McTear & Anor v Engelhard & Ors

Factual and Procedural Background

This case concerns the application of principles for relief from sanctions following late service of witness statements and late disclosure of documents in litigation involving claims assigned from a company subject to a Company Voluntary Arrangement ("CVA"). The claimants, originally administrators and supervisors of the CVA company (referred to as "Company A"), sought recovery of a sum of £412,739.17 allegedly loaned by Company A to another related company ("Company B"). The defendants (referred to as "the appellants") disputed the claim, asserting that the sum represented management charges rather than a loan, and raised defences including estoppel and breach of fiduciary duty by directors of Company A.

The procedural history includes multiple orders for disclosure and witness statement exchanges, with the defendants serving witness statements late and disclosing newly discovered documents shortly before trial. The defendants applied for relief from sanctions and extensions of time related to these late disclosures and amendments to their defence. The trial and several judgments followed, addressing these procedural issues and the substantive claims.

Legal Issues Presented

1. Whether the defendants should be granted relief from sanctions for the late service of witness statements and late disclosure of documents.
2. Whether the defendants were properly excluded from calling witnesses due to their procedural breaches.
3. Whether the judge erred in refusing permission to re-amend the defence shortly before trial.
4. The substantive legal issues concerning the nature of the sum claimed (loan versus management charges), breach of fiduciary duties, and estoppel.

Arguments of the Parties

Appellants' Arguments

• The judge wrongly applied the precedent from Mitchell, leading to denial of a fair trial.
• The late service of witness statements was a trivial breach and should not have been treated as serious.
• The judge should have allowed witnesses to give evidence without reference to the new documents or allowed some witnesses to give evidence.
• The solicitor's bereavement justified some delay and the judge failed to properly consider this.
• The exclusion of defendants' evidence affected the substantive findings, particularly regarding an independent auditor’s evidence.
• The judge erred in refusing to admit new documents and in refusing permission to amend the defence to plead set-offs and true account balances.
• The judge wrongly found no estoppel as there were representations and dealings relevant to the CVA proposal.

Appellees' Arguments

• The exclusion of defendants' evidence was justified by deliberate procedural breaches.
• The late disclosure and witness statements disrupted the trial and justified refusal of relief from sanctions.
• The substantive claims were supported by accounting records and fiduciary duty breaches, unaffected by excluded evidence.
• The defendants’ late amendments raised new complex issues needing time to consider, justifying refusal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Mitchell v. News Group Newspapers Ltd [2013] EWCA Civ 1537	Guidance on relief from sanctions and procedural compliance.	The judge applied Mitchell principles but the appellate court found the application overly harsh and unjustified exclusion of evidence.
Denton v. TH White Ltd [2014] EWCA Civ 906	Refined the three-stage test for relief from sanctions, emphasizing proportionality and efficient litigation.	The court clarified that the judge decided issues prior to Denton and should have applied Denton’s approach, leading to allowance of relief from sanctions.
Utilise TDS Ltd v. Davies & others	Consideration of seriousness and significance of breaches in relief from sanctions applications.	Used to illustrate that trivial breaches should not be compounded by unrelated breaches at early stages of analysis.

Court's Reasoning and Analysis

The court analyzed the defendants' late service of witness statements and late disclosure of documents as connected but distinct issues. It found that the defendants’ delay in serving witness statements (50 minutes late) was trivial and not part of a deliberate plan to subvert the litigation process, though the method of disclosing new documents as exhibits to witness statements was inappropriate.

The court emphasized that the defendants should have notified the claimants immediately upon discovering new documents, which would have avoided escalating tensions and suspicion. The aggressive correspondence between solicitors exacerbated the situation but did not justify excluding evidence.

Regarding the new documents, the court found them largely confirmatory of existing records and of limited relevance, and that the claimants could have dealt with them fairly at trial without adjournment. The judge’s inference of impropriety was unjustified.

The court held that the judge erred in treating the applications for relief from sanctions relating to witness statements and disclosure as inextricably linked and failing to consider them separately. Had the judge properly applied the three-stage Denton test, relief from sanctions should have been granted, allowing the defendants to call their witnesses and rely on the new documents.

On the substantive issues, the court noted that the original judge found no adequate pleading or evidence supporting the defendants’ claim that the sum represented management charges rather than a loan, and upheld findings of breach of fiduciary duty and improper exercise of management power. However, the appellate court concluded that these findings could not stand without considering the excluded evidence, necessitating a retrial.

The court declined to decide on the permission to re-amend the defence, leaving it to the trial judge to manage at retrial.

Holding and Implications

The appeal is allowed. The court reversed the decision excluding the defendants' witnesses and relying on the new documents. The defendants are permitted to call their witnesses whose statements were served late, and to rely on the newly disclosed documents.

The court ordered a retrial of all substantive issues before a new judge. The question of whether the defendants should be permitted to re-amend their defence is to be decided as a case management matter at the retrial stage.

This decision directly affects the parties by reinstating the defendants' ability to present their full case. No new legal precedent was established beyond clarifying the proper application of relief from sanctions principles in the context of late disclosure and witness statements.