Mason & Ors v Mills & Reeve (A Firm)

This judgment arises out of my decision to grant the Claimants permission to Re-Amend the Particulars of Claim to add a differently pleaded case. This permission was granted on 24th November 2010 being the second day of the trial. As a result of that decision the trial was adjourned to recommence on the 17th January 2011.

The decision to grant permission to Re-Amend the Particulars of Claim arose out of the way in which the Claimants opened their case at the start of the trial on 23rd November 2010. During that opening it became clear to me (and Mr Simpson QC who appears for the Defendants) that the way in which the case was being opened by Mr Mathew QC for the Claimants was not in accordance with his pleaded case. He did not accept this and I ruled that the matters that he raised in his opening were not to be found in the Amended Particulars of Claim, the then pleading for the trial. Accordingly on the next day he produced a draft Re-Amended Particulars of Claim and sought permission to Re Amend the Particulars of Claim in that form. That was opposed by the Defendants but despite that opposition I granted permission on terms.

I intimated that I would give reasons for my decision later as the Defendants intimated through Mr Simpson QC that they might seek to appeal my decision. I refused permission to appeal.

In order to understand the Re-Amendment it is necessary to set out the nature of the case shortly. The Claimants are the executors and daughters respectively of Christopher J Swain (“Mr Swain”) who died on 17th February 2007 during a heart procedure in Thailand. A fortnight or so earlier the entire issued share capital of Swain’s International Plc (“the Company”), his successful family business, had been sold in a Management Buy Out (“the MBO”) for a total consideration in cash and loan notes of approximately £3.5M.

The company carried on a substantial business as photographic wholesalers. Mr Swain beneficially owned 72.408% of the shares and his daughters owned 5.324% each with the remainder owned by an employees benefit trust (“the SWET”).

The material terms were set out in a revised Heads of Terms dated 23rd November 2006 which became the foundation of a lengthy and complex Share Purchase Agreement (“SPA”) completed on 31st January 2007 by Mr Swain, his daughters, the SWET and the MBO purchaser.

Mr Swain’s liability to Capital Gains Tax (“CGT”) as a result of his disposal of his shares was, on the Claimants’ case, about £160,000 (his shareholding had the benefit of CGT “business asset taper” relief at 10%). The personal representatives discharged that. As a result of his death his estate was also liable for Inheritance Tax (“IHT”) on the full amount of the value of the consideration. The relevant amount of IHT was on the Claimants’ case approximately £1M. In 2006/2007 the nil rate band was £285,000 and IHT was charged at 40% above that. Mr Swain’s estate comprised other assets and had a net probate value of £3.5M.

The Defendants are a well known national firm of solicitors. They were retained by Mr Swain and his daughters to act in relation to negotiations with the MBO team and the structure of the MBO itself. This involved some corporate tax work for which separate fees were paid. The Defendants by Craig Hodgson (“Mr Hodgson”), its partner having conduct of the MBO, invited Mr Swain to ask for personal tax advice (being described, the Claimants contend, by the Defendants as “personal tax advice”, “general tax advice”, “an overview of ……the tax position”) in addition to the separate advice on the sale of the shares for himself and his daughters.

The SPA is quite complicated. One matter however was that part of the purchase price (£1M) was deferred consideration in the form of loan notes to be redeemed over a period of up to 10 years from the date of completion.

The tax advice was provided principally by Isobel Pooley (“Ms Pooley”) a senior solicitor in the Defendants’ tax department in a letter to Mr Swain dated 4th January 2007.

It is contended that at least from October 2006 the Defendants knew that Mr Swain’s health was “weak” (being the expression given to it in paragraph 6 of the Claimants’ skeleton argument). They knew that he had had a heart attack in the past, suffered from type 2 diabetes and was overweight. Mr Swain was described in internal notes of the Defendants as being ill. From at least 16th January 2007 Mr Hodgson knew that Mr Swain was about to undergo some form of heart procedure.

It is the Claimants’ case as pleaded in the Amended Particulars of Claim that the Defendants failed to give any advice about the IHT consequences (either lifetime or death implications) in particular as to the difference his death would make after the MBO was completed and during the period that the deferred consideration was payable. It is complained that the advice failed to mention any IHT consequences at all immediately arising out of the transaction, not even as to the fact that the loan notes did not qualify for any business property relief (“BPR”).

The significance of it is that if the MBO had taken place after the death no IHT would have been payable because Mr Swain would have held property which would have been relieved 100% by the Business Property Relief. The company was an unquoted qualifying trading company and Mr Swain’s shareholding was so qualified. In addition there would have been no Capital Gains Tax as there would have been a deemed disposition acquisition of the shares at the date of his death at market value so that any subsequent sale would only attract Capital Gains Tax on any increase in value over and above the market value of the shares at the time of his death.

Thus in broad terms the Claimants contend that the failure on the part of the Defendants to advise as to this possibility and address it by postponing the MBO until after the operation has cost the Claimants somewhere in the region of £1.3M. The claim therefore is a significant one.

The essence of the claim was that given Mr Swain’s imminent heart operation (as it is put) and given his health the Defendants ought to have advised Mr Swain to have postponed the MBO until after his operation. The Claimants have led evidence showing that apparently the deceased was concerned about the operation in conversations to his friends. They have also led evidence to show that the purchasers under the MBO (who were the working directors in the company) would have been willing to defer the sale.

The major difficulties about this approach seemed to me to be twofold. First it concentrated on the seriousness of the illness and the imminent operation.

In fact in my view the imminent operation was not a risky one. Whilst Mr Swain had had cardiac problems in 2001 thereafter this appeared to have been satisfactorily dealt with. However in 2006 he was noted to have an abnormal cardiac rhythm (atrial flutter). He was admitted to the Bangkok Heart Hospital on 22nd July 2006 to perform coronary angiography and a catheter ablation for the atrial flutter. The angiogram showed no re-narrowing of the arteries. However the catheter ablation did not take place because a pre-procedure transoesophageal echocardiogram (“TOE”) revealed the presence of a left atrial thrombus (clot). Therefore the ablation was postponed whilst Mr Swain’s blood was thinned. That involved taking warfarin over a period of six months. It was therefore planned that after that period he would revisit the Bangkok Hospital Medical Centre (the February visit). There a further TOE would take place and if that showed that the clot had been satisfactorily dealt with the ablation would then take place.

The TOE was performed under sedation and it is not clear what happened after that. Mr Swain’s blood pressure apparently collapsed during the TOE procedure and despite various attempts to address it he died on the operating table. The ablation had never taken place. There are no satisfactory notes of the procedure. There was no autopsy and Mr Swain’s body was cremated. It is therefore unknown precisely why he died.

The Defendants have an expert report by Dr Simon Fynn which ultimately was not challenged by the Claimants. Dr Fynn highlighted the low risk procedure of both the TOE and the ablation. The risk of death on both he estimated at less than 1 in 1000. Further he had no knowledge of any deaths during a catheter ablation of an atrial flutter being reported in medical literature.

It follows that on that evidence there was no serious risk arising from the operation which Mr Swain is about to undergo that ought to have allegedly required the Defendants to consider giving advice in that regard. Of course it would have been otherwise if the Defendants’ medical evidence had been challenged but it was not.

The second difficulty is that the claim is predicated by an assumption that Mr Swain would die on the operating table. As I have said the medical evidence showed that it was unlikely that anyone would have thought that he might die on the operating table. If he survived the operation the problem posed by the transferring of his assets from BPR protected assets to non BPR assets remains the same. There is therefore a difficult case (to put it mildly) on causation.

Mr Mathew QC opened following an acknowledgment that the medical evidence was not challenged and the contention that it was not relevant on the basis that the Claimants’ primary case was that the cautionary advice they referred to ought to have been given to Mr Swain whatever his state of health. During argument Mr Mathew QC contended (for example) that even if Mr Swain was a healthy 25 year old with no illnesses at all it is the kind of advice which the Defendants being retained on the MBO and to advise on personal tax matters ought to have given. On objection by Mr Simpson QC I ruled on the form of the then pleadings as I have set out above.

The Claimants produced a Re-Amended Particulars of Claim overnight. Mr Simpson QC argued that the Re-Amended Particulars of Claim had no prospect of success. In effect he contended that the proposed Re-Amended Particulars of Claim did not disclose a cause of action and were bound to fail. I rejected that. It seems to me that the claim is readily understood and is clearly set out in such a way in the Re-Amended Particulars of Claim so that the Defendants know the case against them and are able to plead to it.

Mr Simpson QC’s next objection was on the basis that there was no evidence produced to show that this was an argument that had a reasonable prospect of success. He correctly submitted that an application for permission to amend requires evidence to show that it has a real prospect of success see the White Book paragraph 17.3.6. He secondly submitted (correctly) that there was no evidence produced to me to show that the Re-Amendment had a real prospect of success.

The Re-Amendment involves first contending that the Defendants had a duty to advise any seller in the position that Mr Swain found himself of the advisability of seeking advice to address the consequences of the change of assets as set out above. Second, the proposed Re-Amendment contends that such advice could have been obtained within a few weeks at the most and that a satisfactory scheme could have been created which would have been put in place at the same time as the SPA and ensured that thereafter Mr Swain’s estate would be protected from any CGT and/or IHT consequences arising out of a death after the sale of his business.

Mr Simpson QC was of course right. The reason why he was right is because this contention was not in the original claim. In the light of that submission I granted permission to Re-Amend conditionally. I required the Claimants to adduce evidence to show that these contentions have a reasonable prospect of success within 10 days.

The next basis for Mr Simpson QC to oppose the application to Re-Amend was as a matter of discretion. He took me through the history of the claim. The Claimants had applied to amend their Particulars of Claim earlier. The Application came on before HH Judge Kaye QC on 20th April 2010. I am told (and this was not challenged by Mr Mathew QC) that one of the proposed amendments was virtually the same as the one before me. There was an exchange over a period of time between Judge Kaye QC and Mr Mathew concerning the amendments. HH Judge Kaye QC appeared to be troubled about the wording of the amendments and this led to him saying this:-

“(T105 et seq)….[the amendment] …..(s) a whole new ball game as to precisely what in the circumstances the Defendants were supposed to have done.

In short it seems to me the problem with these amendments is a matter of language, rather than timing, particularly since the result of the first application this morning was to adjourn the matter.

Had there not been arguments about the amendments, and the arguments simply stressed upon their lateness, I might have had acceded to the application.

But it does seem to me that there is some objection to those substantial proposed amendments, but the objection is more to the wording.

The course I propose to adopt therefore in these circumstances on the basis that the wording it seems to me at this stage does need a rethink, is to put counsel to his election.

I can either rule, refuse the application at this stage, simpliciter, or invite Mr Mathew QC to reconsider the wording of the proposed amendments and adjourn the application to allow further amendments to come forward, and the language to be rethought and to adjourn the application to a different date…….It is right that the Defendants should know precisely what it is the case that they come and are supposed to meet.”

That took place on the first day of the trial but the trial had already been adjourned due to problems concerning the air pollution that occurred in April 2010.

Thereafter Mr Mathew QC elected to withdraw his application and produce a new draft. I am told that draft went through seven changes but the one closest to the presently proposed re-amendment was dropped.

Mr Simpson QC submitted strongly that once the Claimants had elected to withdraw the proposed amendment I should not allow them a second bite of the cherry by allowing it to be resurrected. That would be unfair and an abuse he submitted.

There was of course no adjudication on the proposed amendment. If there had been an adjudication adverse to the Claimants then save in exceptional circumstances it would have been impossible for me to consider a fresh application. The invariable way to challenge such a decision by HH Judge Kaye QC would have been for the Claimants to seek to appeal his decision to the Court of Appeal. I do not sit in an appellate capacity and therefore had there been a decision it would have been quite wrong of me to permit the Claimants to revisit a decision made against them by a Judge at the same tier level.

That is not the case here in my opinion however. HH Judge Kaye QC gave an indication in the most general of terms. But he did not make a decision. It seems to me therefore that I am not precluded from entertaining the application by reason of what happened before Judge Kaye QC. It is however I accept a factor that I should take into account in deciding whether to grant permission to amend.

Mr Simpson QC referred me to the decision of the Court of Appeal in Bonnie Louise Woods v Chaleff & Ors (dated 28th May 1999). That decision in my view shows nothing more than that on the facts of that particular case the Court of Appeal concluded that the Judge ought not to have allowed the application to amend so close to the trial. There are however a number of cases each way on the approach to amendments that are late see generally paragraphs 17.3.7 of the White Book. It is an important factor to be born in mind.

The timing of the application can only be described as late. If acceded to it inevitably would have meant an adjournment because fresh evidence would have to be led (including expert evidence) on this issue. However the delay caused by that is not substantial. I have directed the trial to start on 17th January 2011 with an expanded estimate of 10 days taking into account the expert evidence if any.

That is not an unreasonable delay in my opinion.

In my judgment the general principles are set out in paragraph 17.3.5 and in particular the observations of Peter Gibson LJ in Cobbold v Greenwich LBC 9/8/99 (unrep):-

“the overriding objective (of the CPR) is that the court should deal with cases justly. That includes, so far as practical, ensuring that each case is dealt with not only expeditiously but also fairly. Amendments in general ought to be allowed so that the real dispute between the parties can be adjudicated upon provided that any prejudice to the other party caused by the amendment can be compensated for in costs, and the public interest of the administration of justice is not significantly harmed”

The third matter raised by Mr Simpson QC was prejudice. If of course there is prejudice which might be caused by a proposed amendment which cannot be resolved or dealt with that is a substantial factor that almost invariably will lead to a refusal of the application. There is no suggestion that the costs that have been wasted will not be paid to the Defendants. They will therefore be fully paid for the financial cost of this adjournment. I accept that the proceedings are stressful (but no more stressful for them than the Claimants) and that the presence of the proceedings unresolved will be prolonged by the consequences of the adjournment. However that period as I have said is a relatively short one. They will be required to face a new case. However the evidence is not likely to be greatly lengthened as it involves primarily looking at legal issues and expert evidence. It is true as I have said that the case is differently presented but the mere fact that the case is differently presented is not prejudice to the Defendants in this situation in my view. It must be appreciated that the case is not statute barred. No principle of estoppel arises or prejudice can be relied upon merely because the Defendants face a new case for the first time.

The claim is a substantial one. It represents at around 30% of the value of Mr Swain’s estate. If I refuse the Claimants permission to re-amend the trial will proceed on what the Claimants will perceive as the wrong basis. That is therefore in my view an injustice. The injustice is exacerbated because the Claimants will then be deprived (they will see) of an arguable case to seek to recover a large sum of money from the Defendants. It would be an affront to justice in my view to allow a trial to proceed on a false and artificial premise created by the refusal of the amendment. As Peter Gibson LJ observed, an important duty of the court is to ensure that all parties to a trial have the fullest opportunity to present their cases provided they are presented in a way which is not unfair to the other side. It is not said on behalf of the Defendants that they cannot meet these amendments in time for the adjourned trial. It is not said that they are seriously prejudiced in my view by the relatively short delay. It is not said that they have been prejudiced by the way in which the Claimants have first put forward such a claim, withdrawn it and now seek to reinstate it beyond the fact that the case has taken a different turn.

Taking all of those factors into account it seems to me that they do not outweigh the fundamental need to ensure that the Claimants are entitled to a just and comprehensive hearing of their complaints against the Defendants. To deprive the Claimants of a right to do that by refusing this Re-Amendment is by far a greater injustice than anything that the Defendants appear to suffer as a consequence of permitting the amendment.

For all of those reasons I consider that it is appropriate to exercise my discretion in favour of the Claimants to permit them to Re-Amend the Particulars of Claim in the form of the draft produced by Mr Mathew QC but subject to the conditions and terms as set out in the consequential order I made.