Smailes & Anor v McNally & Anor

Compliance with an unless order requiring standard disclosure is an objective question of interpretation and application of the order and the disclosure rules. It is not a discretionary case-management decision. A reasonable search must be assessed by the factors in Civil Procedure Rules 1998 r 31.7(2), including the likely significance and ease of retrieving identified documents.

Good faith and an extensive disclosure process do not cure the failure to search for and list documents known to exist, known to be central to the case, and known to require disclosure. A disclosure statement is not conclusive where the disclosing party admits that such documents existed and were omitted.

The claimant joint liquidators brought proceedings against two former officers of Atrium Training Services Ltd, alleging fraudulent trading and insolvent trading under sections 213 and 214 of the Insolvency Act 1986. The claims concerned an alleged tax underpayment of about £45 million.

After repeated disclosure failures, Henderson J made an unless order requiring the liquidators to conduct a compliant search and provide a compliant list by 28 June 2013. Although the liquidators served a list, it omitted 152 highly relevant weekly payment reports, described as scripts. Birss J held that the liquidators had complied with the order.

The former officers appealed. The central issue was whether the omission of the scripts meant that the liquidators had failed to conduct the required reasonable search and to comply with the unless order.

1. Appeal allowed. Birss J was wrong to find compliance. The unless order took effect according to its terms: the liquidators’ proceedings were struck out without further order, and the former officers could enter judgment for their costs.

2. Whether an unless order has been complied with is an objective question. It requires interpretation of the order and the relevant disclosure rules and their application to the facts. Although procedural in character, it is not a discretionary case-management decision.

3. The order required a reasonable search for the documents within standard disclosure. Under Civil Procedure Rules 1998 r 31.7(2), the court had to assess the quantity of documents, the nature and complexity of the proceedings, the ease and expense of retrieval, and the significance of documents likely to be found. The clarification in Practice Direction 31A also brought documents on which the liquidators relied within the required search.

4. The scripts were few in number, physically held in the liquidators’ own offices, easy to retrieve, and central to a substantial fraud claim. Their existence and relevance were already known, and their disclosure had been promised. The solicitors nevertheless excluded underlying material because the scripts would be disclosed, but failed to check that the scripts had been sent for scanning or to conduct a further search after the order. This was no search for the critical documents, let alone a reasonable one.

5. The observation in Digicel (St Lucia) Ltd v Cable & Wireless [2008] EWHC 2522 Ch that disclosure does not demand an exhaustive search did not apply. It concerned large-scale electronic disclosure without an identified target document. Good faith could bear on a party’s decision about relevance and on relief from sanctions, but it could not establish compliance where the party had already decided that the known documents should be disclosed.

6. Further, if the scripts had already been located through an earlier search, their omission from the list independently breached the second limb of the unless order. The disclosure statement was not conclusive because there was no evidential conflict: the liquidators accepted both the documents’ existence and relevance. The court did not determine any application for relief from sanctions.

7. The respondents were ordered to pay the appellants’ costs of the appeal and of the applications before Birss J. The £95,000 interim payment ordered below was to be repaid with interest. No stay was imposed.

• Court of Appeal (Civil Division): Allowed the former officers’ appeal and held that the liquidators had not complied with Henderson J’s unless order.

• High Court of Justice, Chancery Division, Companies Court (Birss J): Held that the liquidators had complied with the unless order and did not reach relief from sanctions.

• High Court of Justice, Chancery Division (Henderson J): On 7 June 2013, made an unless order requiring a compliant search and disclosure list under Civil Procedure Rules 1998 Part 31.