A FAILURE TO DISCLOSE CAN BE JUST AS TELLING AS DISCLOSURE ITSELF: EVIDENCE, INFERENCES AND THE BLUE ANGEL CASE

August 25, 2015 · by · in Applications, Civil evidence, Civil Procedure, Disclosure, Uncategorized

The decision of Mr Robin Hollington QC (Sitting as a Deputy Judge of the Chancery Division) in Davy -v- Croxen [2015] EWHC 2372 (Ch) (“The Blue Angel case”) contains some illuminating observations about the practicalities and costs of disclosure and the potential practical impact of  a refusal to disclose documents.

“I will say at the outset what the outcome is but, in fact, the route by which I reach that outcome is far more important than the actual outcome.”

  1. “This is a classic type of case, in my judgment, where the court can avoid the cost and expense of disclosure and cross-examination by adopting the alternative course of drawing inferences which are appropriate from any failure on the part of any party to be full and frank with the court. It seems to me that this is precisely what Mrs. Justice Rose had in mind at the outset”.

KEY POINTS

  • The applicant had declined to disclose documents which may be relevant to an issue in the application.
  • Rather than order the specific disclosure, with a possible spiralling of costs and further applications, the judge did not  make an order.
  • It was open to the trial judge to draw what inferences he or she thought appropriate about the applicants’ failure to give disclosure of potentially relevant documents.

THE CASE

The applicants were seeking to replace the respondent administrators with an independent liquidator. The hearing is listed for trial for seven days at the end of October 2015.  The respondents made an application for disclouse of advice from firms of accountants in relation to the payment of dividends. (There was also a cross-application by the applicants for disclosure).

THE RESPONDENTS’ CASE: AN ULTERIOR MOTIVE

The respondents’ case is that the applicants had an ulterior motive.
  1. In this case, without going into the detail of the evidence, it is plainly the respondents’ case that the applicants in this matter have an improper collateral purpose in seeking their removal, namely to obstruct and delay the proper investigation and pursuit of claims in misfeasance against them, arising out of a dividend of about £11million said to have been declared and paid in about June 2010 but, so the respondents say, in fact effected in June 2011 and fraudulently backdated to a year earlier. I will come back to the sequence of evidence to that effect. Whilst I was not referred to any specific authority to the effect that the court can take that into account in the exercise of its discretion, I am satisfied that the trial judge might well take into account, in the exercise of his discretion, the extent to which the removal application was motivated by a desire to obstruct and delay the proper investigation of that claim. I have in mind, although I do not think I was specifically referred to such cases, a line of cases concerned with whether a compulsory winding up order should be made where there is in place a voluntary liquidator appointed, by one means or another, by those in control of the company against whom allegations of misfeasance exist. I was referred to one case, the Medisco case, and the cases that I have in mind fall into the same type of case as the Medisco case. The respondents’ application for disclosure is obviously directed to that issue.
  2. The applicants’ main complaint about the respondents’ application for disclosure is partly that there is no case to answer and, in particular, they rely upon the fact that Ms. Davey made a number of cash advances before the administrators were appointed but after June 2011. Their main complaint is, in effect, that the respondents have raised this issue really only as a defence to their removal and in order to divert attention from due consideration of their own incompetence and inefficiency, including incompetence and inefficiency and delay in any investigation and pursuit of any claim against the applicants for misfeasance. So one finds, rather unfortunately, in this case, as will be seen, that when the respondents after the issue of these proceedings seek to pursue the applicants for misfeasance, by raising questions and seeking answers and disclosure, the applicants then respond by relying upon that as a further ground for the removal of the administrators, which appears to lead to a relentless spiralling of allegations and counter-allegations.
  3. On the material before me I cannot, of course, form any views as to where the truth lies. That is a matter for the trial judge, insofar as he needs to form a view, and, indeed I should refrain, so far as I can, for present purposes from expressing any views on that in order not in any way to restrict or hinder the trial judge in the exercise of his discretion in the light of his much fuller consideration of all the material. But it seems to me that it is likely that the trial judge is going to have to ask himself this question: Are the applicants seeking to stifle the investigation of the claims against them by applying to remove the respondents or are the respondents only raising the misfeasance claims because of the removal application?

THE DECISION IN RELATION TO DISCLOSURE

  1. Mr. Davies, for the applicants, complains strongly about the piecemeal and delayed production of evidence by the administrators in relation to the allegation of misfeasance, but I have to say that in the course of the hearing I have formed the distinct impression that the applicants, whilst professing that they had nothing to hide, were rather not going to cooperate in any way in telling the court in these proceedings what they knew about the £11million dividend or any appropriation of assets out of the companies in favour of the applicants in 2010 or 2011. That lack of cooperation was justified on the basis, so they said, that this was an irrelevant issue cooked up by the respondents to hide their own misconduct. In my judgment, there is a real prospect that the trial judge will disagree with the applicants on this. There is evidence of wrongdoing in this case which the court may take into account against the applicants if the court is satisfied that the applicants could assist the court on the issue of this alleged wrongdoing and they have failed to do so. Mr. Davies submitted that one only has to look at the cash advances made by Ms. Davey after this dividend was declared and paid and before administrators were appointed, to show that there cannot have been any wrongdoing, but I simply do not follow that argument. It does not seem to me to be directed at all to the question of whether there was or was not any wrongdoing.
  2. I turn, in those circumstances, to the respondents’ application for disclosure. The first question to my mind is this: is the issue of misfeasance material to the trial of the removal application? In my judgment, it may well be. The court will obviously not be determining that issue but it will have to decide what weight to attach in the exercise of its discretion to the respondents’ allegation that the removal application was issued so as to stifle the investigation of that claim. The court will also have to consider the question, as I have said, of what interest the applicants have in the relief they seek and of the legitimacy of that interest.
  3. One outcome that the trial judge might well be considering in this case is some sort of joint office holding, one office holder to control the investigation and pursuit of claims against the bank and the administrators, if such claims are of substance; another office holder to control the investigation and pursuit of claims against the applicants, if such claims are of substance. There needs to be more than one office holder because one office holder could not reasonably be expected to control both. Alternatively, the court might entertain an application by the applicants to apply for permission to bring a claim in the derivative form against the banks and the administrators on the basis that the companies are, and remain, controlled by the alleged wrongdoers, in other words, administrators who are themselves defendants and banks who are, by their funding, maintaining those administrators in office. It does not seem to me to be out of the question that the court might entertain an application for permission to bring claims on behalf of the companies in a derivative form in those circumstances, but the court would obviously be mindful of the question of whether there was substance in those claims and would ask itself whether any reasonable board of directors would authorise such proceedings and would view them as being in the interests of the companies.
  4. I also have to ask myself, do I need to order disclosure on this issue when I could alternatively leave it to the discretion of the trial judge to determine what adverse inferences may fairly be drawn from the failure of the applicants to give disclosure on this issue. I also have to ask myself, if I were not satisfied that this alternative course was the best one, to what extent should I order disclosure having regard to, firstly, the fact that the trial judge will not be determining whether misfeasance has occurred and it is not suggested by the respondents that general disclosure should be ordered on this issue; secondly, any oppression of the applicants; thirdly, the applicants’ own case that this issue has only been raised by the respondents so as to divert attention away from their own failings, and, fourthly, and importantly, the evident desire of Mrs. Justice Rose, when giving directions, to limit the expense and time taken up in this application and the issues that needed to be addressed by the trial judge. So she did not make any order for general disclosure and she made no order for the cross-examination of any witnesses.
  5. As I see it, my job is to make an order which will best enable the trial judge to reach a fair result at the trial without undue cost to the parties. Doing the best I can, in my judgment, the best course is to leave it to the trial judge to draw such inferences adverse to the applicants as he sees fit from their failure to give full and frank disclosure of what they know in relation to the misfeasances alleged against them and of the documents which cast light upon it which either are, or have been, in their possession. He may well form the view that the applicants in this case, asking as they do the court to exercise its discretion in their favour so as to remove the respondents, can reasonably be expected to make full and frank disclosure to the court on the issues raised against them by the respondents. I emphasise, however, that it is ultimately a matter for the trial judge and he will no doubt exercise his discretion having regard to the contents of my judgment.
  6. This is a classic type of case, in my judgment, where the court can avoid the cost and expense of disclosure and cross-examination by adopting the alternative course of drawing inferences which are appropriate from any failure on the part of any party to be full and frank with the court. It seems to me that this is precisely what Mrs. Justice Rose had in mind at the outset.
  7. I do not think it would be right to make a full and general order for disclosure against the applicants and no such order is sought. In my judgment, making a partial order for disclosure, even of the documents previously offered by the applicants to be disclosed, seems to me to be likely to do more harm than good. It may be taken to suggest that this is the limit of their disclosure obligations and it also may prove to be inadequate and lead to yet further evidence and dispute about its scope and as to the applicants’ obligations as to searching and the like.
  8. So I do not determine any issue as to privilege. Such issues can be raised, as necessary, before the trial judge. So I make no order on the respondents’ application for disclosure.
  9. As to the applicants’ cross-application for disclosure, much has already been given, as I understand it, voluntarily. As for para.4, namely disclosure in relation to costs, in my judgment, the right thing to do here is to adjourn this to the trial judge on the basis of the assurances given by both parties at the hearing before me yesterday to the effect that if the judge were minded to order the disclosure sought by the applicants, and also if he were minded at the same time to order disclosure of costs as against the respondents, then the parties would have the material information with them at the beginning of the trial so that it could be produced immediately if the judge thought it should be disclosed.
  10. So far as the costs of these applications are concerned, superficially the respondents’ application has failed but I have made no order on the basis that I think that it is not necessary to do so and that the best course is to leave it to the judge to draw such adverse inferences against the applicants as he sees fit. In substance, therefore, it could be said that the respondents were the real victors, but I think it would be wrong of me to order the applicants to pay the costs. The trial judge will be much better placed than I am and, by the end of the trial, it will have become clear who the real victor was so far as this application was concerned. It is, of course, possible, I acknowledge, that the judge takes a completely different view from me to the lack of transparency on the part of the applicants. So I would reserve the costs to the trial judge. I know that I have heard no argument about this but those are my firm views.
  11. As a postscript to my judgment I would urge the parties to consider a resolution of these proceedings by applying for the appointment of joint office holders. Whether those office holders are administrators or liquidators it does not matter. There might be one nominated by the applicants, one nominated by the banks, with separate roles. One to control the claims against the administrators and the bank; one to control the claims against the applicants for misfeasance. These proceedings do no credit to the legal system or the insolvency profession in this country. It is litigation piled upon litigation and I have referred to the spiralling of allegations in this case. I think the trial judge will be interested in being told why such a solution has not been reached in this case.

COMMENT

This case serves as a reminder (albeit implicit in the judgment) that the absence of evidence and documents in a case can be just as significant as disclosure. There are circumstances in which a court can, properly, draw inferences when a party elects not to adduce evidence on key issues.  No conclusions were reached in this case, however the application for disclosure was refused because it was open to the trial judge to make such a conclusion if the evidence warranted it.

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