Liquidator allowed a proof in multi-million pound claims against legal firms over collapse of hedge fund

The Inner House of the Court of Session ruled that the averments of the pursuer Paul Duffy, as liquidator of Heather Capital Ltd (HC) in its action against Levy & McRae (LM) and Burness Paull (BP) were “sufficient to entitle” HC to a proof in each case.

Lady Paton, Lady Clark of Calton and Lord Glennie heard that the two actions were raised in 2014, but the solicitors’ firms claimed that, on a proper construction of the liquidator’s own pleadings and without the need for evidence, it could be seen that certain obligations had been extinguished by the passage of time in terms of the Prescription and Limitation (Scotland) Act 1973.

Those submissions were successful in the BP action following a debate before Lord Tyre, and partially successful in the LM action after a debate before Lord Doherty.

The liquidator appealed and the firms cross-appealed, but the Inner House held that a proof before answer should be allowed in each case with all pleas standing and remitted the cases to the Outer House.

The opinion focused upon obligations which are subject to the five-year prescriptive period and the effect on the running of that period of sections 11(3) and 6(4) of the 1973 Act.

HC, which was incorporated in the Isle of Man in 2005, had received investments exceeding $400 million prior to its liquidation in 2010.

In 2012, the liquidator was able to confirm that millions of HC’s funds were missing in circumstances suggestive of a “deliberate fraud” by two HC executive directors Gregory King and Santo Volpe, using a “Ponzi” scheme whereby apparent repayments to HC were in fact funded in a circular way by HC itself.

The liquidator raised an action against LM, contending that the company was defrauded of about £90 million and seeking to recover the sum of £28.412 million which the firm was said to have “dishonestly assisted” Mr King in diverting from HC.

The liquidator also raised an action against BP seeking to recover £7.3m on the basis that a then partner in the firm had dishonestly assisted Mr King in diverting from HC in “breach of his fiduciary duties”.

Each summons was met with inter alia a plea of prescription and Lord Tyre sustained the plea in the BP case while in the LM case Lord Doherty held that the issue should be determined at a preliminary proof, prompting the appeal and cross-appeals.

On behalf of the liquidator it was submitted that HC’s averments were sufficient to engage section 11(3). It was argued that BP and LM erred in their cross-appeals in contending that HC’s averments disclosed (i) actual knowledge on the part of HC; and (ii) in the BP case, imputed knowledge on the part of HC via one of its directors. They also erred in their assertion that, on HC’s averments, there had been no conduct on the part of BP and LM qualifying within section 6(4). In the result, each action should go to a proof before answer, all pleas standing.

In a written opinion, Lady Paton said: “While it is possible that losses which were easily identifiable by HC may have occurred in 2007, leading to the triggering of the five-year prescription in 2007 (i.e. more than five years before the actions were raised in 2014), this is a matter of dispute which cannot be resolved on the pleadings alone. In any event, HC’s averments of reasonable diligence (ie section 11(3) of the 1973 Act) and of error induced by the solicitors (ie section 6(4), with the proviso of ‘reasonable diligence’) are, in my opinion, sufficient to entitle HC to a proof before answer in each case, all pleas standing.”