Liquidator’s £28m action against solicitors’ firm following collapse of hedge fund to proceed

A judge in the Court of Session ruled that the averments of the pursuer Paul Duffy, as liquidator of Heather Capital Ltd (HC) in its action against the firm of Levy & McRae, were “suitable for inquiry”, but decided that a preliminary proof on the issue of prescription was required.

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

HC’s liquidator raised an action against the firm and eight other individuals who were partners in the firm in the period from 1 January 2007 to 31 December 2008, contending that the company was defrauded of about £90 million.

The scheme involved the transfer of funds to companies incorporated in Gibraltar, which were owned or controlled by one of HC’s directors, Gregory King, or other third parties such as Nicholas Levene.

A solicitors’ firm in Gibraltar, Hassans, acted in these transactions, one of which concerned a company called Westernbrook Properties Limited.

In January 2007 £19 million was paid into the Levy & McRae’s client account, but was paid out five days later to Niblick Investments, a Panamanian company owned by Mr Levene.

Later that month a further payment of £9.412 million was made to Levy & McRae’s client account and was paid out in March to the client account of Hassans.

In December 2008 there was also an “unexplained payment” of £200,000 made to the eighth defender, Peter Watson, from Hassans’ client account.

The liquidator, who was appointed in July 2007, raised an action to recover the sum of £28.412 million from the firm, partners and former partners.

The liquidator pleaded that HC was the client of the first defender at the material time and accordingly, the defenders owed HC certain fiduciary duties, together with “an obligation to exercise the knowledge, skill and care of reasonably competent solicitors”.

The primary remedy sought was for an accounting by the defenders and for payment of any balance found to be due.

The pursuer averred that the defenders held the funds in trust for it, and that they paid £19 million to Niblick and £9.412 million to Hassans in “breach of trust”.

Alternatively, the pursuer sought damages of £28.412 million on grounds of the defenders’ breach of trust et separatim breach of fiduciary duties et separatim breach of contract et separatim negligence et separatim dishonest assistance.

The principal issue debated before Lord Doherty was whether the court could determine without further inquiry that each of the obligations upon which the pursuer founds has been extinguished by prescription.

The defenders maintained that all of the obligations upon which the pursuer founded have been extinguished by the short negative prescription, and that certain of the pursuer’s averments were “irrelevant”.

But the pursuer’s position was that the obligation of accounting for trust funds et separatim the obligation to restore the value of the trust property paid away are not obligations to which the short negative prescription applied, as both were prescriptible obligations subject only to the 20-year prescription.

In relation to the obligations which were subject to the short negative prescription, the pursuer insisted that it was not aware that it sustained loss until after the liquidator was appointed, and that it could not with reasonable diligence have been aware that it had until less than five years before the action was raised, in terms of section 11(3) of the Prescription and Limitation (Scotland) Act 1973.

It also averred that there was an “error” as to whether the pursuer had a possible right of action against the defenders, but that the period when it was in error “induced by the conduct” of the defenders should not be reckoned as part of the prescriptive period, in terms of section 6(4)(a)(ii) of the 1973 Act.

The judge held that with the exception of its section 11(3) case, the pursuer’s averments were “suitable for inquiry”.

In a written judgment, Lord Doherty said: “In my opinion the pursuer’s averments as to the existence of a trust and of an obligation to account for trust funds are sufficient to entitle it to inquiry. It cannot be said that the pursuer is bound to fail (or that the defenders’ prescription plea is bound to succeed) even if the pursuer establishes all it avers.

“As an alternative to an accounting for trust funds the pursuer seeks restoration of the value of trust property paid away in breach of trust. In my opinion a trustee’s obligation to restore the value of trust property to the trust is not an obligation to which the short negative prescription applies. Once again, in my opinion the pursuer’s averments of trust and of an obligation to restore the value of trust property are suitable for inquiry.”

On the section 11(3) case, the judge said he was “not persuaded” that he could determine on the pleadings that the pursuer had actual awareness that it had suffered loss more than five years before the action was raised, but on the other hand, he added that he was persuaded that the pursuer’s averments “do not adequately explain why it could not with reasonable diligence have discovered that it had suffered loss more than five years before the action was raised”.

In relation to the section 6(4) case, the judge held that that the word “conduct” was “wide enough to include an omission to act in breach of an obligation or duty”, and that it was for the defenders to establish that the proviso applied so as to exclude a period from the period of error founded upon by the pursuer.

Lord Doherty said: “This is important because, even though I am of the view that the pursuer’s averments in relation to its reliance on section 11(3) are not adequate to set forth a case that it could not with reasonable diligence have been aware that relevant loss, injury or damage had occurred more than five years before the action was raised, it does not necessarily follow that the defenders will succeed in discharging the onus upon them of establishing that the pursuer could with reasonable diligence have discovered the error upon which it founds at a date earlier than the pursuer in fact discovered it.”