England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		30 July 2003

Mr Justice Tugendhat :

1. The Applicants are former partners in the firm of Jay Benning & Peltz, a firm of solicitors which practised in London. The Respondents are a firm of accountants. Following the discovery of a shortfall in their accounts the Applicants make this application for pre-action disclosure.
2. All solicitors are required to comply with the requirements of the Solicitors Act 1974 s.34, which include delivery of an annual accountant's report in a prescribed form to the Law Society. The report must certify compliance with the applicable rules as to accounts. For the period 1^st April 1996 to 31^st March 1997 and 1^st April 1997 to 31^st March 1998 the Applicants retained the Respondents to prepare the reports required to comply with the Solicitors Act. The reports they delivered are dated 23^rd September 1997 and 11^th September 1998.
3. Rule 4 of the Accountant's Report Rules 1991 requires the accountant to make an examination of the books, accounts and other relevant documents of the solicitor. In cases specified in the rule the accountant is required to make test checks of postings to clients' ledger accounts from records of receipts and payments and compare sample lodgments into and payments from client accounts. In their report dated 23 September 1997 the Respondents specified that they relied on the exception contained in the Accountant's Report Rules 1991 Rule 4(3). This provides for solicitors who use a computerised system of accounting (such as the Applicants had). The accountant is not required to check all client ledger balances extracted on the list produced by the computer against the individual records of ledger accounts, provided the accountant is satisfied that a satisfactory system of control is in operation and the books are in balance, and that he carries out a test check of the extraction against the individual records.
4. In October 1998 a Mr Belal, whom the Applicants had employed as cashier and principal bookkeeper for eighteen years, suddenly left their employment.
5. To prepare the report for the period 1^st April 1998 to 31^st March 1999 the Applicants retained a different firm of accountants, Munday Long & Co. They prepared a report dated 25 February 2000. They found various discrepancies in relation to client accounts, and after investigation concluded that there appeared to be a substantial shortfall between the monies which the Applicants were supposed to be holding and those which were in fact held. One account where there appeared to be a six figure shortfall was held in the name of Eurokind Properties Ltd. That was an account which had been mentioned by name by the Respondents in its report for the year ended 31^st March 1998. The mention was unrelated to any discrepancy, merely drawing attention to the account being misnamed, but it may suggest that the account may or ought to have been the subject of other checks.
6. Munday Long & Co noted in their report that an apparent shortfall in the client's bank account had been drawn to their attention at the commencement of the audit. At the date of that report the Applicants were in the process of reconciling every client balance to the individual client files, but had completed only three quarters of the task. They add that 'It is clear from the results of our audit tests that this problem existed as at 31 March 1998 but was undetected by the previous auditors. Based on our tests, a difference on the Client's Bank Account of at least £44,300.30 existed at that time. As it is likely that the balances shown by the computer system as at 31 March 1998 were understated, the difference at this point is likely to be substantially higher'. They estimated a shortfall of £591,378.22. They attribute this to the dishonesty of Mr Belal.
7. The Applicants do not know which (if any) clients accounts were the subject of test checks made by the Respondents. The Applicants contend that the Respondents negligently failed to satisfy itself that there was a satisfactory system of control in place and that the books were balanced and that had it not been for this failure, then the shortfall in the accounts would have been uncovered at an earlier stage, and their losses would have been significantly reduced. However, they recognise that whether this is so or not may depend on which accounts were subjected by the Respondents to test checks and other procedures specified by the Accountant's Report Rules. They therefore pursued enquiries by letters addressed to the Respondents. This has not led to the production of the information or documents sought.
8. On 18^th June 2002 solicitors for the Applicants wrote to the Respondents referring to the defalcations which they said were almost certainly carried out during the period when the Respondents prepared and audited the accounts for the years ending 31^st March 1997 and 1998. They add that Grant Thornton have been instructed and found a number of errors and discrepancies in the Clients' account bank reconciliations as at 31^st March 1998 which indicate that such matters ought to have been drawn to the attention of the Applicants. Examples are given, quantified in two respects in the sums of £2,996.38 and a figure of about £20,000. They invited the Respondents to provide, on a voluntary basis, sight of the Respondents's working papers which would enable Grant Thornton to investigate whether the prima facie indications are substantiated. They made clear that an application for pre-action disclosure was being contemplated.
9. On 21 August 2002 the Respondents' replied through solicitors saying that inadequate information had been given to support a request for pre-action disclosure. In particular they said they should be provided, amongst other information, with 'full and precise details of the defalcations that took place, how and when they were carried out by Belal, which matters they related to, the sums of money involved and the loss suffered'.
10. After further correspondence, by a letter of 12^th December 2002, the Applicants' solicitors set out a detailed explanation of the Applicants' claim, which they stated to be in accordance with the Professional Negligence Pre-Action Protocol. The letter included a paragraph: 'It is alleged that had your clients' conduct not fallen below that of reasonably competent Accountants, they would have drawn such discrepancies/errors to our clients' attention and action could have been taken to prevent subsequent defalcations. We are unable to provide further details until such time as we have had the opportunity to consider your Client's working papers for the years ending 31^st March 1997 and 1998'. After referring to a shortfall in excess of £600,000 they estimated that the final figure in respect of the Applicants' loss has yet to be determined, but is envisaged to be in excess of £250,000. No disclosure was given in response to this.
11. By Notice dated 12 May 2003 the Applicants apply for an order pursuant to CPR31.16 that the Respondents give pre-action disclosure of its files, working papers and any other documents produced in relation to its preparation of the accountant's reports for the Applicants for the years ended 1997 and 1998.
12. CPR Part 31.16 provides:

Disclosure before proceedings start

(1) This rule applies where an application is made to the court under any Act for disclosure before proceedings have started.†

(2) The application must be supported by evidence.

(3) The court may make an order under this rule only where—

(a) the respondent is likely to be a party to subsequent proceedings;

(b) the applicant is also likely to be a party to those proceedings;

(c) if proceedings had started, the respondent's duty by way of standard disclosure, set out in rule 31.6, would extend to the documents or classes of documents of which the applicant seeks disclosure; and

(d) disclosure before proceedings have started is desirable in order to—

(i) dispose fairly of the anticipated proceedings;

(ii) assist the dispute to be resolved without proceedings; or

(iii) save costs.

(4) An order under this rule must—

(a) specify the documents or the classes of documents which the responent must disclose; and

(b) require him, when making disclosure, to specify any of those documents—

(i) which are no longer in his control; or

(ii) in respect of which he claims a right or duty to withhold inspection.

(5) Such an order may—

(a) require the respondent to indicate what has happened to any document which are no longer in his control; and

(b) specify the time and place for disclosure and inspection.

13. The facts set out above were given in a witness statement for the Applicants. In response the Respondents point out in a witness statement that the Applicants are not in a position to say that the Respondents did not carry out such tests as were required by the Accountant's Report Rules 1991. It follows, they contend, that no order for pre-action disclosure is appropriate since it cannot be properly said as things stand that the Respondents are likely to be a party to subsequent proceedings. Likewise, in respect of the loss suffered, the Respondents contend that the Applicants have given insufficient detail. On either basis, submit the Respondents, the case could not proceed on the information at present available, and if proceedings were commenced, then they would be struck out, at least unless further information were provided. Pre-Action Disclosure is not available, it is submitted, where an action is doomed to failure. This is, they say, a fishing expedition, the aim being to define the issues in the light of the disclosure, rather than the other way round.
14. I turn then to the requirements of CPR 31.16, guided by the judgment of the Court of Appeal in Black v Sumitomo Corporation [2002] 1 WLR 1562.
15. The question whether conditions (a) and (b) are fulfilled in this case depends on whether a claim which may or may not be well founded can be said to be one in which the parties can be said to be likely to be parties to subsequent proceedings. Likely here means no more than 'may well' (Black [72]). In my judgment these conditions are fulfilled. It is clear that jurisdiction can be established in cases where there is a reasonable prospect that litigation can be avoided because the documents sought will show that proceedings cannot or should not be commenced (Black [80]). This is not a case where in my view the proceedings would be struck out if commenced. It is sufficient if there is a real prospect in principle of such an order being fair to the parties if litigation is commenced, even if the Applicants do still lack a vital ingredient in the pleading of their case (Black [68], [81]).
16. If conditions (a) and (b) are fulfilled in the present case, so then is condition (c). The documents sought would be covered by standard disclosure. If there is an issue at all, it is likely to be whether, after doing whatever they did do, the Respondents ought to have brought to the attention of the Applicants matters which would have brought the defalcations to light. If (contrary to my view) there were the doubt that the Respondents submit exists as to whether the disclosure stage would ever be reached, that is a matter which I can and should take into account as a matter of discretion (Black [77]).
17. Condition (d) is also satisfied in my judgment. If it were to appear on disclosure that the Respondents had done what was appropriate for the report they had to make, and that in doing that they had not in fact seen anything which ought to have drawn their attention to the defalcations, then disclosure would assist the dispute to be resolved without proceedings, and would save costs. Alternatively it may well assist the parties to dispose fairly of the anticipated proceedings.
18. The real issue in the present case seems to me to be one of discretion. There are a number of observations to be made in the light of Black. While this is not a case of alleged medical negligence, it is a case of alleged professional negligence by an accountant. The documents sought seem to me to be as near as could be the equivalent of the medical records noted (in Black [85]) as being 'obvious examples'. They are directly related to the professional work alleged to have been negligently performed (cf Black [94]). The loss complained of here is one that is reasonably plain, and has been realised, rather than a speculative loss (Black [88]-[89]). After the report of February 2000, and with the benefit of the expert assistance of Grant Thornton, the Applicants are in a position to contend that the Respondents negligently failed to satisfy itself that there was a satisfactory system of control in place and that the books were balanced and that had it not been for this failure, then the shortfall in the accounts would have been uncovered at an earlier stage, and they would have been significantly reduced. While the onus is on a claimant to prove his case, if there were a clear answer to this the Respondents could have explained what it was. They have declined to do so.
19. This is not to say that there is no substance in the Respondents' submission that the claim remains speculative and may be a fishing expedition. It is unclear why the Applicants have not been more forthcoming as to the dates of the defalcations and the accounts from which, so far as they are aware, they were made. But the point is one of degree. Rix LJ specifically contemplated that an order might be appropriate 'even where the complaint might seem somewhat speculative or the request might be argued to constitute a mere fishing expedition'. This is a case where the Applicants have suffered what (for present purposes) I assume to be an undoubted misfortune, but need disclosure to investigate the mechanism of their misfortune (cf Black [52]).
20. A factor which may be relevant in some cases might be the volume of material which would be covered by the order, and the difficulty and expense of complying with the order. In answer to my enquiry, Mr Nicol indicated that his clients thought that the documents would be likely to be filed together and to take up no more than a very few lever arch files. Mr Henderson did not seek to dispute that.
21. Having considered the matters raised by the parties, in the exercise of my discretion I make the order sought.