11 November 2015
In the case of David T Morrison & Co Ltd v ICL Plastics Ltd, the Supreme Court ruled that the prescriptive clock starts ticking when a creditor becomes aware of the occurrence of loss, regardless of whether that loss was known to have been cause by negligence. In the recent case of Heather Capital LLP v Burness Paull & Williamson LLP, in one of only a handful of decisions since ICL, the Court of Session considered the application of section 6(4) and section 11(3) of the Prescription and Limitation (Scotland) Act 1973.
Heather Capital Limited (in liquidation) was a hedge fund. It has made headlines on several occasions over the last year or so in relation to attempts by the liquidator to recoup very significant losses from the various professional advisers who acted on behalf of the hedge fund. The Court has now issued a ruling in the hedge fund’s case against Burness Paull & Williamson LLP, solicitors who acted on its behalf.
The action was concerned with losses said to have been sustained in April and July 2006, arising from loans made to various shelf companies. The solicitors acted for the company in drafting loan agreements and in making the loans. In 2007, the company’s auditors raised concerns about the loans, which appeared in the company’s accounts. It later transpired that the loan funds had been paid to various third parties on the instructions of one of the directors. The Court action against the solicitors was raised in November 2014. The Pursuers’ position was that the loss was not known until April 2012, when, in response to questions asked of them by the liquidator, the solicitors confirmed the destination of the loan funds.
The Court accepted the argument advanced by the solicitors that by the end of 2007, all of the directors of the Pursuers had received an auditors’ report which flagged up the possibility of fraud and in those circumstances, the Pursuers had failed to explain to the Court why it could not with reasonable diligence have discovered the loss earlier than it did. The Court emphasised that s11(3) of the Act is not concerned with the question of whether a Pursuer should have been aware of his loss at an earlier stage, but whether he could have been aware of it.
The Court’s decision in that regard left the Pursuers to hang their hat on arguments under s.6(4) of the Act. They claimed that they were erroneously induced to refrain from making a claim by the solicitors’ own conduct, which was said to suspend the prescriptive clock from ticking. The “error” for the purposes of s.6 (4) was, the Pursuers said, induced by the solicitors failing to tell them that the funds had been sent to a third party on the instructions of one of the directors. The Pursuers argued that the solicitors were under a continuing duty to tell them about the destination of the funds.
The Court held that the Pursuers were confusing the cause of the action i.e. the error in sending funds to a third party, with “error” for the purposes of stopping the prescriptive clock ticking. In effect, the Pursuers argued that until the solicitors told them about the error in sending the funds to a third party, the prescriptive period would not begin to run. The Court emphasised that there is an important distinction between the error which gives rise to the claim and the error which induces a creditor to refrain from making a claim. A creditor who wishes to rely on s.6(4) to postpone the beginning of the prescriptive period needs to be able to point to a positive act which induced him to refrain from making his claim.
The Court also rejected a secondary argument that despite no longer being instructed to act for the Pursuers, the solicitors were under a continuing duty to warn them that they might have a claim. It was argued on behalf of the solicitors that this would prevent the prescriptive clock ever beginning to tick in a case where a party denied liability. The Court observed that such a result would be “absurd”.
In this case, the Court reminds us that for a professional to keep silent is not enough to induce error. The Pursuers were never told at any time that the funds had in fact been transferred to the shelf companies.
For the solicitors involved, and indeed for many other professionals, the judgment no doubt brings welcome clarification that silence as to the right to make a claim will not in itself be enough to prevent the prescriptive period starting in a situation where the client knows (or could have reasonable diligence have known) that he has suffered a loss.
For the liquidator involved here, and for other claimants, the case is a salutary reminder that in a post-ICL era, the statutory provisions set a high bar-the start of the prescriptive period will only be postponed by a positive act which induces error or if a claimant can show that he could not have been aware of his loss earlier.