Disclosure and Inspection in Insolvency Proceedings

Author: Simon Hill
In: Article Published: Wednesday 21 February 2018

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When it comes to the need for Disclosure and Inspection, one can draw obvious similarities between insolvency proceedings and any other ordinary civil proceedings. Parties seeking determination by the Court of contentious issues, will want the Court to view the relevant documentary material as part of that determination process, whichever of the parties initially had possession or control of that documentation. Where there is an initial imbalance in the documentation available to the parties, the law will want to rectify that asymmetry, to place the parties on an equal footing, at least in respect to referring to relevant documents. On the face of it therefore, insolvency proceedings should require, as a preparation stage, Disclosure and Inspection, just like any other ordinary civil proceedings. However, while there are undoubtedly similarities, the nature of insolvency proceedings, and the categories of parties involved, means that disclosure and inspection are not automatic. It is not usual practice to have CPR r.31 disclosure and inspection orders in insolvency proceedings.

Disclosure and Inspection

Disclosure and Inspection are crucial to ordinary civil litigation. Invariably in life, there will be an imbalance in the level of documents in the possession or control of each of the parties to litigation. One may have generated most of the documents and so kept copies, or one may just be more diligent at retaining copies - however the imbalance has come about, the process of Disclosure and Inspection remedies this asymmetry. Each party declares what material documents they have (‘Disclosure’; typically on an N265 form), and each will supply to the other, copies of documents the other party requests (‘Inspection’)(subject to rules of privilege etc.). After the process has been undertaken, each party should have the same documents. Going forward, as least in respect to access to documents, the parties will have a level playing field.

Governing Law - Insolvency Rules 2016, r.12.27

The CPR rules on Disclosure and Inspection are applicable to insolvency proceedings in court. They are made so through a gateway provision in the Insolvency Rules 2016, as they were in the Insolvency Rules 1986. As explained in Highberry Ltd. v Colt Telecom Group Plc [2003] 1 BCLC 290 (‘Highberry’), by Lawrence Collins J, it is r.7.60 (now r.12.27), not r.7.51[1], which acts as the gateway for incorporating CPR rules on Disclosure and cross-examination into insolvency proceedings (note the hearing of insolvency proceedings will normally be on the basis of written evidence). At paragraph 33 he said:

“Consequently in my judgment the governing provisions are the 1986 Rules which give the court power to order disclosure and cross-examination on the application of any party to insolvency proceedings. The equivalent CPR provisions are not incorporated by reference through r 7.51(1) of the 1986 Rules, because the CPR and the practice and procedure of the High Court apply to insolvency proceedings "except so far as inconsistent with these Rules," and the 1986 Rules make express provision for these matters.’

It is necessary then to turn to this gateway provision, since this empowers the Court to make Disclosure and Inspection. Insolvency Rules 2016, r.12.27 is entitled ‘Further information and disclosure’, and makes provision for the Court to make order in accordance with CPR Part 31, as well as Part 18 Further Information (which shall be quoted below, for completeness). R.12.27 reads:

‘(1) A party to insolvency proceedings in court may apply to court for an order—

(a) that in accordance with CPR Part 18  (further information) another party—

(i) clarify a matter that is in dispute in the proceedings, or

(ii) give additional information in relation to such a matter; or

(b) for disclosure from any person in accordance with CPR Part 31 (disclosure and inspection of documents)

(2) An application under this rule may be made without notice to any other party.’

Although the wording is slightly different as between r.12.17 and the former rule, r.7.60, substantively they are the same. This is important because, in addition to readers perhaps still getting used to the transition from the Insolvency Rules 1986 to Insolvency Rules 2016, all of the currently reported case law relates to r.7.60, rather than its new iteration r.12.27. The former r.7.60 read as follows: 

‘(1) Any party to insolvency proceedings may apply to the court for an order–

(a) that any other party

(i) clarify any matter which is in dispute in the proceedings, or

(ii) give additional information in relation to any such matter; in accordance with CPR Part 18 (further information); or

(b) to obtain disclosure from any other party in accordance with CPR Part 31 (disclosure and inspection of documents).

(2) An application under this Rule may be made without notice being served on any other party.’

Given they are substantively the same rule, the r.7.60 case law should apply equally to the r.12.27 rule.

Willingness of the Court to Exercise its Discretion

R.12.27 grants the Court a discretion whether or not to order Disclosure and Inspection.  Mr Robin Hollington QC sitting as a Deputy Judge of the High Court in Re Angel Group Ltd (also known as Davey v Croxen (Administrator)) [2015] EWHC 2372 (‘Re Angel Group’) confirmed this discretion, before going on to note that the Court takes an atypical approach to Disclosure and Inspection in respect to insolvency proceedings. He said, at paragraphs 9 and 10:

‘As to authority as to how I should exercise the undoubted discretion that I have, it is clear that I do not just proceed on the basis that this is a common-or-garden application under the CPR in ordinary proceedings. These proceedings are special, so to speak….’

The Court’s willingness to exercise that discretion in insolvency proceedings in court, depends heavily on the nature of the proceedings, as well as the issues and order sought, considered in light of the overriding objective. This was made clear by Lawrence Collins J in Highberry, when he said, at paragraph 33:

'Whether such an order will be made will depend upon the nature of the proceedings and the nature of the disputed questions. Any application for such an order must be viewed in the light of the overriding objective laid down by the CPR, which is not, of course, not inconsistent with the 1986 Rules and is incorporated by reference through 7.51(1).'

These statements by Lawrence Collins J were adopted in Re Angel Group, paragraph 10.

Whether the discretion will be exercised, will depend on whether it is desirable in the interests of justice so to order - whether it is just. This principle was recognized in Re Primlaks (UK) Ltd (No.2) [1990] BCLC 234 (‘Primlaks’), a decision of Harman J, where he said, at 239F to H (substituting ‘Disclosure’ for the old reference to ‘discovery’):

“The ordinary rule is that if application is made, even in proceedings brought by a regulating summons, and the court is satisfied that it is desirable in the interests of justice, then discovery should be ordered. That proposition in my view must apply also to applications under r 7.60 of the 1986 rules which says that any party may with the leave of the court obtain discovery. The same principles must, in my view, apply to a rule providing for obtaining the leave of the court and a rule that the court may make such order for discovery as it seems just, as under Ord 24, r 4. I cannot believe that the difference of wording in the two rules ought to be held to lead to differing burdens.’

Though in general terms Disclosure and Inspection should be ordered where it could be proper to so order, the Court will not do so were it would be unduly burdensome, oppressive or not necessary for the disposal of the issue, or issues, before the Court. This principle was recognized by Harman J in Primlaks; he said, at 239G:

Thus, once one sees that that is an issue to which discovery could properly go, in general terms discovery will be ordered unless it is unduly burdensome, oppressive or not necessary for the disposal of the issue before the court.”

Theses principles from Primlaks, were adopted by the Deputy Judge in Re Angel Group, paragraph 9. The upshot from this, is that the Court will ask itself, as part of its analysis, for each document sought, is it necessary for the determination of the matter that it be disclosed/inspected. For each document, would Disclosure and Inspection be oppressive or unduly burdensome to provide, including cumulatively. What is not necessary, is excessive and unreasonable, and should not be required to be disclosed. As will be apparent, applications for partial (or specific) Disclosure and Inspection, are more likely to meet this exacting criteria, than applications for full and general orders for Disclosure and Inspection.

The Nature of the Proceedings

Although touched on earlier, it would be helpful briefly to return to the nature of the proceedings in a little more detail, since the Court is very reluctant to grant disclosure in certain categories of insolvency proceedings in court. Two areas are expressed addressed in the reported authorities.

In Highberry, Lawrence Collins J noted, at paragraph 28, that ‘…an order for disclosure is unprecedented in the context of a contested administration petition.’ Further, he said, at 35:

“It seems to be plain that the nature and purposes of an application for an administration order, the nature of the enquiry by the court, and the usual urgency of the application, make it inevitable that only very exceptional circumstances will justify an order for disclosure or cross-examination in proceedings for an administration order.”

For winding up petitions proceedings, Lawrence Collins J said, at paragraph 29 of Highberry:

‘As long ago as 1883 Chitty J. said that he had had considerable experience of winding up petitions, and he had never heard of an order for general disclosure of documents: Re Hoover Hill Gold Mining Co (1883) SJ 434. He said: "the late Master of the Rolls had always emphatically refused such applications, saying that he was not going to assist a man to wreck a company by ransacking its documents.’

A wider analysis of the various categories of cases and the willingness of the Court to order disclosure (and/or cross-examination), was given by Highberry, at paragraphs 30 and 31:

‘Prior to the CPR orders for discovery and/or cross-examination were been made in proceedings under the Companies Act 1985: see, e.g Re Lifecare International plc [1990] BCLC 222 (application for order under section 428 for transfer of shares) and contrast Re Cloverbay Ltd (No. 2) [1990] BCLC 449. Orders for disclosure and cross-examination have also been made under the Insolvency Act 1986: Re Primlaks (UK) Ltd (No. 2) [1990] BCLC 234: application to set aside voluntary arrangement. But orders for disclosure have been refused because they were not necessary for fairly disposing of the matter: Re Polly Peck International plc [1993] BCC 886 (Directors Disqualification Act 1986, s. 7(2); Re Bank of Credit and Commerce International SA (No. 4) [1994] 1 BCLC 419 (application under Insolvency Act 1986, s. 130 for leave to commence proceedings).

There are some cases where the resolution of a factual dispute (e.g. as to the honesty of a director) plainly calls for cross-examination: see Re Lo-Line Electric Motors Ltd [1988] Ch 477, 487. So also there may also be extremely rare cases (as an exception to the general rule that a winding up petition on a disputed debt will be dismissed) where the existence of the debt may be resolved in the winding-up proceedings after cross-examination: Re Claybridge Shipping Co. [1997] 1 BCLC 572, 579, per Oliver LJ.’

Leave Failure to Disclose to Found Appropriate Adverse Inferences

An alternative approach is availlable to the Court. The Court could adopt the approach taken in Re Angel Group, where both sides made claims against the other and sought disclosure orders – on one, the Court in Re Angel Group made no order and left it to the trial judge to make what adverse inferences he chose to make from any failure to give full and frank disclosure, and on the other, the Court in Re Angel Group adjourned the application to the trial judge on the assurance that the relevant material would be brought to court by the relevant parties, to be available to produce immediately if so ordered.[2]

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW 

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

[1] The now obsolete r.7.51 was entitled ‘Principal court rules and practice to apply’, and r.7.51(1) read ‘The CPR, the practice and procedure of the High Court and of the county court (including any practice direction) apply to insolvency proceedings in the High Court and county court as the case may be, in either case with any necessary modifications, except so far as inconsistent with the Rules.’

[2] Re Angel Group related to two groups of companies in administration. The companies in question had been essentially owned and run by one person, the first applicant (a second applicant company was owed by the first applicant). The applicants had applied to have the respondent administrators removed from office, and have them replaced with an independent liquidator. That application was set down for a 7 days trial. The respondent administrators in turn were investigating misfeasance allegations against the first applicant. In essence, each accused the other of acting to stifle the other one. The Judge has two applications for specific disclosure before him, the first by the respondent administrators, seeking from the applicants disclosure of: (1) advice received from two specified firms of accountants (all that advice is said to refer to the declaration and payment of dividends), and (2) further information by way of a witness statement as to the particulars of oral advice given by those firms of accountants. The second was issued by the applicants as a free standing cross-application for disclosure.

On the respondents’ application for disclosure, though the 7 day trial to remove the respondents as administrators, was not also for determination of the misfeasance claims/material, that material would still be relevant. The trial court ‘...will have to decide what weight to attach in the exercise of its discretion to the respondents' allegation that the removal application was issued so as to stifle the investigation of that claim. The court will also have to consider the question, as I have said, of what interest the applicants have in the relief they seek and of the legitimacy of that interest.’

Discussing his approach and rationale, the Deputy Judge said, at paragraphs 47 to 51:

‘I … have to ask myself, do I need to order disclosure on this issue when I could alternatively leave it to the discretion of the trial judge to determine what adverse inferences may fairly be drawn from the failure of the applicants to give disclosure on this issue. I also have to ask myself, if I were not satisfied that this alternative course was the best one, to what extent should I order disclosure having regard to, firstly, the fact that the trial judge will not be determining whether misfeasance has occurred and it is not suggested by the respondents that general disclosure should be ordered on this issue; secondly, any oppression of the applicants; thirdly, the applicants' own case that this issue has only been raised by the respondents so as to divert attention away from their own failings, and, fourthly, and importantly, the evident desire of Mrs. Justice Rose, when giving directions, to limit the expense and time taken up in this application and the issues that needed to be addressed by the trial judge. So she did not make any order for general disclosure and she made no order for the cross-examination of any witnesses.

As I see it, my job is to make an order which will best enable the trial judge to reach a fair result at the trial without undue cost to the parties. Doing the best I can, in my judgment, the best course is to leave it to the trial judge to draw such inferences adverse to the applicants as he sees fit from their failure to give full and frank disclosure of what they know in relation to the misfeasances alleged against them and of the documents which cast light upon it which either are, or have been, in their possession. He may well form the view that the applicants in this case, asking as they do the court to exercise its discretion in their favour so as to remove the respondents, can reasonably be expected to make full and frank disclosure to the court on the issues raised against them by the respondents. I emphasise, however, that it is ultimately a matter for the trial judge and he will no doubt exercise his discretion having regard to the contents of my judgment.

This is a classic type of case, in my judgment, where the court can avoid the cost and expense of disclosure and cross-examination by adopting the alternative course of drawing inferences which are appropriate from any failure on the part of any party to be full and frank with the court. It seems to me that this is precisely what Mrs. Justice Rose had in mind at the outset.

I do not think it would be right to make a full and general order for disclosure against the applicants and no such order is sought. In my judgment, making a partial order for disclosure, even of the documents previously offered by the applicants to be disclosed, seems to me to be likely to do more harm than good. It may be taken to suggest that this is the limit of their disclosure obligations and it also may prove to be inadequate and lead to yet further evidence and dispute about its scope and as to the applicants' obligations as to searching and the like.

So I do not determine any issue as to privilege. Such issues can be raised, as necessary, before the trial judge. So I make no order on the respondents' application for disclosure.

For completeness, the applicant’s disclosure application had partially been fulfilled by voluntary disclosure by the respondent administrators. As to the Disclosure order sought in relation to costs, the Deputy Judge held, at paragraph 52, that:

‘…the right thing to do here is to adjourn this to the trial judge on the basis of the assurances given by both parties at the hearing before me yesterday to the effect that if the judge were minded to order the disclosure sought by the applicants, and also if he were minded at the same time to order disclosure of costs as against the respondents, then the parties would have the material information with them at the beginning of the trial so that it could be produced immediately if the judge thought it should be disclosed.’