AXA Equity & Life Assurance Plc & Ors v National Westminster Bank Plc & Ors [1998] EWCA Civ 782 (07 May 1998)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(Mr. Justice Rimer)

Royal Courts of Justice
Thursday, 7th May 1998

B e f o r e :

LORD JUSTICE MORRITT
LORD JUSTICE BROOKE
LORD JUSTICE MAY

____________________

AXA EQUITY & LIFE ASSURANCE PLC
SOCIETY PLC AND OTHERS
Appellants
-v-
NATIONAL WESTMINSTER BANK PLC AND OTHERS
Respondents

____________________

(Handed Down Judgment of Smith Bernal Reporting Limited,
180 Fleet Street, London, EC4A 2HD
Telephone No: 0171-421 4040
Fax No: 0171-831 8838
Official Shorthand Writers to the Court)

____________________MR. N. THOMAS Q.C. (instructed by Messrs Norton Rose, London, EC3) appeared on behalf of the Appellants/Plaintiffs.
MR. C. HOLLANDER and MR. T. ADAM (instructed by Messrs Barlow Lyde & Gilbert, London, EC3) appeared on behalf of the 6th Respondent/6th Defendant.
THE FOURTH RESPONDENT appeared in Person.

____________________


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LORD JUSTICE MORRITT:

    1. By his order made on 2nd February 1998 Rimer J refused

the application of the plaintiffs (“the Investors”) for orders for discovery of documents against, amongst others, National Westminster Bank plc, Midland Bank plc (“the Banks”) and Resort Hotels plc. (“the Company”). The application was not made in the course of a pending action pursuant to RSC Ord. 24 but in reliance on the jurisdiction of the court recognised by the House of Lords in Norwich Pharmacal Co. v. Commissioners of Customs & Excise [1974] AC 133 (“Norwich Pharmacal”). The documents are required in connection with proceedings brought by the Investors against Coopers & Lybrand (“Coopers”) for damages for negligence or pursuant to s.150 Financial Services Act 1986 arising from their investment of £19.3m in an issue of 12.375% first mortgage debenture stock, redeemable in 2016, made by the Company in November 1991. Rimer J concluded that the orders sought did not come within such jurisdiction. The Investors submit that the judge was wrong. Coopers contend that even if the judge were wrong in that respect he was right to refuse the relief sought because the case the Investors seek to make against Coopers is not sufficiently strong and the relief sought not sufficiently specific.

    1. The Company owned, operated and managed hotels, restaurants and public houses. During the relevant period down to the debenture stock issue the Banks were the principal lenders to the Company, Coopers were its auditors and the 14th plaintiff (“BZW”) its financial advisers. The directors of the Company wished to convert short and medium term bank debt into long term debt at a fixed rate of interest and for a fixed period. Accordingly they determined to create and issue the debenture stock to which I have referred. BZW co-ordinated the preparation of the necessary listing particulars and entered into a placing agreement with the Company. As agent for the Company BZW instructed Coopers to carry out certain work in connection with the listing particulars. In summary that work included the provision of a working capital report and work in relation to a statement of indebtedness and extracts from the Company’s audited financial statements. Listing particulars incorporating the product of that work were duly registered with the Registrar of Companies and formed the basis for the application of the Company that the stock to be issued should be admitted to the Official List of the International Stock Exchange of the United Kingdom.
    2. On 26th November 1991 the Investors (other than BZW) subscribed £19.3m for the issue of such stock. Two years later the Company failed; dealings in its shares were suspended in July 1993, it defaulted in payment of the interest due on the stock in December 1993 and went into administrative receivership in June 1994. In March 1997 Mr Feld, the managing director of the Company during its financial years from 1st May April 1989 to 30th April 1991, was convicted of a number of offences of knowingly making misleading, false or deceptive statements and of forging or falsifying documents. These offences related primarily to a rights issue made by the Company in April 1992, though some of the forgeries were committed in 1991.
    3. The Investors have had access to documents adduced in evidence during the trial of Mr Feld, to the statements of certain witnesses made in connection with that trial and to a transcript of the summing up of the judge, His Honour Judge Zucker QC. In view of a defence advanced by Mr Feld the judge referred in his summing up to criticisms made of Coopers relating to its dealings with the Company and the preparation of financial information concerning the Company.
    4. One such criticism related to a bridging loan of £7m made by National Westminster Bank plc to the Company. This was recorded in a letter from that bank to the Company dated 24th October 1991 but did not feature in either the working capital report, confirmation of indebtedness or statement of indebtedness incorporated into the Listing Particulars prepared, in each case, by Coopers. It appears that the copy of the letter from the bank to the Company, as shown by the Company to Coopers, had been falsified by the omission of any reference to this facility. But Coopers stated in their written confirmation of indebtedness dated 19th November 1991 that they had received confirmation of outstanding loans from the relevant lenders.
    5. Another criticism related to a transfer to the account of the Company with Midland Bank plc of £4m on 23rd October 1991. This deposit was retransferred on the following day but was recorded in the listing particulars under cash balances as an unincumbered asset of the Company on 23rd October 1991. In fact it was subject to a letter of hypothecation which had been disclosed in a letter from Midland Bank plc to the Company but was omitted from the copy of that letter supplied by the Company to Coopers. The existence of this charge was not disclosed by Coopers in either its written confirmation of indebtedness dated 19th November nor in the listing particulars.
    6. These two criticisms suggest that the assets of the Company had been overstated by £11m. Such overstatement would have been significant because the “projected headroom” of the Company, that is to say the amount by which the available facilities exceeded the projected indebtedness, for the period after November 1991 fluctuated between £8m. and £13.5m. In addition the Investors point to the fact that by comparison with the accounts of the Company to 30th April 1991 those for the year ended 30th April 1993, produced in March 1994, showed, for the first time, exceptional liabilities of £61.6m. Such liabilities must be regarded in the context of a group with total assets of £53m., as recorded in the accounts for the previous year. So regarded, it is suggested that the overstatement of net assets is unlikely to have been confined to the £11m. to which specific reference has been made.
    7. On 30th October 1997 the Investors issued a writ against Coopers seeking damages for negligence or breach of duty and compensation under s.150 Financial Services Act 1986 arising out of or in connection with the accounts of the Company for the years 1989 to 1991 or in connection with the listing particulars. Their solicitor in an affidavit sworn in these proceedings stated that the Investors

“have good reason to believe that a wrong has been committed by Coopers in relation to the issue of Resort stock, but they are currently disabled from pursuing Coopers by a lack of information as to their claim.”

Later she added

“[they] are therefore seeking disclosure of documents against the defendants to this action under the Norwich Pharmacal principles, in order to pursue their claim against Coopers.”

She emphasised that the Investors were seeking

“full information from the defendants to include all information necessary to enable them to decide whether it is worth suing Coopers or not.”

    1. The writ in this action was issued on 18th December 1997. The defendants were the respondents to this appeal, Mr Feld and the solicitors acting for him in connection with the criminal proceedings. The relief sought was wide-ranging and in general terms. In summary the Investors sought an order against each of those defendants for the provision to the solicitors for the Investors of true copies of documents in its possession, custody or power relating to the preparation by Coopers of the accounts of the Company for the financial years 1990 and 1991 or of the listing particulars or otherwise showing the financial position of the Company as at October/November 1991. Coopers was subsequently joined as an additional (the 6th) defendant at their own request. The opposition to the relief sought comes from them not from the other defendants.
    2. In his judgment Rimer J indicated that he considered the claim of the Investors under s.150 Financial Services Act 1986 to be extremely weak but their prospects of establishing a duty of care were stronger; the problem, he observed, was to plead and prove a breach of such duty. After considering Norwich Pharmacal he said

“By contrast with the Norwich Pharmacal case, the [Investors] in the present proceedings do not have a prima facie case against Coopers. Nor on the material before the court do they even disclose an arguable case, since their evidence concedes that, on the information at present known to them and without the desired discovery, they cannot plead a case against Coopers and cannot hope to progress their writ to a trial. The whole point of their discovery application against the defendants is to find out if they do have a case against Coopers.

In my judgment, Norwich Pharmacal provides no authority at all for the proposition that discovery for that purpose can properly be ordered against third parties.” 11. The judge then considered submissions based on subsequent authorities, namely, RCA Corporation v Reddington Rare Records [1974] 1 WLR 1445; Bankers Trust Co. v. Shapira [1980] 1 WLR 1274; Societe Romanaise de la Chaussure SA v British Shoe Corporation Ltd [1991] FSR 1; Arab Monetary Fund v Hashim (No.5) [1992] 2 All ER 911; Panayiotou v Sony Music Entertainment (UK) Ltd [1994] Ch.142 and Mercantile Group (Europe) AG v Aiyela [1994] 1 All ER 110. His conclusion was

“In my judgment, Hoffmann L.J.’s analysis [in the Mercantile Group case] is adverse to the [Investors’] application in this case. The [Investors] have identified Coopers as alleged wrongdoers and have issued a writ against them. The defendants against whom they seek discovery are, in principle, compellable to give evidence at any trial so that, on the face of it, the discovery order sought against them infringes the mere witness rule and cannot therefore be made. There are exceptions to the mere witness rule, of which Norwich Pharmacal provides one type of example, the Bankers Trust and Aiyela cases provide others. The present case does not fall within any of those exceptions. [Counsel for the Investors’] argument is, in effect, that there is a further exception, namely the case where, although the alleged wrongdoer has been identified, there will be no trial unless the desired discovery is obtained since without it the plaintiffs will not know if they have a case at all, cannot therefore plead it and cannot progress it to trial. In my judgment, however, there is no such further exception. For reasons given earlier, I consider that applications for discovery for that purpose are in the nature of “fishing” applications which the court will not allow.”

    1. Before the judge the Investors also relied on P v T Ltd [1997] 1 WLR 1309. Rimer J accepted that that case might be regarded as going beyond any previous decision but not as authority justifying the orders sought from him. His overall conclusion was that

“the orders sought against the five defendants are of a type which the courts do not make and, were the applications to be opposed by the defendants, it would decline to make them. That is because they are in the nature of “fishing” orders and because they are not justified by any exception or qualification to the mere witness rule. Moreover, I agree with [Counsel for Coopers] that the correct analysis is that the court has no jurisdiction to make the orders sought. I do not consider that the correct analysis is that the court has a general jurisdiction to make discovery orders of all sorts and for all purposes against anyone but merely declines to make orders of the present sort as a matter of discretion and if the application is opposed. I prefer the view that the development of English law has reached the point that it recognises a jurisdiction to make discovery orders of, inter alia, the Norwich Pharmacal type, but that it has not reached the point where it recognises a jurisdiction to make orders of the type sought by the Investors in the present case.”

    1. By their notice of appeal the Investors sought orders in the same wide form which Rimer J had refused. In oral argument the scope of the orders sought was substantially reduced to the following categories: (a) correspondence or other communications with Mr Feld, the Company or Coopers relating to Cooper’s working capital report, statement of indebtedness dated 19th November 1991 and review of the extracts from the audited financial statements; (b) the letter dated 24th October 1991 from National Westminster to the Company in the form in which it was sent by the Company or Mr Feld to Coopers; (c) documents relating to the transfers on or about 23rd and 24th October 1991 of £4m to and from the account of the Company with Midland and any letter of hypothecation or charge relating to the same; (d) the index of the documents held by the Company or its administrative receivers specified in the correspondence and (e) the documents referred to by Judge Zucker QC on pages 131 and 132 of the transcript of his summing up in so far as such documents are not embraced in one or more of categories (a) to (d). Coopers accepted that, whatever the result of this appeal, they would provide to the Investors’ solicitors the version of the letters from respectively National Westminster and Midland to the Company sent by the Company to Coopers from which the references to the facility of £7m. and the letter of hypothecation relating to the cash deposit of £4m. had been deleted. Coopers opposed the orders sought notwithstanding their narrower scope.
    2. Counsel for the Investors did not contend that this case was so similar on its facts to that of any previously decided case as to be determined by that earlier decision. He accepted that the judge’s analysis of the earlier decisions and the distinctions between those cases and this was right. He criticised the judgment on the grounds that it was internally inconsistent; on the one hand (see paras 10 and 12 above) the judge concluded that the Investors could not plead an arguable case so that without the orders sought there could be no trial and such orders were of a “fishing”, and, therefore, impermissible nature, but on the other (see para 11 above) he decided that the orders sought were precluded by the mere witness rule thereby presupposing a trial. The Investors contend that the orders sought are not objectionable on either ground; first, the Investors have and can plead a good cause of action for compensation under s.150 Financial Services Act 1986 and for damages for negligence; second, the claim is for disclosure of specific documents shown to exist in so far as they may be in the possession custody or power of persons who were implicated in the wrongs of which complaint is made. I will deal with these contentions in turn.
    3. The judge’s conclusion that the Investors had no cause of action under s.150 Financial Services Act 1986 depended largely on his view of the application of the section. It is clear that s.150 can only apply to a person “responsible for” the listing particulars alleged to be untrue or misleading. By virtue of s.152(1)(e) a person “who has authorised the contents of, or any part of, the particulars” is such a person unless the provisions of s.152(8) exclude him. The latter subsection provides that nothing in section 152 should be construed as “making a person responsible for any particulars by reason of giving advice as to their contents in a professional capacity”. The judge thought, in the light of the provisions of that subsection, that the prospects of establishing a liability under s.150 were “extremely weak”. I can only say that I disagree. Consideration of the instructions to Coopers and the documents provided by them in the knowledge of the purpose for which they were required indicate to me a good prima facie case that the part of the particulars relied on as being false was authorised by Coopers. It is at the very least reasonably arguable that the information provided was factual and not advice given in a professional capacity so that liability could not be excluded by s.152(8).
    4. In the case of the claim in negligence the judge considered the Investors’ prospects of success in establishing the existence of the necessary duty of care to be rather better than their prospects of success under s.150. For Coopers counsel sought to argue that the judge was wrong in that respect. Reliance was placed on statements in Jackson & Powell on Professional Negligence 4th Edition para. 8.70 to the effect that accountants cannot be liable for statements made in offer documents because they do not accept responsibility for such statements and owe no duty to those who purchase the relevant securities in the market. But in this case, for the reasons already given, I consider that there is a good arguable case that Coopers are responsible for the statements relied on for they authorised them. Further, the Investors were not purchasers in the market but subscribers pursuant to and, as they claim, in reliance on the listing particulars.
    5. In respect of both claims it is apparent that the judge thought that the Investors were unable to plead or prove any falsity in the particulars for the purposes of s.150 Financial Services Act 1986 or any breach of the duty of care for the purposes of a claim in negligence. It is clear that his opinion in this respect was based on the affidavit evidence of the Investors’ solicitor which I have quoted. But in expressing the views he did the judge made no reference to the underlying documents consisting of the instructions to Coopers, the documents and information they provided for inclusion in the listing particulars and the documents produced during the trial of Mr Feld and referred to by Judge Zucker in his summing up. For the Investors it is submitted that the court is not bound to accept the opinion of the Investors’ solicitor but should consider for itself whether the Investors can plead a claim such as to give rise to a trial in due course. For Coopers it is submitted that either the Investors’ solicitor tempered the statements in her affidavit so as to come within the terms of judgments of the courts as to the circumstances in which orders such as the Investors seek will be granted or those statements represent the considered appraisal of one with complete knowledge, which this court cannot have, as to all the material, privileged and unprivileged, available to her clients. Either way, it is submitted, there is no justification for the court allowing the Investors to escape from the consequences of such statements.
    6. In my view it is obvious that the court must have regard to all the evidence but is not bound by the conclusion of the Investors’ solicitor as to the ability of the Investors to plead and prove their claim so far as it depends on matters before the court. If the court disagrees with the conclusion of the Investors’ solicitor it may become relevant at a later stage of the inquiry to consider the reasons for that difference of opinion. Bearing in mind that a party is required to plead the material facts on which he relies, not the evidence by which he hopes to prove them, I see no problem in counsel for the Investors pleading a good cause of action in relation to the two specific matters to which I have referred earlier. In relation to each of them the fact and the nature of the overstatement of assets, how it arose and why Coopers should have spotted it can be properly pleaded. Whether all those matters can be proved is another matter; that will depend on what facts are denied, what is produced on discovery, in answer to interrogatories or in response to subpoenas. In my view it is plain that the Investors have sufficient information to ensure that there is a trial of the case they seek to make against Coopers if they choose to make it.
    7. In Norwich Pharmacal the House of Lords was concerned with whether an application by a patentee for an order directing Customs & Excise to disclose the identity of the importer of goods alleged to infringe the patent. It was accepted that Customs & Excise were not themselves liable for infringement but, to some extent, they controlled the importation which constituted the infringement. The patentee sought disclosure of the names. Counsel for the Investors does not suggest that Norwich Pharmacal governs this case; he accepts the distinctions drawn by the judge. The case is nevertheless relevant for the principles it established or recognised. The effect of that decision as expounded in later cases was summarised by Hoffmann LJ in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 at p.374

“that jurisdiction to order disclosure against a third party exists when two conditions are satisfied. First, the third party must have become mixed up in the transaction concerning which discovery is required. Secondly, the order for discovery must not offend against the “mere witness” rule, which prevents a party from obtaining discovery against a person “who will in due course be compellable to give that information either by oral testimony as a witness or on a subpoena duces tecum”.”

    1. The phrase “mixed up in” is derived from the speech of Lord Reid in Norwich Pharmacal. Such phrase, though expressive, is of uncertain scope. No doubt this was intended so that the width of the jurisdiction might be worked out on a case by case basis. But the sense of its meaning may be obtained from the context in which the phrase was used by Lord Reid. Having described the “mere witness” rule and concluded that it was inapplicable because there could be no trial unless the identity of the alleged wrongdoers was disclosed Lord Reid pointed out that it did not follow that discovery might be ordered against anyone who could give information as to the identity of a wrongdoer. He continued

“It [discovery] is not available against a person who has no other connection with the wrong than that he was a spectator or has some document relating to it in his possession. But [Customs & Excise] are in an intermediate position. Their conduct was entirely innocent; it was in execution of their statutory duty.But without certain action on their part the infringements could never have been committed. Does this involvement in the matter make any difference?”

Lord Reid analysed the relevant involvement of the Customs & Excise as including control over the infringing goods such that they could not get into the hands of the consignee without their consent. After referring to the authorities as analysed by Lords Cross of Chelsea and Kilbrandon he continued

“They [sc. the authorities] seem to me to point to a very reasonable principle that if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers. I do not think that it matters whether he became so mixed up by voluntary action on his part or because it was his duty to do what he did. It may be that if this causes him expense the person seeking the information ought to reimburse him. But justice requires that he should co-operate in righting the wrong if he unwittingly facilitated its perpetration.”

    1. The Investors contend that not only the Company but the Banks also were “mixed up in” the transaction from which the liability of Coopers is alleged to arise. I would reject that submission so far as it relates to the Banks. It is not necessary that, as facilitators, they should have come under any liability themselves but they must have been so involved as to justify treating them differently from the bystander with whom such a person was contrasted by Lord Reid. But, in each case, the only connection with the relevant transaction was as a banker to the Company and author of a letter giving information to the Company at its request which was both factual and accurate. Neither bank did anything to cause or facilitate either the alleged forgery of the copy of the letter sent by the Company to Coopers or Coopers’ alleged negligence in failing properly to ascertain the liabilities of the Company. Nor is this a case where property claimed to be his by the person seeking the discovery has passed through the hands of the person from whom discovery is sought. cf Bankers Trust v Shapira [1980] 1 WLR 1274. Accordingly I would dismiss the appeal in so far as orders for discovery are sought against the Banks on the grounds that neither of them is shown to fall within the first of the two conditions necessary to justify such an order as summarised by Hoffmann LJ in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 at p.374.
    2. By contrast I would reject the submission of Coopers that the Company was not sufficiently “mixed up in” the relevant transactions either. Whatever was done by Mr Feld was done by him in his capacity as managing director of the Company seeking to convert short term bank debt into medium term debenture stock. His activity did not constitute a fraud on the Company but on those who were misled into believing that the net assets of the Company were greater than in fact they were. Plainly the activity of Mr Feld for which the Company was responsible caused or facilitated the transaction or wrong of which the Investors complain. Accordingly whether the order sought against the Company should be made depends on whether, if made, it would offend against the “mere witness” rule.
    3. The “mere witness” rule is sufficiently formulated in the judgment of Hoffmann LJ in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 at p.374 which I have already quoted. The rule does not apply in cases where the identity of the alleged wrongdoer is not known for in such cases there will be no trial unless the order for discovery is made. For similar reasons the rule does not operate so as to preclude such an order in respect of claims to trust property which may be dissipated, Arab Monetary Fund v Hashim (No.5) [1992] 2 All ER 911, nor to a post-judgment Mareva injunction, Mercantile Group (Europe) AG v Aiyela [1994] QB 366. But in this case for the reasons already given I conclude that the Investors can properly plead a case against Coopers for compensation under s.150 Financial Services Act 1986 and for damages for negligence in connection with the overstatement of assets in the two respects to which I have referred. Thus, if the Investors so wish, there will be a trial of an action for such relief against Coopers. Production of documents by the Company for the purposes of that action may be compelled by a subpoena duces tecum. Evidence from individuals, whether or not they were agents of the Company at the material time, may be compelled by subpoena ad testificandum. It follows that the orders sought against the Company and the Banks would offend against the “mere witness” rule and for that (in the case of the Banks additional) reason should be refused.
    4. During the course of argument Counsel for the Investors accepted that had any order been made it would have to be as specific as to the documents to be produced as would a subpoena duces tecum. I mention this for the sake of completeness only because it is not a point which arises for decision if, as I think it should be, the appeal is dismissed for the other reasons I have mentioned.
    5. Counsel for the Investors also raised in the course of argument the case where, although the identity of the wrongdoer is known, one fact crucial to the proper allegation of his liability is not but is susceptible of ascertainment from a known document in the hands of a third-party. It was suggested that in such a case if the third-party had been mixed up in the relevant transaction then there was no objection to an order for discovery; the mere witness rule would not be infringed because without the ascertainment of the missing fact there would be no trial; the application would not be lacking in particularity so as to be stigmatised as mere fishing for the document constituting the piece missing from the jigsaw puzzle would be capable of identification. It is not necessary to decide the point and I do not do so but I see much force in it. The consequence would be that the principle of Norwich Pharmacal would be applicable in any case where, for whatever reason, the action for which the document or information was required could not in its absence proceed to trial and would not be confined to cases in which the reason why the action could not so proceed was ignorance as to the identity of the proper defendant. The establishment of such a proposition would also enable effect to be given to the reference made by Lord Reid in Norwich Pharmacal to the duty to provide “full information” as well as the identity of the wrongdoer without giving rise to a general obligation to give disclosure. cf Arab Monetary Fund v Hashim (No.5) [1992] 2 All ER 911, 914.
    6. In summary I would dismiss this appeal because

a) the Banks were not so mixed up in the alleged tortious acts of Coopers as to warrant an order for discovery against them; and

b) the orders for discovery sought against the Banks and the Company would infringe the “mere witness” rule because the Investors can plead an arguable case against Coopers such as to give rise to a trial in due course in which both the Banks and the Company may be compelled to produce the documents now sought.

BROOKE LJ: I agree.

MAY LJ. I also agree.

Order: Appeal dismissed with costs.IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(Mr. Justice Rimer)

Royal Courts of Justice
Thursday, 7th May 1998

B e f o r e :

LORD JUSTICE MORRITT
LORD JUSTICE BROOKE
LORD JUSTICE MAY

____________________

AXA EQUITY & LIFE ASSURANCE PLC
SOCIETY PLC AND OTHERS
Appellants
-v-
NATIONAL WESTMINSTER BANK PLC AND OTHERS
Respondents

____________________

(Handed Down Judgment of Smith Bernal Reporting Limited,
180 Fleet Street, London, EC4A 2HD
Telephone No: 0171-421 4040
Fax No: 0171-831 8838
Official Shorthand Writers to the Court)

____________________MR. N. THOMAS Q.C. (instructed by Messrs Norton Rose, London, EC3) appeared on behalf of the Appellants/Plaintiffs.
MR. C. HOLLANDER and MR. T. ADAM (instructed by Messrs Barlow Lyde & Gilbert, London, EC3) appeared on behalf of the 6th Respondent/6th Defendant.
THE FOURTH RESPONDENT appeared in Person.

____________________


HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

LORD JUSTICE MORRITT:

    1. By his order made on 2nd February 1998 Rimer J refused

the application of the plaintiffs (“the Investors”) for orders for discovery of documents against, amongst others, National Westminster Bank plc, Midland Bank plc (“the Banks”) and Resort Hotels plc. (“the Company”). The application was not made in the course of a pending action pursuant to RSC Ord. 24 but in reliance on the jurisdiction of the court recognised by the House of Lords in Norwich Pharmacal Co. v. Commissioners of Customs & Excise [1974] AC 133 (“Norwich Pharmacal”). The documents are required in connection with proceedings brought by the Investors against Coopers & Lybrand (“Coopers”) for damages for negligence or pursuant to s.150 Financial Services Act 1986 arising from their investment of £19.3m in an issue of 12.375% first mortgage debenture stock, redeemable in 2016, made by the Company in November 1991. Rimer J concluded that the orders sought did not come within such jurisdiction. The Investors submit that the judge was wrong. Coopers contend that even if the judge were wrong in that respect he was right to refuse the relief sought because the case the Investors seek to make against Coopers is not sufficiently strong and the relief sought not sufficiently specific.

    1. The Company owned, operated and managed hotels, restaurants and public houses. During the relevant period down to the debenture stock issue the Banks were the principal lenders to the Company, Coopers were its auditors and the 14th plaintiff (“BZW”) its financial advisers. The directors of the Company wished to convert short and medium term bank debt into long term debt at a fixed rate of interest and for a fixed period. Accordingly they determined to create and issue the debenture stock to which I have referred. BZW co-ordinated the preparation of the necessary listing particulars and entered into a placing agreement with the Company. As agent for the Company BZW instructed Coopers to carry out certain work in connection with the listing particulars. In summary that work included the provision of a working capital report and work in relation to a statement of indebtedness and extracts from the Company’s audited financial statements. Listing particulars incorporating the product of that work were duly registered with the Registrar of Companies and formed the basis for the application of the Company that the stock to be issued should be admitted to the Official List of the International Stock Exchange of the United Kingdom.
    2. On 26th November 1991 the Investors (other than BZW) subscribed £19.3m for the issue of such stock. Two years later the Company failed; dealings in its shares were suspended in July 1993, it defaulted in payment of the interest due on the stock in December 1993 and went into administrative receivership in June 1994. In March 1997 Mr Feld, the managing director of the Company during its financial years from 1st May April 1989 to 30th April 1991, was convicted of a number of offences of knowingly making misleading, false or deceptive statements and of forging or falsifying documents. These offences related primarily to a rights issue made by the Company in April 1992, though some of the forgeries were committed in 1991.
    3. The Investors have had access to documents adduced in evidence during the trial of Mr Feld, to the statements of certain witnesses made in connection with that trial and to a transcript of the summing up of the judge, His Honour Judge Zucker QC. In view of a defence advanced by Mr Feld the judge referred in his summing up to criticisms made of Coopers relating to its dealings with the Company and the preparation of financial information concerning the Company.
    4. One such criticism related to a bridging loan of £7m made by National Westminster Bank plc to the Company. This was recorded in a letter from that bank to the Company dated 24th October 1991 but did not feature in either the working capital report, confirmation of indebtedness or statement of indebtedness incorporated into the Listing Particulars prepared, in each case, by Coopers. It appears that the copy of the letter from the bank to the Company, as shown by the Company to Coopers, had been falsified by the omission of any reference to this facility. But Coopers stated in their written confirmation of indebtedness dated 19th November 1991 that they had received confirmation of outstanding loans from the relevant lenders.
    5. Another criticism related to a transfer to the account of the Company with Midland Bank plc of £4m on 23rd October 1991. This deposit was retransferred on the following day but was recorded in the listing particulars under cash balances as an unincumbered asset of the Company on 23rd October 1991. In fact it was subject to a letter of hypothecation which had been disclosed in a letter from Midland Bank plc to the Company but was omitted from the copy of that letter supplied by the Company to Coopers. The existence of this charge was not disclosed by Coopers in either its written confirmation of indebtedness dated 19th November nor in the listing particulars.
    6. These two criticisms suggest that the assets of the Company had been overstated by £11m. Such overstatement would have been significant because the “projected headroom” of the Company, that is to say the amount by which the available facilities exceeded the projected indebtedness, for the period after November 1991 fluctuated between £8m. and £13.5m. In addition the Investors point to the fact that by comparison with the accounts of the Company to 30th April 1991 those for the year ended 30th April 1993, produced in March 1994, showed, for the first time, exceptional liabilities of £61.6m. Such liabilities must be regarded in the context of a group with total assets of £53m., as recorded in the accounts for the previous year. So regarded, it is suggested that the overstatement of net assets is unlikely to have been confined to the £11m. to which specific reference has been made.
    7. On 30th October 1997 the Investors issued a writ against Coopers seeking damages for negligence or breach of duty and compensation under s.150 Financial Services Act 1986 arising out of or in connection with the accounts of the Company for the years 1989 to 1991 or in connection with the listing particulars. Their solicitor in an affidavit sworn in these proceedings stated that the Investors

“have good reason to believe that a wrong has been committed by Coopers in relation to the issue of Resort stock, but they are currently disabled from pursuing Coopers by a lack of information as to their claim.”

Later she added

“[they] are therefore seeking disclosure of documents against the defendants to this action under the Norwich Pharmacal principles, in order to pursue their claim against Coopers.”

She emphasised that the Investors were seeking

“full information from the defendants to include all information necessary to enable them to decide whether it is worth suing Coopers or not.”

    1. The writ in this action was issued on 18th December 1997. The defendants were the respondents to this appeal, Mr Feld and the solicitors acting for him in connection with the criminal proceedings. The relief sought was wide-ranging and in general terms. In summary the Investors sought an order against each of those defendants for the provision to the solicitors for the Investors of true copies of documents in its possession, custody or power relating to the preparation by Coopers of the accounts of the Company for the financial years 1990 and 1991 or of the listing particulars or otherwise showing the financial position of the Company as at October/November 1991. Coopers was subsequently joined as an additional (the 6th) defendant at their own request. The opposition to the relief sought comes from them not from the other defendants.
    2. In his judgment Rimer J indicated that he considered the claim of the Investors under s.150 Financial Services Act 1986 to be extremely weak but their prospects of establishing a duty of care were stronger; the problem, he observed, was to plead and prove a breach of such duty. After considering Norwich Pharmacal he said

“By contrast with the Norwich Pharmacal case, the [Investors] in the present proceedings do not have a prima facie case against Coopers. Nor on the material before the court do they even disclose an arguable case, since their evidence concedes that, on the information at present known to them and without the desired discovery, they cannot plead a case against Coopers and cannot hope to progress their writ to a trial. The whole point of their discovery application against the defendants is to find out if they do have a case against Coopers.

In my judgment, Norwich Pharmacal provides no authority at all for the proposition that discovery for that purpose can properly be ordered against third parties.” 11. The judge then considered submissions based on subsequent authorities, namely, RCA Corporation v Reddington Rare Records [1974] 1 WLR 1445; Bankers Trust Co. v. Shapira [1980] 1 WLR 1274; Societe Romanaise de la Chaussure SA v British Shoe Corporation Ltd [1991] FSR 1; Arab Monetary Fund v Hashim (No.5) [1992] 2 All ER 911; Panayiotou v Sony Music Entertainment (UK) Ltd [1994] Ch.142 and Mercantile Group (Europe) AG v Aiyela [1994] 1 All ER 110. His conclusion was

“In my judgment, Hoffmann L.J.’s analysis [in the Mercantile Group case] is adverse to the [Investors’] application in this case. The [Investors] have identified Coopers as alleged wrongdoers and have issued a writ against them. The defendants against whom they seek discovery are, in principle, compellable to give evidence at any trial so that, on the face of it, the discovery order sought against them infringes the mere witness rule and cannot therefore be made. There are exceptions to the mere witness rule, of which Norwich Pharmacal provides one type of example, the Bankers Trust and Aiyela cases provide others. The present case does not fall within any of those exceptions. [Counsel for the Investors’] argument is, in effect, that there is a further exception, namely the case where, although the alleged wrongdoer has been identified, there will be no trial unless the desired discovery is obtained since without it the plaintiffs will not know if they have a case at all, cannot therefore plead it and cannot progress it to trial. In my judgment, however, there is no such further exception. For reasons given earlier, I consider that applications for discovery for that purpose are in the nature of “fishing” applications which the court will not allow.”

    1. Before the judge the Investors also relied on P v T Ltd [1997] 1 WLR 1309. Rimer J accepted that that case might be regarded as going beyond any previous decision but not as authority justifying the orders sought from him. His overall conclusion was that

“the orders sought against the five defendants are of a type which the courts do not make and, were the applications to be opposed by the defendants, it would decline to make them. That is because they are in the nature of “fishing” orders and because they are not justified by any exception or qualification to the mere witness rule. Moreover, I agree with [Counsel for Coopers] that the correct analysis is that the court has no jurisdiction to make the orders sought. I do not consider that the correct analysis is that the court has a general jurisdiction to make discovery orders of all sorts and for all purposes against anyone but merely declines to make orders of the present sort as a matter of discretion and if the application is opposed. I prefer the view that the development of English law has reached the point that it recognises a jurisdiction to make discovery orders of, inter alia, the Norwich Pharmacal type, but that it has not reached the point where it recognises a jurisdiction to make orders of the type sought by the Investors in the present case.”

    1. By their notice of appeal the Investors sought orders in the same wide form which Rimer J had refused. In oral argument the scope of the orders sought was substantially reduced to the following categories: (a) correspondence or other communications with Mr Feld, the Company or Coopers relating to Cooper’s working capital report, statement of indebtedness dated 19th November 1991 and review of the extracts from the audited financial statements; (b) the letter dated 24th October 1991 from National Westminster to the Company in the form in which it was sent by the Company or Mr Feld to Coopers; (c) documents relating to the transfers on or about 23rd and 24th October 1991 of £4m to and from the account of the Company with Midland and any letter of hypothecation or charge relating to the same; (d) the index of the documents held by the Company or its administrative receivers specified in the correspondence and (e) the documents referred to by Judge Zucker QC on pages 131 and 132 of the transcript of his summing up in so far as such documents are not embraced in one or more of categories (a) to (d). Coopers accepted that, whatever the result of this appeal, they would provide to the Investors’ solicitors the version of the letters from respectively National Westminster and Midland to the Company sent by the Company to Coopers from which the references to the facility of £7m. and the letter of hypothecation relating to the cash deposit of £4m. had been deleted. Coopers opposed the orders sought notwithstanding their narrower scope.
    2. Counsel for the Investors did not contend that this case was so similar on its facts to that of any previously decided case as to be determined by that earlier decision. He accepted that the judge’s analysis of the earlier decisions and the distinctions between those cases and this was right. He criticised the judgment on the grounds that it was internally inconsistent; on the one hand (see paras 10 and 12 above) the judge concluded that the Investors could not plead an arguable case so that without the orders sought there could be no trial and such orders were of a “fishing”, and, therefore, impermissible nature, but on the other (see para 11 above) he decided that the orders sought were precluded by the mere witness rule thereby presupposing a trial. The Investors contend that the orders sought are not objectionable on either ground; first, the Investors have and can plead a good cause of action for compensation under s.150 Financial Services Act 1986 and for damages for negligence; second, the claim is for disclosure of specific documents shown to exist in so far as they may be in the possession custody or power of persons who were implicated in the wrongs of which complaint is made. I will deal with these contentions in turn.
    3. The judge’s conclusion that the Investors had no cause of action under s.150 Financial Services Act 1986 depended largely on his view of the application of the section. It is clear that s.150 can only apply to a person “responsible for” the listing particulars alleged to be untrue or misleading. By virtue of s.152(1)(e) a person “who has authorised the contents of, or any part of, the particulars” is such a person unless the provisions of s.152(8) exclude him. The latter subsection provides that nothing in section 152 should be construed as “making a person responsible for any particulars by reason of giving advice as to their contents in a professional capacity”. The judge thought, in the light of the provisions of that subsection, that the prospects of establishing a liability under s.150 were “extremely weak”. I can only say that I disagree. Consideration of the instructions to Coopers and the documents provided by them in the knowledge of the purpose for which they were required indicate to me a good prima facie case that the part of the particulars relied on as being false was authorised by Coopers. It is at the very least reasonably arguable that the information provided was factual and not advice given in a professional capacity so that liability could not be excluded by s.152(8).
    4. In the case of the claim in negligence the judge considered the Investors’ prospects of success in establishing the existence of the necessary duty of care to be rather better than their prospects of success under s.150. For Coopers counsel sought to argue that the judge was wrong in that respect. Reliance was placed on statements in Jackson & Powell on Professional Negligence 4th Edition para. 8.70 to the effect that accountants cannot be liable for statements made in offer documents because they do not accept responsibility for such statements and owe no duty to those who purchase the relevant securities in the market. But in this case, for the reasons already given, I consider that there is a good arguable case that Coopers are responsible for the statements relied on for they authorised them. Further, the Investors were not purchasers in the market but subscribers pursuant to and, as they claim, in reliance on the listing particulars.
    5. In respect of both claims it is apparent that the judge thought that the Investors were unable to plead or prove any falsity in the particulars for the purposes of s.150 Financial Services Act 1986 or any breach of the duty of care for the purposes of a claim in negligence. It is clear that his opinion in this respect was based on the affidavit evidence of the Investors’ solicitor which I have quoted. But in expressing the views he did the judge made no reference to the underlying documents consisting of the instructions to Coopers, the documents and information they provided for inclusion in the listing particulars and the documents produced during the trial of Mr Feld and referred to by Judge Zucker in his summing up. For the Investors it is submitted that the court is not bound to accept the opinion of the Investors’ solicitor but should consider for itself whether the Investors can plead a claim such as to give rise to a trial in due course. For Coopers it is submitted that either the Investors’ solicitor tempered the statements in her affidavit so as to come within the terms of judgments of the courts as to the circumstances in which orders such as the Investors seek will be granted or those statements represent the considered appraisal of one with complete knowledge, which this court cannot have, as to all the material, privileged and unprivileged, available to her clients. Either way, it is submitted, there is no justification for the court allowing the Investors to escape from the consequences of such statements.
    6. In my view it is obvious that the court must have regard to all the evidence but is not bound by the conclusion of the Investors’ solicitor as to the ability of the Investors to plead and prove their claim so far as it depends on matters before the court. If the court disagrees with the conclusion of the Investors’ solicitor it may become relevant at a later stage of the inquiry to consider the reasons for that difference of opinion. Bearing in mind that a party is required to plead the material facts on which he relies, not the evidence by which he hopes to prove them, I see no problem in counsel for the Investors pleading a good cause of action in relation to the two specific matters to which I have referred earlier. In relation to each of them the fact and the nature of the overstatement of assets, how it arose and why Coopers should have spotted it can be properly pleaded. Whether all those matters can be proved is another matter; that will depend on what facts are denied, what is produced on discovery, in answer to interrogatories or in response to subpoenas. In my view it is plain that the Investors have sufficient information to ensure that there is a trial of the case they seek to make against Coopers if they choose to make it.
    7. In Norwich Pharmacal the House of Lords was concerned with whether an application by a patentee for an order directing Customs & Excise to disclose the identity of the importer of goods alleged to infringe the patent. It was accepted that Customs & Excise were not themselves liable for infringement but, to some extent, they controlled the importation which constituted the infringement. The patentee sought disclosure of the names. Counsel for the Investors does not suggest that Norwich Pharmacal governs this case; he accepts the distinctions drawn by the judge. The case is nevertheless relevant for the principles it established or recognised. The effect of that decision as expounded in later cases was summarised by Hoffmann LJ in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 at p.374

“that jurisdiction to order disclosure against a third party exists when two conditions are satisfied. First, the third party must have become mixed up in the transaction concerning which discovery is required. Secondly, the order for discovery must not offend against the “mere witness” rule, which prevents a party from obtaining discovery against a person “who will in due course be compellable to give that information either by oral testimony as a witness or on a subpoena duces tecum”.”

    1. The phrase “mixed up in” is derived from the speech of Lord Reid in Norwich Pharmacal. Such phrase, though expressive, is of uncertain scope. No doubt this was intended so that the width of the jurisdiction might be worked out on a case by case basis. But the sense of its meaning may be obtained from the context in which the phrase was used by Lord Reid. Having described the “mere witness” rule and concluded that it was inapplicable because there could be no trial unless the identity of the alleged wrongdoers was disclosed Lord Reid pointed out that it did not follow that discovery might be ordered against anyone who could give information as to the identity of a wrongdoer. He continued

“It [discovery] is not available against a person who has no other connection with the wrong than that he was a spectator or has some document relating to it in his possession. But [Customs & Excise] are in an intermediate position. Their conduct was entirely innocent; it was in execution of their statutory duty.But without certain action on their part the infringements could never have been committed. Does this involvement in the matter make any difference?”

Lord Reid analysed the relevant involvement of the Customs & Excise as including control over the infringing goods such that they could not get into the hands of the consignee without their consent. After referring to the authorities as analysed by Lords Cross of Chelsea and Kilbrandon he continued

“They [sc. the authorities] seem to me to point to a very reasonable principle that if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers. I do not think that it matters whether he became so mixed up by voluntary action on his part or because it was his duty to do what he did. It may be that if this causes him expense the person seeking the information ought to reimburse him. But justice requires that he should co-operate in righting the wrong if he unwittingly facilitated its perpetration.”

    1. The Investors contend that not only the Company but the Banks also were “mixed up in” the transaction from which the liability of Coopers is alleged to arise. I would reject that submission so far as it relates to the Banks. It is not necessary that, as facilitators, they should have come under any liability themselves but they must have been so involved as to justify treating them differently from the bystander with whom such a person was contrasted by Lord Reid. But, in each case, the only connection with the relevant transaction was as a banker to the Company and author of a letter giving information to the Company at its request which was both factual and accurate. Neither bank did anything to cause or facilitate either the alleged forgery of the copy of the letter sent by the Company to Coopers or Coopers’ alleged negligence in failing properly to ascertain the liabilities of the Company. Nor is this a case where property claimed to be his by the person seeking the discovery has passed through the hands of the person from whom discovery is sought. cf Bankers Trust v Shapira [1980] 1 WLR 1274. Accordingly I would dismiss the appeal in so far as orders for discovery are sought against the Banks on the grounds that neither of them is shown to fall within the first of the two conditions necessary to justify such an order as summarised by Hoffmann LJ in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 at p.374.
    2. By contrast I would reject the submission of Coopers that the Company was not sufficiently “mixed up in” the relevant transactions either. Whatever was done by Mr Feld was done by him in his capacity as managing director of the Company seeking to convert short term bank debt into medium term debenture stock. His activity did not constitute a fraud on the Company but on those who were misled into believing that the net assets of the Company were greater than in fact they were. Plainly the activity of Mr Feld for which the Company was responsible caused or facilitated the transaction or wrong of which the Investors complain. Accordingly whether the order sought against the Company should be made depends on whether, if made, it would offend against the “mere witness” rule.
    3. The “mere witness” rule is sufficiently formulated in the judgment of Hoffmann LJ in Mercantile Group (Europe) AG v Aiyela [1994] QB 366 at p.374 which I have already quoted. The rule does not apply in cases where the identity of the alleged wrongdoer is not known for in such cases there will be no trial unless the order for discovery is made. For similar reasons the rule does not operate so as to preclude such an order in respect of claims to trust property which may be dissipated, Arab Monetary Fund v Hashim (No.5) [1992] 2 All ER 911, nor to a post-judgment Mareva injunction, Mercantile Group (Europe) AG v Aiyela [1994] QB 366. But in this case for the reasons already given I conclude that the Investors can properly plead a case against Coopers for compensation under s.150 Financial Services Act 1986 and for damages for negligence in connection with the overstatement of assets in the two respects to which I have referred. Thus, if the Investors so wish, there will be a trial of an action for such relief against Coopers. Production of documents by the Company for the purposes of that action may be compelled by a subpoena duces tecum. Evidence from individuals, whether or not they were agents of the Company at the material time, may be compelled by subpoena ad testificandum. It follows that the orders sought against the Company and the Banks would offend against the “mere witness” rule and for that (in the case of the Banks additional) reason should be refused.
    4. During the course of argument Counsel for the Investors accepted that had any order been made it would have to be as specific as to the documents to be produced as would a subpoena duces tecum. I mention this for the sake of completeness only because it is not a point which arises for decision if, as I think it should be, the appeal is dismissed for the other reasons I have mentioned.
    5. Counsel for the Investors also raised in the course of argument the case where, although the identity of the wrongdoer is known, one fact crucial to the proper allegation of his liability is not but is susceptible of ascertainment from a known document in the hands of a third-party. It was suggested that in such a case if the third-party had been mixed up in the relevant transaction then there was no objection to an order for discovery; the mere witness rule would not be infringed because without the ascertainment of the missing fact there would be no trial; the application would not be lacking in particularity so as to be stigmatised as mere fishing for the document constituting the piece missing from the jigsaw puzzle would be capable of identification. It is not necessary to decide the point and I do not do so but I see much force in it. The consequence would be that the principle of Norwich Pharmacal would be applicable in any case where, for whatever reason, the action for which the document or information was required could not in its absence proceed to trial and would not be confined to cases in which the reason why the action could not so proceed was ignorance as to the identity of the proper defendant. The establishment of such a proposition would also enable effect to be given to the reference made by Lord Reid in Norwich Pharmacal to the duty to provide “full information” as well as the identity of the wrongdoer without giving rise to a general obligation to give disclosure. cf Arab Monetary Fund v Hashim (No.5) [1992] 2 All ER 911, 914.
    6. In summary I would dismiss this appeal because

a) the Banks were not so mixed up in the alleged tortious acts of Coopers as to warrant an order for discovery against them; and

b) the orders for discovery sought against the Banks and the Company would infringe the “mere witness” rule because the Investors can plead an arguable case against Coopers such as to give rise to a trial in due course in which both the Banks and the Company may be compelled to produce the documents now sought.

BROOKE LJ: I agree.

MAY LJ. I also agree.

Order: Appeal dismissed with costs.