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Prescription - when does the clock start?

Following the 2014 Supreme Court decision in ICL Plastics there has been a flurry of cases on prescription and when the five year period starts or can be delayed. Two recent court rulings involving the same pursuer reveal a potentially significant difference of judicial opinion on the circumstances when time runs out to bring a claim.

The uncertainty that this introduces creates both risk and opportunity and is important for claimants and insurers.

The two recent decisions of The Court of Session concern the winding up of Heather Capital; a long-running and complex insolvency case involving allegations of fraud, misappropriation and diversion of funds amid a series of fictitious loans in 2007.

In the same year, the company’s auditors accepted an assurance from the directors of Heather Capital that the loans had been repaid to the fund. However the auditor also warned in a letter to directors that further investigations were required.

A liquidator was appointed to wind-up Heather Capital in 2010. They subsequently became aware of the role that solicitors, Levy & McRae, were alleged to have played in various transactions and funds remittance. The liquidator then raised proceedings and sought a substantial sum from them.

As part of its defence denying any impropriety, lawyers for Levy McRae argued that time had run out, and that the liquidator was too late to make a claim. The five-year period, it was maintained, began with the 2007 letter from the auditor, not the 2012 discovery by the liquidator.

Lord Doherty agreed. In a written opinion he accepted that Heather Capital should have been more diligent in addressing the warning from its auditors. It was wrong to rely on the acceptance of the repayment by the auditor in 2007 as absolution from further inquiry and action. As such he did not accept that section 11 (3) of the Prescription and Limitation (Scotland) Act 1973 applied in that they were on notice on receipt of the auditors letter and had they acted with due diligence then a loss may have been uncovered at that stage.

This is possibly harsh in the circumstances for the creditors. Is it fair and reasonable for the creditors to lose out where it seems to have been the directors who ignored the warnings of the auditors? This is however the logical outcome of the decision in ICL Plastics and there are other examples of perhaps harsher outcomes. The Scottish Law Commission has recognised problems with the time limit and particularly issues around section 11 (3) and is currently consulting on whether to amend the position.

But the liquidator’s also relied on section 6 (4) of the 1973 Act. They argued that they were induced into refraining from raising proceedings due to an error induced by Heather Capital or their agent. The allegation was the Levy and Macrae had sent funds to a third party and failed to notify Heather Capital or the liquidator of the ‘true sequence of events’ that lead to the loss.

Lord Doherty held that those averments were sufficient for enquiry and that if proven would be sufficient to invoke section 6 (4). This however can be contrasted with the decision of Lord Tyre in Heather Capital v Burness Paull and Williamson ([2015] CSOH 150). He held in very similar circumstances and with similar averments that this was not sufficient to invoke section 6 (4) and that the action had therefore prescribed. It seems that those two decisions are irreconcilable with one another. It may be that the Inner House or Supreme Court will have the last word on this.

A possibly important factor in the Levy & McRae case is that the liquidator argued that the firm had ‘breached its fiduciary duties’ to account for trust funds. This was not subject to the five-year rule, but 20 years. Lord Doherty accepted that a relevant case had been set out in support of that. This does not appear to have been argued before Lord Tyre in the Burness case.

This is an interesting development. Not only does that significantly extend the period to raise proceedings but also potentially excludes a defence of contributory negligence. Can this be argued for all creditors who advance loans to law firms with the express instructions for it to be used for a specified purpose and no other? If so that could lead to many more claims with limited defences available.

Pending clarification either through an appeal or legislation it seems matters remain uncertain which is good or bad news depending on who you are advising.

First published on Scottish Legal News on 21 September 2016.

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