LBI HF v Stanford

In this matter I have before me a restored application by the defendant, Mr. Stanford, to re-re-amend his defence and counterclaim. I propose, as the transcript will show I made clear this morning, to dismiss this application on certain undertakings which have been given by Mr. Alexander QC, counsel for the claimant, which I will refer to as "LBI", and those undertakings have now been put in writing and it is not necessary for me to read them out.

Since Mr. McDonnell QC, who appears for Mr. Stanford, in reply, in effect, did not seek to dissuade me from this course - indeed he described it “the most sensible and satisfactory outcome” of the application - and since I am not, or at any rate not consciously laying down any new principles, my reasons for doing so are unlikely to be of any interest to anyone other than the parties or the judge hearing the trial of this action in October. Those persons will have a full understanding by the time they have to look at this judgment, if they ever do, of the issues in the case and, if necessary, can refer to the full transcript of the hearing which has taken place over the last two days for any further detail.

In those circumstances, I do not regard it as necessary or helpful to give any more than a very short judgment, explaining the course I have taken and why, although in fact that in itself is likely to be discernible from a reading of the transcripts.

It is not necessary for me to give more than a very brief description of the case, which I can usefully take from the judgment of Newey J on the pre-trial review. The proceedings arise out of loans that the Part 20 defendant, Landsbanki Luxembourg SA (“Luxembourg”), made to Mr. Stanford in 2007, one to buy a property at 39 Ennismore Gardens in London and one to buy a property at Courchevel and both loans were secured over the London property.

The proceedings were started in July 2011 when Luxembourg issued proceedings (his judgment reads “in the Central London County Court”; I am not sure that is right but it does not matter) seeking a possession order in respect of 39 Ennismore Gardens and judgment for the amount of the loans with interest. They were subsequently transferred to the High Court.

There has been an assignment of Luxembourg's loan book to its parent which is now the claimant, LBI, and LBI has been substituted as claimant. Those proceedings have been set down for trial at the beginning of next term listed in a five-day window beginning on 1st October with what was then a 15-day estimate, but, as a result of the pre-trial review, has, as I understand it, become a 17-day estimate.

It is not necessary to recite the procedural history which is well known to the parties. There was when the matter was proceeding in the county court a successful application by the then claimant Luxembourg for preliminary issues, but after the assignment and substitution and transfer to the High Court that was discharged by Mann J in July 2013 who gave directions leading up to the trial in October this year.

In March of this year Mann J had to deal with the service of witness statements and he made a debarring order precluding the defendant from relying on any other evidence of fact than that served in time. The matter then came before Newey J on a pre-trial review on 24th July. At the pre-trial review the proposed re-re-amendment pleading fraud was not put forward by counsel for Mr. Stanford. Instead the application made to Newey J was that there should be a stay of proceedings pending the outcome of certain proceedings in Iceland which, he hoped, would lead to assessments of the status of LBI's accounts.

Newey J refused a stay for the reasons given in his judgment which it is not necessary for me to recite. That was on the afternoon of 24th July. On the next day, 25th July, Mr. McDonnell appearing then (as he does before me) for Mr. Stanford told Newey J that in the light of certain information he had received from his Icelandic law expert, Mr. Jónatansson, he proposed now to bring forward an application to amend to plead fraud and that application was brought on 1st August. It appeared before Warren J on 7th August. He adjourned it, although expressing certain views about it, and it is that adjourned application which comes before me. Warren J delivered a judgment which appears only in an unapproved form to date on 8th August.

There has been no dispute between counsel as to the principles applicable to an application to amend. I was referred to some well known authorities. They are Cobbold v Greenwich LBC (9th August 1999, unreported), Worldwide Corporation Limited v GPT Limited (2nd December 1998, unreported), Swain-Mason and Ors v Mills & Reeve LLP [2011] EWCA Civ 14 and Brown v InnovatorOne plc [2011] EWHC 3221 (Comm), a decision of Hamblen J.

Hamblen J's decision contains a summary of the relevant principles at paragraphs 5-13. It is not necessary for me to read them all out. Those paragraphs are to be regarded as incorporated in this judgment because they seem to me adequately and accurately to encapsulate the principles laid down in the various Court of Appeal cases.

At paragraph 14 Hamblen J said:

"As the authorities make clear, it is a question of striking a fair balance. The factors relevant to doing so cannot be exhaustively listed since much will depend on the facts of each case. However, they are likely to include:

(1)

the history as regards the amendment and [the explanation as to] why it is being made late;

(2)

the prejudice which will be caused to the applicant if the amendment is refused;

(3)

the prejudice which will be caused to the resisting party if the amendment is allowed;

(4)

whether the text of the amendment is satisfactory in terms of clarity and particularity".

I propose to deal very briefly with each of those four factors. So far as the history as regards the amendment is concerned, I am entirely satisfied that this is to be regarded for the purposes of these principles as a late amendment. It is not as late as some of the amendments referred to in the other cases, which were made either at or very shortly before trial, but it is a late amendment, there having been directions given well over a year ago in July 2013 leading up to a trial date in October, the case having been set down for and given a listing in October and a pre-trial review having been heard in July of this year. Any application which comes after the pre-trial review must, in my judgment, be regarded as late. The purpose of a pre-trial review is to ensure that the case is ready for trial and applications which are made after that date, especially applications such as this one, which are likely to lead to a disruption of the trial, should be regarded as late for these purposes.

As to the explanation as to why it is being made late, it is not necessary for me to recite the entire history which is a matter of some complexity, but I accept the submission made by Mr. Alexander that the explanations that have been given leave something to be desired. The suggestion that fraud might be pleaded against LBI, as opposed to the existing plea which is an obligation of a representation made by Luxembourg, (the so-called bond representation) was something which has been mooted or suggested or referred to, or to use Mr. McDonnell's word adumbrated, on a number of occasions during the course of these proceedings dating back at least to the summer of 2013. It is true that at that stage what seemed to be being adumbrated was an extension of the bond representation so that it was alleged against LBI as well as against Luxembourg; but, nevertheless, the fact is that there has been floating around for a considerable time a suggestion that the defendant would want to plead fraud against LBI and would seek to do so if it were possible for him to do so. Indeed, the matter is referred to in bold in further information given by the defendant in a number of places.

However, when the matter came before Newey J on 24th July he records in his judgment that Mr. McDonnell told him that Mr. Stanford did not feel that he was in a position to plead fraud. The exact words of Newey J's judgment, paragraph 7 are:

"In the course of his submissions today Mr. John McDonnell QC, who appears with Mr. Daniel Burkitt for Mr. Stanford, told me that Mr. Stanford continues to feel that he cannot properly advance a case of fraud against LBI as yet. Mr. McDonnell also explained however that Mr. Stanford suspects fraud and he hopes that developments in Iceland will enable him to put forward a case to that effect."

However, having failed to obtain a stay as sought from Newey J, the next day Newey J was told (that is on 25th July) that Mr. Stanford's legal team now felt it would be possible to plead fraud and that an application would be made; it is that application which indeed was made on 1st August and comes before me.

I have been helpfully referred by Mr. McDonnell to what he described as a recent case of the House of Lords Medcalf v Mardell, [2003] 1 AC 120 as a convenient place to refer to the Code of Conduct, paragraph 606 of which, as it then stood, was set out in paragraph 11 of Lord Bingham's judgment and which contains the well-known provision that a barrister must not plead any allegation of fraud unless he has clear instructions to make such allegation and has before him reasonably credible material which as it stands establishes a prima facie case of fraud.

That, as Lord Bingham said, is an important and salutary principle (see paragraph 22). It also, as Lord Steyn said, is one that sometimes poses difficult problems for practitioners. This is paragraph 35:

"Making allegations of dishonesty without adequate grounds for doing so may be improper conduct. Not making allegation of dishonesty where it is proper to make such allegations may amount to dereliction of duty."

I fully accept that they are delicate and difficult decisions. What, however, I have not fully understood, despite Mr. McDonnell attempting to explain it to me, is how on the first day of the pre-trial review, that was on 24th July, Newey J could be told that Mr. Stanford's legal team did not think that it was a case which could properly be advanced; but on the next day, without any new material supporting the plea, it was one that could properly be advanced. It is, to my mind, a fair comment that Warren J made on the first hearing of this application at paragraph 4 of his judgment in which he said:

"... this smacks ... of a tactical manoeuvre. The defendant wanted to get the trial put off so that he could see what ammunition he might obtain from the result of other proceedings which would take some years to run their course. Having failed in that, he now wishes to allege fraud in these proceedings. He could have formulated that claim and run an application to amend as an alternative before the judge, albeit that might have undermined his primary case".

I tend to agree.

Moreover, there has been since the hearing before Warren J, indeed during the course of the hearing before me, what I regard as a rather extraordinary development. In the course of his submissions Mr. McDonnell made it quite clear to me that the documentary material which enabled him to form the view overnight between the 24th and 25th July that it was, after all, proper to plead fraud was a document called the Lynx Report, a report into the claimant's affairs by a firm of Norwegian advocates. The matter was put before me on the basis that the Lynx Report had only very recently come into Mr. Stanford's possession; although, even on Mr. McDonnell's account, it had been in his possession since sometime towards the end of June, some four weeks or so before the PTR. It appeared during the hearing, and all this will appear on the transcript, that in fact Mr. Stanford, who is currently being sued in Iceland by a successor to LBI (namely, the so-called "good bank") on a guarantee, had a Supreme Court attorney acting for him in Iceland who filed the defence to those proceedings and that attached to that defence, which was filed on 15th November 2012, were a number of documents including the Lynx Report and, indeed, a summons brought by LBI against its auditors PwC. I am not sure whether the PwC summons was brought by LBI or the new good bank, it does not matter for these purposes. Both those documents are documents which are of significance for the pleading that is now sought to be advanced.

I have this morning received a witness statement from Mr. Stanford in which he says that he himself did not know about that and did not have a copy of the Lynx Report until the date on which he already said he had it. I have made it clear in the course of argument that I am not prepared to disbelieve what he says for the purposes of this application, not having heard his evidence, but it does seem to me to be fairly extraordinary that his Icelandic lawyers had in their possession and relied on, in proceedings in which they were acting for him in Iceland, the two key documents on which the plea is now primarily sought to be based as long ago as November 2012.

One would have thought in circumstances in which Mr. Stanford says that he has been querying whether the bank was honestly or dishonestly run since receiving a copy of the Truth Report in 2010 and has been telling the Claimant’s English lawyers through his English lawyers that he has been considering whether he could plead fraud in these proceedings for at least a year, that a source of information which he might have turned to was the Icelandic lawyers acting for him in Iceland, at least to see whether they could get hold of any information which would be helpful to him.

It does seem to me in the circumstances that this is a case where the material that is now relied upon to make this late plea of fraud is not material that has only very recently become available to Mr. Stanford, but has been available to him, albeit as I say I accept not actually in his personal possession, since November 2012.

There are other aspects to this which it is not necessary for me to deal with, although I should just mention that so far as the PwC summons is concerned, there is evidence before me that that was in the possession of the solicitors acting for his ex-partner, Karen Millen, who is also being sued by one or other of the Landsbanki banks, and that an individual at Mr. Stanford and Ms. Millen's former firm Speechly Bircham was acting on both cases. Again, one might have thought that the solicitors involved, had they been making attempts to see whether a fraud case could be run or not, might have put their heads together, if necessary after taking instructions from Mr. Stanford and Ms. Millen as to whether they would do so.

That leaves aside entirely the fact that even on Mr. Stanford's account, as I say, the Lynx Report has been in his possession and available to him since the end of June. It does raise the question of why these amendments were not formulated and pleaded before the pre-trial review, even if, as Warren J said, as a fallback and secondary argument compared to the application for a stay which was the primary position adopted for Mr. Stanford on that hearing.

Mr. McDonnell said to me that it cannot really be supposed that whether that application was made on the first day of the pre-trial review or on the second day of the pre-trial review made any significant difference, but that to my mind rather underestimates the impact of not indicating any intention to plead fraud until after the pre-trial review was over and dealt with.

In those circumstances, I do take the view that so far as Hamblen J's first factor is concerned, there are very considerable reasons for thinking that this application is not only late, but that the explanations that have been given are not fully adequate explanations, justifying the application being made at such a late stage. Nevertheless, that by itself is not a complete answer to the application, it is necessary to consider the potential prejudice to both parties.

The prejudice to the applicant (that is to Mr. Stanford) is as follows. His advice from Mr. Jónatansson, his Icelandic lawyer, is first that this claim for damages for fraud has not been cancelled as a result of the Icelandic insolvency proceedings but is still one that can be maintained, but second that it is only capable of being maintained as a counterclaim, and hence by being pleaded in this action in England. The advice from Mr. Svensson, which has been given to the claimant, is contrary on both counts. Mr. Svensson's advice is that the claim has already been cancelled and has not been revived and it could, if it were one which had been not been cancelled, still be prosecuted in Iceland.

At one stage it did appear as if I might have to form at least a provisional view as to whether Mr. Svensson or Mr. Jónatansson was more likely to be right; but in the circumstances I do not think it necessary to express any such view and I do not think it helpful to do so. I will simply say there is obviously a question of Icelandic law as to whether the claim has been cancelled or not. If the claim has already been cancelled and has not been revived, then there is no prejudice to Mr. Stanford in refusing the application to amend because he is not being deprived of a claim which has any reality to it. Indeed, if the claim is a bad one because it has already been cancelled, it is in his interests as much as the claimant's interests that the claim not be advanced because it will simply lead to the incurring of costs which he will be liable for at the end of the day.

On the other hand, if the claim has not been cancelled, there is a potential prejudice to the applicant in depriving him of what he says is the only opportunity he now has to bring a claim which has a very substantial nominal value.

The prejudice to the claimant is also very easy to see. The immediate prejudice is the loss of the trial date. Mr. McDonnell tried to persuade me that it might be possible, particularly if suitable admissions as to the facts were forthcoming from Mr. Alexander on behalf of the claimant, that the trial date could be kept. I regard this, along with Warren J, as a wholly unrealistic submission in the circumstances. The adding of an allegation of fraud against the bank would necessarily involve the most careful and anxious consideration by the winding-up board of the bank, both as to which factual admissions to make and how to respond to the allegation that not only had the report and accounts been misstated, but that had been done deliberately; indeed, as I accept as a requirement under English law, which Mr. McDonnell says would apply to this claim, with the intention that the defendant, or at any rate a class of persons including the defendant, would rely upon them.

I approach the application to amend on the basis that if it is added to the pleadings it would prima facie necessarily cause the loss of a trial date and that is something which would undoubtedly cause real prejudice to the claimant; albeit the claimant is not an individual and does not suffer from the stresses of litigation in the same way as an individual, there will inevitably be a waste of costs. It is, as the authorities show, in any event, something which requires a heavy onus on the applicant to cause the loss of a trial at the last minute in this way.

During the course of the hearing I suggested a position which might enable Mr. Stanford to keep his claim alive but at the same time not prejudice the trial date. It is not necessary to detail it, it all appears on the transcript at the end of yesterday afternoon's hearing. In the course of this morning's hearing Mr. Alexander volunteered the undertaking, which I have previously referred to. That undertaking will also achieve what I thought my proposal might achieve, namely it will enable the trial to go ahead and without any prejudice to the claimant in terms of loss of trial date. It will simultaneously enable Mr. Stanford, if so advised, to bring proceedings in Iceland in which I imagine the first point (and maybe taken as a preliminary point) will be the question whether indeed his claim has been cancelled as a result of the Icelandic insolvency statutes. If he can persuade the Icelandic court that his claim has not been cancelled and that Mr. Jónatansson's view is to be preferred to Mr. Svensson's, it will then enable him to bring forward such a claim as is maintainable in Iceland. It does seem to me in those circumstances that the appropriate thing to do is to allow that to take place, if Mr. Stanford is so advised, rather than to disrupt and derail the proceedings in England.

As between my proposal and Mr. Alexander's, I have not the slightest hesitation in saying that Mr. Alexander's is the preferable one. As I have said, one key issue and quite possibly a determinative issue will be whether Mr. Svensson or Mr. Jónatansson is correct in their view of Article 100 of the relevant Icelandic insolvency law. If that is tried in England it will have to be tried as a question of fact on the basis of hearing evidence from learned experts in Icelandic law and it will be necessary for the English judge to determine what the law of Iceland is, a point on which there appears to be no Icelandic authority. It is always a difficult matter for an English judge to determine a point of foreign law, even if the judge is fully familiar with the language concerned. It is obviously preferable that that issue should be determined by an Icelandic court as a matter of law in an authoritative way, rather than by an English court as a matter of fact after hearing expert evidence.

It does seem to me that Mr. Alexander's proposal provides all the protection which Mr. Stanford could possibly legitimately require. If the claim has not been cancelled and if there is anything in it at all, he will be able to proceed with it in Iceland. As discussed with Mr. Alexander this morning, that may or may not have an impact if the claimant's claim is otherwise well-founded on the relief to which the claimant can establish its entitlement at the end of the English proceedings.

There are two aspects to that, one is the question of possession and one is the question of the money claim. The question of possession will turn on some well-known English authorities as to the prima facie right of a mortgagee to possession, despite the existence of a possible unliquidated cross-claim for damages, whether that gives rise to a set-off or not, and the impact of section 36 of the Administration of Justice Act 1970 which confers on the court in the case of a dwelling house a discretionary jurisdiction to take various steps to avoid possession actually being executed. I may add in parenthesis, it may or may not be a relevant consideration that it appears from what I was told this morning by Mr. McDonnell that Mr. Stanford is not actually living in the property in question at the moment, but has let it out at what he described to me as the extraordinary sum of £40,000 per month, money which, as far as I am aware, is going into his pocket rather than into the pocket of the bank.

Be that as it may, the whole question of whether the potential Icelandic proceedings might or might not afford a ground for staying or suspending an order for possession is something which can be adequately dealt with by the English judge at the conclusion of the trial in October.

The other matter is the question of a money judgment: prima facie, if otherwise a good claim, the bank would be entitled to a judgment for a liquidated sum. I can see that it might or might not be an answer to that that there is a potential insolvency set-off which might, if it took effect in the same way as an English insolvency set-off, operate as a self-executing set-off and amount to a partial defence or even a total defence to the money judgment. These are matters which can all be dealt with, if necessary, after the conclusion of the trial of the issues which are due for trial in October.

In those circumstances, it does seem to me that the solution put forward by Mr. Alexander is one which affords the least possible prejudice to either party and is one which I gratefully adopt. It follows that the application for permission to amend should be dismissed. It is not necessary in those circumstances to consider Hamblen J's fourth factor which is whether the claim has been adequately and properly particularised and pleaded. Mr. Alexander did refer me to various aspects in which he said the pleading was materially deficient but it is not necessary for me to say any more about that at all.

I now have to deal with the costs of this application. The well known starting point is the general rule that the costs should follow the success of the application. On the face of it the application has been made and has been dismissed and the starting point, therefore, is that it is the claimant which is the unsuccessful party.

Mr. McDonnell has strenuously sought to persuade me that my acceptance of Mr. Alexander's undertaking means that the Defendant is in substance the successful party because he has kept alive the possibility of bringing a fraud claim against the bank.

I do not regard that, as I made clear in the course of the argument, as an accurate characterisation of the outcome of this application. The purpose of this application was to enable a fraud claim to be brought and litigated and tried in England and not as a freestanding claim but as a counterclaim to the current proceedings with the inevitable consequence, as it seemed to me, in the way in which the application was opened, that the trial date would be lost.

It was that which Mr. Alexander on behalf of the claimant opposed strenuously and as appears from my substantive judgment, he had some very good grounds for opposing that and I regarded, as I made clear in my substantive judgment, the application as both late and as made without a fully adequate explanation and as one where although there was some potential prejudice to the defendant, there was also significant potential prejudice to the claimant who stood to lose a trial date which had been fixed for a long time and in circumstances where I did not accept that it was reasonable or proper to leave the application until after the pre-trial review, the pre-trial review being the opportunity to review the state of the case to see if it were ready for trial or not.

As I said in my substantive judgment, I have considerable sympathy with the view of Warren J that the decision not to plead fraud before the pre-trial review but instead to put all the eggs in the basket of an application for stay and then on the next day to change one's mind and to plead fraud instead does smack of a tactical manoeuvre.

The effect of Mr. Alexander's undertaking, which I did not have to pressure him into offering but was offered voluntarily and has, as I have said in argument, been a very sensible way of not only minimising the prejudice to his client but minimising so far as there is any, the prejudice to the defendant, is that there is no good reason why the trial, which is set for October, should be affected at all and that that trial can go ahead as planned. To that extent I regard the claimant as the successful party who has achieved what it intended to achieve which was to keep the trial date and enable the issues already pleaded to be determined without them being complicated by new issues being brought in.

The fact that Mr. Alexander's undertaking has the advantage for the defendant that even if Mr. Jónatansson's view is to be preferred to Mr. Svensson's view, he does not lose the claim entirely, is something that I regard as a bonus or advantage to the defendant, not something which he was seeking to obtain from this application or that he can regard as signalling success in the application.

Had this application been brought at the pre-trial review, it is unlikely that it would have taken as long to hear as it has. It is unlikely that it would have been as expensive as it has. I do take the view that the prima facie position that an application which is brought and which fails is one that carries the usual consequence that the unsuccessful applicant should pay the respondent's costs even if, as matters turned out, it is only in the course of the hearing that the respondent has offered an undertaking which has the incidental advantages that I have mentioned.

It should not be thought that in the absence of the undertaking I would necessarily have allowed the application. I did put forward a suggestion as to one possible outcome, but, as the transcript will show, that was not by any means a concluded view as to what the outcome of the application would be and I think it is enough to say that the claimant's position in this application has throughout been that if Mr. Stanford has a claim at all against the bank, and if, contrary to Mr. Svensson's view, that claim is still maintainable as a result of Article 100 of the Icelandic insolvency law, then the claim could be brought in Iceland.

That was not taken up by Mr. Stanford's legal team as a possible solution to the application. Instead, it was fought on the basis that the only way in which Mr. Stanford's position could be protected was by allowing the application to amend.

In those circumstances, I regard Mr. Stanford as the unsuccessful party and I will order him to pay the claimant's costs of this application, to include the costs reserved by Warren J.