Moses Fan Sithole & Others V Thor Chemicals Holdings Ltd, Desmond John Cowley
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| Page Moses Fan Sithole & Others v Thor Chemicals Holdings Ltd, Desmond John Cowley A2/2000/2894 Court of Appeal (Civil Division) 28 September 2000 2000 WL 1421183 Before: Lord Justice Waller Lord Justice Robert Walker Lord Justice Laws Thursday, 28th September 2000 On Appeal from the Queen's Bench Division (Mr Justice Eady)
Thursday, 28th September 2000 Lord Justice Waller: 1 I will ask Robert Walker LJ to give the judgment. Lord Justice Robert Walker: 2 This is an appeal from an interlocutory order of Eady J made on 31st July 2000. The judge refused permission to appeal but permission was granted by Brooke LJ on 25th August. The appeal has been expedited because the trial of the action was to have begun on 2nd October (with an estimated duration of six weeks). It is now due to begin on 11th October. 3 The claimants in the action are 21 individuals, resident in South Africa, who claim damages for physical and psychological injuries said to have been caused by exposure to, and inhalation of, mercury, mercury vapour and mercury compounds while working at industrial premises Cato Ridge, Natal, South Africa. Those premises were run by a South African company called Thor Chemicals (SA) (Proprietary) Ltd (“ Thor SA” ). Thor SA has at all material times been a wholly-owned subsidiary of an English company, Thor Chemicals Holdings Ltd (“ TCH” ), which is the first defendant. The case against TCH, in bare outline, is that in or about 1987 it exported its mercury business to South Africa from Margate, England because of continuing trouble with the Health and Safety Executive, and that it has exercised control over operations in South Africa. The second defendant is Mr Desmond Cowley, who was at all material times the Chairman and managing director of TCH. According to the most recent filed accounts of TCH he has become the only director of that company. It is pleaded that he was at all times the individual controlling the operations of TCH and its wholly-owned subsidiaries. 4 Since 1992 (when evidence of mercury poisoning at Cato Ridge emerged) there has been much litigation about it, including criminal prosecutions in South Africa as well as three civil actions in England. The first two actions (in which there were in all 23 claimants, three being the widows of deceased workers) were consolidated and in April 1997 they were settled by an agreed award of £1.3 million. This action is the third action. 5 The first two actions were marked by serious delays, some caused by applications by the defendants to strike out the actions or to stay them on the ground of forum non conveniens. The defendants failed at first instance and in this court and they were refused permission to appeal to the House of Lords. As Maurice Kay J said in a judgment on 7th November 1996 (which contains a valuable review of the issues and history of the earlier actions), the defendants were entitled to take such points as they thought fit, in accordance with the advice which they received, but a great deal of time was lost and expense incurred. Other delays were the result of failure by the defendants to comply with orders of the court. 6 That is only background, and the judge decided not to take it into account in considering the defendants' conduct in this action. When the claimants' solicitors contacted the defendants' solicitors before starting this action, there was no indication that issues over jurisdiction would be raised again. But when proceedings were started Mr Cowley's solicitors declined to accept service, stating that Mr Cowley was resident in Spain. When an order for substituted service was made pursuant to the Brussels Convention, the solicitors contended that Mr Cowley was resident in South Africa. On 27th May 1998 Toulson J dismissed an application to set aside the substituted service. The defendants' solicitor, Mr Cherry, has since said in a witness statement dated 18th July last that Mr Cowley lives in Spain “ for most of the year.” 7 The defendants then applied to stay the proceedings on the ground of forum non conveniens, despite their lack of success with a similar application in the earlier proceedings. On 31st July 1998 Garland J dismissed the application. The defendants did not give notice of their intention to defend nor did they serve a defence. After warnings the claimants entered judgment in default on 24th September 1998. 8 The defendants applied to set aside the judgment in default but did not provide any evidence in support of the application. Master Hodgson dismissed the application and on 5th November 1998 Gray J dismissed an appeal; there was still no evidence in support of the application. 9 The defendants then sought to appeal the orders of Garland J and Gray J. On 3rd February 1999 this court (in the persons of Judge LJ and Tuckey LJ) refused permission to appeal from Garland J but (with evidence of a defence, largely replicating the defence in the earlier actions, having at last been produced) allowed the appeal from Gray J. The defendants were ordered to pay the costs of the failed application forthwith, and the other costs were made claimants' costs in the case. Tuckey LJ made it clear that the proceedings must not be further delayed. The costs ordered to be paid forthwith were agreed at £18,000 but were paid only when a statutory demand was issued against the defendants in April 2000. 10 In an attempt to progress matters the claimants unilaterally served their expert evidence on 18th October 1999, and proposed 31st January 2000 for service of the defendants' expert evidence. By letter dated 20th October 1999 the defendants' solicitors suggested 31st March 2000, but they subsequently failed to confirm that date. On 17th January 2000 the defendants' solicitors agreed to an order for service of their experts' report by 5th May 2000, and on 21st January Master Trench made an order to that effect. The case came before Buckley J on 8th March to fix a trial date. The hearing was attended by counsel and solicitors, but there was no suggestion made that the defendants would not be able to meet the agreed date of 5th May. But it is now clear that one expert (Mr Fuller of Burgoynes, who is a chemical engineer) was not even instructed until 31st March 2000. 11 Since the order of 21st January, as the claimants submit, the defendants have done little to prepare for trial or comply with their obligations. They served no new witness statements but relied on some of those served in the earlier proceedings, despite some significant changes in the defendants' pleaded case. 12 The claimants also contend, with considerable justification, that the defendants have failed to comply with their disclosure obligations in various respects, especially in relation to the period after 1992 (that is, after the period covered by disclosure in the two earlier actions). They contend that the failure had still not been made good when the matter was before Eady J on 21st July; and that contention also seems to be right. Some of these matters were ventilated before Eady J, but others were ventilated only at the pre-trial review three days ago. 13 The defendants have still not disclosed a quantity of internal documents, whereas they disclosed 900 in respect of the period down to 1992. A further complication (which has come to light only at a very late stage) is that of those 900 documents it appears that something like two thirds may no longer be extant. There has also been no disclosure of any documents (with one exception which I shall mention) in relation to a demerger of the TCH group, which took place in 1997. That is something which I shall have to come back to later as a separate topic. 14 The position as to experts' reports on behalf of the defendants is that two were produced just before 12th May 2000 after a week's extension had been agreed: those of Mr Gidlow (relating to toxicology) and Dr Powell (relating to neurosychology). The judge noted that Dr Powell's report appeared to be flawed in that he had taken as controls other members of the Cato Ridge workforce who had also been exposed to mercury. The judge extended time to 12th June 2000 so as to let in the report of Professor Wessley (dealing with psychiatry and epidemiology) but excluded the report of Mr Fuller (whose report had been criticised as being based on various factual assumptions apparently derived from Mr Cowley but not borne out by any witness statement). 15 On 21st July 2000 the judge had before him an application by the defendants (which had not been made until 26th June 2000) for an extension of time for those of the experts' reports which were late, and applications by the claimants for an order striking out the defence, or ordering a payment into court under rule 3.1(3) of the Civil Procedure Rules. The claimants have also issued an application for an order under section 423 of the Insolvency Act 1986, which relates to transactions at an undervalue entered into for the purpose of prejudicing the interests of present or potential creditors. They applied to Eady J for an order for disclosure in support of that section 423 application. In Barclays Bank v Eustice [1995] 1 WLR 1238 this court made an order for disclosure on a comparable application made in proceedings in the Queen's Bench Division, despite the defendants' reliance on legal professional privilege as a reason for withholding disclosure. 16 Before setting out the known facts as to the demerger I must summarise as briefly as I can the most recent developments: several surprising things have happened in quick succession. The hearing before Eady J was on 21st July. He said that he had decided that he would not strike out the defence, but apart from that he reserved judgment. He gave judgment on 31st July, ruling on the experts' reports as I have mentioned. He also made an order for disclosure of the post-1992 documents by the 14th August. That part of his order was expressed in general terms and did not specify any particular classes of documents. However, he also ordered disclosure of lists identifying Dr Powell's controls and identifying the eleven workers (referred to in Professor Wessley's report) whom the defendants admit were exposed to mercury at Cato Ridge. Having already declined to strike out the defence the judge also declined to order any payment into court by the defendants. He declined to order disclosure in relation to the section 423 application. He gave other detailed directions at trial, including a pre-trial review between 19th and 22nd September. 17 In declining to order any payment into court the judge recognised that that potentially severe sanction may be appropriate where a party has been guilty of repeated default or where there is doubt as to his good faith and where the other party needs protection. The judge's reasons for this part of his decision are not particularly clear from his reported judgment, but he seems to have attached some weight to a submission (said to be supported by an unreported decision in Chapel v Williams, 8th December 1999) that an impecunious party should not be ordered to pay into court a sum which he was unlikely to be able to raise. 18 Since 31st July there has been considerable difficulty (for which the defendants' solicitors blame the claimants solicitors') in arranging the meetings of experts directed by the judge, and on 29th August the defendants issued an application relating to that. However, by now there had been meetings or telephone discussions between Dr Powell and Dr Plunkett and between Mr Gidlow and Professor Blain. The defendants say that they have complied fully with their disclosure obligations, but that is hotly disputed on behalf of the claimants. 19 I must also record that on 9th August the Legal Services Commission (Special Cases and Multi-Party Action Unit) wrote to the claimants' solicitors expressing concerns about the defendants' financial position. The letter said: “ The Commission has a duty to ensure that those cases that are publicly funded do not result in unenforceable judgments being obtained” . 20 The letter indicated that the Commission was not at that time prepared to extend the legal aid certificate to enable the case to proceed to trial and that establishing a claim under section 423 was of critical importance to that. 21 On 31st August (either in the light of the letter from the Legal Services Commission or possibly in the light of the permission to appeal recently granted by Brooke LJ) the claimant's solicitors applied for the trial date to be postponed. However, on 6th September they indicated that they were no longer seeking an adjournment. 22 The pre-trial review ordered by Eady J was held on 25th September (that is last Monday) before Hallett J. She directed, on the claimants' application, that the trial should begin on 11th October (that is, a postponement of a week together with two reading dates). The judge was presented with a number of new complaints by the claimants about non-disclosure of documents, and she was asked afresh to debar the defendants from defending for that reason. She made an order for a disclosure statement by the defendants under CPR rule 31.10 in respect of three matters: (a) medical and employment records; (b) internal Thor documents since 1992 relating to pleaded issues; and (c) documents relating to mercury exposure from toxic waste and floor contamination at Cato Ridge since 1992. 23 However, Hallett J left to this court the task of deciding what if any sanctions should be imposed. Her approach was perhaps understandable but it has increased the problems with which this court has had to deal at short notice. 24 The last week or two has brought a flurry of further witness statements. Some of those would be admitted in evidence by this court as being necessary to bring the court's information up-to-date. Other material — and notably a witness statement by Mr Cowley which was unexpectedly produced this morning — could and should have been placed before Eady J and is by no means the sort of evidence which this court would normally entertain afresh. 25 I will come back to that witness statement because I must now go back in time to set out the known facts about the demerger transaction on which both sides have addressed a good deal of argument. The claimants say that that transaction deprived THC of assets worth over £20 million for the purpose (by inference) of frustrating claims such as those made by the present claimants. The defendants say that the demerger happened over three years ago, some time before these claims were made, and that it was carried out for good commercial reasons. 26 The information that emerges from TCH's filed annual reports and accounts (all audited by Pannell Kerr Forster of Hatton Garden, London, EC1) reveal what is to my mind the only reliable information on this subject. The company's accounting date was 31st December throughout. For 1994 TCH had eleven wholly-owned subsidiaries, including Thor (SA), a company incorporated in South Africa. Other subsidiaries were incorporated in England, France, West Germany, Italy, Spain, the United States of America, Australia, Japan and Malaysia. TCH had an issued and paid-up capital of a little over 225,000 £1.00 ordinary shares, of which about five percent were held by directors. The group had net shareholders' funds with a book value of about £18.9 million, and the consolidated profit and loss account showed a group profit of £3.19 million after tax. A note to the accounts refers to legal proceedings against Thor (SA) being “ satisfactorily concluded” after the year end. (Those were criminal proceedings in South Africa which ended with a plea bargain.) The note also referred to an official inquiry in South Africa as to the disposal of a stockpile of about 3,000 metric tons of mercury containing material stored at Cato Ridge. 27 For 1995 there were two new wholly-owned subsidiaries, both incorporated in England. The issued share capital and the directors' holdings were much the same. The group's net shareholders' funds were about £23.4 million and the group profit £4.2 million after tax. A note in the accounts referred again to the inquiry as to the disposal of the stockpile and to a prosecution of Thor (SA) for contamination of ground water. 28 For 1996 the wholly-owned subsidiaries had increased by a further company incorporated in England, Thor International Holdings Ltd (“ TIH” ), which became the direct holding company of most of the former direct subsidiaries of TCH. (However, Thor (SA) remained a direct subsidiary of TCH, as did an American company, Thor Chemicals Inc.) There was a slight increase in the issued share capital of TCH with little overall change in the directors' shareholdings. The Group's net shareholders' funds were about £2.88 million and the group profit was about £3.96 million after tax. The only relevant part of the note on the contingent liabilities referred again to the stockpile. There was a new note (note 31: Ultimate Controlling Party) stating that the directors regarded Eurotrust, a trust registered in Jersey, to be the ultimate controlling party. 29 The reason for the extraordinary reduction in group shareholders' funds appeared (so far as it appeared anywhere) in the directors' report, which recommended a final dividend for the year of no less than £21.5 million. The directors' report stated under the heading “ EVENTS SINCE THE YEAR END” : “ (1) Contingent Liability Included in the attached financial statements is an accrual for costs of £700,000 arising in respect of an action brought by some of the workers in the company's South African subsidiary. Rather than continue to defend the case, which could have cost at least £5,000,000 even if the company had won, the directors elected after the year end, to offer an out of court settlement of £1,300,000 which has since been accepted by the plaintiffs. The directors have decided not to amend the attached financial statements to include this settlement and will instead include the additional £600,000 cost in the financial statements for the year ended 31 December 1997. (2) De-merger On 21st March 1997 the company's shareholders passed a resolution effecting a de-merger of the group's speciality activities into a new group known as ‘ Tato Holdings Limited’ ” [“ Tato” ] “ As of that date, the following subsidiary companies became subsidiaries of [Tato].” 30 There followed the names of the eleven indirect subsidiaries which had during the year become direct subsidiaries of TIH. TIH itself is not mentioned, but Tato's report and accounts for 1997 (again audited by Pannell Kerr Foster) showed TIH as a direct wholly-owned subsidiary of Tato and the eleven companies (and one new American company) as indirect subsidiaries. 31 More details about the demerger were set out in the accounts for 1997. Notes 27 and 28 (headed “ Major Non-cash Transactions” and “ Disposal of Subsidiary Undertaking” ) confirm that the demerger was effected by distributing the entire issued share capital of TIH as a dividend in specie, so that no consideration was received. The distribution was made on 21st March 1997. At that time TIH had fixed and current assets with a book value of nearly £32 million and liabilities of nearly £10 million, giving net assets with a book value of about £22,250,000. However, the disposal was regarded as realising a loss of just over £700,000, so as to arrive at £21,550,000 as the monetary amount of the dividend. 32 These accounts showed that the group had shrunk to three subsidiaries, Thor (SA), Thor Chemicals Inc and a new subsidiary incorporated in Spain, Organicos Metallicos SL. Group shareholders' funds were £3,270,000 and group profit £750,000 million after tax. A note (Contingent Liabilities - Group) referred to the continuing problem of the stockpile which had then apparently grown to 3,500 metric tons and on which the Official Commission of Inquiry had made recommendations. It appears from another note that most of the directors of TCH had resigned on 21st March 1997, the day of the demerger, leaving as directors only Mr Cowley and Mr S Van der Vyver. The note which I have mentioned stated: “ In addition, as a result of civil occupational injury litigation instituted against TCH, a potential liability for legal costs of up to £1.2 million exists. The claims against the company were brought by current and former employees of [Thor (SA)]. As the plaintiffs are legally aided, it is unlikely that, should the company be successful in defending the claims, any costs will be recovered from the Legal Aid Board.” 33 The latest available accounts are those for 1998. They show Mr Cowley as sole director with a holding of more than half the issued share capital. They show the group comprising the same three subsidiaries. Mr Van der Vyver evidently resigned on 1st January 1999. The accounts show group shareholders' funds of about £2,500,000 after a loss for the year of just under half a million pounds. The note on the contingent liabilities is much the same as in the 1997 accounts, but with rather larger estimated costs in connection with the stockpile. Mr Cowley is shown in note 26 as the company's immediate and ultimate controlling party. 34 I have gone through these accounts in some detail because they seem to be the only reliable source of information about the demerger which is of central importance to the claimants' application under section 423. I shall refer to the section in more detail shortly, but at this stage it is sufficient to note that it applies to a transaction entered into for no consideration, and that the purpose of the person entering into the transaction is highly relevant. The filed reports and accounts say nothing about the purpose of the demerger, beyond the bald statement that it was a demerger of the group's “ speciality chemical activities” . 35 There was until this morning no first-hand evidence from Mr Cowley (or any other existing or former director of TCH or Tato) as to the purpose of the demerger. The only relevant witness statements on behalf of the defendants were two short witness statements from their solicitor, Mr Cherry. In his witness statement dated 18th July 2000 Mr Cherry had stated: “ The corporate restructuring was completed in March 1997, with full knowledge of the likely cost of settling the Ngcobo action. The present proceedings were not brought until January 1998 and the Defendants had no means of knowing that they might be brought. In the event that this part of the Claimants' application proceeds, there is substantial documentary evidence which will show that a responsible analysis of contingent liabilities was made. Moreover I should state once more that these Defendants are not employers of anyone in South Africa and never have been.” 36 Mr Cherry has not, however, either in that witness statement or in any later evidence, stated what the “ good business reasons” were, nor has he exhibited any of the “ substantial documentary evidence” to which he referred. 37 In a second witness statement Mr Cherry has added a little more financial information. However, that is concerned with recent events rather than with the purpose of the demerger. He has stated that Mr Cowley believes that TCH has about £70,000 in the bank, a figure which has since been corrected to about £98,000. That represents the unexpended balance of a sum of £100,000 for which TCH sold its “ Thor” trademark. The £70,000 is said to be needed for TCH's costs of the action. 38 Mr Cherry has also stated that Thor (SA) has recently sold its organo-metallic business by way of a management buy-out, for about £200,000 payable by instalments. The sum of £40,000 has been paid. Mr Cherry has stated that the whole of that sum, together with any future profits and proceeds of disposals, are earmarked for remedial work on the site. 39 In the absence of an order for disclosure (which the judge declined to make) the only other material about the demerger originating from the defendants was, until this morning, two press releases (one dated 29th June 2000 and issued in South Africa and the other dated 6th July 2000 and issued in England). These assert that the demerger (described as a “ restructuring” or an “ unbundling” ) had nothing to do with the current litigation but was (according to Mr Cowley as quoted in the press releases): “ very much connected with the earlier court case when [THC] made an out-of-court settlement of R9.42 million” .
41 In his first relevant witness statement the claimant's solicitor, Mr Richard Meeran, has asked the court to infer from the South African press release that the demerger was designed and entered into by TCH for the purpose of avoiding liabilities to potential creditors, including the claimants in this action. 42 I must now refer to the witness statement of Mr Cowley produced for the first time this morning. Lord Brennan QC (appearing with Mr Graham Read for the claimants) saw it first, he told us, at 10.15 this morning and, as a result of seeing it, he felt obliged to apply for an adjournment. This court was not unsympathetic to the application but felt, in view of insuperable practical difficulties in arranging a further hearing next week, that the matter must proceed, unsatisfactory though it was to have to deal with evidence produced at such a late stage. 43 The witness statement of Mr Cowley referred to, and exhibited, a letter signed by Mr Cowley which had been sent to all the shareholders of THC on 3rd March 1997. It was a letter dealing with the proposed demerger, although, to my mind, most unusually in comparison with all similar letters which I have seen, it did not identify any professional advisers, either merchant bankers or solicitors, as having considered the proposals and commending the transaction to the shareholders. There seems to me, furthermore, to be an obvious inconsistency between what is said in the letter (which refers to the litigation as on-going and to a compromise settlement as a mere possibility) and the body of the witness statement by Mr Cowley in which he refers to the corporate reconstruction as having followed quickly on the settlement. To my mind neither the content of the witness statement and its exhibit, nor the circumstances in which it was produced, does anything to allay any suspicions that I feel about the purpose of the demerger. On the contrary, if anything, it serves only to increase them. 44 Lord Brennan and Mr Read have in their skeleton arguments and oral submissions supported the inference of a transaction within section 423 by reference to the chronology and the circumstances of the successive claims made against the defendants. I have already referred to many of those matters and I need not repeat them. It is sufficient to say that the demerger was a fairly complicated exercise which appears to have required valuations of assets in several different countries. Its planning and preparation must have occupied a considerable period. In the absence of some convincing explanation, the inference would be irresistible that it was connected with the litigation which had been pending against TCH since 1994. However, on that point there is no need for inference, since in the press releases it was readily accepted that the demerger was “ very much connected” with that litigation. The defendants are taking their stand on the much narrower point that it was not connected with the present litigation which was commenced by writ issued on 13th March 1998. 45 Lord Brennan, while not criticising Mr Cherry (who appears to have had some difficulty in taking instructions) has described the evidence of Mr Cherry on that point as entirely unsatisfactory. He has drawn attention to the following matters in particular: (1) In the criminal proceedings in South Africa, State v Van der Vyver & Others count 2 (contravening section 28(2) of the Machinery and Occupational Safety Act) named 29 employees of Thor (SA) who had been injured in the course of their employment. These employees included five who are claimants in the present proceedings.
46 For my part, I hesitatingly accept Lord Brennan's submission that the evidence in support of the defendants' position, including the witness statement produced this morning, is entirely unsatisfactory. Apart from that witness statement, it is wholly unparticularised hearsay, and there are reasons for doubting the credibility of Mr Cowley in making the witness statement produced this morning. At this interlocutory stage there is an arguable case, and to my mind a good arguable case, that in entering into the demerger TCH had the purpose of putting assets beyond the reach of future claimants rather than those who were claimants in the Ngcobo and MKhize actions. It is difficult to get a clear picture of the precise timing of the settlement of those actions and the carrying out of the demerger transaction. However, on any view, by the time that the demerger was finally put into effect on 21st March 1997 TCH must at least have had a good idea of the level at which it was going to be able to settle claims made in the first and second actions. 47 Section 423 of the Insolvency Act 1986 (transactions defrauding creditors) is, so far as relevant, in the following terms. [Here read in the text of the section.] 48 By section 424, the victim of a transaction is among those who can apply for an order. “ Victim” is defined in section 423(5). Section 425 gives the court wide powers in making an order under section 423(2). 49 Section 423 is the latest in a long line of statutory provisions directed at reversing transfers made in order to defeat the claims of creditors. Its language is new and there is no presumption that it should be construed in the same way as older provisions. The meaning of “ purpose” in section 423(3) has been considered by this court in Royscot Spa Leasing Ltd v Lovett [1995] BCC 502. This court took the view that it was not necessary that prejudice to present or potential creditors should be the sole purpose. The court indicated that the predominant purpose was the most likely formula, while leaving open the possibility that substantial purpose would be sufficient. 50 That case was followed by this court in Barclays Bank Plc v Eustice, which I have already mentioned, without comment on the suggestion that “ substantial” purpose should be preferred to “ dominant” purpose. The latter case also shows that although proceedings under the Insolvency Act 1986 are normally assigned to the Chancery Division, an application may in appropriate circumstances be made in proceedings pending in another division. 51 In this court Mr Christopher Purchas QC (appearing with Ms Anna Guggenheim for the defendants) has submitted that Eady J's order of 31st July should stand. There is, he said, insufficient reason to interfere with the judge's exercise of discretion. Mr Purchas also generously accepted that this court should consider the order made by Hallett J, as it covered new points raised before her, even though there is no appeal from her order before us. 52 In the course of argument this court indicated that it was not minded to make an order striking out the defence or debarring the defendants from defending either on the issue of liability generally or upon any particular issue relevant to liability, except, of course, so far as the order of Hallett J has already made some provision to that effect. We expressed that view on the basis that (serious though the breaches on the part of the defendants have been) that would be too serious and sweeping a sanction to apply. 53 The court's power to order a payment into court, or to impose a condition for a payment into court, was not (even before the introduction of the CPR) limited to ordering security for costs. A condition as to a payment into court was often imposed on the grant of conditional permission to defend under the old Order 14 of the Rules of the Supreme Court, and in Yorke Motors v Edwards [1982] 1 WLR 444, the House of Lords approved the increasing use of such conditions, thus to some extent anticipating this part of the CPR. 54 Part 3 of the CPR (the court's general powers of management) provides in rule 3.1(3): “ Where the court makes an order, it may (a) make it subject to conditions, including a condition to pay a sum of money into court.”
56 If the claimants' grievances about the defendants' conduct of this litigation had depended solely or mainly on the late service of the experts' reports and the perceived deficiencies of some of those reports, I would be disposed to accept Mr Purchas's submission that there would be no sufficient reason for interfering with the judge's exercise of his discretion. 57 However, it appears to me that the defendants' failures in the matter of disclosure, although receiving less attention in the judgment, have indeed been much more far reaching and serious than the late service of some of the experts' reports and the deficiencies in them. I do see force in the submission made on behalf of the claimants that these failures on the part of the defendants must be seen in the wider context of the defendants' conduct throughout the action. I think the judge may not have had time to stand back and look at that in the round. In particular, I consider that the judge erred in two important matters in connection with the demerger. 58 First, the judge said that on the evidence before him he was not prepared to make an order for disclosure. In my judgment the evidence from the filed accounts, which I have thought it right to go through in some detail, raised a strong inference of a claim under section 423 of the Insolvency Act 1986 which the defendants have not, despite ample opportunity, put in any convincing evidence to rebut. I include in that Mr Cowell's witness statement of this morning. I think that the judge was wrong in his assessment of the evidence which he had before him and that the new evidence does not significantly alter the position. 59 Secondly, I consider that the judge was wrong to accept that the defendants were impecunious, without considering what associated companies or trusts might have funds available for a payment into court. That point was forcibly made by Lord Diplock in Yorke Motors v Edwards [1982] 1 WLR 444 at page 449, an appeal against a condition (as to payment into court) under RSC Order 14. Lord Diplock pointed out that although the party himself might be impecunious, it was up to him to show that the resources were not available to him from family, friends, associates and so on. That approach was followed, in relation to an application for security for costs against one of the group of companies, by Bingham LJ (sitting as a single Lord Justice) in Klockner v Gatoil Overseas Inc 16th March 1990. That decision is not reported but it has been followed and applied by the full court on numerous occasions. 60 It is an approach, it seems to me, which is particularly apposite in this case because of the circumstances of the demerger leading to the inference, so far not effectively rebutted, that TCH was deliberately isolated from the resources of the majority of companies within the group to the tune of a sum in excess of £20,000,000. All the demerged companies' assets are at risk of an order under section 423, and all the demerged companies would appear to have a very real interest in considering whether they should support TCH in resisting the application. The suspicious circumstances of the demerger, together with all the background of this matter as I have described it, to my mind amount to a case where there have been both serious breaches of the litigation obligations on the part of the defendants and to a real doubt as to whether they are defending these proceedings in good faith. On any view, it seems to me that the claimants are entitled to protection from that. 61 The judge seems not to have addressed his mind adequately to those aspects of the matter. That makes it possible (and indeed necessary) for this court to form its own view as to how the judge should have exercised his discretion. In my judgment all the circumstances of this case call for the defendants to be required to make a substantial payment into court as a condition of continuing to defend this action. They also call for an immediate order for disclosure of documents relevant to the section 423 issue. 62 As to the amount of any such payment, the damages obtained by the claimants, even if wholly successful, are likely to be relatively, though I stress “ relatively” , modest: Lord Brennan suggested a sum of the order of £700,000 as to the maximum damages recoverable by all 23 claimants. The costs of the action will plainly be substantial. (In the settlement of the two consolidated actions, the costs were apparently agreed at about £600,000, so that they amounted to nearly half of the total settlement figure.) Mr Meeran in his second witness statement dated 10th July 2000 asked for an order for payment in of £400,000. In my view that sum is not unreasonable in all the circumstances, even though the trial date is now so close. It may be said that the defendants have been on notice as to this application for a considerable time, and that if they now have a problem with raising the money from the Tato Group or persuading the Tato Group that it should contribute, that problem is to some extent of their own making. 63 I would therefore allow this appeal. I would order a payment in by the defendants of the sum of £400,000 as a condition of continuing to defend the action. I would also order disclosure in relation to the demerger. 64 LORD JUSTICE WALLER: I entirely agree and will only add a short word of my own. 65 It seems to me there is no answer to there being an order for discovery in relation to the section 423 application. First, if that were a separate application, it is certainly not an application which could be struck out on the basis that it was unarguable. Indeed the claimants have made out a strong prima facie case under that section, as my Lord has indicated. Thus, there is no reason why discovery should not have taken place. Secondly, it is in fact important and fair to these claimants that they should have that discovery in order to ascertain whether in this publicly funded action, if judgment were to be obtained by them, there are likely to be assets available to meet any judgment or any order for costs. 66 As regards the other aspect, whether there should be an order for payment into court under Part 3.1, (3) or (5), it seems to me this is clearly a case where such an order should be made. This case had a hearing date fixed for 2nd October this year, fixed by Buckley J on 8th March this year. That fixing of the date was made in the context of an order having been made on 21st January for disclosure by 15th March, and an order for experts' reports to be served by the defendants by 5th May (it said by the defendants, because the claimants had unilaterally served their reports much earlier). At that stage, when the date was being fixed, the defendants never suggested any difficulty with the timetable. But, despite that trial date, the defendant did not fulfil their disclosure obligations at all in March, April, May, June or July of this year. 67 What they had to do was to supply a list in relation to the events post 1992, the lists in the previous action standing as lists for all previous dates. No list had been served prior to this matter actually coming on before Eady J. Indeed, in the result he had to make an order for disclosure. Indeed, that was not the end of the matter because further orders had to be sought from Hallett J earlier this week. The failure to abide by the timetables for the delivery of experts' reports was also quite unjustified. The difficulties that that has placed the claimants in are obvious; and the risk that such behaviour presents to the trial date is obvious; and the possible effect that that might have on other court users is also obvious. This is, thus, clearly a case where the court should consider ordering a payment in under the powers provided by the CPR. 68 In considering that question the matters relevant to the section 423 application come into the assessment, and in my view my Lord is right in criticising the learned judge for not taking those matters into account in that assessment. I would, for my part, also suggest that the previous conduct of these defendants in the previous proceedings would be relevant. These defendants appear to have some track record for attempting to make the fighting of an action as difficult as possible; and there does seem at least to be a prima facie case, a strong prima facie case, that assets may have been disposed of so as to make recovery for these claimants difficult even if judgment was obtained. Such circumstances are just those in which, as it seems to me, a court should exercise its discretion. 69 It would seem that the judge may have felt that the impecuniosity of the defendants was to be taken into account. That might be right, and would be right, if the defendants had put in evidence to demonstrate not only lack of funds in their own hands but that the funds could not be obtained from elsewhere. My Lord has already cited Yorke Motors for that proposition. There is no such evidence from the defendants. We may have had more information before us than the judge did, for example, in relation to precisely what the failures were in relation to disclosure, but in my view it is now possible to see that the judge was clearly wrong not to make an order for payment into court and not to make an order for disclosure. As regards the quantum of the sum to be paid into court, I agree with the sum proposed by my Lord. 70 I also would allow the appeal. Lord Justice Laws: 71 I agree that the orders proposed by my Lords should be made for the reasons given by them, and I do not desire to add anything.
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