Smailes & Anor v McNally & Anor

Factual and Procedural Background

The appeal concerns whether the claimant joint liquidators of Company A complied with an Unless Order made by Judge Henderson relating to disclosure in litigation against two former officers of the company. The underlying claim alleges fraudulent trading and trading while insolvent under the Insolvency Act 1986, centering on an alleged tax underpayment of approximately £45 million for events occurring between 2003 and 2005. The action commenced in May 2011.

Initial directions set disclosure deadlines and trial dates, but the timetable was repeatedly delayed. The former officers complied with disclosure deadlines, but the liquidators initially served an overly broad disclosure list that did not select relevant documents but listed all documents by storage boxes, failing to comply with the Civil Procedure Rules (CPR).

The former officers sought an Unless Order requiring the liquidators to conduct a reasonable search and provide a proper list of documents, including an affidavit explaining the search and document custody. Despite initial denials that relevant documents had been withheld, subsequent searches were conducted without informing the former officers' solicitors. The parties agreed on new directions, but the liquidators’ disclosure remained deficient, prompting the court to issue an Unless Order on 7 June 2013 threatening striking out if compliance was not met.

The Unless Order required the liquidators to conduct a search compliant with CPR 31.7 and provide a compliant list of documents by 28 June 2013. This was the sixth disclosure deadline set. The liquidators’ disclosure process involved scanning and uploading documents to an electronic database, but critically failed to include highly relevant documents known as "scripts"—weekly payroll reports central to the tax underpayment claim. These scripts were mistakenly excluded from the electronic disclosure and not listed, despite their acknowledged importance and promises to disclose them.

Upon challenge, the scripts were eventually located in the liquidators’ offices and uploaded, but only after the disclosure deadline had passed. A supplemental disclosure list revealed thousands of additional documents. The former officers contended this late disclosure evidenced a failure to conduct a reasonable search as required by the Unless Order.

Legal Issues Presented

1. Whether the claimant joint liquidators complied with the Unless Order requiring a reasonable search and proper disclosure of relevant documents.
2. Whether the omission of the "scripts" documents constituted a failure to comply with the Unless Order.
3. Whether the judge below erred in concluding that the liquidators had complied with the Unless Order despite the known omission.

Arguments of the Parties

Appellants' Arguments

• The liquidators failed to carry out a reasonable search as required by CPR Part 31.7 because they did not include the "scripts" in the disclosure list or upload them to the electronic database.
• The omission of the scripts was not due to bad faith but amounted to a clear breach of the Unless Order since the existence and relevance of the scripts was known and they had been promised to be disclosed.
• The disclosure statement certifying compliance was not conclusive given the admitted non-disclosure of relevant documents.
• The failure to include the scripts could not be excused by reliance on copies made for litigation purposes, as these were the only copies available.
• The judge below erred in inferring compliance and failing to apply the relevant CPR factors fully and correctly.

Appellees' Arguments

• The search and disclosure exercise was extensive, conducted in good faith, and proportionate to the case complexity and volume of documents.
• The omission of the scripts and some other documents was not due to bad faith but inadvertence, and did not justify striking out.
• The methodology for disclosure had been explained in detail and agreed with the former officers’ solicitors.
• The copies of the scripts held were not "original" copies and therefore not required to be disclosed separately.
• Any further documents disclosed later did not necessarily indicate non-compliance with the Unless Order.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Nochia Corporation v Argos Ltd [2007] EWCA Civ 741	Massive over-disclosure risks overlooking important documents.	Used to highlight the risk posed by the liquidators' initial indiscriminate document listing.
Digicel (St Lucia) Ltd v Cable & Wireless [2008] EWHC 2522	Reasonableness of search; no requirement to leave no stone unturned.	Distinguished as applicable to vast electronic disclosure without identified target documents; court held it did not apply where documents' existence and relevance were known.
Realkredit Denmark AS v York Montague Ltd [1999] CPLR 272	Inference may establish failure to conduct reasonable search if evidence conflicts.	Distinguished as involving disputes over existence of documents; not applicable where relevant documents' existence and relevance were admitted but not disclosed.
Morgans v Needham (28 Oct 1999)	Duty to decide what documents are relevant and disclose them; Unless Order must be clear.	Applied to emphasize the liquidators' duty to disclose the scripts and the inadequacy of the order enforcement if unclear.
Frankenstein and Gavin's House-to-House Cycling Cleaning and Insurance Company [1897] 2 QB 62	Disclosure statement conclusive unless contradicted by surrounding circumstances.	Rejected as the liquidators' admission and surrounding facts showed the disclosure statement was not conclusive.
Denton and TH White Ltd [2014] EWCA Civ 906	Sanctions and relief from sanctions; importance of compliance and co-operation.	Referenced regarding the context of compliance and co-operation, noting the former officers did not act opportunistically.

Court's Reasoning and Analysis

The court focused on whether the liquidators complied with the Unless Order requiring a reasonable search and proper disclosure. It identified that the "scripts" were critical documents, known to be relevant and promised to be disclosed, yet were omitted from the electronic disclosure and the list served by the deadline. The failure to check that these documents had been delivered to the external scanning provider and uploaded was a fundamental oversight.

The court distinguished this case from others involving disputes over document existence or relevance, emphasizing that here the existence and relevance of the scripts were admitted. The liquidators' failure to include them constituted a breach of the Unless Order.

The judge below had accepted that the search was reasonable and conducted in good faith, but the appellate court found that good faith does not excuse non-compliance with the order. The judge erred by relying on inferences and irrelevant factors such as prior explanations of methodology, which were moot if the database was incomplete.

The court held that compliance with disclosure orders is a question of interpretation and application of the rules, not a matter of discretion. The omission of the scripts was a clear failure to comply with the order.

The court also rejected the argument that the disclosure statement was conclusive, given the admitted non-disclosure of relevant documents.

Holding and Implications

The court ALLOWED THE APPEAL, holding that the claimant joint liquidators did not comply with the Unless Order by failing to disclose the "scripts" documents as required.

As a consequence, the Unless Order takes effect according to its terms, resulting in the striking out of the liquidators' claims without further order, and the former officers are entitled to enter judgment for their costs, subject to detailed assessment if not agreed.

The court ordered that the appellants are entitled to their costs of the appeal and set aside previous orders for interim payments made by the lower court, ordering repayment with interest.

The court declined to stay its orders despite an offer by the liquidators to apply for relief from sanctions, noting that the proceedings have reached final determination.

No new legal precedent was established beyond the application of existing principles concerning disclosure obligations and compliance with Unless Orders.