England and Wales High Court (Chancery Division) Decisions

IN THE LIVERPOOL DISTRICT REGISTRY
CHANCERY DIVISION

		35 Vernon Street Liverpool L2 2BX
		4th February 2016

THE VICE CHANCELLOR:

1. Baker Blower Engineering Company (BBE) is a precision engineer. It machines blanks or billets of metal into tools or components working to very fine tolerances. The metals vary in nature from basic steel to the highest quality specialist alloys and titanium ("specials"). The machining process produces swarf or, if a mistake is made or a blank or billet substantially reduced in size, scrap. In the industry generally this swarf or scrap might be returned to a customer who had supplied his own blank or billet of high grade material; but if the material was of low grade or the precision engineer himself had supplied the material then it might be collected by the engineer and sold, once a sufficient volume had accumulated, to a scrap metal dealer.
2. Mr. Birch was the sole shareholder of BBE. On 16^th December 2011 he contracted to sell the entire share capital in BBE to Beccanor Limited, which appears to have been an acquisition vehicle, under a share purchase agreement ("SPA") containing conventional terms. The obligations of Beccanor under that SPA were guaranteed by Mr. Paul Dixon, Beccanor's owner and managing director.
3. The terms of sale provided for a substantial payment to be made on completion and then for deferred consideration to be paid in sixth monthly tranches thereafter. Completion of the sale took place on 16^th December 2011 and the first of the deferred consideration payments was made: but thereafter there was delay or default in payment of the deferred consideration.
4. By June 2014 the size of the unpaid instalments and the period for which the payment had been outstanding triggered a contractual provision making the whole of the purchase monies due immediately. The total sum due from Beccanor to Mr. Birch was and is £185,000. These facts are not contentious.
5. When Mr. Birch began to press for his money an issue emerged. On 29^th June 2014 (immediately following formal demand) Mr. Dixon wrote a letter in which he referred to some tax and other warranties in the SPA. He then referred to the industry practice relating to swarf and scrap, which I have described. His letter then said:

"For a period of years, exceeding 20 years prior to the completion date BBE had an arrangement with Richard Fletcher Metals Limited for the collection and purchase of BBE's scrap metal. Following a recent audit of BBE's books and records for the years prior to the completion date it is clear that while some payments received from Fletchers in respect of the ferrous scrap were accounted for in BBE's books and records, cash payments received from Fletchers in respect of the non-ferrous scrap/specials were not recorded and accounted for in the books and records of BBE. This practice (hereinafter called "the Practice") existed for a period in excess of 20 years prior to the completion date. The Practice was not disclosed to the buyer either in the SPA, the disclosure letter, the accounts or the management accounts or in any other way."

The letter went on to say that it was clear that this amounted to a breach of the warranties and would lead to BBE having a liability to the UK tax authorities for undeclared income, penalties and interest. He concluded his letter simply demanding a response by no later than 4pm on 4^th July 2014.

6. Mr Dixon followed up that letter with a further e-mail on 12^th July 2014 direct to Mr. Birch. He said:-

"As you are probably aware, HMRC has the power to go back many years if it discovers any evidence of avoidance or evasion. The advice that I have at present is that based upon extremely conservative estimates of the level of non-ferrous scrap produced in the years prior to 2011 we have a contingent liability to HMRC in the range of £340,000 to £700,000 for unpaid, taxes, penalties and interest".

7. The background to these letters was that in January 2013, so some 18 months prior, Mr. Dixon had challenged the former Manager of BBE, Mr. Finkhill with having been involved in the sale of swarf and scrap to Fletchers for cash. When challenged, Mr. Finkhill said that he had only been continuing a practice that had existed for many years previously. He was dismissed for gross misconduct and agreed to pay £45,000 plus interest in respect of the value of the scrap that he had stolen. He appears to have entered into a charge in March 2013 to secure that promise.
8. Pursuing that disclosure by Mr. Finkhill Mr. Dixon had contacted Mr. Fletcher. Mr. Fletcher telephoned Mr. Dixon on 23^rd January 2013 and in the course of the conversation, which Mr. Dixon recorded, said that he had been in the habit of paying Mr. Birch (the vendor of BBE) cash for non-ferrous, ie special waste. This caused Mr. Dixon both to introduce a new procedure for waste collection at BBE's operation and to conduct an audit of BBE's records. That is the audit referred to in his letters. The new procedure instituted in January 2013 and operated until December 2013 is said to have produced recorded sales of non-ferrous waste of approximately £19,000 over the twelve month period. It was because he was armed with the material from Mr. Finkhill, the material from Mr. Fletcher, the product of the audit and the comparator of his own monitored operation of the business that Mr. Dixon advanced in correspondence the arguments he did in response to the demand for payment. (He also made reference to a current investigation by HMRC: but this was never fleshed out with any detail, and my attention was not drawn to any relevant disclosure).
9. In the continuing correspondence Mr Birch acknowledged that there were some cash sales of swarf and scrap, but said that they were trivial in amount and were applied in the business for the social benefit of the workforce. Proceedings were eventually issued by Mr. Birch on 2^nd March 2015. He simply relied on the payment clauses in the SPA and the demands he had made (which were incontrovertible), seeking as relief the payment of the sum of £185,000 plus interest of £4,400 odd.
10. When the Defence came in it admitted all of the material allegations relating to the obligation to pay but it then said in paragraphs 13 and 14:

"On or about 13^th January 2015 Mr. Birch's solicitors admitted in correspondence that some small payments were received by the company on very limited occasions which was not accounted for. It is averred that the Defendant's best estimate as to the cash payments received by the Claimant for the period January 1996 to December 2011 is an average an annual figure of £10,000 subject to full disclosure by the claimant. The Defendants will as necessary seek formal permission to amend this Defence…. It is averred that the claimant is in breach of Schedule 4 tax covenant of the share purchase agreement for the reasons set out above. The breaches cannot yet be fully particularised."

Paragraph 21 then said:

"In the circumstances and by reason of the matters aforesaid it is denied that the Claimant is entitled to the relief sought in its claim or any relief from the Defendants".

The Defence does not bear the signature of counsel. The Defence did not expressly plead any setoff. The Defence did not plead the counterclaim in respect of damages for breach of warranty (to the extent that these exceeded Mr Birch's) claim, as the figures suggested in correspondence did). The Defence remained in that form even though Counsel became involved at the time of the case management conference on 18^th September 2015.

11. After the exchange of those statements of case there had been requests for information. In a Response Beccanor had (a) slightly expanded its pleading in relation to "the best estimate" by explaining (in answer number 3 to its response dated 9^th June 2015) how it had managed to conduct the estimating process (b) identified the covenants on which it relied and (c) asserted that Mr. Birch had failed so far to make any payment in respect of BBE's liability for taxation (which was not specified) and was therefore in breach of the tax covenant; but beyond that there was no further elaboration.
12. At the CMC on 18^th September 2015 an indication was given by Counsel for Beccanor that the Defendants might want to amend their Defence: but they had prepared no pleading. District Judge Obodai was not prepared either to give them a general permission to amend or to postpone the hearing to allow them to submit an amendment (or indeed to postpone the hearing to allow them to produce a fresh costs budget which included the possibility of a subsequent amendment application being made). She accordingly made an order which began with a warning that the parties must comply with the terms imposed on them otherwise their case was liable to be struck out or some other sanction imposed. She warned that if the parties could not comply then they were expected to make a formal application to the Court before any deadline imposed on them expired.
13. Paragraph 4 of the order dealt with witness statements. It said they had to be simultaneously exchanged by 4pm on 6^th November 2015. The order provided in the usual way that oral evidence would not be permitted at trial from a witness whose statement had not been served in accordance with that order or had been served late except with the permission of the Court. The order said that the trial would take place in a window commencing on 8^th January 2016 and ending on 29^th April 2016 with an estimated length of hearing of three days. The District Judge directed that the parties were bound to agree dates for availability between themselves and should nominate a single point of contact for dealing with the Court, so that by no later than 4pm on 9^th October 2015 there would be a telephone call from the nominated contact point to a member of the Chancery Listing Office providing the agreed availability so as to enable the claim to be listed for trial. The order said that failure to provide availability would result in the trial being fixed in any event.
14. It is necessary to look at what happened to fixing the trial and to exchanging witness statements.
15. The solicitors for the Claimant proposed that either the Defendants should identify their Counsel and provide details of counsel's clerk or, alternatively, should provide the Claimant's solicitors with details "of your client's and your counsel's dates of unavailability" so that liaison could be established with the Court in compliance with the order. The Defendants chose the former alternative. During the course of 9^th October the Defendants identified the Counsel they intended to instruct and provided his clerk's details to the Claimant's solicitors. Counsel's clerks between them then notified the dates of availability to the Court, the Defendants' counsel's clerk in fact communicating the information. After the dates of availability had been provided to the Court (and nine minutes before the expiration of the deadline for listing) the Defendants' solicitors provided dates of availability for the Defendants and their witnesses limited to the 1^st to 5th February and the 8^th to 12^th February 2015. But of course by that time Counsel's clerks had already lodged dates of availability with the Court, the Defendants' Counsel's clerk apparently being unaware of the dates of the Defendants' unavailability.
16. Pursuant to that process the trial was fixed for three days commencing on 17^th February 2016: but it was outside the window of availability that the Defendants' solicitors had so belatedly notified. The Defendants' solicitors became aware of this on 23^rd October 2015.
17. Then came the exchange of witness statements due on 6^th November 2015. Two minutes before the expiry of the time for exchanging witness statements the Defendants indicated that they would not be exchanging. The trial was in due course fixed. They had made no prospective and made no concurrent application to extend time for compliance.
18. Accordingly, when the Defendants decided not to exchange witness statements on 6^th November 2015 they did so knowing that the time before trial was extremely limited. It is explained in the witness statement of Mr. Dixon that what was going on was that they were trying to assemble evidence in order to allege deceit and fraud against Mr. Birch. This process continued even when it became apparent on 23^rd October 2015 that a trial date had been fixed for a date for which the defendant or more accurately one of the Defendants' witnesses was not available. Mr. Dixon says that he had decided (a) not to apply for an extension of time within which to serve his witness statements (as he had been required to do by paragraph 4 of District Judge Obodai's order) (b) not to apply to vacate the trial which he knew had been fixed for a date that one of his witnesses could not manage because of the lateness of his own solicitor's provision of dates and (c) not to apply to amend the Defence because he wanted to make a composite application.
19. This "composite application" was eventually issued on 5^th January 2016, although it was not served on the claimant's solicitors until 4:30 pm on 14^th January 2016, one month before the first day of the trial.
20. It is this application that I must now deal with. It has three parts, although they are inevitably interlinked. The first is an application to vacate the trial and to relist it on a date when the Defendants' witnesses are all available, and after the conclusion of further procedural steps. The second is an application to amend the Defence and to bring a counterclaim. The third is to apply for relief from sanctions and be granted an extension of time to serve witness statements. As I have indicated, these applications are all interlinked.
21. The application to vacate the trial is grounded upon the non-availability of Mr. Stephen Hill, one of Mr. Dixon's witnesses (who will deal with practices at BBE before completion of the sale in December 2011, had booked a holiday and was known to be unavailable during February before the 27^th ). Of course, at present Mr Hill will not be a witness at trial: Beccanor and Mr. Dixon have not served any witness statement in relation to Mr. Hill and need relief from sanctions to do so. I have read the intended witness statement. The evidence of Mr. Hill does not address any of the actual matters raised in the existing Defence; it rather produces evidence in relation to the intended particularised plea of setoff for breach of warranty and (more importantly) the intended counterclaim for damages for breach of warranty and damages for deceit i.e. the intended (but as yet unmade) plea of fraud. The trial itself on the issues set out in the present statement of case could proceed in the absence of Mr. Hill.
22. There would, of course, be no objection to vacating the trial if the Defence and Counterclaim were to be amended because that inevitably would involve a departure from the fixed trial date: but then there would be no point in permitting an amendment of the pleaded case unless there were relief from sanctions sufficient to permit evidence to be adduced in support of the proposed amended case. The outcome of each application has a bearing on the other. Nonetheless, the merits of each must be addressed individually.
23. The application to vacate the trial date a month before the commencement of a trial is not one that I regard as meritorious. The present listing came about because of (a) the failure of the Defendants' solicitors to attempt to comply with the order of the Court until nine minutes before the expiration of the deadline and (b) their failure to inform their own Counsel and his clerk of the dates of availability or to limit his authority to reach agreement with his opposite number until they had done so. They discovered the consequences of that failure on 23^rd October but did not then apply to vacate the trial at a time when a new trial date could be fixed for the convenience of all the parties very near to the original date: they waited until 4^th January 2016. On its own the application to vacate the trial lacks merit and should be dismissed.
24. The application to amend the Defence and Counterclaim is one which it is common ground is made "late" in the sense that its inevitable consequence will be to disrupt a fixed trial. I have been taken to the authoritative statement of principle by Lloyd LJ in Swain-Mason [2011] EWCA Civ 14 as to how the discretion to permit amendment under CPR 17.3 should be exercised in accordance with the overriding objective. It inevitably involves a balancing exercise. The approach to the balancing exercise was conveniently summarised by Carr J in paragraph 38(b) of her judgment in Qua Sue Ling v. Goldman Sachs [2015] EWHC 759 in these terms:

"Where a very late application to amend is made the correct approach is not that amendments ought in general to be allowed so that the real dispute between the parties can be adjudicated upon, rather a heavy burden lies on a party seeking a very late amendment to show the strength of the new case but by justice to him, his opponent and other court users requires him to be able to pursue it. The risk to a trial date may mean that the lateness of the application to amend will of itself cause the balance to be loaded heavily against the grant of permission".

She went on to observe in paragraph 38(e) that gone are the days that it was sufficient for an amending party to argue that there was no prejudice that could not be compensated for in costs and that nowadays other prejudice is more readily given weight. She also pointed out (drawing on the "relief from sanction" provisions under CPR 3.9 and the cases decided under it) that a much stricter view is taken of non-compliance both with the rules and with orders of the Court. She said:

"The achievement of justice means something different now. Parties can no longer expect indulgence if they fail to comply with their procedural obligations because those obligations not only serve the purpose of ensuring that they conduct the litigation proportionately in order to ensure their own costs are kept within proportionate bounds but also the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionately and that the courts enable them to do so".

25. In the instant case the amendments reflect the arguments that were advanced in correspondence as long ago as June 2014 on the basis of the material which by then had been garnered from as early as January 2013. Indeed, the language of the proposed amendments reflects the language of the letters then written. So what new has happened that would justify an amendment now being pleaded in respect of something that could have been incorporated in almost exactly the pleaded terms in the original pleading?
26. The answer given is that in December 2014 Mr. Fletcher's company went into administration and Mr. Dixon managed to get some documents from the administrators relating to the amount of waste that Mr. Fletcher had collected from BBE. This documentary material Mr. Dixon says supports to a significant degree the volume of waste disposed of for cash. In particular, he relies on some documents immediately preceding the completion date of the SPA, which suggest that between March and August 2011 some 57 drums of non-ferrous specialist waste were collected by Mr. Fletcher from BBE. This, says Mr. Dixon, dramatically illustrates how Mr. Birch cannot be right when he says the amount of waste dealt with for cash in this way was minimal in amount and trivial in value.
27. This recent material is evidence which could have been deployed in support of a case that could itself have been pleaded on the basis of the material that Mr. Dixon already had deriving from (a) his dealings with Mr. Finkhill (b) his telephone conversation with Mr. Fletcher, (c) the results of his audit and (d) the advice he had received relating to what extrapolations might have been made from the period during which he himself kept records in relation to BBE's operations. That is the nature of the amendment which it is now proposed to make.
28. In Innovator 1 [2011] EWHC 3221 Hamblen J suggested that the balancing exercise to accord with the principles applicable might be considered under four headings: (a) to look at the history of the amendment; (b) to look at the prejudice to the Defendant if the amendment is refused; (c) to look at the prejudice to the innocent party if the amendment is allowed; and (d) to look at the clarity of the proposed amendment. Nothing arises under the last head. The proposed amendment is clear, indeed, it has been clear since about June 2014.
29. So far as the history of the amendment is concerned, as I have indicated, this is a plea which could have been advanced in the original Defence and if the original Defence had been settled by counsel undoubtedly would have been. It is an amendment which could have been made prior to the September 2015 CMC but was not made. It was an amendment which could have been applied for shortly after the CMC when District Judge Obodai pointed out that the absence of a form of pleading made it impossible to consider the application. It was an amendment that could have been made at any stage well before 4^th January 2016. This is a very late amendment and the application to make it is itself not prompt. That in short is the history of the amendment.
30. So far as prejudice to the Defendants is concerned the matter lies thus. Mr. Vickers submits, though Mr. Pickering does not concede, that if this amendment is not allowed now then what Beccanor can do is commence proceedings to set aside the judgment on the basis of fraud or, alternatively, seek a judgment against Mr. Birch in new proceedings for breach of warranty and for fraud uninhibited by the doctrine in Henderson and Henderson (1843) 3 Hare 3 because the plea was not advanced in this case: and since that course is open I should spare the parties the expense and delay of further proceedings and reshape this action. If that is the submission made then the prejudice to Beccanor and Mr. Dixon, (principally Beccanor because it is Beccanor that has the direct right of action on the warranties) is that it has to commence its own proceedings rather than tag along with a counterclaim in the present proceedings. That is not an outcome which if Mr. Vickers is right bars Beccanor from bringing this claim at all.
31. So far as prejudice to Mr. Birch if the amendment is allowed, this is the prejudice which Lloyd LJ referred to in the vernacular in his judgment in Swain as "being mucked about". Why should his case (properly conducted in accordance with the orders of the Court) be delayed by parties who have had many months to consider how to put their case (including in response to requests to clarify their position) but now have changed their minds? More significantly any amendment requires Mr. Birch effectively to prepare to meet a new case (possibly including expert evidence) not hitherto advanced save in correspondence some while ago. Mr. Dixon has chosen the time at which to launch his counter-attack and has "all his ducks in a row", to adopt another vernacular expression, Mr. Birch has to start assembling his material in answer to this claim. The inevitable consequence of allowing the amendment will be to lose the trial date. He will lose his expected judgment for payment of the sums outstanding, a claim to which there is no substantial defence at present advanced.
32. In my judgment, undertaking the relevant balancing exercise in light of the principles to which I have adverted by reference to the judgment of Carr J, I am not satisfied that Beccanor and Mr. Dixon have discharged the heavy onus upon them of showing why it is just to postpone the trial of what is apparently a straightforward action in order to permit them to bring a claim in breach of warranty and deceit which could have been proceeded with shortly after it was advanced in correspondence in June 2014. In the circumstances I do not think it right to grant leave to amend. That conclusion aligns with the conclusion I had reached on the propriety of vacating the trial date.
33. This then leave the questions of witness statements which have been deliberately served out of time. The relevant principles are found in CPR 3.9 and the guidance given in Denton [2014] EWCA Civ 906. It is common ground that failure to serve any witness statement is a serious breach. No real explanation is proffered as to why the Court's order was broken in the first place. Mr. Dixon's original witness statement in this application indeed provided no explanation at all. His supplemental witness statement (only given on 28^th January 2016) essentially advances the case that it was because he was minded to make a composite application that he decided not to comply with the Court's order regarding evidence.
34. Mr. Pickering made three submissions: First, he invited me to note that the decision to breach the Court order was deliberate and was deliberately not followed by an application for relief from sanctions. Second, he submitted that the breach of the Court order was pointless, because statements from Mr. Dixon and Mr. Hill could have been served even if they had to be supplemented later by further material, and would have obviated the need for one limb of the "composite application". The witness statements could of course only address the pleaded issues and much of their content was not really germane to that; but the witness statements could nonetheless have been served. Thirdly, he submitted that if at the time when the witness statements were due for service it was known that Mr. Hill was not going to be available to give evidence orally then it was all the more important to serve the written material. So doing would lay the ground for any necessary steps for the admission of hearsay evidence from Mr Hillor and apprise the Claimant of the material with which he would have to deal if the Defence were amended or the trial vacated, giving him a fair trial chance to deal with those matters. Each of these seems to me to be a significant point to be weighed in the balance. This was a conscious and inexplicable breach of the order of the Court.
35. If CPR 3.9 and the particular emphasis it now contains has any meaning, in my judgment this is the sort of case to which it must apply. Of course the rules must always yield to the circumstances of the case and the overall justice of the situation. But in my judgment refusing relief from sanction does not produce an unjust outcome. It simply means that the trial will be confined to such issues (though I cannot see any of substance), as arise on the Defendants' pleaded case. It means that Beccanor and Mr. Dixon, if he is to join in a case in deceit, must start their action for fraud, breach of warranty or deceit as a freestanding claim (if Mr. Vickers is right that that course is still open). That is not an unjust outcome for them: and it is just towards the Claimant and other litigants.
36. Before reaching this conclusion I had examined the possibility of bringing this case back into the lists within the original trial window (to deal with the claim and a truncated trial of some issues in the intended Amended Defence and Counterclaim): but the amount of work to be done and the availability of the Claimant's legal team precludes this course.
37. In the circumstances the just outcome is to dismiss all three applications and I so order.
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