Micheal & Ors v Phillips & Ors

Relief from sanctions depends on the three-stage approach in Denton v T H White Limited: the seriousness and significance of the breach, the reason for it, and all the circumstances of the case. Serious failures to comply with an unless order requiring disclosure, particularly where relevant electronic evidence has been destroyed or withheld without adequate explanation, may justify striking out a defence and counterclaim. The court must assess the practical prejudice caused by the breach, including the inability to prepare for a trial dependent on financial records. A sanction agreed by consent will ordinarily carry substantial weight in the proportionality assessment. The court need not assess the underlying merits where the disclosure failures prevent a reliable evaluation of them.

The claim arose from the operation and proposed sale of a minicab business. The claimants alleged breaches of duty, misuse of company assets, diversion of business and related contractual and property claims against the first and second defendants.

Following disclosure difficulties, an unless order required searches, disclosure statements and an explanation of documents that had been lost or destroyed. The defendants admitted serious non-compliance and sought relief from sanctions, permission to amend their pleading, and permission to defend the claim. The central issue was whether relief should be granted before trial.

1. Outcome. The application for relief from sanctions was refused. The first and second defendants’ Defence and Counterclaim were struck out, and they were debarred from defending the claims.
2. The court applied the three-stage test in Denton v T H White Limited [2014] EWCA Civ 906. The defendants accepted that their breaches were serious and significant and that there was no good reason for them. The decisive issue was whether relief was just in all the circumstances.
3. The defendants remained in substantial breach of the unless order. They had failed to disclose relevant computer records and had not adequately explained the destruction of hard drives and loss of electronic data. The court found that relevant information was likely to have been contained on the systems and that the explanations concerning the alleged cyber attack were unsatisfactory.
4. The failure to disclose cheques, invoices, invoice books, bank statements, accounting material relating to another company, bookkeeping data and proper details of searches was also material. The documents were relevant to tracing financial transactions and alleged intermingling and diversion of funds.
5. The breaches significantly prejudiced the claimants’ ability to prepare for trial. The defendants had consented to the unless order, so their later complaint that the sanction was disproportionate carried little weight. The court also considered the proposed amended pleading but could not reliably assess the merits while important disclosure remained absent.