Smailes & Anor v McNally & Anor

The Court of Appeal considered whether the joint liquidators had complied with an Unless Order requiring them to conduct a reasonable search and to serve a compliant list of documents in accordance with CPR Part 31 (notably rules 31.6 and 31.7). The court held that the omission of known, central documents called "scripts" from the disclosure list, and the failure to check that those scripts had in fact been delivered for scanning and upload, amounted to non-compliance with the Unless Order. The consequence prescribed by the order (strike out unless compliance) therefore took effect.

The decision applies CPR 31.6/31.7 and the factors in CPR 31.7(2) (number of documents, nature and complexity of proceedings, ease and expense of retrieval, and significance of documents likely to be located) to the facts. The court distinguished authorities relied on by the judge below where there was no identified target document and emphasised that where existence and relevance of documents are known, a more searching approach is required. The appeal was allowed and the strike-out provision of the Unless Order was given effect.

Background and parties: The joint liquidators of Atrium Training Services Ltd (the claimants) sued two former officers, Mr McNally and Mr Maclean, for alleged fraudulent trading and wrongful trading arising from an alleged underpayment of tax (claims under sections 213 and 214 of the Insolvency Act 1986). The proceedings had a protracted disclosure history with multiple missed disclosure deadlines.

Procedural posture: At first instance an Unless Order was made by Henderson J requiring the liquidators to conduct a search under CPR 31.7 and to provide a list of documents complying with CPR 31.10 by a specified date, failing which the claims would be struck out. Birss J later held that the liquidators had complied with that order. The defendants appealed to the Court of Appeal, which is the court giving this judgment.

Nature of the dispute on appeal: The appeal concerned only whether the liquidators had complied with the Unless Order. The central factual dispute concerned the non-inclusion of 152 "scripts" — weekly schedules recording pay and tax deductions for operatives — from the disclosure list. The scripts were known to exist, were central to the claim (tax liability), had been referenced in earlier litigation and had been promised to the defendants, but were not uploaded to the electronic disclosure database because they were not delivered to the scanning provider.

Issues framed by the court: (i) Whether the search conducted by the liquidators met the standard of a "reasonable search" under CPR 31.7; (ii) whether omission of the scripts and certain other documents showed failure to comply with the Unless Order; (iii) whether the judge below had been right to treat good faith and a broadly proportionate methodology as sufficient where known relevant documents were omitted.

Court's reasoning: The court applied CPR 31.6 (standard disclosure) and CPR 31.7 (requirement to make a reasonable search), and the factors listed in CPR 31.7(2). It found that the scripts were few in number (152), were in hard copy at the liquidators' offices, were central to the claim and had been expressly relied on and promised for disclosure. The liquidators' process excluded underlying documents on the basis that the scripts would be disclosed, but the scripts were never delivered to the scanning contractor and no adequate follow-up search occurred after the Unless Order was made. The Court of Appeal concluded there was an admitted omission of known relevant documents and that this was not a case in which inference was necessary: the omission itself established non-compliance. The court also explained that authorities about not leaving "no stone unturned" in very large electronic disclosure exercises were distinguishable where the existence and relevance of particular documents are known. The appeal was allowed and the strike-out consequences of the Unless Order were given effect; consequential orders relating to costs and repayment of an interim payment were made.

Additional points: The court remarked on the unusual character of the case, where relevant documents were known to exist and had been promised but were not produced. The court declined to stay its orders to permit a renewed application for relief from sanctions.

Appeal allowed. The Court of Appeal held that the liquidators had failed to comply with the Unless Order because they omitted from their disclosure list known, centrally relevant documents (the "scripts") and did not carry out the requisite reasonable search to ensure those documents were delivered and uploaded; the strike-out provision of the order therefore took effect and consequential orders on costs and repayment followed.

Appeal to the Court of Appeal from the High Court of Justice, Chancery Division, Companies Court (Birss J). Neutral citation for this Court of Appeal judgment: [2014] EWCA Civ 1299.