Lexi Holdings (In Administration) v Pannone & Partners

This is an opposed application for an order for the provision of further information under CPR 18.1, by the defendants, a solicitors firm, in a hotly contested claim for damages in excess of £42 million arising out of the firm’s conduct of a retainer by the claimant in connection with its business of the provision of secured bridging loans.

The nature of the claim, and of the issues mainly in dispute, sufficiently appears from my judgment in relation to mainly unsuccessful cross-applications for summary judgment handed down on 26^th October 2009 (“the 2009 Judgment”). Paragraphs 1 to 16 of the 2009 Judgment provide a sufficient summary of the background for present purposes.

This application follows a written request for further information served by the defendants on 18^th February 2010 (“the RFI”). The request relates to the re-amended particulars of claim (“the RAPOC”), and to replies, dated 19^th December 2008, to an earlier request for information dated 1^st December 2008 (“the Replies”). It consists of some thirty one questions, covering ten pages. To some extent it repeats earlier, unanswered, requests. In other parts it seeks information for the first time about the important re-amendments in the RAPOC, which I permitted to be made on 8^th July 2009, in circumstances described in paragraphs 16 and 71 to 81 of the 2009 Judgment.

It is not suggested by the defendants that they need the information requested in order to plead a full defence, or to understand the ambit of their disclosure obligations. A full re-re-amended defence was served in March 2010, and disclosure has now been given, albeit after the present application was issued on 31^st March 2010. Rather, it is said that the defendants require the information for the purpose of completing work on their witness statements (now due for exchange in October this year) and in certain respects in order for them fully to understand the case which they have to meet. Emphasis was placed by Mr Patrick Lawrence QC for the defendants upon the fact that the RAPOC now alleges that the defendants had both actual and constructive knowledge of the fact that the managing director of the claimant, one Shaid Luqman, had no authority to instruct the defendants to make the payments complained about in this claim, but made them nonetheless, in circumstances where those payments are alleged to have formed part of the process by which Shaid Luqman dishonestly misappropriated tens of millions of pounds from the claimant. The allegation that solicitors made payments of the claimant’s money knowing that the instructions to make those payments were unauthorised is, as is common ground, a very serious allegation of dishonesty.

The claimant’s response to the RFI was, by letter dated 11^th March 2010 from its solicitors, to decline to provide any of the information requested, on the grounds that:

“The requests set out in that document (the RFI) are not reasonable, necessary or proportionate in order for your clients to understand our client’s claim. Our client’s claim is more than adequately particularised in the Particulars of Claim, Reply, Points of Reply in relation to the illegality defence and responses to previous Requests for Further Information.”

The claimant has (according to a costs schedule served for the purposes of this application) since then incurred costs in excess of £50,000 in defending its refusal to respond to the RFI, including a sum in excess of £29,000 in counsel’s fees. To have provided the information requested, regardless whether the defendants strictly needed it, would (taking a necessarily broad brush) have cost the claimant rather less then one tenth of the total sum expended in resisting the provision of any of it. Mr Philip Marshall QC for the claimant explained that, in the claimant’s view (and, I infer, the view of its legal team) the defendants’ conduct of the case thus far had been characterised by an extravagant, improper and inappropriate attitude, including excessive requests for early disclosure, a misconceived summary judgment application, and repetitive requests for information, such that it was time for the defendants’ approach to be curtailed by what he described as “a good rap on the knuckles”.

The court was presented with no less than ten lever arch files of documents supposedly relevant to the application, one from the defendants and nine from the claimant, without any attempt by the claimant to confine their contents to what was either necessary or likely to be needed by the court. The result of the claimant’s apparent wish to enforce procedural rectitude on the defendants has been a hearing attended by leading counsel on both sides lasting more than half a day, a further day’s judicial preparation and judgment writing, and the expenditure of more than 150 hours of time by the parties’ solicitors and counsel, in relation to a purely procedural dispute which, so far as I have been able to ascertain, the parties made no attempt whatsoever either to compromise or significantly to narrow.

It ought not to be necessary, more than ten years after the introduction of the overriding objective and the CPR, to have to say that such an approach to the resolution of interim procedural disputes is wholly unacceptable. The litigation of issues of bad faith and dishonesty may of course generate intense feelings of bitterness on both sides, and a determination to leave no stone unturned, regardless of cost, and all the more so in high value cases such as this one. Nonetheless the parties and their legal teams are obliged by CPR 1.3 to help the court to further the overriding objective. While a case is being prepared for trial this requires the parties and in particular their legal teams to put on one side their understandable feelings of mutual outrage and hostility, and to cooperate with each other in a process of preparation for trial which incurs only proportionate costs and uses no more than an appropriate share of the court’s resources.

As will appear from the remainder of this judgment, neither party is solely to blame for the disproportionate expense and court time taken up by this application. In many respects the RFI went well beyond what is contemplated by the CPR, (in contrast with the regime for further and better particulars under the RSC), and was pursued in full in the face of correspondence from the claimant which should have led to a substantial reduction in the information sought. Nonetheless some of the requests were properly made and the claimant’s decision to oppose the provision of any of the information requested out of a desire to administer a procedural rap on the knuckles to its opponent was in my judgment equally inappropriate, at least without a serious attempt to identify what might sensibly be provided, at modest cost, by way of response, or some real prior attempt to explore a procedural compromise.

The regime for further information introduced by Part 18 is based upon the tests of necessity and proportionality. Paragraph 1.2 of the Practice Direction to Part 18 provides that:

“A Request should be concise and strictly confined to matters which are reasonably necessary and proportionate to enable the first party to prepare his own case or to understand the case he has to meet.”

The CPR thus takes a more restrictive approach to what used to be regarded as an entitlement to particulars under the RSC, for reasons explained by Lord Woolf MR in McPhilemy v. Times Newspapers Ltd [1999] 3 All ER 775 at 792 to 3:

“The need for extensive pleadings including particulars should be reduced by the requirement that witness statements are now exchanged. In the majority of proceedings identification of the documents upon which a party relies, together with copies of that party’s witness statements, will make the detail of the nature of the case the other side has to meet obvious. This reduces the need for particulars in order to avoid being taken by surprise. This does not mean that pleadings are now superfluous. Pleadings are still required to mark out the parameters of the case that is being advanced by each party. In particular they are still critical to identify the issues and the extent of the dispute between the parties. What is important is that the pleadings should make clear the general nature of the case of the pleader. This is true both under the old rules and the new rules.

As well as their expense, excessive particulars can achieve directly the opposite result from that which is intended. They can obscure the issues rather than providing clarification. In addition, after disclosure and the exchange of witness statements pleadings frequently become of only historic interest.”

I shall apply the test identified in paragraph 1.2 of the Part 18 Practice Direction in the remainder of this judgment.

Some indication that the defendants’ request was not framed with that test in mind appears from its preamble, which is as follows:

“Where a request seeks particulars of matters relied upon in support of an allegation of knowledge (actual or constructive), the claimant is requested to set out all matters so relied upon with the utmost particularity so that (for instance) where a particular communication is relied on, it is identified by author, recipient, date. The defendant may apply for an order striking out any allegation of knowledge which is insufficiently particularised.”

This paragraph is to my mind redolent of an attitude which treats particulars as a rigid entitlement, and particulars of knowledge as having to achieve a preconceived level of detail, regardless of its practical effect in terms of providing enlightenment as to the claimant’s case.

The central part of the RAPOC consists of the identification of a large number of payments made by Pannone as Lexi’s solicitors, set out in paragraphs 19, 20 and 21, all of which are alleged to have been unauthorised. These were the matter of detailed analysis on the summary judgment application, and description in the 2009 Judgment. In relation to all of them, the RAPOC asserts that Shaid Luqman (who gave the relevant instructions to Pannone) had no actual or apparent authority to do so, and paragraph 19A.2 of the RAPOC pleads Lexi’s case in relation to apparent authority. It is initially pleaded in relation to payments into the Lloyds TSB account, but repeated in paragraphs 20A and 21A in relation to the other two categories of payments, namely payments to other firms of solicitors acting for Lexi, and a payment to a Mr Jim Denney. In relation to all the payments, Lexi’s case as to the lack of apparent authority is based upon what Pannone is alleged to have known or which it ought to have known about those payments, and about Shaid Luqman’s dishonesty.

Paragraph 19A2(a) alleges that Pannone knew or ought to have known that all monies related to Lexi’s lending should be paid into the Receipts Account if not used to repay loans outstanding under the Facility Agreements. Paragraph 15 sets out the basis upon which it is alleged that Pannone knew or ought to have known the terms of the relevant Facility Agreements (having advised on them). Paragraph 19A2(a) then alleges that all payments of money which ought, pursuant to the Facility Agreement, to have been paid into the Receipts Account, but which were directed to be paid elsewhere, were, therefore, prima facie unauthorised since they would bring Lexi into breach of its Facility Agreement with Barclays. Secondly, in relation to payments to Lloyds TSB account, paragraph 19A2(a) pleads that Pannone knew or ought to have known that the Lloyds TSB account was not a company account, having been so informed by Shaid Luqman by letter dated 22^nd October 2002. Reference is then made to admissions to that effect by two Pannone witnesses whose statements were used on the summary judgment application.

As for Shaid’s dishonesty, paragraph 19A2(b) alleges, by reference to paragraph 11 of the RAPOC, a detailed basis upon which Pannone knew or ought to have been aware that Shaid was both dishonest, and that he had defrauded Barclays in relation to the Facility, so that Pannone should have known or have suspected that such frauds were continuing. Paragraph 11 sets out comprehensive details of previous dealings between Pannone and Shaid Luqman upon which the allegation of knowledge of his dishonesty is based.

There follows at paragraph 22 of the RAPOC, under the heading Breach of Duty, the allegation that each of the payments in paragraphs 19 to 21 were therefore made by Pannone in breach of its duties to Lexi, the basis of that allegation being that (i) Pannone knew or ought to have known that payments otherwise than into the Receipts Account were unauthorised, (ii) that the payments were not for the benefit of or bona fide in the best interest of Lexi, and that Lexi received no consideration for them and, (iii) that Lexi therefore “failed to comply with the Rules by virtue of the foregoing”.

Request 1 seeks particulars of the allegation in paragraph 22 that the payments were made in circumstances in which Pannone knew or ought to have known that they were improper and not in the best interests of Lexi (a summary of Lexi’s case under paragraph 22 given in paragraph 11 of the Replies). The request seeks, in relation to every one of the payments, each matter relied upon in support of the four alternative allegations that:

In my judgment that comprehensive rolled-up request fails to pass the necessity and proportionality tests. I consider it clear from those parts of the RAPOC which I have summarised above that, in relation to all of the payments referred to in paragraphs 19 to 21, Lexi’s case is that Pannone either knew or ought to have known that the payments were improper or not in the best interests of Lexi because, from what Pannone knew about the terms of the Facility Agreements, each of them represented a breach of those agreements sufficient to bring Lexi into peril in its relationship with Barclays, and that Pannone knew or ought to have known that Shaid Luqman was in the habit of defrauding Barclays, and ought to have known or suspected that these payments represented a continuing part of that fraud. In relation to the payments to the Lloyds TSB account, there is the added allegation that Pannone had been told by Shaid that the Lloyds TSB account was his personal account, rather than a Lexi account, such that payments of company money to him, with no apparent consideration flowing to Lexi, were also prima facie outwith his usual or apparent authority.

That is in my judgment a sufficient explanation of Lexi’s case for Pannone both to understand the case it has to meet, and to prepare its defence.

As to request 2, this seeks particulars about “the Rules” referred to in paragraph 22.3, and as to the nature of Lexi’s case about breach of them. The Rules are defined in paragraph 5 of the RAPOC as particular identified provisions of the Solicitors Practice Rules 1990 and the Solicitors’ Accounts Rules. I consider it clear that the allegation in paragraph 22.3 (to which request 2 relates) is simply that if Lexi makes good the allegations in paragraphs 22.1 and 22.2 (which I have already summarised) then there will have occurred breach of those specified rules. It seems to me entirely unnecessary for any further particularity to be provided. Whether or not those parts of paragraphs 22.1 and 22.2 as are made good at trial demonstrate a breach of the rules specified in paragraph 5 will be a matter for submission.

This seeks, in relation to each of the payments in paragraph 19 to 21 information as to:

As to the payments to the Lloyds TSB account I consider that Pannone already have sufficient information about the nature of Lexi’s case. It is set out in detail in a report prepared by KPMG for the Administrators which has been disclosed, and also (although in less detail) in my judgment in proceedings against the Luqmans and others handed down on 16^th November 2007, under the heading “the Individual Misappropriations”, and in particular at paragraphs 95 and following. Lexi’s case against Pannone is that the misappropriation and loss all occurred upon payment of the relevant monies into the Lloyds TSB account. At trial Lexi will have to deal with the difficulty that it established in 2008, as against Waheed, Monuza and Zaurian Luqman, that the Lloyds TSB account was an account of Lexi, an issue already addressed during the summary judgment proceedings, although not determined, see paragraphs 61 to 66 of the 2009 Judgment. Nonetheless, the resolution of that difficulty is not likely to be assisted by the provision of further information.

I consider that the position is otherwise in relation to the payments to other Lexi solicitors and to Mr Denney, the subject matter of paragraphs 20 and 21 of the RAPOC. It is by no means obvious that payments of Lexi’s money by Pannone to other panel solicitors used by Lexi, or to Mr Denney who had been an LPA receiver in connection with a security realisation by Lexi, caused Lexi any immediate loss, even if Lexi succeeds in showing that they should have been made to the Receipts Account. Nor does the RAPOC contain any explanation of what happened to those monies once paid by Pannone sufficient to explain the nature of Lexi’s case as to loss. Mr Marshall’s response for Lexi was that first, if the payments were unauthorised, then the money was misappropriated and secondly, that the process assisted Shaid in his continued fraud against Lexi by means of false accounting. As to the first point, I consider that the case that misappropriation is constituted by the making of an unauthorised payment is sufficiently explained, but the case for consequential loss, in the full amount of the payments made is not, in relation to payments to other solicitors and to Mr Denney. Prima facie those solicitors would have needed to hold the money for Lexi in client account, and Mr Denney would have had a claim against Lexi for his work as receiver if it had not been satisfied by the payment complained of. As to the false accounting, it is not clear to me either from the RAPOC or from any other materials just how that case is to be made good. It follows that I direct that, in relation to the payments other than to Lloyds TSB, the information sought by request 3 is to be provided.

Paragraph 24 of the RAPOC identifies a series of payments which Pannone did make into the Receipts Account but which Lexi alleges ought not to have been made into that account, not being bona fide redemption proceeds properly attributable to a borrower to whom Lexi had made an advance. The allegation is that Pannone failed to take reasonable steps to ensure that monies which it paid into the Receipts Account were bona fide redemption proceeds of that kind. Request 4 to 6 seek to tease out details of Lexi’s case that Pannone owed a duty to check that such monies were bona fide redemption proceeds, an explanation why Pannone were not entitled to rely upon Shaid’s instructions, and an explanation as to what steps Pannone should have taken to satisfy itself that payments requested to be made into the Receipts Account were bona fide redemption proceeds.

In my judgment these requests clearly fail the necessity test. Paragraphs 4 to 6 of the RAPOC contain a sufficient identification of the legal basis of Pannone’s alleged duties, and paragraph 24 sufficiently identifies the factual basis upon which it is alleged that the payments in question were not in fact bona fide redemption proceeds. Beyond that, I consider that the issues as to whether Pannone were in breach of duty by making those payments into the Receipt Account are a matter for evidence and submission, rather than further elucidation in pleadings.

This seeks particulars of the allegation, implicit in paragraph 24, that none of the payments there specified were “genuinely” received by Pannone in respect of Lexi’s lending. In my judgment Pannone do not need that information in order to understand the case against them, still less to prepare their response to it. In paragraph 2(ii) of Pannone’s Points of Defence in relation to the plea of illegality, Pannone positively pleads that the paragraph 24 payments were arranged by Shaid as part of a deceit which he and Lexi perpetrated against Barclays, and the other syndicate banks led by Barclays. It is therefore common ground on the pleadings that these payments were not genuine loan redemptions, so that there is no issue between the parties about that allegation. Furthermore, in seeking information as to the source of each of the paragraph 24 payments, request 7 does no more that seek a repetition of information already sufficiently provided in the detailed description of each of those payments provided in the subparagraphs of paragraph 24 of the RAPOC.

This request seeks (rather like request 2) particularity as to the Rules alleged to have been infringed by Pannone’s making of the paragraph 24 payments. In my judgment that information was already given with sufficient precision in December 2009 in paragraph 26(ii) of the Replies.

Paragraph 26 of the RAPOC pleads that, in relation to the paragraph 24 payments, that “Pannone caused the Company’s payments into the Receipts Account to be wrongly accounted for and are liable to compensate the Company in respect of all losses arising therefrom.” Paragraph 35.2 of the RAPOC pleads, as Particulars of Loss and Damage:

“Losses arising from the incorrect accounting treatment of sums paid into the Receipts Account as set out above including the false inflation of the director’s loan account of the Company and improper withdrawal of Company funds in repayment of the same and making of false entries for redemption which allowed the actual redemption monies (for genuine loans) to be misappropriated by Shaid.”

Requests 9 to 12 and 25 seek to elucidate what false accounting is referred to, and how that false accounting (as opposed to the mere making of the paragraph 24 payments) caused Lexi loss of the types specified in paragraph 35.2 of the RAPOC. Mr Lawrence submitted that those matters were wholly opaque, and unintelligible even by reference to other material (beyond the RAPOC itself) thus far provided to Pannone by Lexi.

Mr Marshall’s response was that the nature of the accounting treatment was sufficiently set out in paragraph 24, and that the causative consequences were obvious. In my judgment the details in paragraph 24 only show how Pannone accounted for those payments to its client Lexi. They do not begin to show how Lexi internally accounted for those payments, or how either Pannone’s accounting or Lexi’s internal accounting in relation to those payments assisted Shaid in his fraud. In my judgment it is necessary for further information, in terms of an intelligible explanation of those matters, to be provided in advance of trial, and I direct therefore that Lexi respond to requests 9 to 12 and 25.

This request seeks a further explanation of the allegation in paragraph 27 of the RAPOC that Pannone knew or ought to have known that Shaid Luqman was of bad character, and instigating the unauthorised and improper payments set out in paragraphs 19 to 21 and 24. Paragraph 28 of the Replies contains Lexi’s response to an earlier, similar request by Pannone, and directs the reader to paragraphs 11 to 24 of the RAPOC and to the fact that Pannone might have obtained information about Shaid’s earlier criminal convictions from his brother and two sisters, all of whom were directors of Lexi.

In my judgment request 13 fails the necessity test. It raises matters for evidence and for argument at trial.

Section E (consisting of paragraphs 27 to 34) of the RAPOC advances Lexi’s higher value claim against Pannone, amounting to some £42 million (by contrast with the £9.7 million odd claimed as a result of the particular unauthorised payments). It is, in substance, a whistleblowing claim, to the effect that what Pannone knew about Shaid Luqman and his conduct was sufficient to require it to report that knowledge either to Lexi’s board, to Barclays and its reporting accountants, to its auditors or to the police, with the consequence, had that been done, that all or substantially all of Shaid’s misappropriations and breaches of duty against Lexi would have been prevented. Request 14 is the first of a series which seek further information about what I shall call Lexi’s whistleblowing case.

A similar whistleblowing case was advanced by Lexi against its directors Monuza and Zaurian Luqman, in relation to their knowledge of Shaid Luqman’s previous convictions. It failed before me, but succeeded before the Court of Appeal. The whistleblowing case against Monuza and Zaurian involved my having to make findings of fact, by no means all of which were expressly departed from by the Court of Appeal, on its different analysis of the issues.

Request 14 seeks information about Lexi’s whistleblowing case against Pannone under seven subheadings. The first seeks to be told the gist of the information that Pannone should have provided to the Board. In my judgment this is sufficiently identified in paragraph 28.1 of the RAPOC, namely the matters pleaded in paragraphs 11, 19 to 21 and 24.

The second subheading seeks an identification of the time when that information could have been provided. In the light of Lexi’s case that all or substantially all Shaid’s misappropriations would thereby have been prevented, I consider that the time is sufficiently identified, by implication, as being on or before the date when the first of those misappropriations is alleged to have occurred. Subparagraphs (iii) and (iv) seek to identify what, on the hypothetical basis that Pannone had made such a report in good time, would have been the instructions forthcoming, and the identity of the persons to whom Pannone would have reported. In my judgment those are matters of argument and evidence, not necessary for Pannone’s preparation of its defence.

Subparagraphs (v) to (vii) of request 14 seek an understanding of the extent to which Lexi will attempt at trial as against Pannone to depart from certain findings of fact which I made in connection with the whistleblowing case against Monuza and Zaurian. In my judgment it is both sensible and necessary, (in the sense of informing Pannone as to the ambit of the case which they have to meet) that this information be provided. It is unlikely to put Lexi to any significant trouble or expense, so that its provision will not be disproportionate. I therefore direct that Lexi provide the information sought in subparagraphs (v) to (vii) of request 14 but not otherwise.

This seeks an explanation why Pannone should have reported to the Board at all, rather to Shaid Luqman as Lexi’s managing director. This is in my judgment a pure question of argument, once the facts as to what Pannone knew or should have known about Shaid (all of which are sufficiently clearly pleaded) have been ascertained.

These seek information in relation to the allegation that Pannone should have blown the whistle to Barclays or to its reporting accountants Pricewaterhouse Coopers, similar to that sought in requests 14(i), (ii) and 15. For the same reasons, I consider it to be unnecessary for that information to be provided. Request 18 seeks information as to what it is alleged that Barclays would have done if the whistle had been blown. It is divided into two subparagraphs, the first of which is designed to elucidate who at Barclays would have been responsible for considering what action to take, and the second seeks information about Barclays’ then state of knowledge. Mr Lawrence explained that this information would be necessary to enable Pannone to decide what, if any, further third party disclosure to seek from Barclays.

Mr Marshall’s response was that the identity of the persons responsible at Barclays was sufficiently apparent from my judgment in the whistleblowing case against Monuza and Zaurian and that the other information requested would be sufficiently apparent from witness statements to be served in due course, to the extent not already available from the evidence of a Mr Gresham in those earlier proceedings. The individuals in question were Mr Palmer and Mr Gresham, and it is not at present clear whether Lexi proposes to deploy any evidence from Mr Palmer at the trial as against Pannone.

In my judgment the necessity test is (just) satisfied in relation to any case which Lexi intends to advance that Mr Palmer would have done something if the whistle had been blown by Pannone at the requisite time. I therefore direct that request 18(ii) be answered in relation to Mr Palmer.

These requests seek similar information in relation to Lexi’s case that Pannone should have blown the whistle to the company’s auditors and (or alternatively) to the police. In my judgment sufficient information is already supplied in paragraph 28, including in particular, 28.4 of the RAPOC so that the request for further information in those respects fails the necessity test. I have already dealt with request 25, above.

Schedule A to the RAPOC sets out a list of the payments which in aggregate amount to the £42 million odd misappropriations by Shaid which it is alleged that a blowing of the whistle by Pannone would have prevented. Request 26 seeks information about the source and destination of all those payments. In my judgment that information is (to the limited extent necessary) already available to Pannone both in the 2007 Judgment, in the KPMG reports and the other materials thus far made available by Lexi.

Mr Lawrence told me that request 27 is no longer pursued, because Pannone have already been given the information therein requested. As to the remainder, it was agreed that Lexi should reply to requests 28 and 30, but not to 29 and 31, which are no longer pursued. They relate to losses alleged to have been suffered from transactions procured by Shaid Luqman in breach of sections 320 and 330 of the Companies Act 1985, which it is alleged that a blowing of the whistle by Pannone would have prevented. Thus far, no explanation has been given as to the timing, amount or causative analysis of any such losses and, notwithstanding Lexi’s robust refusal in correspondence to answer any of the requests in the RFI, it later became common ground that this information would need to be provided, before the beginning of the hearing before me.

The result is that Lexi must provide the further information sought by requests 3 (in relation to payments to other solicitors and Mr Denney), 9 to 12, 14 (v) to (vii), 18 (ii) in relation to Mr Palmer, 25, 28 and 30, but no others. I will hear submissions as to a timetable, if it cannot be agreed.