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Atrium Training Services Ltd v Smailes and Others, High Court, 27 September 2013

14 November 2013
The issues

Disclosure, electronic disclosure, whether duty to search complied with

The facts

The claim concerned the allegations of the liquidators of Atrium made against a former director and company secretary of the same in respect of fraudulent trading contrary to Section 213 of the Insolvency Act 1986 and trading whilst insolvent contrary to Section 214 of the 1986 Act.

At the heart of the dispute was the allegation that Atrium had failed to pay £45 million in tax to HMRC between 2003 and 2005. The matter came before the judge in relation to disclosure. The liquidators’ disclosure list was served on 8th June 2012 but it became clear that the disclosure exercise had not been conducted correctly. Essentially every conceivable document from Atrium in the liquidator’s possession had been listed, often simply with reference to boxes. The number of documents was vast. The former directors applied for an unless order. In the meanwhile and prior to the hearing of the unless order the liquidator’s solicitors had embarked on a massive fresh disclosure exercise examining the contents of hundreds of boxes of potentially relevant material and involving eight fee earners. At the hearing the new solicitors appointed for the liquidators told the judge that three more months would be needed for the exercise to be completed. A fresh date for disclosure was ordered. Subsequently and extension of time in respect of that date was applied for by the liquidator’s solicitors and granted but in unless form.

The liquidator’s disclosure exercise was completed within the required time, along with a disclosure statement signed by the liquidators with a statement of truth. The list was 22,000 pages long and containing about 6,000 documents. The disclosure exercise had involved scanning the documents obtained from the first solicitor after conducting a spot check and removing certain categories for irrelevance; in addition to electronic sources documents had been uploaded namely to a hard-drive and a server. The database was interrogated with search terms and an on-screen review for relevance was undertaken by six people. The documents identified as relevant were then encoded by paralegals so that a description of the document was saved with date/author etc. That e-disclosure database was now available for the parties to use via a website. It demonstrated that a serious effort had been made on the liquidator’s part to perform a proper disclosure exercise.

Objection was made, however, with allegations that documents were missing and also in respect of the nature of the list itself.

Two categories of documents plainly relevant and in the liquidator’s possession were not in the list – these were the scripts and the bank statements. It had been agreed that a supplementary list would be provided and was so provided on 10th September 2013 consisting of a further 628 documents. The documents had not been disclosed because of an error.

The second problems concerned the nature of the list which was said not to comply with CPR 31.10 in that it failed to provide a short description so that the given documents could be indentified.

The former director’s position was that the liquidators were in breach of the order of 7th June 2013 and the action should stand struck out. They had applied for judgment. They relied on the change in the overriding objective CPR Rule 1.1 (2) implemented in April 2013 to include reference to enforcing compliance with rules, practice, directions and orders and submitted under the prior practice relief against sanction would have been given to the liquidators and that under the new, more robust regime, the case for allowing no relief was even stronger.

The decision

The primary obligation on the liquidators under the unless order was to conduct a reasonable search and list the relevant documents found in that search. Such a search required the parties to identify and collate potentially relevant documents, to review the collated documents to decide which ones were actually relevant and to produce and serve an appropriate list. All of this was to be done in a reasonable manner, reasonable depending on the factors of Rule 31.7 (2). A search not carried out in good faith would not be a reasonable search. A search conducted in good faith and which was fair and proportionate given the number of documents involved, nature and complexity of the case, ease and expense of retrieval and the significance of any document likely to be located would be a reasonable search and would be one which complied with the order. This was a substantial case involving serious allegations justifying the extent of disclosure exercise from the point of view of proportionality. However, even looking at the exercise with the benefit of hindsight, there was no justification for saying it was not a reasonable search. It was an extensive search plainly carried out in good faith. It was completed within the time specified by the order. It was true that two classes of documents were missed but there was no suggestion that this was the result of bad faith and the court was satisfied that the fact that these two classes were missed did not support an inference that the exercise itself was not a reasonable search.

As to the form of the list, the list had been produced using e-disclosure software consisting of a table with a series of headings. For 55% of the documents in the list the ‘file name’ field was blank. For 421 documents the ‘author’ field was blank. A number of documents were identified with a single work ‘spreadsheet’ or ‘transcript’. The former director submitted that with such limited information the list was of no practical utility. The liquidator’s case was that the list was compliant with the relevant practice direction, namely Practice Direction 31 b relating to the disclosure of electronic documents. If they were right and Practice Direction 31 was applicable then the list was compliant with it and was therefore compliant with rule 31.10.

The practice directions were concerned with electronic documents. A document held by the party in the form of a piece of paper was not an electronic document. Thus where documents had been uploaded onto a database the practice direction would not ordinarily apply. If the liquidators had unilaterally taken it upon themselves to use an electronic disclosure approach of the kind they did without prior notice to the parties then using the terms of the practice direction as a means of covering up a serious inadequacy in the disclosure, then they could expect little sympathy from the courts. But this was not the case here. In the circumstances of the case it would be absurd to say that Practice Direction 31 b did not apply to this exercise despite the fact that strictly speaking the underlying documents were not electronic documents.

Further reason why it would be absurd not to apply Practice Direction 31 b – at least to some extent – was that the source of the documents included a server, i.e. electronic documents within the meaning of Practice Direction 31.

Finally, the fact that some document labelling fields were blank was not an indication that the list was not compliant with rule 31.10. The liquidators were not in breach of the order in respect either of the missing documents or the form of the list.

 

 

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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