Barness & Ors v Formation Group & Ors

MR JUSTICE MORGAN: This is an application by application notice dated 18 January 2018. It was initially issued in an action with Claim No HC-2015-004561. After the application notice was issued, as a result of an order made in the 2015 proceedings, fresh proceedings were issued under Claim No BL-2018-000671.

In the 2018 proceedings the claimants are a Mr Cole and Others, as listed in a schedule to the claim form and the defendants are identified in schedules 2 and 3 to the claim form. For present purposes the only defendants I need to refer to are those identified in schedule 2 and they are Scion Financial Partners Ltd and Scion Limited. Although the application notice which is before me was issued before the issue of the 2018 claim form, the parties have proceeded, I think wisely and correctly, on the basis that that application should be treated as having been made in the 2018 proceedings and, in particular, having been made by the claimants in those proceedings against the two Scion companies.

Although the claims which are being advanced in the most recent claim form were originally advanced in the 2015 proceedings, in many respects from a procedural standpoint, the litigation is at a very early stage. The claimants have not yet served their particulars of claim. There have been repeated extensions of time for them to do so. They have, however, produced draft particulars of claim and in particular I have been given what are described as "draft generic particulars of claim" and also a further lengthier document described as "draft particulars of claim". Because there have been no particulars of claim served on the Scion defendants, there is no defence as yet and plainly all the further stages of the litigation lie ahead. It is not entirely predictable what will happen in this litigation; what will be pleaded; what issues will arise; what applications will be made, although of course I can reflect the probabilities in deciding what is the appropriate order to make at the present time.

I will refer to the draft generic particulars of claim in more detail in due course, but it is right to say that the draft pleading makes serious allegations against the Scion defendants. In particular it is said that certain documents prepared for the Scion defendants, on which it is said the claimants relied, resulting in substantial losses to the claimants, contained fraudulent statements to induce the claimants' investments.

The claimants, through their counsel, tell me that the claimants are in a position to serve the draft particulars of claim in their present form. In that form those particulars will bear the signatures of leading and junior counsel. Those leading and junior counsel tell me that their signature of the particulars of claim in their draft form when issued will not involve any contravention of the standards as to professional conduct on the part of counsel. However, the claimants apply under Part 18 of the CPR for orders that at this stage, and before service of the particulars of claim, the defendants, against whom the proceedings will continue and who are accused of fraudulent statements, should provide a large group of documents or provide extensive information which will enable the claimants in various ways to put their case more fully or in a way which is liable to be more effective from the claimants' standpoint than the present draft pleading, if that were to be issued. On any view an application of that kind is most unusual. That does not mean that it is not well-founded, but it does mean that I must look at my powers to make the order which is sought with some care.

The power which I am asked to exercise is that conferred by CPR rule 18.1, which is in these terms:

Part 18 is supported by Practice Direction 18 and paragraph 1.2 of the Practice Direction reads:

I have been referred to some statements in other cases as to the way in which I should go about exercising this power and, indeed, as to the extent of the power so conferred. I was referred to King v Telegraph Group Ltd [2005] 1 WLR 2282, a decision of the Court of Appeal. The leading judgment was given by Brooke LJ with whom the other members of the court agreed. At paragraph 62 and following in his judgment, Brooke LJ referred to the power to order information under Part 18. At paragraph 63, he said:

I was also referred to the decision of Vos J (as he then was) in Trader Publishing Ltd v AutoTrader.com.inc [2010] EWHC 142 (Ch). The relevant part of his judgment is at paragraphs 14 to 16. I need not, I think, describe the background to the remarks made by the learned judge in that case, but I can go straight to what he says in paragraph 16 as follows:

It is not difficult to see why the learned judge was right to make those remarks. Putting it in my own words, with the advantage of the argument I have heard today, it seems to me that Vos J was giving effect to the words in rule 18.1 which refer to "any matter which is in dispute". The learned judge was saying that the possibility of finding other persons who might be sued as defendants or finding further claims to be made against existing defendants took one away from matters which were currently in dispute into matters that might possibly in the future become in dispute. It is clear that rule 18 deals with the current position at the time of the application to the court and requires the court to identify: what matter is currently in dispute? It is only in relation to such a matter that an order can be made clarifying the matter or giving additional information in relation to the matter.

I ought to comment also on paragraph 1.2 of Practice Direction 18. What is said in the present case, as I will explain, is that the information which is sought is reasonably necessary and proportionate "to enable the first party to prepare his own case". I do not think it is said that the information is reasonably necessary and proportionate "to understand the case he has to meet". At present the defendants have not identified in any detail which has been explained to me the case which the claimants have to meet, although the defendants do say the claimants have no case and they will no doubt in due course, if required, advance that in appropriate detail, but I will focus for the purpose of this application on the question whether the information which is sought is reasonably necessary and proportionate to enable the claimants to prepare their own case.

In the course of argument there was some discussion as to what was meant by "prepare his own case". At present in this litigation we are at an early stage. The next thing that has to be done by the claimants is to serve particulars of claim. If the information were reasonably necessary and proportionate to enable the claimants to serve particulars of claim, then it could be said that the case comes within paragraph 1.2 of the Practice Direction. But what I am not concerned with at this early stage is to try to work out what the claimants will need in order to present their case at trial or, indeed, at any intermediate stage in the life of this litigation. I am not going to consider what information the claimants reasonably need to prepare their witness statements or any expert evidence or other preparatory matters of that kind, not least because it is premature to attempt to predict those matters at this stage, which is, as I stressed, the earliest possible stage procedurally in the life of this litigation.

Guided in that way I now refer to the draft particulars of claim which have been prepared and have been discussed in the course of this application. I will refer to the draft generic particulars of claim rather than the fuller version. The only point I think that was drawn to my attention where there was a difference related to an allegation of negligent misrepresentation in relation to the scheme known as "Premier 2". As far as I can see that is not itself in the draft generic particulars of claim.

The draft generic particulars of claim are a lengthy document, extending to some 27 or 28 pages to which are attached other documents arising out of the relevant transactions with references made in the pleading. The draft generic particulars of claim are too lengthy for me to describe in every detail, but I will refer to the matters which are of principal importance for present purposes. The pleading identifies parties; it identifies three schemes, which are called the Premier 1 scheme, the Premier 2 scheme and the Premier 3 scheme. The allegation is that these schemes were promoted by the defendants to investors and the claimants were investors who invested in the schemes. For the purpose of the promotion of the three schemes the defendants, it is said, prepared information memoranda (shortened to "IM"). The pleading then identifies statements in the IMs which are said to be express or implied representations of fact. The pleading then pleads what is said to be the waterfall in relation to Premier 1 and in due course Premier 3. The reason for pleading the waterfall is to compare and contrast the statements in the IMs with the financial arrangements which were at the time of IMs provided for or at least contemplated to be entered into.

The pleading then says that the representations which had earlier been identified in relation to Premier 1 were false. That pleading covers some three pages of the draft. That assertion is immediately followed by the statement that the representations which were false were known to be false; alternatively, were made recklessly. In other words, it is a case of fraud in the tort of deceit. The pleading asserts that the corporate defendants are liable for that deceit, although the individuals who may have caused the statement to be made or made the statements themselves are not identified. The pleading is quite explicit; that the claimants are not in a position to identify individuals and so the pleading refers to them using a definition of “relevant individuals” but it is then pleaded that the relevant individuals had certain states of mind and knew certain matters which allows an allegation of deceit to be advanced against them. It is then pleaded that the representations earlier identified were made negligently. It is further pleaded as an alternative claim that contrary to the statutory provisions in FSMA the information memorandum relating to Premier 1 was not fair or clear and was misleading.

In relation to the Premier 2 scheme, taking it from the draft generic particulars of claim, it is said that the information memorandum for Premier 2 was not fair or clear and was misleading. As I have indicated, there is a relatively limited allegation of negligent misrepresentation in relation to the information memorandum in relation to Premier 2.

The pleading then turns to Premier 3 where the pattern is broadly similar to what had been alleged in relation to Premier 1. I stress that there is an allegation of fraud in relation to Premier 3.

Moving on then in the pleading, it is said that the statements which are criticised induced the claimants to make their investments. The causes of action against Scion Financial Partners Ltd are pleaded in deceit; for negligent misrepresentation; for breach of statutory duty under section 138D of FSMA and for unlawful means conspiracy. As regards Scion Ltd the allegation against it is in the tort of conspiracy to injure by unlawful means. Paragraph 49.2 of the draft pleading is to the effect that although the claimants do not currently know the identity of the relevant individuals, it is likely that the relevant individuals included at least one individual whose knowledge and conduct is attributable to Scion Ltd. I can add to that, from the evidence put before me, that the claimants do know who were the principal persons behind these two companies, two individuals in particular. Finally, it is pleaded that the claimants have suffered loss and damage, further particulars of which will be provided in due course.

The application notice, under CPR Part 18 identifies six categories of information which the court is asked to order the defendants to provide. I will not read into this judgment the full text of those six categories. I will attempt to summarise what is the subject of the relevant categories. Category A requires the identification of certain individuals who participated to some extent or other in the preparation of the IMs for the three schemes. Category B asks for details of the waterfall arrangements in relation to the three schemes. Category C refers to the basis on which the IMs made certain statements which were said in the pleading to be false statements. Category D asks for details of calculations and projections undertaken for the purpose of preparing the IMs. Category E asks for an explanation, again in relation to assumptions of a financial character which were used when preparing the IMs. Finally, Category F cross-refers to advice given by leading tax counsel in consultation as long ago as 27 July 2005 where counsel referred to statements being backed up by "outside sources", so that Category F asked for identification of these outside sources.

Before I update the matter with developments that happened in recent days, I will refer briefly to the witness statement which was served in support of the application. It is the fourth witness statement of Mr Tickner of the claimants' solicitors. He describes the purpose of the application in a way to which the defendants have drawn my attention. In paragraph 10 of his witness statement Mr Tickner says that the claimants wish to have the further information sought to enable them to plead their case "fully". He also says it is needed so that the claimants can apply to join all necessary parties to these claims. The suggestion elsewhere in the witness statement is that if the defendants are ordered to identify individuals as per Category A of the draft order, some at least of those individuals will be considered to be potential further defendants to these claims. It is to be expected that if they are joined they will face claims based on an allegation of fraud.

I need not, I think, refer to further evidence that has been exchanged, but I will refer briefly to certain correspondence that has passed in very recent times. This part of the correspondence begins with the letter of 18 April 2018 from Travers Smith, solicitors for the defendant. That letter deals with the six categories of documents referred to in the draft order and makes some comment on each of them. The sending of that letter has caused the claimants and their advisors to consider the points that were made and to consider what might be appropriate to be done at the hearing of this application. The claimants make the point that the letter of 18 April 2018 is a solicitors' letter, is not a witness statement, and the defendants have chosen not to verify it in a witness statement. However, it is recognised that the court might be persuaded to pay attention to the letter or be influenced by it and that the court might be prepared to take a restricted view of the relief which is currently sought by the claimants. In order to assist the court in that event, the claimants' solicitors have identified a different formulation of the categories of information which are now in the alternative put forward on this application.

There are now four categories, lettered A, B, C and D. Again, I will not read out every word of the categories; I will attempt to summarise them once again. Category A seeks the identification of certain persons whose involvement with the information memoranda is defined or described. Category B refers to something called "verification notes". It is suggested in the course of the evidence that the defendants are likely to have historically prepared verification notes referring to the contents of the information memoranda. These verification notes would have been prepared for all three schemes. What the claimants ask is for the defendants to give information contained in the verification notes which relate to five out of the six categories of information in the draft order. The sixth of the original categories not now included relates to the waterfall for the three schemes. Categories C and D, which are now put forward in the alternative, do not relate to Premier 1 or Premier 3; they relate only to Premier 2 and they relate to one film which was to be the subject matter of the arrangements, pursuant to the investment in Premier 2. So those are the documents that had been put before me in support of the application.

I think I can describe succinctly certain conclusions which I have reached. In so far as the object of this application is to identify further defendants who might in the future be joined as defendants in these proceedings; that plainly is not a request for information as to a matter in dispute. Similarly, in so far as the object of the application is to obtain information about a further claim that might be made against the present defendants, in particular a claim in fraud in relation to the information memorandum for Premier 2, that again is not a matter in dispute. Things that may be matters in dispute in the future do not qualify as matters in dispute at the present time for the purpose of paragraph 18. Mr Chapman QC, who appears with Mr Vinall for the claimant, points out entirely correctly that if the matters I have described are not the object of the application and if the application is justified on other grounds, then the fact that the consequence of the application succeeding is that further defendants and further causes of action are identified should not be considered to be undesirable or even harmful to the application which is made. I accept that submission, although I do draw attention to the fact that in the evidence put forward in support of the application the claimants did seem to regard it as a permissible object of the application that they could find further defendants to sue. So in so far as the application might have been put on the basis of further defendants and further causes of action, it plainly cannot be put on that ground.

The way in which it is put, by reference to paragraph 1.2 of the Practice Direction, is to say that the matters which are sought are reasonably necessary and proportionate to enable the first party (that is the claimants) to prepare their case. The position on that is that I can see that there might be advantages for the claimants and possibly for both parties if some further information was given to the claimants at this stage. The claimants accept, and they assert, that they are in the dark in relation to certain matters. If they were not in the dark and had full information about those matters no doubt they would reflect the information which they have in their pleading. Being in the dark, as they assert, they have not been able to do that. A pleading based on a fuller understanding of the facts is likely to be a better pleading both from the claimants' point of view and from the defendants' point of view. But those observations do not necessarily mean that the information sought is reasonably necessary and proportionate to enable the claimants to prepare their particulars of claim. The fact is that the claimants have prepared their particulars of claim. I have referred to what is said about the relevant individuals; I have referred to what is said about the falsity of representations and the pleading of fraud. Mr Chapman, speaking for himself and Mr Vinall, tells me that counsel can properly sign that pleading to enable it to be issued, so if I do not make an order under Part 18 I am not producing the result that the pleading cannot be served. I therefore proceed on the basis that it will be served.

I do not know what will happen after that. One possibility is the defendants will defend and set out their case and define the issues and the matter will be assessed and will go forward from there. I asked Mr Green QC, leading counsel for the defendants, whether in such an event the defendants would apply to strike out any part of the pleading, possibly the part of it alleging fraud, on grounds that the pleading was not properly particularised. Mr Green was not in a position to say what might happen. He did not say that the defendants would apply to strike out any part of the pleading, but he did not commit the defendants to serving a defence without an application to strike out.

I think if I had been clear that there will be no application to strike out the allegation of fraud I would have without any real hesitation refused to make an order under Part 18, but even without the ability to predict what will happen about a possible strike-out, I am in the end persuaded that the claimants have not brought the case within paragraph 1.2 of Practice Direction 18. They have not satisfied me that the material they seek is reasonably necessary to enable them to serve their particulars of claim. On that basis I will not make an order in relation to any parts of the information which has been sought, either in the draft order or in the alternative put forward.

In the course of argument references were made to alternative approaches that might be adopted. My attention was drawn to rule 3.1(2)(m), which allows the court to take any other step or make any other order for the purpose of managing the case and furthering the overriding objective. Reference was also made to rule 31.12 which allows a court to order specific disclosure or specific inspection and the terms of rule 31.12 suggest that an application for specific disclosure may be made at any stage in the proceedings.

I refer to rule 3.1(2)(m) and rule 31.12 in particular in relation to one category of information or one category of documents. In the most recent formulation of the relevant material there is a reference to verification notes. Although this is not in evidence, I understand that it is probably the case, if not certainly the case, that verification notes will have been prepared for the information memoranda in relation to all three schemes. It seems likely, doing the best I can at this very early stage in the litigation, that the verification notes will have some considerable bearing on the allegations of falsity and of fraud. It might be thought, therefore, that it would help everyone if the verification notes were provided even before the pleading so that the claimants could take them into account and either withdraw all or some of their allegations of fraud or, alternatively, make those allegations with the additional support that they say they find in the verification notes. If the claimants did not have the verification notes before they are required to serve their pleading, then it may be the verification notes will only be provided much later in the litigation, not at the point of the defence being served but at the later stage of disclosure being given. When the verification notes are then provided, if my prediction turns out to be right, then that may lead to a reformulation of the allegations of falsely and of fraud. I can see disadvantages in the case being put one way and then being put another way. It might be said to be better put in the second way from the outset, rather than put in in a way that is not pursued.

However, it is an unusual thing to order what is, in effect, disclosure or information under Part 18 before the claimants' pleading is served. I also have considerable hesitation about making an order at this stage in this litigation involving allegations of fraud against the defendants where the order would require the defendants to provide information at the outset to help the claimants formulate the case against them. I think the orthodox approach is to require the claimants to plead their allegations on the material they have, to let those allegations be defended and disclosure be given and for the parties then to take stock and if the matter goes to trial for the issues to be tried.

I certainly have power to make innovatory orders. Just because something is unusual does not mean I should never do it, but in this case I am inclined to the view that the orthodox approach is the wiser, more appropriate course and it is the course that I will therefore adopt. Accordingly, I will dismiss the application under Part 18.