Jersey Unreported Judgments

Taxation - application by the plaintiff for discovery against the defendant.

[2015]JRC126

Royal Court

(Samedi)

11 June 2015

Mr A. P. Booth appeared on his own behalf.

Advocate M. P. Cushing for the Defendant.

CONTENTS OF THE JUDGMENT

judgment

the master:

Introduction

1.        This judgment represents my reasons for granting the plaintiff's application for specific discovery against the defendant. 

Background

2.        The substantive background to the claim is set out in my earlier judgment in this matter reported at Booth-v-Zenith Trust Company Limited [2014] JRC 231 at paragraphs 2 to 8 which I specifically adopt for the purposes of this judgement.  In addition, the procedural history is relevant to the application which I also set out briefly.  The proceedings were first commenced by order of justice served on 18^th July, 2013.  An answer was filed on 9^th October, 2013.  Various directions were given in March and April, 2014 to progress the matter to trial.  In July, 2014 the defendant issued his application to strike out part of the plaintiff's order of justice which resulted in my earlier judgment dated 24^th November, 2014.  Following on from determination of the defendant's strike out application, the plaintiff's order of justice was further amended on 4^th February, 2015.  The defendant filed an amended answer on 27^th April, 2015.  Notwithstanding these amendments to the pleadings, in the interim discovery was provided by both parties, verified by affidavit, at the beginning of 2015. 

The plaintiff's application

3.        The plaintiff seeks the following:-

(i)        All banking records from 18^th July, 2003, to the present day, relating to a payment of £410,133.13 ("the Payment");

(ii)       Any information regarding the Payment especially any correspondence between the defendant and STM Group plc("STM") as part of the due diligence investigations which must have taken place prior to the purchase of the defendant by STM in 2010;

(iii)      Information relating to an indemnity from Michael Russell and Michelle Jardine to STM regarding the Payment; and

(iv)      Information as to how the Payment was treated in the defendant's accounts. 

4.        The reference to the Payment is to be found in paragraphs 35 to 41 of the amended order of justice.  In paragraph 35, the plaintiff claims he was seeking from the defendant an account in respect of a surplus of income over expenditure from the defendant, given that the scheme operated from 2000 to 2002. 

5.        At paragraph 36 it is pleaded that, in 2003, Mr Russell of the defendant proposed that the defendant distribute £745,646.60 to the plaintiff from the scheme.  It was not in issue between the parties that part of the sum so distributed would then be shared with the defendant, pursuant to what is described in the amended order of justice as a redistribution agreement.  In relation to the redistribution agreement, it is the plaintiff's case that initially the defendant was to receive 50 per cent of the sum distributed out of the scheme to the plaintiff.  However, this was varied to 55 per cent.  The plaintiff  now complains about this variation, as set out in paragraph 38 of the amended of justice, which provides as follows:-

"However, shortly afterwards, on 11th October 2000, Mr Russell approached the Plaintiff once more and requested 55% on the basis that he had to make a distribution to Mr Youd and Michelle Mulholland (Jardine), also of the Defendant.  The Plaintiff alleges that the Defendant (a), despite the Defendant having agreed upon a Payment from the Plaintiff and (b) that the Defendant sought an increase in its financial recovery citing its own obligations to pay sums to Mr. Youd and Mrs Mulholland/Jardine.  The Plaintiff avers that in respect of (a) the Plaintiff was not aware that the Defendant was not looking after the Plaintiff's financial interests, see Appendix A hereto and that in respect to (b) the plaintiff avers that the Defendant has unjustly enriched itself by claiming monies in respect of Payments that should have been made to Mr. Youd and Mrs Mulholland/Jardine.  However, despite the considerable passage of time, and the sale of the Defendant company to new owners, no such payments have been made.  In light of these matters (a) and (b) the Plaintiff would not have entered into the agreement dated 18th July, 2003, see Appendix C hereto."

6.        It is common ground that, in July 2003, the plaintiff received the sum of £745,646.60 from companies to whom the defendant provide company secretarial, bookkeeping and accountancy services as part of the scheme, out of which the plaintiff then made the Payment to the defendant. 

7.        The amended answer at paragraph 28A in response to paragraph 38 of the amended order of justice pleads as follows:-

"As to paragraph 38, it is denied, if it is alleged, that the Defendant (through Mr Russell) represented to the Plaintiff whether on 11 October 2000 or at any time that the proportion of any fee income earned by the OffCos which it had been proposed would be distributed to the Defendant should be increased on the basis that the Defendant was required to make distributions to Mr Youd and Mrs Mulholland.  Mr Youd, Mrs Mulholland and Mr Russell were, at the material times, directors of and shareholders in the Defendant in any event.  The monies paid to the Defendant following the 18 July 2003 agreement, were held by the defendant until April 2010 when those monies were paid to Mr Russell and Mrs Mulholland (who were then the sole shareholders of the Defendant) prior to the completion of the acquisition of the Defendant by STM Group PLC in April 2010."

8.        While the plaintiff filed a skeleton argument in advance of the hearing, the reasons why the plaintiff was seeking specific discovery only became clear from his oral submissions at the hearing, which he had helpfully reduced to writing.  In summary, he contended there were two issues on the pleadings relevant to the application:-

(i)        the money received and including the Payment was a first tranche of surplus income, whereas the defendant contended that these Payments represented a closure fee.  This was in issue both in the original order of justice and the amended order of justice and the original answer and the amended answer;

(ii)       In response to the plaintiff's assertion that he was misled in to agreeing a variation to the redistribution agreement, in addition to denying that the plaintiff was misled, the defendant by paragraph 28A effectively contended that there was no need or basis to make distributions to Mr Youd and Mrs Mulholland because the receipt of the Payment was always part of the assets of the defendant and in due course it would have been distributed to shareholders in any event, including at the time Mr Youd and Mrs Mulholland. 

9.        The plaintiff contended that it did not appear to be the case, by reference to material provided to him by Mr Youd (who was a director of the defendant), which indicated that the Payment had not been treated as normal income of the company, but had been held separately and treated differently.  This was further confirmed by voluntary disclosure made by Messrs Appleby for the defendant shortly before the hearing where accounts for the defendant on a redacted basis for the year ended 30^th June, 2009, were produced.  These accounts recorded the Payment as an advance success fee and noted that no income would be recognised as income of the defendant until the termination of the scheme.  This is the scheme described in my previous decision.  The plaintiff submitted the note in the 2009 accounts did not make sense because based on a letter he had written on 4^th November, 2004, the scheme had come to an end many years before 2009.  Therefore the Payment could have been treated as income of the defendant but it wasn't at least in 2009.  The defendant's case, as the plaintiff understood it, i.e. the Payment was no different from any other income received by the defendant, was not consistent with the Payment not being recoded as income of the defendant in its 2009 accounts produced many years after the scheme had ceased to operate. 

10.      Finally, the plaintiff sought any relevant documents from the defendant as to what was said to STM or agreed with STM in relation to the Payment when the defendant was acquired by STM.  The plaintiff relied on a letter from the defendant to Mr Youd dated 16^th April, 2010, and emails between Mr Youd and Mr Russell dated 23^rd and 24^th July, 2013, to show that some statements had been made to STM by the defendant about the Payment.  He also used these documents to justify a request for any indemnities given in relation to the Payment to STM. 

The defendant's submissions

11.      Advocate Cushing firstly reminded me of the legal tests on applications for specific discovery by reference to Hanby v Oliver [1990] JLR 337.  As the plaintiff had not filed any affidavit evidence in support of the application, Advocate Cushing therefore contended that the application should be dismissed.  If I did not accept this submission, alternatively, he reminded me that there were no allegations that the Payment represented any deliberate misappropriation of such funds, or that the use of such funds was unlawful.  The requests made were therefore irrelevant to the plaintiff's claim and were a fishing expedition. 

Discussion

12.      I start by reference to the applicable legal principles which are found in Hanby v Oliver at page 348 line 19 to page 350 line 8 as follows:-

"We have already expressed the view that the court ought to proceed on the basis that a list of documents which appears to have been prepared with the assistance of the party's advocate and which is verified by an affidavit in proper form ought to be regarded as conclusive save in exceptional circumstances. Those circumstances may include not only inherent evidence from the sources described in the passage which we have cited from the judgment of Brett, L.J. but also evidence which satisfies the test posed by Tomlin, J. in Astra-National Prods. (1), that is to say evidence sufficient to displace the oath of the party who has verified the list, by making a prima facie case that there are in that party's possession documents which are relevant to matters in issue in the action. In this connection we note the practice direction given by the Deputy Judicial Greffier in his judgment in Jones v. Atkinson (3) that-

    "... every application for an order for specific discovery must be supported by an affidavit stating that the deponent believes, with the grounds of his belief, that the other party has, or has had, in his possession, custody or power the document, or class of document, specified in the application and that it is relevant...."

A party seeking further discovery after an affidavit has been made following an order under r.6/16(1), must persuade the court that, despite the affidavit, his opponent has not complied with the order. It seems to us that it must be necessary, in these circumstances, for the party seeking further discovery to show, by evidence on oath, not only a prima facie case that his opponent has, or has had, documents which have not been disclosed, but also that those documents must be relevant to matters in issue in the action. The court must be satisfied that the documents will contain information which may enable the party applying for discovery to advance his case, damage that of his opponent, or lead to a train of enquiry which may have either of those consequences. It is not enough to show only that the documents may be relevant in the sense described. A court faced with evidence which establishes no more than that the documents may or may not be relevant would not be entitled to disregard the oath of the party who, having (ex hypothesi) seen and examined the documents with the assistance of his advocate, has sworn, in effect, that they are not relevant.""

13.      In relation to Advocate Cushing's contention that an affidavit was required and that, in the absence of an affidavit, the application should be dismissed, it is clear that an affidavit of discovery in proper form should be regarded as conclusive save in exceptional circumstances.  It is also clear that generally the party seeking further discovery should show on oath that there are documents relevant to matters in issue in the action to rebut the conclusive nature of the other party's affidavit of discovery. 

14.      This case however, is unusual.  This is because, after discovery had occurred, pleadings were amended and the defendant provided both the 2009 accounts and evidence of payments from the defendant to two new accounts opened in the name of Mr Russell and Mrs Mulholland in 2010.  Although these documents were provided voluntarily, in my judgment they should have been provided as part of the defendant's disclosure.  This is because I regarded such documents as relevant to the issue of whether the Payment was a closure fee as the defendant contends or a first tranche of income as the plaintiff contends.  These documents are also relevant to the issues raised by paragraph 38 of the amended order of justice and paragraph 28A of the amended answer.  In that regard I agreed with the plaintiff's submission that paragraph 28A of the amended answer is, in effect, pleading a case that the Payment became part of the income of the defendant.  While Advocate Cushing denied this was the effect of paragraph 28A and was not the defendant's pleaded case, it is difficult to construe paragraph 28A in any other way. The payment received could only be distributed to shareholders for their benefit, if it came to form part of the income and assets of the defendant.  This is what I consider the statement "Mr Youd, Mrs Mulholland and Mr Russell were, at the material times, directors of and shareholders in the Defendant in any event" in paragraph 28A implies.  The documents produced voluntarily are therefore relevant to the issue of how the Payment was treated by the defendant, which is part of the defence to the plaintiff's claim. 

15.      As the documents produced voluntarily were not disclosed in January this year, although relevant to an issue on the pleadings prior to their amendment, the affidavit of discovery cannot now be regarded as conclusive, because at least two material documents were omitted.  It is important, in that regard, to record that the additional documentation provided was not provided pursuant to the ongoing duty of disclosure, to which all parties are subject, but only to avoid unnecessary costs incurred, as was set out in a letter from Appleby for the defendant to the plaintiff dated 26^th May, 2015, sent just before the hearing.  Yet the documents provided voluntarily are relevant to the issues I have identified at paragraph 8 above and should have formed part of the original list, and should also have been disclosed because discovery as an ongoing duty, following the amendments to the pleadings.  

16.      In these unusual circumstances, I was therefore satisfied that an affidavit was not required from the plaintiff when there was evidence before me from the defendant that disclosure, that should have been made by that defendant, was not in fact made.  This failing by the defendant allowed me to conclude, as a matter of evidence, that it was not safe to regard the defendant's discovery affidavit as conclusive, even though the plaintiff had not filed an affidavit in support of his application. 

17.      I therefore acceded to Mr Booth's request because the issue of how the monies paid by the plaintiff to the defendant in July 2003 were treated by the defendant is relevant to the two issues I have identified, in particular to the allegations made at paragraph 38 of the amended order of justice and paragraph 28A of the amended answer.  I therefore also rejected the submission that these requests were a fishing expedition. 

18.      There was no issue between the parties that the documents sought did not exist. 

19.      Other than in relation to bank statements, it was also not in issue that an order for specific discovery was not necessary for disposing fairly of the case.  The qualification in respect of bank statements arose because Advocate Cushing, for the defendant, was not in a position to say whether the monies representing the Payment were retained by the defendant in a single bank account, in which case there would be no difficulty in producing the relevant bank statements, or whether trying to track down where monies had been held was a complex task, which might be oppressive for the defendant.  In those circumstances I gave Advocate Cushing liberty to apply not to have to produce bank statements, if to do so, would be disproportionate to the issue between the parties.  I reached this view because, notwithstanding the issues I have referred to between the parties, the fact of the Payment being made was not disputed and some accounts have been produced or will be produced which will show how the money was treated from an accounting perspective.  If it is an unduly onerous task to produce copies of relevant bank statements, it is open to the defendant to contend that the other discovery I have ordered should be produced is sufficient for a fair disposal of the plaintiff's claim.  

20.      In relation to production of indemnities given to STM, and due diligence concerning the acquisition of the defendant by STM, it is clear, from the defendant's letter to Mr Youd dated 16^th April, 2010, and emails between Mr Youd and Mr Russell dated 23^rd and 24^th July, 2013, that some statements were made to STM by the defendant about the Payment.  Whether what was said is to be found in due diligence or any indemnity or both is a matter for the defendant acting through Appleby to consider, but I am satisfied that such documents are relevant to the two issues I have identified above, and in some form appear to exist.  

21.      In respect of costs I ordered plaintiff's costs in the cause because, while the plaintiff was ultimately successful in relation to his application, the real basis of the plaintiff's arguments was only advanced at the hearing itself.  I therefore reached the view that ordering plaintiff's costs in the cause, which deprived the defendant of their costs because they lost the argument at the hearing, but only allowed the plaintiff to recovery his costs, if he was successful at trial, best reflected the justice of the application. 

Authorities

Booth-v-Zenith Trust Company Limited [2014] JRC 231.

Hanby v Oliver [1990] JLR 337.