal adverse effects on either the respondents or the litigating public generally leads me to conclude, as I say with some hesitation, that on balance relief should be granted in relation to this failure.

Conclusion

[101]The application for relief fails and is dismissed.