E-DISCLOSURE: UNLESS ORDERS: STRIKING OUT, COMPLIANCE AND DENTON: DEFENDANTS COME TO GRIEF

February 2, 2017 · by · in Appeals, Disclosure, Relief from sanctions

There is a lot to consider in the judgment today of Mr Justice Green in Micheal -v- Phillips [2017] EWHC 42 (QB). It relates to inadequate disclosure; retention of electronic documents; peremptory orders and relief from sanctions. Things did not go well for the party in default.

“Given the scale of the non-observance of the Order it is unnecessary to dwell in detail upon other matters. However there are a number of additional points to make. First, the failures significantly and unfairly prejudice the ability of the Claimants to prepare for trial. This is a case which will turn upon the forensic analysis of underlying financial data. A great deal of the most important documentation and data has been withheld from the Claimants by the Defendants. Second, the Defendants entered into the Unless Order by consent. The proportionality of the sanction for non-compliance was thus voluntarily accepted by them. It is of little moment to complain now that to visit the consented to sanction upon the Defendants is disproportionate. Third, I take into account the history of this case and the profoundly unsatisfactory way in which electronic data has been suppressed and/or lost”

KEY POINTS

  • The defendants had failed to comply with a peremptory order for disclosure and their defence and counterclaim were struck out.
  • The defendants’ application for relief from sanctions was refused.
  • The defendants had consented to the peremptory order. They could not complain that the result of the order was disproportional.
  • The defendants’ solicitor, who was aware that electronic documents had been destroyed, should have notified the claimant immediately.

 

THE CASE

The claimants brought an action alleging breach of management agreements in relation to the running of a taxi firm. Earlier in the proceedings an injunction had been made, its terms included an order that the defendants

    1. “… preserve, keep safe and not destroy or damage until trial or further order“:
“All electronic files and associated computer hardware within their possession or control containing information and data belonging to the Third Claimant, including all and any emails sent or received for and on behalf of the Third Claimant held on any severs.
The books, accounting records and bank statements of the Second Defendant and those of any other company or concern under the control of the First Defendant.”

Further the defendants’ solicitor made it clear that they were aware of the duty to retain elecronic document.

    1. The Defendants, and their solicitors, were well aware of the importance of retaining electronic files and data. On the 4th March 2015 solicitors then acting for the Defendants, in a letter dealing with disclosure matters, stated and represented the following about retention of electronic data and files:
“We confirm that our client has retained all electronic files and data that was stored within the Second Defendant’s computer system and will be kept safe and will not be destroyed pending the finalisation of the trial or further Order.”

DISCLOSURE BY THE DEFENDANT

The claimants complained that the defendants’ disclosure was inadequate.

It is the Claimants’ case that the First and Second Defendants failed to give proper disclosure as required by the Order of Master Eastman. … the position of the Claimants was that the Defendants disclosure list was remarkably short and inadequate. It contained just 33 documents. The descriptions of the documents varied from the quite specific to the very general. The Claimants also complained that the First and Second Defendants had not conducted a proper search for documents created before “the dispute began“. ….It was also said that the list omitted documents that had been disclosed earlier pursuant to the Order of Flaux J of the 10th November 2014. Next it was complained that the list failed to identify documents that were once in the possession of the Defendants but which were no longer in their possession; nor was there any explanation of what had become of those documents. It was also complained that the Defendants had failed to give inspection of relevant conveyancing files.”

THE UNLESS ORDER

The claimants sought for and obtained an unless order in relation to the defendants’ disclosure:-
    1. The Defendants ultimately agreed to the applied for unless order without the need for a hearing having earlier, in correspondence, described the application as “… misguided and wholly disingenuous”. I will deal later in this judgment with the issue of data held on the computers of the First and Second Defendants. I observe that at this point in time no reference was made by the Defendants or by their legal advisors to any inability to give disclosure of relevant documents held on computers due to an alleged cyber attack upon the computers belonging to the Second Defendant said to have occurred in May 2016. Nor was there any reference to hard drives, containing relevant evidence, having already been destroyed. The Claimant, and the Court, was under the (mis)apprehension that relevant information held on computers did exist and would be disclosed.
    2. Under the Order the First and Second Defendants were required to carry out searches for documents set out in paragraphs [3], [4], [5], [6], [8], [9], [10], [11] and [12] of the Schedule attached to the Order. By 4pm on the 28th October 2016 the First and Second Defendants were required to serve upon the Claimants’ solicitors a supplemental list of documents accompanied by a disclosure statement: (a) listing documents found pursuant to the specified searches; (b) listing documents that had been disclosed by the Defendants to the Claimants since service of the First and Second Defendants list of comments on the 17th June 2016; and (c), “… listing all documents which have been, which are no longer, in the First and Second [Defendants] control and stating what has happened to them and when they were destroyed or lost (as the case may be)…“. This latter requirement assumes considerable importance in this case because of the facts, described below, in relation to the “cyber attack” (see paragraphs [39ff] below).
    3. Paragraph [2] of the Unless Order stated that unless these steps were taken by the stipulated time then “… [the] Defence and Counterclaim shall be struck out and [the First and Second Defendants] shall be debarred from defending the claim“.
    4. In addition it was ordered that unless by 4pm on the 28th October 2016 the First and Second Defendants served upon the Claimants’ solicitors a witness statement providing details of the searches undertaken in accordance with the Order, and confirming the accuracy of the supplemental list of documents, and identifying any documents listed in the Schedule that were said either “not to exist” and “to have been lost or destroyed“, and stating when such documents were lost or destroyed, then, again, the Defendants defence and counterclaims will be struck out and they will be debarred from defending the Claim.
    5. The Schedule to the Unless Order contained a series of both specific and general categories of disclosure to be provided. By way of example of specific items the Defendants were required to provide job figures for all of the First and Second Defendants’ businesses for the relevant period and correspondence and communications relating to the First and Second Defendants dealings with the domain name “www.a1network.co.uk” and the email address “a1@network.co.uk”. Two specific categories are of greater importance to the present dispute. Paragraph [5] was in the following terms:
“5. All underlying accounting documents relating to the accounts of the First and Second [Defendants] businesses, including all of the books, accounts, papers, ledgers, SAGE programmes and nominal ledgers, PAYE records, despatcher and taxi software for the relevant period.”
  1. Pursuant to paragraph [12] of the Unless Order the First and Second Defendants were required to disclose: “copies of all accounting documentation relating to companies owned, operated or controlled by the First [Defendant] during the relevant period“.

THE DEFENDANTS’ BREACH

The defendants failed to comply with the peremptory order. As is not uncommon in these cases things were left (quite literally) to the final hour.

  1. In the final hour prior to expiry of the deadline set out in the Unless Order (4pm 28th October 2016) the Defendants’ solicitors sent 16 emails to the Claimants’ solicitor in purported compliance with the Unless Order. It was agreed between the parties that hardcopies would be provided by the 1stNovember 2016. Hardcopies were provided on the 3rd November 2016 together with a data stick. Upon review of the material it was the Claimants’ solicitors position that there remained material non-compliance.
  2. On the 9th November 2016 the Claimants’ solicitors wrote to the Defendants’ solicitors and included a document entitled “Outstanding Disclosure”. That document amounted to a detailed three page list of documents, and categories of documents, which had not, so it was said, been provided.
  3. By this stage software which had been sent pursuant to an email dated the 28th October 2016 and a data stick had been examined by an independent IT expert instructed on behalf of the Claimants. He confirmed that the software contained shell software programmes and the data stick had upon it no data whatsoever.
  4. Solicitors for the Defendants responded on the 15th November 2016 asking for 7 days to respond. The Claimants issued their application that the Defence and Counterclaim be struck out and the First and Second Defendants be debarred from defending the claim on the 21st November 2016. On the 23rd November 2016 the Defendants’ solicitors wrote to the Claimants enclosing a draft application to re-amend the Defence (by substitution). They proposed that the Claimants’ application be adjourned to be dealt with at the same time as the proposed application to amend.
THE DEFENDANTS’ ACTIONS AFTER THE BREACH
    1. Solicitors for the Defendants responded on the 15th November 2016 asking for 7 days to respond. The Claimants issued their application that the Defence and Counterclaim be struck out and the First and Second Defendants be debarred from defending the claim on the 21st November 2016. On the 23rd November 2016 the Defendants’ solicitors wrote to the Claimants enclosing a draft application to re-amend the Defence (by substitution). They proposed that the Claimants’ application be adjourned to be dealt with at the same time as the proposed application to amend.
    2. On the morning of the hearing of the Claimants’ application set down before Mrs Justice Laing, namely the 19th November 2016, the Defendants served a witness statement by Mr Hayward, a solicitor for the Defendants, indicating that the Defendants would be applying for relief from sanctions. Mrs Justice Laing ordered that the Claimants’ application be adjourned to be heard with the application of the First and Second Defendants for relief from sanctions. An order was made compelling the Defendants to give access to their computers. Once again no reference was made by the Defendants or their advisors to the computer records already having been destroyed. Again the assumption of the Claimants and the Court was that computer records existed. Paragraphs [2] and [3] of the Order stated as follows:
“2. The First and Second Defendants shall by 4pm on 7 December 2016 permit the Claimant’s appointed IT and accountancy experts to access and inspect all and any computers and computer systems within their possession or control to search for and take copies of any documents (including any computer software and data):

2.1 Relevant to the issues in the dispute, including:

2.1.1 the documents and data required to be disclosed under the Order of Deputy Master Sullivan dated 14 October 2016 and/or

2.1.2 the documents and data ordered to be preserved and delivered up by the Order of Mr Justice Flaux dated 10 November 2014; and

2.2 Within the relevant period, namely 1 January 2010 to 24 November 2014

3. The parties’ solicitors shall be present during the inspection and shall endeavour to agree the manner in which the search shall be undertaken and documents retrieved and copied.”
    1. The witness statement served by Mr Hayward, dated the 19th November 2016, admits non-compliance with the Unless Order in relation to a series of documents identified in the statement. It is said that the failure earlier to disclose the documents was purely an administrative oversight on the part of the solicitors since the Clients had, in fact, earlier provided these to the solicitors. It is said that the failure was not-deliberate.
    2. As observed no reference is made in this statement to any cyber attack or to the wholesale deletion or wiping of emails and other business documents from the Defendants’ computers or to the destruction of hard drives. This was the context in which the Defendants agreed to the Claimants appointing IT experts to access and inspect all of the computers and computer systems within the possession or control of the First and/or Second Defendants.
F. Present Position
    1. The present position is that the Defendants admit non-compliance with the Unless Order and accept that the failure is a serious and significant one. It is also accepted that there is no good reason for the failure. This means that, for present purposes, prima facie in accordance with the terms of the Unless Order the Defence and Counterclaim of the First and Second Defendants is to be struck out and those Defendants are to be debarred from defending the claim.

 

THE DEFENDANTS’ APPLICATION FOR RELIEF FROM SANCTIONS

G. The Denton Test for Relief from Sanctions
  1. What now arises is the Defendants’ application for relief from sanctions. The test for the grant of relief is well known and was set out by the Court of Appeal in Denton v T H White Limited [2014] EWCA Civ 906 (“Denton“). In that case the Court of Appeal established a three stage test that a court should apply when determining an application for relief from sanctions. Under the first stage the court identifies and assesses the seriousness and significance of the failure to comply with any rule, practice, direction or court order which engages CPR 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. Under the second stage a court considers why the failure or default occurred. Under the third stage the court evaluates all of the circumstances of the case in order to enable it to deal justly with the application (CPR 3.9(1)(a)(b)).
  2. In broad terms the position advanced by Mr Cobill who appeared on behalf of the Defendants can be summarised as follows. First, the failures amounted to administrative oversight or a misunderstanding of the meaning of the Unless Order on the part of the solicitors acting for the Defendants. Second, the failure caused the Claimants no significant prejudice and has not adversely affected ability to prepare for trial. Third, the failure has now been remedied or is capable of being remedied in the near future. Fourth, the First and Second Defendants have applied to amend their defences and counterclaim and the outcome of the hearing of the application could effect the trial timetable anyway thereby reducing further any forensic prejudice to the Claimants which they might otherwise have sustained. Fifth, the amended pleading sets out strong answers to the Claimants case and they should not be denied the right to advance their case at trial. Sixth, the claim is high value and to prohibit the Defendants from defending their claim would be unjust and disproportionate.

APPLYING THE DENTON TEST

It was agreed that the defendants’ breaches were serious and there was no good reason.

    1. I turn now to consider the real dispute between the parties which is whether it is just in all the circumstances to grant the Defendants’ application for relief from sanctions. For all the reasons that I set out below I have come to the conclusion that: there remains serious outstanding breaches of the Unless Order; that I should refuse the application for relief; and, that I should therefore grant the Claimants’ application for an order that the Defence and Counterclaim of the First and Second Defendants be struck out and that they be debarred from defending the claim.
    2. I start by considering whether, as of today, in the period shortly prior to trial, the First and Second Defendants have complied with their disclosure obligations pursuant to the Unless Order. As to this I am satisfied that even now there is a substantial failure to comply with the Unless Order. There are many instances of breach. I do not propose to examine every particular instance of non-compliance. Instead I propose to focus upon the principal failings that have been identified in the present case. I also consider below other factors potentially relevant to the analysis.
(i) Failure to provide computer records – the cyber attack
    1. First, there is the wholesale failure to give disclosure of documents stored on the First and Second Defendants’ computers and the failure to provide any adequate explanation for their non-retention in accordance with the Unless Order. It will be recalled that in November 2014 Mr Justice Flaux enjoined the Defendants from destroying or removing data from computers and that in March 2015 the Defendants’ solicitors confirmed and represented that both they and their Clients would preserve and not destroy, and keep safe, all such computers (see paragraph [17] above).
    2. I have referred above (cf paragraph [31]) to the fact that pursuant to the Order of Mrs Justice Laing the Defendants were required to grant access to their computers. Following the making of that Order an exchange occurred between solicitors and it was agreed that inspection would occur on the 7th December 2016, i.e. just one week before the hearing in this case. The Claimants attended with an IT expert. Upon arrival IT experts instructed by the First and Second Defendants informed the Claimants’ representatives that the Second Defendant had been the subject of a cyber attack in May 2016, i.e. some seven months earlier, which had resulted in these same experts removing all of the hard drives from the computers and replacing them with new ones. Moreover the old hard drives had been drilled through and disposed of. There had been no attempt to download existing data. There were no backup tapes. Accordingly, all computer data prior to May 2016 had been irretrievably lost. The Claimants were unaware of this until the explanation was tendered at the inspection.
    3. I start my analysis of this issue by recording that at the outset of the hearing of this application I asked Mr Cobill, acting for the Defendants, to confirm a number of matters. First, I wished to know upon what date the Defendants’ solicitors first became aware of the cyber attack. Second, I sought an explanation as to why the cyber attack had not been disclosed earlier, given the multitude of occasions upon which that information was relevant to issues relating to disclosure. Third, I sought evidence as to whether the Defendants’ solicitors had either themselves or through some independent third party conducted an exercise to verify the accuracy of the information provided to the Claimants. In response to these requests, and having taken instructions, I was informed that the Defendants’ solicitors first came to learn of the cyber attacks after the making of the Order by Mrs Justice Laing on the 29th November 2016, but before the inspection occurred on the 7th December 2016. It was explained that the Defendants’ solicitors took the view that the inspection should proceed in any event because it was their view that the Claimants would wish to view the site and the computers for themselves and to ask questions about the extent and nature of the cyber attack. The Defendants’ solicitors were also anxious to ensure that it could not be said that they had failed to comply with the Order of Mrs Justice Laing. It remains the case however that between the 29thNovember 2016 and the 7th December 2016 solicitors acting for the Defendants did not notify the Claimants that, in actual fact, the inspection would be a wasted (and costly) exercise in futility since the computers were incapable of generating any relevant disclosable evidence. I should also record that I did not require the Defendants’ solicitors to verify this information by affidavit or witness statement. Mr Hornett, counsel for the Claimants, confirmed that his Clients accepted the evidence given by counsel for the Defendants on instructions. Accordingly I treat the evidence given by Mr Cobill as to the position of the Defendants’ legal advisers as true and common ground between the parties.
    4. I turn to the facts relating to the cyber attack.
    5. At the commencement of the hearing I was provided with a series of witness statements addressing the cyber attack. A statement was provided by Mr Hayward, the Defendants’ solicitor. Statements were also provided by Mr David Bolton, a self-employed IT consultant who, along with his colleague, Mr Simon Pearse, provided software and system infrastructure services to Mr Phillips’ taxi businesses. A statement was provided by Mr Phillips’ son. The First Defendant did not however produce a witness statement so has not signed a statement of truth about the cyber attack even though it appears that he personally ordered IT experts to destroy the computers.
    6. In paragraph [12] of his Statement Mr Bolton refers to an article which he prepared fro the tech-website “http://insights.dice.com/”. The article was published on the 7th June 2016, i.e. very shortly following the alleged “cyber attack”. Mr Bolton states in his witness statement that when he wrote the article the encryption of the database file had not occurred so that he “erroneously put in the article that the damage we suffered was light“.
    7. The article is entitled “A case study in a dealing with ransomware”. Mr Bolton in this contemporaneous article describes how a taxi firm in East London “with 12 networked PCs” (i.e. the Second Defendant) was the subject of a malware problem. Mr Bolton’s “best guess” was that the malware had penetrated the network via an email attachment. The article states as follows:
“The malware infected 4 PCs at the central office and 2 at satellite offices; the other 6 weren’t touched. The damage to these infected PCs was remarkably light: the log files (.log) were all encrypted, as well as one config file (.txt) that the server used for mapping East London into booking zones. After replacing that file, the server was able to run. The only loss was the log files.
The #decryptmyfiles.html contained a message asking for 1.2 Bitcoins (about $500) to recover the PCs, including details on how to pay. No ransom was paid. The taxi firm’s Managing Director already had a plan to replace all PCs in a few months as most were 6 to 8 years old. That plan was accelerated, and all 12 PCs were replaced one week after the initial infection.
I returned a week later to help replace the PCs and to my surprise discovered that no further infections had occurred since the first one. It’s my belief that the malware just ran once from one PC and managed to infect 5 others. But it wasn’t permanent, and didn’t reload after a reboot, so the malware was gone.”
    1. In the witness statements served at the outset of this hearing various, inconsistent, statements are made by Mr Bolton and his colleague Mr Pearse. I have already referred to the fact that Mr Bolton says that he erroneously described in the article that the damage was light. Mr Pearse, for example, says that because the malware encrypted the log files on the dispatcher the back up was lost meaning that “… although great lengths had been gone to in order to preserve such files and details, the infection also encrypted these files”. Mr Pearse also says that replacement PCs were refurbished and that they disposed of the old hard drives via the “correct protocol”. He says that he demonstrated this to the experts in attendance at the computer inspection on the 7th December 2016.
    2. I am wholly unsatisfied by the explanations given by the Defendants to account for the failure, on their part, to provide disclosure and/or to preserve the hardware. First, the contemporaneous article prepared by Mr Bolton makes it plain that the infection was very light and impaired only a small number of the Defendants’ computers. Second, the effect of the malware was transient and when the system was rebooted it had disappeared. Thirdly, Mr Bolton in his article states that the First Defendant, i.e. Mr Phillips, indicated that he was intending to replace the entire computer system and used the occasion of the malware infection to accelerate that decision. In other words the destruction of the existing computer system was due to a desire to update the system and not the malware. Fourth, Mr Phillips was necessarily aware that this was a breach of the Order for preservation made by Flaux J in November 2014, and confirmed by the Defendants’ solicitors in March 2015 (see paragraph [17] above). There is no conceivable excuse for either the failure to disclose the relevant documents or the destruction of the computers. This is the context in which Mr Phillips has chosen not personally to prepare and sign a witness statement. Fifth, for reasons I set out below the malware infection does not mean that documents were not retrievable (for instance from external servers) and these have not been disclosed even now.
    3. I am in no doubt but that the information available on those computers could have been highly relevant to the Claimants’ case. It is a feature of this case that the Defendants most common response to the Claimants’ requests for disclosure involve explanations such as: we no longer have the documents, we never had the documents, we had them but we have now disposed of them, etc. Even if that were, to test the argument, true of hardcopies previously in the possession of the Defendants it would not have been true of records contained on the computer. This is a case, par excellence, whereby evidence of financial transactions would be pivotal. It is in my view inevitable that valuable and relevant information would have been contained on those computers.
    4. An additional feature of this incident is that there was a multiplicity of occasions when disclosure of the fact that electronic disclosure could not be given was appropriate. I have identified them above (see paragraphs [21] – [33] above). It is trite that pursuant to CPR 31.10 a Defendant must explain what has happened to documents that must have existed but which no longer exist and it was in any event required pursuant to the Unless Order (see paragraph [24] above). It was incumbent upon the Defendant to explain that electronic documents had been in the Defendants’ possession as of May 2016 when they served their original list of documents on the 10th June 2016. It was also incumbent upon the First Defendant to bring to the Court’s attention the non availability of computer generated documents when the matter came before Mrs Justice Laing on the 29th November 2016. It was also a culpable failing on the part of the First Defendant to fail to inform his solicitors of the situation. This led those solicitors, manifestly with the knowledge and concurrence of the First Defendant, to prepare witness statements which were used in the proceedings, and to exchange correspondence with the Claimants’ solicitors, which were in material respects misleading by virtue of their failure to explain that electronic disclosure could not be given.
    5. In the course of the hearing I asked counsel for the Defendants when the hard drives were destroyed. Having taken instructions he was unable to provide a precise date. I was told that there was no formal record of the date of destruction.
    6. Mr Hornett, for the Claimants, described the facts relating to the electronic documents as, variously, “remarkable”, “perplexing”, and “highly damning”. He pointed out a number of additional facts which he said makes the picture get “even worse”. First, the First Defendant’s personal laptop had no data pre-dating 2016 yet it was not suggested that this had been the subject of a cyber attack. Clearly that data has been deliberately wiped. Second, the server had almost no emails pre-dating 2016 yet the email accounts were all stored remotely and would not have been affected. These emails could have been retrieved but have not been.
    7. In short the failure to provide electronic disclosure is a serious breach of the Order of Flaux J of November 2014 and the Unless Order. But most importantly the failure to account for the destruction of the data is a serious breach of the Unless Order.
(ii) Cheques, invoices, invoice books and bank statements
    1. No cheques, invoices, invoice books or bank statements for the Second Defendant were disclosed. In his Witness Statement, upon instructions from the First Defendant, Mr Hayward, states that Mr Phillips did not have any further documents relating to paragraphs [5] and [12] of the Unless Order. But he also argues that the First and Second Defendants do not regard cheques, invoices, invoice books or bank statements as falling within the scope of the Unless Order.
    2. I should state, before analysing this issue, that Mr Cobill, during the hearing, quite properly and candidly accepted (a) that in actual fact Mr Phillips did possess and/or control a number of cheques, invoices and other documents falling within this category and, (b) that it was not arguable to suggest that their disclosure did not fall within the scope of paragraphs [5] and/or [12] of the Unless Order. He was driven to argue only that these documents could now be disclosed and that their disclosure would not prejudice the Claimants in preparation for trial. Of significance, at least to the first explanation given, is that the injunction imposed by Flaux J required the First and Second Defendant to preserve the Second Defendant’s bank statements. Accordingly if these statements were in fact no longer in the possession of the Second Defendant that would be an additional breach of the Order of Flaux J. As to the second explanation, which Mr Cobill no longer attempts to support, it is in my judgment plain that these documents fell within the concept of “all underlying accounting documents” and/or “papers“. Evidence was tendered by an expert accountant on the part of the Claimant that HMRC requires bank statements to be kept as part of a company’s accounting records. HMRC Guidance was placed before the Court which establishes this fact.
    3. The failure on the part of the First and Second Defendants to disclose these documents is, in my judgment, highly material and is a serious breach of the Unless Order. This is a case where “moneys in” and “moneys out” of accounts may be critical in following money flows and transfers. This will be of the essence in a case in which it is alleged that the Defendants intermingled the finances of various companies and diverted funds to the benefit of the First Defendant.
(iii) Romford Minicab Services Limited (“RMSL”)
    1. No accounting documents were listed or copies provided for Romford Minicab Services Limited. This is a company of which Mr Phillips is a Director and the Second Defendant the sole shareholder. It was the acquisition of this company that led to the amalgamation of the businesses and it is therefore of at least potential significance. Mr Hayward has, upon instructions from the First Defendant, claimed that the company is dormant. However there are a number of difficulties with this explanation. First, the Defendants have provided details of other dormant companies. So dormancy has not hitherto been used as an excuse for non-disclosure. Second, an analysis of the accounts of RMSL demonstrates that in fact it has creditors and holds significance shareholder funds. As such it does not convey the appearance of being dormant. Third, in the course of the hearing, upon instructions from Mr Phillips, it was explained by counsel that in fact the company was not entirely dormant and: “there may have been one transaction“. I have recorded in this judgment the words articulated by Mr Cobill upon instructions from the First Defendant. In my judgment this is, both alone and when viewed in conjunction with other failings, significant. Part of the central allegation made by the Claimants is that the First Defendant diverted funds to other companies operated by him. RMSL was one such “other” company which played a part in the narrative relating to the dispute between the parties. Documents before the Court suggest that, at one point in time at least, it did operate minicab services. In my judgment this is a further breach of the Unless Order.
(iv) Documents relating to the external book keeper
    1. During the inspection of computers on the 7th December 2016 the Claimants were informed that data was held by an external book keeper, Mrs Sparks, and that this material was not under the control or possession of the Defendants and could not be disclosed. In the course of the hearing the issue between the parties narrowed somewhat. Mr Cobill for the Defendants contended that the Defendants had in fact disclosed relevant accounting data generated by Mrs Sparks. However Mrs Sparks used a SAGE book-keeping software which she owned personally. It was not therefore open to the Defendants to require her to disclose it. To this the Claimants had two responses. First, pursuant to CPR 31.4 and the relevant Practice Direction a “document” included electronic documents readily accessible from computer systems and electronic devices and servers and documents that had been deleted. Parties were required to give disclosure of electronic documents in their “Native Format” in a manner preserving metadata. Parties are required to provide available searchable OCR with the documents in an Electronic Image. The Defendants were therefore required to give disclosure of electronic documents in their original list and to give inspection by way of electronic copies. This applied to both accounting software and data (for example generated by SAGE or its equivalent). It is argued that even if it were the case that the SAGE software belonged to Mrs Sparks, this did not prevent the Defendants from disclosing in appropriate electronic form data which related to them and which did not, thereby, disclose confidential data and information relating to other clients of Mrs Sparks. Second, and in any event, the Defendants have identified documents which were not, in any event, disclosed even in hard form. And this included PAYE and NI records for the periods 1st January 2010 – 31st December 2010, and, 31st December 2012 – 31st December 2013.
    2. I am satisfied that there has been non-disclosure. In my judgment this is a yet further failure to comply with the Unless Order.
(v) Details of search
    1. Paragraph 4(a) of the Unless Order required the First and Second Defendants to serve a witness statement providing “details” of the searches undertaken. The witness statement of the First Defendant dated the 28th October 2016 states, starkly, at paragraph [3] that: “I have searched for documents located at my work premises”. The work premises are not identified. There are no actual details of the searches conducted. Mr Hayward, in his witness statement, observes, again upon instructions from Mr Phillips, that Mr Phillips undertook a search and retrieved documents from his (unidentified) accountants. None of this is referred to in the supplemental list or in Mr Phillips’ witness statement.
    2. There is, in my judgment, force in the Claimants’ complaint that the minimalist and skeletal form in which the Defendants purported to comply with the requirement to provide details of the searches undertaken is inadequate. The purpose of that provision in the Unless Order was to enable the other party, and in due course a Court, to know with a reasonable level of detail that the party the subject to the order (viz Mr Phillips), had conducted a proper disclosure exercise. In the particular circumstances of this case, and in particular as the facts have unfolded, the paucity of the information provided by Mr Phillips in his statement becomes ever more unsatisfactory. In my judgment I am driven to the conclusion that the virtual non-answers provided by the Defendants was part of a broader strategy of refusing to provide disclosure.
(vi) Other alleged continuing non-disclosure
    1. There are a number of other failings that the Claimants rely upon as amounting to breaches of the Unless Order. It is unnecessary for me to address them given the conclusion that I have arrived at which is that the Defendants remain in substantial breach of the Unless Order.
(vii) Other matters relating to Denton Stage 3
    1. Given the scale of the non-observance of the Order it is unnecessary to dwell in detail upon other matters. However there are a number of additional points to make. First, the failures significantly and unfairly prejudice the ability of the Claimants to prepare for trial. This is a case which will turn upon the forensic analysis of underlying financial data. A great deal of the most important documentation and data has been withheld from the Claimants by the Defendants. Second, the Defendants entered into the Unless Order by consent. The proportionality of the sanction for non-compliance was thus voluntarily accepted by them. It is of little moment to complain now that to visit the consented to sanction upon the Defendants is disproportionate. Third, I take into account the history of this case and the profoundly unsatisfactory way in which electronic data has been suppressed and/or lost. Fourth, I express no view as to the ultimate merits of the case. I have taken into account the amended pleading which the Defendants wish to rely upon. However this is not a case in which a Court is able to assess the relative merits of the respective arguments in order to factor that into the weighing exercise inherent in Denton Stage 3.
H. Conclusion
  1. In conclusion, for all the reasons set out above, the First and Second Defendants’ are in material breach of the Unless Order. Their application for relief from sanctions is refused. I strike out the Defendants’ Defence and Counterclaim. I debar the First and Second Defendants from defending the claims. I will now hear submissions from the parties on the consequences of my ruling.

 

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