CENTENARY 6 LTD AGAINST TLT LLP [2024] ScotCS CSIH

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2024] CSIH 13

CA29/21

Lord President

Lord Tyre

Lord Boyd of Duncansby

OPINION OF THE COURT

delivered by LORD TYRE

in the cause

CENTENARY 6 LIMITED

Pursuer and Respondent

against

TLT LLP

Defenders and Reclaimers

____________

Pursuer and Respondent: Smith KC, G Reid; Harper Macleod LLP

Defenders and Reclaimers: McBrearty KC, Paterson KC, Deacon; Clyde & Co LLP

4 June 2024

Introduction

[1]

This reclaiming motion (appeal) arises from the negligence of the defenders ("TLT"),

a firm of solicitors, in failing properly to advise the pursuer ("C6") in relation to the

requirements for lodging caution in proceedings brought by C6 against the joint liquidators

of Centenary Holdings III Limited ("CH III") of which it was the sole shareholder. That

failure resulted in the court refusing a claim by C6 for payment of £22.325 million under

section 212(3) of the Insolvency Act 1986. TLT admit negligence, but deny that C6 sustained

any loss. In this reclaiming motion they seek a wholesale review of the decision of the

commercial judge, who found them liable to pay damages to C6 of almost £10 million plus

interest. There is a cross-appeal by C6 in relation to the commercial judge's quantification of

damages.

Background to the section 212 application

[2]

CH III was a drinks and entertainment company previously called Seagram Distillers

Limited which was acquired in 2000 by a multi-national group ("Vivendi") whose parent

company was Vivendi Universal SA. In December 2001, CH III's drinks business was sold

and it ceased to trade. CH III retained substantial assets valued in excess of £1 billion. It

also had liabilities, including two 25 year full repairing and insurance leases of the Ark office

building in Hammersmith, London which had been Seagram's UK head office. The landlord

of the Ark was Deka Immobilien Investment GmbH. CH III's annual rent was about

£5 million.

[3]

In 2003, Vivendi came under financial pressure from their bankers and wished to rid

themselves of the liabilities under the Ark leases. They attempted to surrender the leases

but Deka declined their offer of £20 million. They were unable to find a new tenant for the

Ark which had an unusual open plan design. Vivendi did not have the funds to undertake

the work required to subdivide the building.

[4]

At that time, Mr Peter Harrod was the financial controller of CH III's immediate

parent company, Centenary Holdings Limited. In October 2003 he sought advice from

PricewaterhouseCoopers ("PwC") who proposed a number of options including a scheme

that, in essence, stripped most of the valuable assets out of CH III, leaving it with some

residual assets together with its liabilities, including the leases.

[5]

Mr Harrod introduced his brother, Mr Murray Richards, to Vivendi. Mr Richards,

who died in 2020, said that he was interested in obtaining possession of and renovating the

Ark. Deka were not willing to assign the leases to any organisation with less than a triple A

rating, and would not therefore assign it to any of Mr Richards' companies. PwC suggested

that Vivendi sell the shares in CH III to one of Mr Richards' companies in order to avoid the

need for an assignation of the leases. In pursuance of PwC's scheme, CH III was sold twice

within the Vivendi group: first from Centenary Holdings Limited to a company called

Centenary 4 Limited ("C4") and then by C4 to C6, the pursuer in this action. In the course of

this process, most of CH III's assets were distributed by a dividend in specie to C4, leaving

CH III with £15 million in cash. The purchase price of £77.7 million payable by C6 to C4 for

CH III was left unpaid as a debt on the intercompany ledger. In 2004, C6 and its now

subsidiary CH III were sold together for a price of £1 by the Vivendi group to a company in

the P4 property group, whose ultimate owner was Mr Richards.

[6]

C6 funded its purchase of CH III from C4 by borrowing £77.7 million from CH III. It

is unlawful for a company to provide a third party with financial assistance to enable that

party to buy the company's own shares, unless certain requirements are met.

Those

requirements, which at the material time were contained in sections 151 to 158 of the

Companies Act 1985, include a "whitewash declaration" by the directors of the acquired

company that if the company provides such assistance, it will still be able to meet its debts as

they fall due in the 12 months following the provision of the assistance. The declaration

must be audited, and a special resolution in favour of the assistance must be passed. Prior

to 22 January 2004, the head of Vivendi's legal division was the sole director of CH III.

Under the restructuring scheme, he was to cease to be a director. He was not willing to sign

the whitewash declaration because he would have no control or influence over the company

after its sale by Vivendi. The declaration was instead signed by Mr Stephen Bloch, an

associate of Mr Richards with no previous knowledge of CH III who was appointed as its

sole director on 22 January 2004. The audit was carried out by PwC, who confirmed that the

declaration was reasonable, having regard to Mr Richards' plans for the Ark. These

included buying it from Deka, and refurbishing and subdividing it for onward let. In the

end, no effort was ever made to refurbish the Ark as proposed. CH III entered into various

unsuccessful transactions and, in 2005, went into liquidation.

[7]

Deka submitted a claim in CH III's liquidation for £38,286,271 consisting of rent

arrears, future rent, and other charges in terms of the leases. In about November 2005, the

joint liquidators, Robert Caven and Kevin Mawer, entered into a compromise agreement

with Deka in terms of which Deka's claim in the liquidation was agreed at £28 million. The

agreement did not contain an anti-embarrassment clause, whereby the claim would be

reduced in the event that, upon obtaining vacant possession of the Ark, Deka managed to

mitigate their losses by selling or re-letting the Ark. In March 2006 Deka sold the Ark for

£47 million.

[8]

The joint liquidators were advised that the financial assistance to C6 had been

unlawful because Mr Bloch's declaration had been dated two days after the date of the loan,

contrary to section 155(6) of the 1985 Act. The joint liquidators commenced proceedings,

funded by Deka, in the High Court of England and Wales against PwC, Mr Bloch and

Vivendi for repayment of £77.7 million. Vivendi counterclaimed against PwC and C6 on the

basis that C6 still owed £77.7 million to C4. On 30 September 2010 the proceedings were

settled by Vivendi paying £47 million to the joint liquidators. As part of the settlement, CH

III assigned to Vivendi all of its rights and interests relating to proceedings against, inter alia,

Mr Bloch and Mr Richards, and Vivendi agreed to indemnify the joint liquidators in respect

of claims by contributories.

[9]

Vivendi then commenced proceedings in the High Court of England and Wales

against Mr Bloch and Mr Richards (as a shadow director) for breaches of their directors'

duties to CH III by causing payments amounting to more than £10 million to be made by the

company. In a judgment dated 9 October 2013 ([2013] EWHC 3006 (Ch)), Newey J found in

favour of Vivendi. In the course of his judgment he stated (paragraph 113) that he could not

regard either of Messrs Bloch and Richards as a reliable witness. As regards Mr Harrod,

Newey J observed (paragraph 114):

"As for Mr Harrod, his written evidence in particular was careful and, I am sure,

largely accurate. At times, however, his desire to help his brother was apparent... I

treat Mr Harrod's evidence with a degree of caution."

The section 212 note

[10]

Section 212 of the Insolvency Act 1986 provides a right of action based on any

delinquency by the directors or liquidators of a company in the course of the company's

winding up. Section 212(1) applies when:

"... a person who ...

(b)

has acted as liquidator. . .

has misapplied or retained, or become accountable for, any money or other property

of the company, or been guilty of any misfeasance or breach of any fiduciary or other

duty in relation to the company."

Section 212(3) states that in that event:

"The court may, on the application of ... any creditor or contributory, examine into

the conduct of the person falling within subsection (1) and compel him--

(a)

to repay, restore or account for the money or property or any part of

it, with interest at such rate as the court thinks just, or

(b)

to contribute such sum to the company's assets by way of

compensation in respect of the misfeasance or breach of fiduciary or

other duty as the court thinks just."

[11]

C6, as a contributory of CH III, lodged a note in the liquidation under section 212

seeking a contribution of about £22.325 million to the assets of CH III by the joint liquidators.

C6 averred that the joint liquidators, in entering into the agreement with Deka, had failed to

exercise the skill and care reasonably expected of ordinarily competent liquidators. Deka's

claim had only been worth £4.5m

and Deka had secured a windfall upon their sale of the

Ark. No ordinarily competent liquidator exercising reasonable skill and care would have

entered into such an agreement without ensuring that it included an "anti-embarrassment"

clause.

[12]

TLT were C6's solicitors in the section 212 proceedings. The court ordered C6 to

lodge caution. TLT failed to lodge caution on C6's behalf despite multiple extensions to the

deadline. As a result, the section 212 note was refused on 5 May 2017. That refusal was

upheld on 10 April 2018 by the Second Division ([2018] CSIH 27). In this action, C6 seeks

damages arising from TLT's failure to lodge caution on its behalf. TLT admit that the failure

amounted to a breach of contract and professional negligence. They contend however that

their negligence did not cause C6 any loss because, for a number of reasons, C6 had a nil or

negligible chance of achieving any success in the section 212 proceedings.

The commercial judge's opinion

Issues for determination

[13]

Before the commercial judge, C6 submitted that the loss to CH III was measured by

the financial consequences of the joint liquidators entering into the agreement with Deka

without an anti-embarrassment provision. The chances of success in the section 212

proceedings had been high. Because the outcome depended on how a third party would

have acted but for the breach of duty, the court in the present case required to value the loss

of C6's chance of success in the note. TLT agreed that the court should approach the matter

as the loss of a chance, but submitted that where there were a number of contingencies the

court should multiply together the percentage chances in relation to each contingency.

Where, as here, the percentage chance attributable to one or more of the contingencies was

nil, the overall result was also nil. The factors relevant to C6's prospects of success were:

whether the claim against the joint liquidators had prescribed;

whether C6 could have secured funding or, alternatively, funded itself to pursue the

claim to a conclusion;

whether C6 could have established breach of duty on the part of the joint liquidators;

whether the joint liquidators would have reached an agreement with Deka limiting

its claim to less than £28 million;

if so, whether there would have been a surplus available to C6 after payment in full

of CH III's creditors.

Prescription

[14]

The commercial judge held that C6's action had not prescribed prior to the

commencement of the section 212 note. On either party's hypothesis of fact, more than five

years had elapsed between concurrence of injuria and damnum and the lodging of the

section 212 note. The question was whether prescription had been suspended or extended

by sections 11(3) or 6(4) of the Prescription and Limitation (Scotland) Act 1973. The creditor

in an obligation of a liquidator to make reparation to a company under his control was the

company. A shareholder did not become the creditor by lodging a section 212 note. It was

the awareness of the company, CH III, which mattered for the purposes of section 11(3).

Similarly, for the purposes of an extension under section 6(4), it was the company's

awareness which mattered. Section 6(4) provided that the prescriptive period could be

extended in certain circumstances including fraud, which had a broad meaning and could

include a breach of duty by a liquidator to a company under his control. Whilst the

liquidator was in office, the company could not act independently of him, and therefore

could not discover any fraud by him. A liquidator's knowledge as to his own wrongdoing

should not be attributed to the company (Julien v Evolving Tecknologies and Enterprise

Development [2018] BCC 376 (PC)). Whether the action had prescribed was a matter of law,

and the court did not need to assess the loss of a chance suffered by C6 in relation to the

prescription issue. If however the court had required to assess the extent of the chance lost,

it would have assessed the chances of the judge in the section 212 proceedings reaching a

different conclusion on the question of prescription as nil or negligible. C6 had a 100%

chance of succeeding on the matter of prescription at preliminary proof.

[15]

If, contrary to the commercial judge's analysis, it was the knowledge of C6 and not

CH III which was relevant for the purposes of prescription, the joint liquidators' prospects of

succeeding at a preliminary proof on prescription would still have been nil or negligible.

Mr Harrod's evidence before the commercial judge was that he became aware of Deka's

claim having been agreed at such a high figure when he read an article in Property Week on

15 April 2011, but he was not a director of C6. Mr Richards referred in an email dated

27 February 2011 to one of CH III's rented properties having been sold at an extraordinarily

high price, but the email did not mention the Ark and could have been referring to another

property. The email was ambiguous and did not fix the controlling minds of C6 with actual

or constructive awareness of the joint liquidators' fraud more than five years before the

presentation of the note.

Funding

[16]

On the balance of probabilities, C6 would have been able to self-fund the section 212

proceedings until the resolution of the preliminary proof on prescription. Thereafter, there

was a very high chance, amounting to a virtual certainty, that Woodsford Group Limited,

litigation funders, would have provided funding. The evidence of Mr Charles Morris, chief

investment officer and director of Woodsford, confirmed this. The theoretical evidence of

Neil Purslow, the chief investment officer of another litigation funder, Therium Capital

Management Ltd, to the effect that a prudent litigation funder, having had sight of Newey

J's judgment in the action by Vivendi against Messrs Richards and Bloch, would have

regarded the proceedings as speculative and unmeritorious and would not have funded

them, was of no assistance where there was evidence that in reality Woodsford would have

provided funding. Mr Morris's point that Woodsford would not have agreed to fund the

present proceedings against TLT unless they would also have funded the section 212

proceedings was particularly compelling. In these circumstances the commercial judge

considered that it was unnecessary for him to consider whether, had no litigation funding

been obtained, C6 would have been able to self-fund the note after resolution of the

prescription issue.

Breach of duty

[17]

The issue of breach of duty could be dealt with shortly, as TLT had accepted in their

submissions that there was a real and substantial chance that C6 would have established

breach of duty by the liquidator in the section 212 proceedings. The only matter in dispute

was what the chance was.

Prospects of limiting Deka's claim

[18]

C6 had reasonable prospects of establishing in the section 212 proceedings that the

joint liquidators would have reached a compromise agreement with Deka for a sum less

than £28 million. On the facts averred by C6, it would have been reasonable to draw the

inference that, had the joint liquidators not entered into a compromise agreement, Deka

would have terminated the leases themselves in order to sell the Ark with vacant possession

or let it to new tenants. The joint liquidators would have required to demonstrate that that

inference should not be drawn, but they had made no averments which did so. Whilst it

was possible that Deka would not have agreed to an anti-embarrassment clause, there was

again a lack of pleading, or evidence led, by the joint liquidators in the section 212

proceedings to that effect.

Surplus

[19]

C6 had reasonable prospects of establishing that, had the Deka settlement been

lower, there would have been a surplus in CH III's assets available to C6 as a result of the

settlement that the joint liquidators reached with Vivendi. TLT's contention that there

would have been no surplus because in that eventuality Vivendi would have offered, and

the joint liquidators would have settled at, a correspondingly lower amount had two

difficulties. The first was that such a defence was not pled by the joint liquidators in the

section 212 proceedings. The evidence of Mr Nicholas Pike, Vivendi's solicitor in the

proceedings brought against them by the joint liquidators, and whose idea it had been for

the joint liquidators to seek caution, was that the defence had not occurred to him. The

second was that the evidence relied upon by TLT in support of the contention was weak.

No evidence was led from anyone from Vivendi about their attitude to settlement of the

proceedings brought against them by the joint liquidators. Hearsay evidence of their

attitude was led from Mr Pike and from Mr Caven, one of the joint liquidators. Mr Caven's

evidence was that Vivendi had requested details of the creditors' claims before they would

agree settlement. They had been willing to recompense the creditors for their losses, but it

was clear that they had no intention of offering a settlement which would have left any

surplus for distribution to C6 as shareholder. Mr Pike gave evidence that Vivendi

considered they had been deceived into the sale of CH III by Messrs Richards, Bloch and

Harrod and were furious with them. They had instructed him not to settle at a sum which

exceeded the creditors' claims. However, in the absence of evidence from Vivendi

personnel, the evidence of Messrs Pike and Craven as to their negotiating position was

inconclusive. It did not establish that they would not have departed from that position if it

had been necessary to do so in order to achieve settlement.

Court discretion

[20]

Section 212(3) gave the court discretion to refuse to make an order compelling a

delinquent liquidator to make a compensatory payment to the company in liquidation.

There were however no circumstances in the present case which would have justified such a

refusal. Where a company under a liquidator's control had suffered loss as a result of his

breach of duty, the liquidator should not be absolved from his liability to make good the loss

on a discretionary basis. Vivendi's feeling that it would be unjust for Messrs Harrod and

Richards to benefit from their blameworthy actions would not be an adequate reason to

refuse to compensate the company for its loss. The situation required to be looked at in the

round; Vivendi had been a party to the scheme to dispose of CH III and it was of direct

benefit to them, as they had been desperate to rid themselves of the Ark lease whilst

stripping out CH III's assets. Any blame for the scheme did not rest solely with Messrs

Richards and Harrod. It would be inequitable to punish C6 for the scheme in those

circumstances. The chances of a judge exercising the discretion to refuse to make an order

were nil.

Loss of chance percentage

[21]

There were obvious difficulties for a firm of solicitors who, having advised a client to

proceed with a litigation, attempted to defend an action for professional negligence on the

basis that the litigation would not have succeeded (cf Mount v Barker Austin [1998] PNLR 493).

C6 had proceeded with the section 212 proceedings on legal advice from senior

counsel that there were reasonable prospects of success. Leaving aside the prescription and

funding points on which the commercial judge had held that C6 would have had a 100%

chance of succeeding, there remained the prospects of establishing breach of duty, the

prospects of the joint liquidators reaching an agreement with Deka to settle at the lower

level, and the likelihood of there being a surplus available for C6 as contributory. The

commercial judge declined to adopt the mathematical approach of multiplying percentages,

because he regarded the questions as facets of the same contingency, namely whether C6

would have succeeded on the merits of the section 212 note. Taking all of the matters raised

together, he assessed their chances of success at 65%. That was a broad brush assessment. It

was in line with the legal advice tendered by TLT to C6: senior counsel had advised that

prospects of success were 60% or more, and TLT had not disagreed. The amount payable to

C6 accordingly fell to be reduced to 65% of its full value.

Quantification of loss

[22]

C6's first conclusion was for payment of the amount of surplus that would have been

distributed to it had it been successful in the section 212 note. The liquidation had been an

unusual one in that there had been sufficient assets in CH III for the creditors to be paid in

full. If C6 had been successful in the section 212 proceedings, Deka's claim would have been

reduced by £22,324.980.56 to £6,670,312.47, thereby reducing the total creditors' claims

(£40,480,471.94) to £18,155.491. The reduction in Deka's claim included the deduction of a

dilapidations claim (of £1,198,166) as there was no evidence before the court that Deka had

had a valid dilapidations claim. However, not all of the sum of £22,324,980.56 would have

flowed through to C6 as a surplus. The creditors of CH III were entitled to statutory interest

from the date of liquidation until distribution. That would have totalled £14,978,280. There

were costs of the liquidation of £2,673,757 which would have had to be met. The surplus

due to C6 as contributory would therefore have been £11,192,472. Interest at the rate of 4%

was payable on that figure from 31 December 2010 until the date of refusal of the section 212

note (5 May 2017). On a broad brush basis, the interest amounted to £2,840,000. Applying

the loss of a chance percentage of 65% to the total of £14,032,472 produced a figure of

£9,121,106, which the commercial judge rounded to £9,122,000.

[23]

The second conclusion was for payment of the expenses as taxed which had been

awarded against C6 in relation to the appeal to the Inner House against the refusal of the

section 212 note. Those amounted to £228,435.31 plus interest of 8% from the date of

citation. TLT's contention that that expense was not recoverable as it had not yet been paid

fell to be rejected; C6 was under a legal obligation to pay the sum. Sixty five per cent of

£228,435.31 was £148,482.95, rounded to £148,500.

[24]

The third conclusion was for recovery of the costs incurred by C6 in the section 212

proceedings. The amount claimed was £253,358.47. Three items which did not relate, or did

not wholly relate, to those proceedings required to be deducted. That left £174,158.47 plus

interest at 4% from 5 May 2017 to the date of citation, and 8% thereafter. Sixty five percent

of that sum was £113,203, rounded to £113,200.

Reclaiming motion: arguments and decision

[25]

TLT challenge the commercial judge's decision on almost all of the issues for

determination. C6 contends that the commercial judge reached the correct decision on those

issues but erred in three respects in his quantification of damages. It is convenient to set out

the arguments and state our decision in relation to each of the various issues in turn.

Prescription

Argument for TLT

[26]

The commercial judge erred in holding that the joint liquidators had a nil or

negligible chance of success in proving that the obligation to make reparation had

prescribed by the time the section 212 proceedings were raised. It was acknowledged that

although the proof had proceeded on the basis that the key date for prescription was 1 April

2016, when the note was served, it was now accepted that the key date was 25 February

2016, when the note was lodged. The note was a derivative claim. There were two issues of

law: first, whether the creditor for the purposes of such a claim was the person bringing the

claim or the company whose patrimony would benefit if the claim were successful and,

secondly, if the creditor was the company, whether actual or constructive awareness of the

person bringing the claim was attributable to it. The commercial judge's decision that the

company was the creditor and that the claimant's awareness was not attributable to it gave

rise to an odd outcome. C6 was the only person who would realistically claim, and it had all

of the requisite knowledge to enable it do so, yet its claim against the joint liquidators could

not prescribe whilst the latter were in office. On that hypothesis, C6 would still be in time to

bring proceedings today, notwithstanding its admitted knowledge since at least 2012. The

commercial judge had erred in finding that the creditor was CH III and not C6, and that it

was CH III's awareness that was relevant. It was the power, entitlement or right of action to

compel performance or fulfilment of an obligation by the debtor that conferred on a person

the status of a creditor. The obligation arising from the joint liquidators' liability to make

reparation to CH III was correlative to the personal right of C6, conferred upon it by

section 212(3)(b), to compel reparation to be made. It made no difference that C6 was

seeking to compel payment to another party, namely CH III. Such an interpretation

accorded with the definitions of claimant and plaintiff used in English and Northern Irish

limitation legislation. It would be surprising if different results were reached in different

parts of the UK in respect of a UK-wide statutory insolvency regime.

[27]

Esto the commercial judge was correct that CH III was the creditor, C6's awareness

was attributable to CH III. The person pursuing a derivative claim was the agent of the

company for that claim and their knowledge was, in most circumstances, attributable to the

company. In the present circumstances, the awareness of C6 as agent was attributable to CH

III as principal, the critical feature being C6's control over the claim against the joint

liquidators. Alternatively, if C6 was not CH III's agent, a special rule of attribution, in place

of the primary rules of attribution or the general principles of agency, should operate to

attribute its knowledge to CH III. A person in C6's position had express statutory authority

in section 212 to enforce the note obligation and thereby interrupt the prescriptive period.

Sections 6(4) and 11(3) of the 1973 Act ought to be construed so as to permit the attribution

of the awareness of a person claiming on the creditor's behalf to that creditor. This was

what the Scottish Law Commission had contemplated relative to what became the proviso

to section 6(4) (see Report on Reform of the Law Relating to Prescription and Limitation of Actions

(1970) (Scot Law Com No 15), [1970] SLC 15 at paragraph 93).

[28]

On either of the foregoing bases it was necessary to consider whether, as a matter of

fact, C6 had had actual or constructive awareness of CH III's loss more than five years before

the note was lodged. Mr Richards had indicated in emails that, by 21 December 2010, he

had decided to sue the joint liquidators. Mr Richards' email dated 27 February 2011 and

Mr Harrod's evidence in cross examination on the terms of that email made it plain that

Mr Richards had been aware of the loss. Though the email came after 25 February 2011, ie

less than five years prior to the lodging of the note, there was no suggestion that the

awareness had been acquired in the two intervening days. C6 was aware of the sale of the

Ark by Deka and the payment of a portion of the Vivendi settlement to CH III's creditors.

That ought to have triggered the taking of steps that the ordinarily prudent contributory

would have taken. The judge had given no reasons for his finding that the pursuer could

not with reasonable diligence have become aware of the loss more than five years before the

lodging of the note. Moreover he had erred in law in reversing the onus of proof by

proceeding on the basis that it would have been for the joint liquidators to prove that C6

was aware of the loss. C6 had led no evidence relating to the lack of awareness of Mr Bloch,

who was sole director of CH III when the loss occurred.

[29]

Esto CH III was the creditor and the C6's awareness could not be attributed to it, the

commercial judge had failed to consider whether CH III had been induced to refrain from

making a claim by the liquidators' fraud or their own error. There was no evidence to

support such a finding. The error required to be the sole cause of the creditor's failure to

claim. That was not the case here; C6's neglect was a separate cause. On the judge's

hypothesis, the fraud or error subsisted by reason of the liquidators remaining in office until

the bringing of proceedings. Self-evidently, the fraud or error did not induce the failure to

make a claim sooner.

Argument for C6

[30]

The commercial judge did not err in finding that the prescription plea in the note was

bound to fail. Section 212 provided a procedural mechanism. It did not create any

substantive rights or obligations. The creditor in the obligation being enforced through the

section 212 note was the company, CH III, not its shareholder. The decision of the court in

Dryburgh v Scotts Media Tax Ltd 2014 SC 651 was indistinguishable from the present

circumstances. Esto C6's knowledge was relevant, the judge was not plainly wrong to

conclude that C6 did not have knowledge until publication of a press article concerning CH

III's liquidation on 15 April 2011. He had not placed the onus of proof on the joint

liquidators. There was no need for the judge to address the steps that a person of ordinary

prudence would have taken for the purposes of section 11(3) of the 1973 Act.

Decision

[31]

The commercial judge was correct to hold that the creditor, for the purposes of

section 6 of the 1973 Act, was CH III. The creditor is the person to whom the obligation

which is sought to be enforced is owed. The relevant obligation was the obligation to make

reparation for loss caused by the joint liquidators' breach of duty. That obligation was owed

to the company whose assets they were alleged to have misapplied: that is, it was owed to

CH III and not to its shareholder. If that obligation existed for more than five years without

a relevant claim or relevant acknowledgment, it was extinguished at the expiration of the

period. However, in terms of section 6(4), any period during which the creditor (ie CH III)

was induced to refrain from making a claim by fraud or error induced by the debtor is not

reckoned as part of the five years. Where the person whose state of mind is in issue is a

company, it is necessary to identify one or more individuals in whom the requisite state of

mind can be attributed to the company: Dryburgh v Scotts Media Tax Ltd (above) at

paragraph 21. In that case the state of mind of a director during the relevant period was

attributed to the company. In the present case CH III was under the direction of the joint

liquidators throughout the period from the commission of the alleged breach of duty until

the lodging of the section 212 note, which was a relevant claim for the purposes of section

6(4) by CH III (not C6). It follows that no part of the time that elapsed after the obligation

arose is reckoned as part of the prescriptive period.

[32]

TLT's argument that the obligation arising from the joint liquidators' liability to

make reparation to CH III was correlative to the right conferred on C6 by section 212(3)(b) to

compel reparation to be made is misconceived. The right correlative to the obligation is the

underlying right of the company to receive reparation for the breach of duty. Section 212

simply affords a mechanism for a variety of persons to enable the company to enforce the

obligation owed to it. If it be the case that English law would produce a different result (a

matter on which we express no view) then that would be the consequence of differences

between the respective laws of prescription and limitation, which would not occasion

surprise or concern.

[33]

TLT's alternative argument was that if the commercial judge was correct that CH III

was the creditor, C6's awareness was attributable to CH III. This argument falls to be

rejected. In the first place, TLT's description of section 212 proceedings as a "derivative

action" is not well founded. That expression refers to actions by minority shareholders on

behalf of a company to seek redress for wrongs committed by those whose majority control

prevents the institution of proceedings at the instance of the company. Such actions, which

developed as an exception to the rule in Foss v Harbottle (1843) 2 Hare 461, were competent

in Scotland at common law (see Wishart v Castlecroft Securities Ltd 2010 SC 16, Lord Reed at

paragraph 2) and are now provided for by sections 265 - 269 of the Companies Act 2006,

superseding the common law. The remedy is a substantive one, not restricted to companies

in the course of winding-up. It proceeds on an entirely different basis from section 212, a

procedural section which does not create a cause of action in itself but provides a method of

litigating particular claims during a winding-up (Stone & Rolls v Moore Stephens [2009] 1 AC

1391, Lord Scott of Foscote at para 110; In re B Johnson & Co (Builders) Ltd [1955] Ch 634, Lord

Evershed MR at 647). Cases such as Wallersteiner v Moir (No 2) [1975] QB 373 using the

terminology of agency in derivative actions under English common law are therefore of no

assistance.

[34]

Secondly, there is nothing in section 6(4) that provides for awareness of fraud or

error by a person other than the creditor to be attributed to the creditor. TLT's contention

that the court ought to apply a "special rule of attribution", attributing the knowledge of C6

or its director or shareholder to CH III, is founded upon a dictum of Lord Hoffmann in

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (PC).

That case examined the circumstances in which liability for the knowledge or actings of

individuals could be attributed to a company. At page 507 Lord Hoffmann observed:

"... (T)here will be many cases in which ... the court considers that the law was

intended to apply to companies and that, although it excludes ordinary vicarious

liability, insistence on the primary rules of attribution would in practice defeat that

intention. In such a case, the court must fashion a special rule of attribution for the

particular substantive rule. This is always a matter of interpretation: given that it

was intended to apply to a company, how was it intended to apply? Whose act (or

knowledge, or state of mind) was for this purpose intended to count as the act etc of

the company? One finds the answer to this question by applying the usual canons of

interpretation, taking into account the language of the rule (if it is a statute) and its

content and policy."

[35]

TLT contend that for the purpose of enforcement of the note obligation, the directing

mind and will of CH III was C6, having regard to the language, content and policy of the

1973 Act, and negative prescription in general. They found upon the reference in the

definition of a relevant claim in section 9(1) to a claim made "by or on behalf of" the

creditor. This provides no basis for the application of a special rule of attribution in the

interpretation of section 6(4). It is not the point that Lord Hoffmann was addressing when

dealing with the attribution to a company of liability for the actings of natural persons. Nor

is it the point that the Scottish Law Commission were contemplating in the passage cited,

which refers to the actions of any person through whom the creditor derived right being

regarded as the actions of the creditor. CH III's right was not derived through C6.

[36]

The obiter observations of the Privy Council in Julien v Evolving Tecknologies and

Enterprise Development (above), in the context of a statute mirroring the English law of

limitation of actions, provide some policy support for this conclusion. At paragraph 61 the

Board observed, in the context of breach of duty by the directors of a company:

"... (T)here is no obvious reason why time should run in favour of the directors of a

company who have committed a deliberate breach of duty, or deliberately concealed

a breach of duty, for as long as they choose to retain control of the company as its

Board. There is much to be said for adhering to the simple rule, based upon the

separate personality of the company from even a sole shareholder, that shareholder

knowledge of a breach of duty owed to the company by its directors, or the ability to

discover the facts, is simply not to be attributed to the company at all, at least for as

long as the allegedly delinquent directors retain control of it."

Those observations are equally applicable to breach of duty by liquidators so long as they

remain in control of the company.

[37]

It follows from the foregoing analysis that any awareness of the controlling minds of

C6 was not relevant to the question whether the joint liquidators' obligation to make

reparation to CH III had prescribed. For the sake of completeness, there is no reason to

interfere with the commercial judge's finding that esto the knowledge of C6 was relevant, the

joint liquidators' prospects of succeeding at a preliminary proof would still have been nil or

negligible. Between 2005, when the Deka deal was agreed, and November 2010 Mr Bloch

was sole director of C6; he was then replaced as sole director by Mr Richards. The

contention that the commercial judge reversed the onus of proof falls to be rejected. Both

parties had founded on evidence led: TLT founded upon the terms of Mr Richards' two

emails. The commercial judge's view was that at a preliminary proof the email of

27 February 2011 would have been unlikely to carry any weight in fixing CH III with

awareness. He was entitled so to conclude. There was no need for him to refer to the email

of 21 December 2010: it is far from clear that the reference to suing the joint liquidators

relates to what became the subject matter of the section 212 note. He accepted Mr Harrod's

evidence that he was not aware of the loss until the publication of an article on 15 April 2011

stating that Vivendi had settled with the joint liquidators, but (contrary to C6's submission)

did not base his decision on this because Mr Harrod was not a director of C6. He noted that

Mr Richards' evidence was not available and that the evidence of the recipient of the email

of 27 February 2011 was of no assistance. In the absence of any evidence consistent with

actual or constructive knowledge on the part of Mr Richards or his predecessor as director,

the commercial judge was entitled to reach the conclusion that he did.

Funding

Argument for TLT

[38]

The commercial judge erred in finding that there was a very high chance, amounting

to virtual certainty, that Woodsford would have funded the section 212 proceedings had

they survived a preliminary proof on prescription. He was wrong simply to accept the

evidence of Mr Morris and to treat Mr Purslow's expert evidence as theoretical. Mr Morris's

evidence in his witness statement that Woodsford would have funded the note was

qualified in his answers to cross examination. He acknowledged that Woodsford had not

been provided with an explanation of either the background transaction by which C6 came

to own CH III or the events leading to its liquidation. He had not known that C6 did not

repay the loan, or that the effect of its claim against the joint liquidators was for part of the

value of that same loan. He did not know that the principals of C6 and CH III had

dishonestly paid away over £10 million prior to CH III's liquidation, at a time when

Mr Harrod was CH III's financial controller. He conceded that those matters would have

been material to Woodsford's decision-making. He accepted that the assignment of claims

taken by Vivendi and its threat to wind up C6 would have been highly material to

Woodsford's decision making, and that these matters had not been disclosed to Woodsford.

He was reluctant to speculate about what the investment advisory panel or Woodsford's

board would have done had they seen Newey J's judgment, either in relation to the previous

litigation or in deciding to fund this litigation, though he did acknowledge that the

information contained within it would have impacted on their decision. It was fanciful to

suppose that Woodsford's advisory panel, armed with Newey J's judgment, and with

knowledge of Vivendi's hostility towards C6, would have recommended to the board that

the claim should be funded, or that the board would have agreed to fund the claim, had C6

obtempered its obligations to Woodsford and disclosed relevant and material information to

it. The contention that weight could be attached to the panel's decision to fund the present

case was also undermined.

[39]

Mr Morris's evidence having been thus neutralised, the commercial judge

misdirected himself by failing to take into account Mr Purslow's evidence that a funder

which had had sight of Newey J's judgment would have been highly unlikely to fund the

section 212 proceedings. Properly analysed, the evidence demonstrated that the prospects

of C6 securing funding for the remainder of the litigation were nil or negligible.

[40]

Having so erred, the commercial judge further erred in deciding that he did not need

to make a finding as to whether C6 could have self-funded the remainder of the litigation

after the determination of the prescription issue at preliminary proof. The issue was

therefore live for the court to determine. The court ought to find that C6 could not have

funded the litigation itself. Mr Harrod stated that Woodsford were not approached in 2015

because at that stage funding was desirable but not essential; by implication, that meant that

it was essential by 2017, when Woodsford were approached. Mr Harrod's evidence that C6

could have self-funded the litigation was no more than an assertion. He had accepted that

C6 could not afford to meet the award of caution of £100,000 as at December 2016, and that

by August 2017 they had fallen into £43,000 of arrears in payment of their legal fees. They

could not afford to pay two awards of expenses made against them in relation to their

attempts to appeal the refusal of the section 212 note to the Inner House and the UK

Supreme Court. Mr Harrod was evasive and inconsistent in his evidence. The court should

prefer the evidence of Mr Jim Diamond, a Jersey-based costs lawyer who acted as a broker to

source litigation funding, and whose evidence contradicted Mr Harrod's assertion that C6

could have self-funded. Mr Diamond had been retained for the purpose of securing funding

once after the event insurance had been obtained. He confirmed that C6 needed funding.

Argument for C6

[41]

The commercial judge's finding that C6 would have obtained funding for the

section 212 note was unassailable. It was a primary finding of fact founded, among other

things, on an assessment of Mr Morris's evidence, which the judge accepted. It was not a

finding which could not be reasonably explained or justified. TLT's criticisms proceeded on

an inaccurate summary of Mr Morris's evidence as a whole and placed excessive weight on

what could reasonably be taken from the observations in Newey J's judgment.

Decision

[42]

The circumstances in which the court will interfere with the findings of fact made by

a Lord Ordinary (including a commercial judge) are well recognised. These were recently

set out by this court in Woodhouse v Lochs and Glens (Transport) Ltd 2020 SLT 1203 (LP

(Carloway), delivering the opinion of the court at para [31]). The court must be satisfied that

the decision was "plainly wrong" meaning that it was one which no reasonable judge could

have reached, in the sense of being one that cannot reasonably be explained or justified

(Henderson v Foxworth Investments Ltd 2014 SC (UKSC) 203, Lord Reed at paragraphs 62 and

67). Plainly wrong is not the only ground for a successful review. The Lord Ordinary may

have made:

"'... `some other identifiable error' including: `a material error of law, or the making

of a critical finding of fact which has no basis in the evidence, or a demonstrable

misunderstanding of relevant evidence, or a demonstrable failure to consider

relevant evidence'" (Lord Reed at para 67); see also Grier v Lord Advocate 2023 SC 116,

LP (Carloway), delivering the opinion of the court at para [109]).

The fact that this court might have reached a different decision is not sufficient to interfere

with the finding of the commercial judge.

[43]

Applying that guidance, TLT's primary argument raises the question whether there

has been a demonstrable failure by the commercial judge to consider relevant evidence, so

that his decision cannot reasonably be explained or justified. That test has not been met.

The commercial judge narrated TLT's submission at paragraphs 69 and 70. He has clearly

had regard to the evidence elicited from Mr Morris in cross examination; he referred to it

expressly at paragraph 76 of his opinion on the related matter of a reputational question.

Although his reasoning could have been more detailed, his finding that Woodsford would

have funded the section 212 proceedings must be assumed to have been made with all of the

evidence, including Mr Morris's response to questions put to him in cross examination, in

mind. Considering matters as a whole there is no reason to interfere with that finding.

TLT's argument based on Woodsford's absence of knowledge of the background to the

liquidation of CH III places excessive weight on Newey J's finding in relation to credibility;

it is important to recall that although he found Messrs Richards and Bloch to be unreliable

witnesses, Newey J did not extend the same assessment to Mr Harrod, observing only that

he treated his evidence "with a degree of caution" where his desire to assist his brother was

apparent. TLT cannot at this late stage present an argument which assumes dishonesty on

the part of Mr Harrod. It is therefore speculative to consider what Woodsford would have

made of Newey J's judgment, had it come to their attention either when considering

whether to fund the note or when considering whether to fund the present litigation. The

commercial judge accepted Mr Morris's evidence that the issue for Woodsford was the

strength of the claim against the joint liquidators, and was entitled to place greater weight

on this than on the evidence of Mr Purslow as to what other funders might have decided. It

is not the case that the commercial judge's finding on this point cannot reasonably be

explained or justified.

[44]

The commercial judge did not consider it necessary to express a view as to whether,

if it had failed to obtain litigation funding, C6 would have been able to self-fund the note

after resolution of the prescription issue. It would have been preferable if the commercial

judge had addressed that hypothesis. It is appropriate to do so.

[45]

In his witness statement Mr Harrod acknowledged that C6 could not rely on the

availability of litigation funding and had to budget to self-fund should that prove necessary.

He obtained from Mr Diamond an estimate of £353,000 for the cost through to and including

a proof. Mr Harrod was confident that he could have funded the claim from his own

resources, including savings, lines of credit, and primarily from his canal boat business

called Jason's Trips which had a surplus cash flow in excess of £100,000 per year for each of

the years 2016 2019. In cross examination, it was put to Mr Harrod that Jason's Trips was a

seasonal business which during low periods did not have sufficient cash to make loans to

C6. Mr Harrod accepted that it had not, for example, had sufficient cash to lend £100,000 to

C6 at the critical time when the lodging of caution would have prevented dismissal of the

note. He disagreed, however, that in late 2016 through to 2017 there was no possibility of C6

meeting the order for caution by way of cash consignment. He had not been prioritising the

cash flow for caution because TLT had advised that after the event insurance was an

acceptable alternative. He maintained that if neither of the litigation funders that were lined

up had agreed to fund, C6 could have funded the note to conclusion.

[46]

It is not for this court to make a general assessment of the credibility or reliability of

Mr Harrod as a witness. We have not had the benefit of seeing and hearing him and must

be guided by the view of the judge who had those benefits. The commercial judge made no

express finding regarding Mr Harrod's credibility or reliability, but there is no indication in

his opinion that he rejected any evidence given by Mr Harrod on either of those grounds.

On the contrary, on the related matter of C6's ability to fund the note up to the stage of a

preliminary proof on prescription, it is clear (paragraph 80 of the commercial judge's

opinion) that Mr Harrod's evidence was accepted in the face of challenge. If this court were

minded to reject Mr Harrod's assertion that C6 could have funded the note to conclusion, it

could only do so on the basis of contradictory evidence on that particular matter.

[47]

Having considered the matters founded upon by TLT, the court finds nothing to

persuade us to reject Mr Harrod's assertion. The terms of his witness statement do not

support the inference that external funding was essential by 2017. Mr Diamond's evidence

was concerned with the obtaining of external funding; he was not in a position to express a

view on C6's ability to self-fund using Mr Harrod's resources. The inability of C6 to find

caution or to pay legal expenses at a particular time could be explained by the seasonal

nature of the cash flow from the canal boat business. Having regard to the relevant

evidence, on the balance of probabilities, if commercial funding had not been obtained, C6

could have funded itself to conclusion of the note proceedings.

Prospects of limiting Deka's claim

Argument for TLT

[48]

The commercial judge found that C6 would have had reasonable prospects of

establishing that the joint liquidators would have reached an agreement with Deka limiting

its claim to a sum less than £28 million. However, the question he ought to have asked was

what were the prospects of the joint liquidators agreeing Deka's claim at £6.67 million? The

evidence did not support the inference that such an agreement would have been reached.

Mr Harrod conceded that it was no more than an assumption that Deka would have opted

to terminate the leases in the absence of settlement. A chartered surveyor who had

produced a report for the purposes of the section 212 proceedings gave evidence that what

an individual landlord would do in such circumstances would depend upon a variety of

circumstances, including how much it stood to gain in the liquidation if the leases were to

continue. In CH III's liquidation, there was a prospect of a substantial dividend. That may

well have informed Deka's view in the event that settlement with the joint liquidators was

not agreed.

[49]

There was no evidence to demonstrate whether Deka had secured a windfall as a

result of the compromise agreement. The absence of any evidence regarding the value of the

Ark represented a significant lacuna in C6's case. It meant that there was a lack of evidence

to suggest what Deka's attitude might have been to settlement had the joint liquidators

taken the desiderated steps. There was no clear evidence from which it could be inferred

that, in the absence of a compromise agreement, Deka would have sold the property when it

did for £47 million. The building was in a state of disrepair. The dilapidations claim

amounted to £1.2 million and it was unclear why the commercial judge had discounted that

claim entirely. Nor was there any clear evidence from which it could be inferred that Deka

would have agreed to a non-embarrassment clause; it was entirely possible that they would

not have done so. It was not within the joint liquidators' gift to insert such a clause into the

compromise agreement: it would have required negotiation. The commercial judge ought to

have determined that C6 had led no evidence demonstrating that there was a real and

substantial chance of Deka's claim being agreed at £6.67 million. The commercial judge

erred in failing to make a specific stand-alone loss of a chance assessment in relation to this

issue. The prospects of success had not been 100%.

Argument for C6

[50]

TLT's arguments regarding the Deka settlement obfuscated a straightforward issue:

Deka's claim was settled for approximately £23 million more than it was worth, irrespective

of the actual sums due or any actual loss, and without provision for the obvious opportunity

for mitigation of future losses. Had the agreement not been entered into, Deka would have

faced the choice of either obtaining vacant possession by terminating the leases, or allowing

the Ark to remain unoccupied for five years until the break option could be exercised. It

was likely that Deka would have terminated the leases. It was a matter of agreement that

the amount due to Deka under the leases at the point of sale of the Ark was £6,670,312.47.

Over 80% of Deka's claim of £38,276,271 comprised a future debt in the form of rent.

Evidence about the market value of the Ark was unnecessary and irrelevant for C6's claim.

It might have been open to the joint liquidators to put the valuation versus the sale price in

issue in the section 212 proceedings, but they had not done so. There was no onus on C6 to

disprove that possibility in the section 212 note, let alone in this action. As regards

dilapidations, Mr Harrod stated that no work was performed. There was no evidence led to

support a contractual or damages claim in relation to dilapidations.

Decision

[51]

The commercial judge observed (at paragraph 91) that in their answers to the

section 212 note, the joint liquidators did not aver that Deka would not have entered into the

compromise agreement; nor did they offer to prove what Deka would have done if the

agreement had not been entered into. They limited themselves to disputing the financial

position of CH III at the time of the agreement. There were no pleadings by the joint

liquidators in the section 212 proceedings that Deka would not have agreed to an anti-

embarrassment clause. In the proof in the present action TLT led no evidence to seek to

displace the inference drawn by C6 that Deka would have terminated the leases of the Ark

in order to sell with vacant possession or re-let to new tenants. The commercial judge found

C6's inference to be a reasonable one on the facts which it averred. The valuation of the Ark

was not put in issue in the note or in the present action. There was no evidence to establish

that Deka would have had a valid dilapidations claim.

[52]

In these circumstances there was a sufficient basis for the commercial judge's

conclusion that C6 had had reasonable prospects of success on this point. He did not

disregard the issue of the percentage chance of success, but addressed it as one of the facets

of his overall assessment of loss of a chance. For the reasons below there was no need for

him to deal with this as a separate and stand-alone loss of a chance.

Surplus

Argument for TLT

[53]

It was virtually certain that had Deka's claim in the liquidation been lower, Vivendi

would have offered a correspondingly lower figure in settlement of the proceedings against

them, and that that offer would have been accepted by the joint liquidators. The commercial

judge had made contradictory findings that the joint liquidators had had a nil or negligible

chance of resisting a finding that there would have been a surplus, and that C6 had only

reasonable prospects of success on this issue. He ought to have determined whether C6 had

a real and substantial chance and then, if so, evaluated that chance. As to the judge's point

that there were no pleadings about surplus, adjustment by the joint liquidators would have

been inevitable had the action not stalled at an early stage. Mr Pike's evidence was that

Vivendi were indemnifying the joint liquidators in the section 212 proceedings (in

pursuance of the obligation undertaken by them when settling the action against them) and

would have become more involved in the defence had the note not been dismissed. It was

overwhelmingly likely that the surplus argument would have been raised. The judge's

finding that the defence had not occurred to Mr Pike was not supported by the evidence.

[54]

The commercial judge was wrong to determine that he did not know what evidence

would have been given by Vivendi's representatives at a proof in the section 212

proceedings. The evidence of Messrs Caven and Pike respectively was unequivocal. What

was important was Vivendi's attitude towards C6. Vivendi believed that Messrs Harrod

and Richards had perpetrated a deceit upon them. Mr Pike's instructions were that under

no circumstances were Vivendi willing to pay more than the value of the creditors' claims.

Steps were taken to investigate the value of those claims and an offer was made to the joint

liquidators which represented the value of those claims together with costs. He had no

doubt that if Deka's claim had been agreed at a lower figure, Vivendi would have offered

correspondingly less. Although Mr Caven did not offer a definitive view as to whether he

would have accepted a lower offer, he acknowledged that a reduced offer in the region of

£25 million would have been a significant sum to risk on litigation, and that there would

have been difficulties with funding if the creditors had not wished to proceed. It would

have been impossible to ignore that the sum on offer would have been sufficient to meet

creditors' claims, although that would not have been the determining factor. Had he taken

account of all the relevant evidence, the commercial judge ought to have concluded that

there was no, or at best a negligible, chance of C6 establishing that if Deka's claim had been

settled at a lower amount, there would have been a surplus available to it.

Argument for C6

[55]

TLT's complex counterfactual argument had not featured in the section 212 note

despite extensive pre-action correspondence, detailed pleading, and obvious consideration

of the background by the joint liquidators' legal advisers. The commercial judge had been

correct to conclude that there was not a high prospect that such a line of defence would have

been added by adjustment, and to find that it had not occurred to Mr Pike. The argument

depended on proving how Vivendi and the joint liquidators would have approached

settlement had it not been achieved at the level ultimately agreed, but TLT had led no

evidence from Vivendi or the legal advisers directly involved, or as regards what the

outcome of the Vivendi proceedings would have been if they had not been settled. It

assumed that a lower settlement would have been driven entirely by the level of creditor

claims rather than reparation for the actions of Vivendi when stripping assets from CH III.

Such a settlement would have been a breach of duty to CH III's contributories. Mr Pike

stated that he had told Vivendi that they were very likely to lose the proceedings and should

therefore settle at the best level they could. The notion that they would have refused to

settle at the level at which they agreed to settle, based on their dislike of Mr Harrod, was

unrealistic. The judge had been entitled to find that the chances of the success of this line of

defence to the section 212 note were nil or negligible.

Decision

[56]

This chapter of the reclaiming motion raises once again the question whether there

has been a demonstrable failure by the commercial judge to consider relevant evidence such

that his decision cannot reasonably be explained or justified. In our opinion there has not.

He has given careful consideration to the evidence of Mr Pike and Mr Caven and found it to

be inconclusive. At paragraph 115 he noted that in the absence of evidence from Vivendi

personnel, the testimony of Mr Pike established no more than the negotiating position that

Vivendi were putting forward to their solicitor and to the joint liquidators, and did not

establish that Vivendi would not have departed from that position if it had been necessary

in order to achieve a settlement. The judge's finding that pleading this as a defence to the

section 212 note had not occurred to Mr Pike was based on evidence given by Mr Pike under

cross examination; when the matter was revisited in re-examination, all that he could say

was that if the note had not been dismissed he would have sought to involve Vivendi more

in the litigation and that he would have raised the point.

[57]

The commercial judge addressed the eventuality that the defence would have

occurred to Mr Pike and been incorporated into the joint liquidators' defence to the note. He

observed that no-one from Vivendi had given evidence in the proof before him and that

there was no reason to believe that it would have been any different in the section 212 note

proof. It was submitted on behalf of TLT that there was a distinction in that Vivendi were

funding the defence to the section 212 note, whereas they had no interest in the TLT proof.

That distinction is unconvincing. The unlawful financial assistance scheme had been

devised and implemented by Vivendi and their professional advisers PwC, and it is not

difficult to envisage a reluctance on the part of those directly involved to subject themselves

to examination in court. As the commercial judge pointed out, Vivendi had a direct interest

in the failure of the section 212 note, and a judge hearing a proof in those proceedings might

well have approached the evidence of Vivendi witnesses with caution. It may well be that

there were individuals within Vivendi who felt strongly that C6 should receive nothing from

any settlement, but the court agrees with the commercial judge's view that the Vivendi

personnel conducting the settlement negotiations would have required to consider the

strength of Vivendi's case, the costs of continuing with the litigation and the potential

downside if they lost, rather than proceeding on the basis of a personal grudge that some

may have held against Messrs Richards and Harrod.

[58]

As regards Mr Caven, the commercial judge narrated his evidence as being that a

lower settlement offer would still have been attractive if it enabled the joint liquidators to

pay all of the creditors in full, but he did not settle the Vivendi proceedings solely with

reference to creditor claims. Mr Caven had not, of course, had to address a situation in

which the Deka claim was settled for £6 million instead of £28 million. Had he had to do so,

his attitude to a settlement offer from Vivendi would, or at least ought, not to have been

driven by the personal feelings of Vivendi personnel. A liquidator in a winding up by the

court is an officer of the court (Millar (1890) 18R 179 LP, [1890] ScotLR 28_158 (Inglis) at 180). In terms of section

130(4) of the Insolvency Act 1986, an order for winding up a company operates in favour of

all the creditors and of all contributories of the company as if made on the joint petition of a

creditor and of a contributory. Section 143(1) provides that

"The functions of the liquidator of a company which is being wound up by the court

are to secure that the assets of the company are got in, realised and distributed to the

company's creditors and, if there is a surplus, to the persons entitled to it."

Against that statutory background, contributories have been described (St. Clair and

Drummond Young, The Law of Corporate Insolvency in Scotland (4th ed, 2011), para 4-46) as

"also being creditors (although subordinated creditors) of the company".

[59]

The argument presented appeared to assume that when considering settlement of the

Vivendi action, the joint liquidators had no obligation to consider the interests of anyone

other than the creditors. In the somewhat unusual situation here, where there was the

prospect of a surplus after the creditors had been paid in full, their duty as officers of the

court would have required them also to have regard to the interests of the company's

shareholder, C6. It follows that Vivendi could not have assumed that a settlement offer

which satisfied the creditors but not the contributories would have been sufficient to dispose

of the claim against them. For this reason too, the commercial judge was entitled to

conclude that the joint liquidators would have faced an uphill struggle in persuading the

judge in the section 212 note to refuse it on the ground that Vivendi would not have entered

into a settlement agreement which resulted in a surplus being available to C6.

[60]

TLT's argument in essence amounts to inviting this court to make its own assessment

of the evidence considered by the commercial judge. Grounds for so doing have not been

made out.

Court discretion not to make an order

Argument for TLT

[61]

The commercial judge erred in failing to consider the blameworthy actions of C6 and

Mr Harrod separately from the issue of Vivendi's conduct. C6 had lost nothing, and had

received £10 million from CH III. Having regard to those actions, it was entirely possible, if

not likely, that a judge in the section 212 proceedings would have declined to make an order

which benefited C6. It would have accorded with justice for the judge in those proceedings

to make an order which fully satisfied the creditors' statutory entitlement to interest on their

claims, but which left nothing for C6.

Argument for C6

[62]

The prospects of a court relieving an office holder of liability under section 212 are

always remote because ex hypothesi the office holder's conduct will have been unreasonable.

In any event, the commercial judge did not accept or make any findings that there was any

blameworthy conduct by either C6 or Mr Harrod such that C6 should be deprived of a

distribution.

Decision

[63]

The power conferred on the court by section 212(3) to require a person who has been

guilty of misfeasance or breach of fiduciary duty to contribute a sum to the company by way

of compensation has a long history, having been first enacted in similar terms as section 165

of the Companies Act 1862. Its purpose, as explained by Selwyn LJ in In re Mercantile

Trading Company (Stringer's Case) (1868-69) LR 4 Ch App 475 at 484-7, was to affirm the wide

power of the court, within winding up proceedings and without the need to raise separate

proceedings, to compel the repayment of moneys misapplied or the contribution of

compensation. In Revenue & Customs Commissioners v Holland [2011] Bus LR 111 (UK

Supreme Court), Lord Hope of Craighead (at paragraph 51) described the discretion

conferred on the court by section 212(3) as a discretion as to how much the person in

question should be ordered to pay, so as to do what is just in all the circumstances of the

case; it was not, however, so wide as to allow the court to decline to make any order at all.

In Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30, Dillon LJ observed, obiter,

at page 33 that it would be permissible for a delinquent director to submit that an order

should be tempered where, for example, full repayment would produce a windfall to third

parties, or where it would involve money going round in a circle or passing through the

hands of someone else whose position was equally tainted.

[64]

The court agrees with the commercial judge's conclusion that the circumstances

would not have justified the making of an order which excluded or restricted any benefit to

C6. TLT's argument depends once again upon an exaggeration of the blameworthiness of

C6 and its shareholder Mr Harrod, as opposed to Mr Richards. In so far as it is suggested

that C6 lost nothing, that would depend upon the manner in which the inter-company

indebtedness of C6 was ultimately resolved within the Vivendi group, which is too remote a

matter to affect the exercise of the court's discretion under section 212(3). There is no reason

why it would not have been just in all the circumstances for the judge in the section 212

proceedings to have ordered the joint liquidators to compensate CH III in full for their

breach of duty.

Loss of a chance percentage

Argument for TLT

[65]

There were six contingencies bearing upon the lost chance: (i) prescription;

(ii) funding; (iii) breach of duty; (iv) surplus; (v) prospects of limiting Deka's claim; and (vi)

court discretion. A principled approach required the commercial judge to assess the value

of the note claim (ie point (v)) before applying the percentage chances relative to the other

discrete contingencies. He failed to do so. He ought then to have treated the contingencies

as discrete and applied a mathematical approach to them. He erred in determining that the

issues which he did not assess as having a 100% chance of success, or thereby, were facets of

the same contingency. In relation to prescription, breach of duty and surplus, C6 had a nil

or negligible chance of success. If any of the contingencies had a nil or negligible chance, as

a matter of arithmetic, the overall lost chance was nil. Even if none of them had a nil chance

of success, a principled approach to evaluation of the chance would have produced an

overall loss of chance percentage much lower than 65%.

[66]

TLT and their senior counsel had been unaware of the problems which C6 faced in

proving their case against the joint liquidators. They were unaware in particular of Newey

J's judgment, or of the Vivendi surplus issue. They did not have Mr Richards' emails

relative to the prescription issue. Had the judge had regard to that evidence, it would have

been obvious that senior counsel's advice as to prospects of success in the section 212

proceedings was not a logical or useful cross-check. The observations of Simon Brown LJ in

Mount v Barker Austin (above) at 510 were not in point.

Argument for C6

[67]

TLT's criticisms were without substance. There was no rule of Scots law requiring a

judge to take the so-called mathematical approach of multiplying the chances of all the

issues together. Scots law avoided adopting such rigid rules of law in the assessment of

damages. There was no need for the judge to give elaborate reasons in reaching a

percentage; on the contrary his brevity in dealing with the issue was commendable.

Decision

[68]

The principle of awarding damages for loss of a chance in litigation was recognised

in Kyle v P&J Stormonth Darling WS 1993 SC 57, where the court held that the pursuer's claim

for damages consisting of the value of a lost right to proceed with an appeal was relevant for

proof. Since then, the courts in England and Wales have developed "a clear and common-

sense dividing line" between those matters which must be proved on balance of

probabilities and those which may be better assessed as the loss of a chance. The distinction,

enunciated in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 and

approved by the UK Supreme Court in Perry v Raleys Solicitors [2020] AC 352, Lord Briggs at

paragraph 20, is as follows:

"To the extent (if at all) that the question whether the client would have been better

off depends upon what the client would have done upon receipt of competent

advice, this must be proved by the claimant upon the balance of probabilities. To the

extent that the supposed beneficial outcome depends upon what others would have

done, this depends upon a loss of chance evaluation."

This approach has been adopted in Scotland (McCrindle Group Ltd v Maclay Murray & Spens

[2013] CSOH 72, Lord Hodge at paragraph 156), and was applied by the commercial judge

in the present case.

[69]

Where the lost chance includes more than one hurdle for the claimant to surmount,

the English courts have, in certain cases, regarded it as appropriate to adopt a

"mathematical" (or, as some might prefer, an arithmetical) approach, multiplying the

percentage prospects of each uncertain outcome to produce an overall loss of a chance

percentage. In Harrison v Bloom Camillin (Chancery Division [2001] PNLR 7 (or

[2000] Lloyd's Rep PN 89), an action for damages against a firm of solicitors who had failed to

serve a writ timeously, Neuberger J held that there were two uncertainties and that the value

of the claim should be reduced by 35% in respect of the first uncertainty, with the remaining

65% being reduced by a further 20% for the second uncertainty. In Joyce v Bowman Law Ltd

[2010] PNLR 413, a case concerning negligent conveyancing, Vos J identified four hurdles

that the claimant would have had to surmount, for which he applied percentages of 85%,

100%, 40% and 85% respectively, resulting in an overall assessment of a loss of a 29% chance.

Vos J did however recognise (at paragraph 55) that there would be cases where a less than

entirely mathematical approach would be appropriate, where the factors affecting the

cumulative future events were not truly independent of one another. An example of the

latter type of case is Hanif v Middleweeks [2000] Lloyd's Rep PN 920, in which each of the

uncertainties had the common factor of the claimant's credibility, and the Court of Appeal

rejected an argument that the judge had erred by failing to multiply percentages together.

[70]

In the present case, the commercial judge assessed C6's chances of success as 100%

on three of the alleged uncertainties, namely prescription, litigation funding, and the risk of

the court exercising its discretion by making no award. That left three issues relevant to

assessment of the loss of a chance percentage, namely C6's prospects of establishing the joint

liquidators' breach of duty, the likelihood of the joint liquidators reaching a settlement with

Deka at a lower figure, and the availability of a surplus for contributories. The commercial

judge rejected the application of a mathematical approach on the ground that these were not

independent contingencies but rather facets of the same contingency, ie whether C6 would

have succeeded on the substance of the section 212 note. The court is not persuaded that he

erred in doing so. Although there may be circumstances in which it would be appropriate to

adopt a mathematical approach to the loss of a chance, it is less obviously attractive in the

context of litigation risks. It is not, for example, the approach that would be adopted by

experienced counsel when advising a client on prospects of success or on the level at which

a settlement offer ought to be made or accepted. As the commercial judge observed, the

uncertainties in the present case would in practical terms have been regarded by the parties

to the section 212 note as facets of one question, namely whether C6 were likely to succeed.

The commercial judge has given reasons for selecting a broad brush figure of 65% and there

is no reason to disturb that assessment.

[71]

The commercial judge's use of the advice on prospects of success given to C6 at the

time of the section 212 note as a cross-check was criticised on the ground that neither senior

counsel nor TLT had been aware of the difficulties faced by C6 in proving its case against the

joint liquidators. This argument places undue weight on the terms of Newey J's judgment,

and assumes that (contrary to the commercial judge's assessment) senior counsel would

have advised that the surplus point was a major difficulty for C6. It was pointed out that

Mr Harrod had made TLT aware of the action by Vivendi against Messrs Bloch and

Richards in which Newey J's judgment had been delivered. In these circumstances the

commercial judge's use of the advice given to C6 as a cross-check was unexceptionable.

Quantum

Argument for TLT

[72]

The commercial judge erred in awarding interest from the date of citation on the sum

sued for in the second conclusion, being the taxed expenses awarded against C6 relative to

the Outer and Inner House proceedings. Though C6 was liable to pay that amount, it was a

matter of agreement in a joint minute that it had not paid it. Interest should not therefore

have been applied to that award.

Argument for C6

[73]

This was a new point which should not be entertained by the court. In any event

there was nothing unfair about the award. C6 was liable to pay interest on the taxed

amount from the date of decerniture against it until payment.

Decision

[74]

An award of expenses normally bears interest from the date of the Auditor's report

on taxation. There is nothing to suggest that that practice will be departed from here. The

Auditor's reports for Outer and Inner House expenses pre-date the date of citation. C6 will

be liable to pay interest to the joint liquidators when it pays the taxed expenses of the section

212 note, including those of the unsuccessful reclaiming motion, and is entitled to recover

such interest from the date of citation in this action.

C6's cross appeal

[75]

C6's cross appeal raises three discrete issues in relation to the commercial judge's

calculation of the sums due by TLT in terms of the conclusions in the summons. As with the

principal action it is convenient to address these individually in turn.

(i)

Conclusion 1: Sum on which interest due

[76]

The commercial judge held (paragraph 139) that if the section 212 note had been

successful, the assets of CH III would have been increased by around £22.3 million. Not all

of that sum would, however, have flowed through to C6. The creditors would have been

entitled to statutory interest, leaving a balance of £13.9 million. That sum would have been

reduced by costs of the liquidation, and the sum distributed to C6 would have been

£11,192,472. The commercial judge held that the judge in the section 212 note would have

awarded interest on the sum due to C6 at the rate of 4% per annum, amounting to around

£2,840,000. The sum to which the loss of a chance percentage was to be applied was

therefore £14,032,472.

[77]

On behalf of C6, it was submitted that the commercial judge erred in applying

judicial interest to the principal sum after the deductions for notional payments to other

creditors. On the hypothesis upon which he proceeded, any payments to other creditors

would have been made from the proceeds of the section 212 note. He ought logically to

have applied judicial interest to the full sum of £22.3 million due to CH III before making the

deduction in respect of payments to creditors.

[78]

In response, TLT submitted that the commercial judge had made no error. The sum

sought in the section 212 proceedings would have been paid by the joint liquidators to CH

III. It would have been apparent to the judge to whom the sum would then be distributed.

He would have been aware that the part payable to CH III's creditors would attract

statutory interest. If he had awarded interest on the whole £22.3 million he would have

been ordering payment of interest on interest. But since the creditors' entitlement was

limited to the statutory interest, the benefit of the interest on interest would have flowed

through as a windfall to C6. The section 212 judge would have wished to avoid such a

result, and the commercial judge was correct to apply judicial interest only to the sum

reaching C6.

[79]

The argument for TLT is to be preferred. The awarding of interest on any principal

sum is a matter for the discretion of the court. It is likely that the judge in the section 212

proceedings would have had regard to the fact that the creditors' entitlement to interest was

fixed and would not be further enhanced by an award of judicial interest on the sum being

paid to CH III. The judge would be likely to have concluded that C6 was appropriately and

adequately compensated for delay in payment by an award of interest at 4% per annum only

on that part of the sum payable to CH III which was flowing through to C6.

(ii)

Conclusion 1: Deduction of statutory interest from sum due to C6

[80]

Section 189(2) of the Insolvency Act 1986 provides that

"Any surplus remaining after the payment of the debts proved in a winding up shall,

before being applied for any other purpose, be applied in paying interest on those

debts in respect of the periods during which they have been outstanding since the

company went into liquidation."

The commercial judge accordingly considered it necessary to deduct the full amount of

statutory interest that would have been due on creditors' claims before determining the sum

that would have flowed through to C6. He noted at paragraph 139 of his opinion that the

creditors would have been entitled to statutory interest from the date of liquidation in June

2005 until distribution in December 2010, ie a period of 5.5 years. He accepted TLT's

calculation of the total amount of creditors' claims (on the hypothesis of reduction of Deka's

claim to £6.6 million) as £18,155,491, and their calculation of statutory interest at 15% (the

rate specified by rule 4.66 of the Insolvency (Scotland) Rules 1986, which were then

applicable) for 5.5 years as £14,978,280.

[81]

On behalf of C6 it was submitted that the commercial judge ought not to have made

any deduction in respect of statutory interest. There had been no evidence as to the

composition of the creditors' claims that had been accepted by the joint liquidators. It was a

matter of agreement that claims amounting to around £3.8 million had already been paid. It

was possible that those payments had been made in full and final settlement. By assuming

without a proper evidential basis that there was a deficit in the statutory interest paid to

creditors, the commercial judge had wrongfully reduced the amount payable to C6. He

ought at least to have reduced the amount to reflect uncertainty as to the amount due. An

argument that the largest debts ought not to have attracted statutory interest because they

were future debts was not insisted upon.

[82]

On behalf of TLT it was submitted that the commercial judge's approach had been

correct. The creditors had a statutory right to interest. Thereafter it was simply a question

of arithmetic. The ingredients of the calculation (duration of the period and total amount of

the claims) were uncontroversial. The total amount of creditors' claims and the amount of

statutory interest paid in December 2010 were contained in a report by the joint liquidators

incorporated into TLT's pleadings, and spoken to in evidence by Mr Caven. There was no

basis for the contention that there was insufficient evidence.

[83]

There was an evidential basis both for the fact that statutory interest over and above

the amount paid to creditors in December 2010 remained due, and also that the amount

remaining due, on the hypothesis that Deka's claim was reduced to £6.6 million, was in

accordance with the calculation adopted by the commercial judge in his opinion. C6's

submission that he erred in making this deduction when calculating the sum to which the

loss of a chance percentage was to be applied falls to be rejected.

(iii)

Conclusions 2 and 3: Application of loss of a chance percentage

[84]

The second and third conclusions were respectively for expenditure incurred on

meeting the expenses of the joint liquidators in the section 212 proceedings, and the

expenditure incurred by C6 on solicitors' and counsel's fees in the proceedings at first

instance and on appeal against the joint liquidators. At paragraphs 149 and 150 of his

opinion, the commercial judge applied the 65% loss of a chance percentage to each of these

sums and, with some rounding, granted decree for payment of £148,500 and £113,200

respectively.

[85]

It was submitted on behalf of C6 that the percentage reduction ought not to have

been applied to these sums, which were costs actually incurred and did not relate to the loss

of a chance. No distinction ought to be drawn between proceedings at first instance and on

appeal: the entire cost resulted from TLT's negligence.

[86]

On behalf of TLT it was conceded that the sums awarded in respect of C6's liability

for expenses (both their own and those of the joint liquidators) in the Inner House and in an

unsuccessful application for leave to appeal to the UK Supreme Court ought not to have

been reduced by the loss of a chance percentage. It was however maintained that the

expenses incurred at first instance had been correctly reduced, as they would have been

incurred in any event and should be treated as part of the lost chance.

[87]

There is no basis for distinguishing between first instance and appellate expenses.

Neither depends upon any uncertainty as to what others would have done; both are part of

the consequential loss flowing from TLT's negligence. The commercial judge erred in

applying the loss of a chance percentage to the sums that he would otherwise have held to

be payable. The sums for which decree ought to have been granted in terms of the second

and third conclusions were accordingly £228,435.31 and £174,158.47 respectively.

Disposal

[88]

The reclaiming motion is refused. The cross appeal is allowed to the extent of

finding the reclaimers liable to pay the respondent the sum of £228,435.31 in terms of the

second conclusion, and the sum of £174,158.47 in terms of the third conclusion, with interest

on each of the said sums as specified in the commercial judge's interlocutor dated 5 May

2023. Quoad ultra the cross appeal is refused.

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