Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 71
CA133/08	NOTE OF LORD HODGE in the cause PHOENICIA ASSET MANAGEMENT SAL Pursuer; against STEVEN ALEXANDER Defender: __________

Pursuer: Campbell; Burness LLP

Havers: McIlvride; Lindsays, Solicitors

11 June 2010

[1] This is an application by the joint liquidators of Echelon Wealth Management Limited ("Echelon") for the remit to the Auditor of Court (i) to tax the account of fees and expenses incurred by them as havers in responding to a specification of documents served on them by the pursuers' agents and (ii) to report.

[2] This action is one of three actions in which investors of funds in Echelon allege that they incurred substantial losses as a result of fraud by the defender, who was a substantial shareholder in and managing director of Echelon. The havers made identical applications in the other two actions, namely those initiated by Stokors SA (CA 134/08) and Lucien Selce (CA 135/08). Echelon specialised in the provision of contracts for differences ("CFDs") which are derivative products, financial spread betting, equities and foreign exchange. Each of the three pursuers instructed Echelon to execute CFD business its or his behalf and alleges that substantial funds which it or he provided were fraudulently misapplied to the benefit of others.

[3] In order to ascertain the flow of funds within Echelon, the pursuers in each case obtained in an unopposed motion an order, dated 23 January 2009, for the recovery of documents, which were sought in a wide-ranging specification of documents. The specification required the provision of all documents which showed or tended to show, among other things, the operation of all of Echelon's bank accounts and of all accounts or sub-accounts which Echelon maintained with other financial institutions in undertaking its dealings, the identities of persons with whom or on whose instructions Echelon transacted, and the circumstances of Echelon's insolvency. It is important to observe that the specification did not seek that the commissioner appointed by the court should excerpt the relevant documents from those which the havers were to produce but in effect imposed on the havers the duty of identifying the documents that fell within its scope.

[4] The pursuers' agents in each case used the optional procedure under Rule of Court 35.3 to serve on the havers on 23 January 2009 a Form 35.3A order, requiring the havers to produce to them the documents falling within the specification. On 2 February 2009 they also sought to cite Mr Cork, one of the havers, to attend a commission on 13 February 2009, but he was absent from the country at the time.

[5] Echelon held a large number of documents, some of which were in paper form and some in electronic form. Mr McIlvride represented to me that the havers decided that they needed to commission bespoke software to enable them to identify within Echelon's extensive business records the ones which fell within the specification. The havers' staff obtained the needed software, developed categories of documents, scanned documents into a computer, tagged the documents to enable searches to be carried out and processed the data. The havers then offered to give the processed documents in electronic form to the pursuers' agents subject to two conditions. The first condition was that the pursuers should pay their expenses. The second condition, which is no longer relevant, was that each of the pursuers should waive confidentiality to allow the havers to hand over the same material in each case and thereby save expense.

[6] The havers' account for the exercise amounted to £53,692.92 plus VAT. It comprised the costs for acquiring the search engine and scanning the documents, which amounted in aggregate to £15,273.83, inclusive of VAT, and fees for the work of the liquidators' staff of £45,602.96, inclusive of VAT. The account identified the personnel in the liquidators' office who carried out the work, their position in the organisation, the nature of the work which they performed and the hours spent on that work.

[7] I was informed that, in response to the havers' claim, the pursuers' agents took the position that they were not under any obligation to pay a fee to the havers to reflect their work in complying with the court order and that, in an attempt to secure payment, the havers asserted a lien, or a hypothec, over the documents. In the event, the pursuers recovered relevant documents from another source and did not insist on the commission and diligence against the havers.

[8] Mr Campbell for the pursuers resisted the havers' motion on two grounds. First, he submitted that the havers as liquidators were under a duty to take possession of the insolvent company's assets and documentation: see the Insolvency (Scotland) Rules 1986, Rule 4.22(1) and (2). In order to perform their statutory duties they needed to ascertain how the defender had operated business of the company, whether the company had claims against any party and whether they required to report the defender or other officers of the company to the relevant regulatory authorities. Thus, he submitted, the havers were claiming from the pursuers for expenses which they needed to incur in their official capacity and, accordingly, no sums were due. As a fall back he submitted that in any event the havers were not entitled to a fee at a professional rate of charging but could claim only a reasonable fee as custodiers of the documents. He referred me to Cuthbertson v Eliott (1860) 22D 389 and Hill v Tait (1856) 18 D 316.

[9] I am satisfied that I should grant the havers' motion. While the pursuers did not gain the benefit of the havers' work in response to the court's order, that was principally because they disputed the havers' entitlement to a fee for that work. It is clear from long-established authority that a haver is entitled to a fee before he produces the documents. The amount of that fee is regulated as the person seeking recovery of the documents can subject it to taxation. The haver can charge a fee for attending at a commission and for his trouble in searching out the documents called for: MacLaren, "Expenses", p.497, Forsyth v Pringle Taylor & Lomond Lawson (1906) 14 SLT 658. I note that MacLaren states also that a haver is not entitled to a fee for copying extracts, unless specially requested to do so by the party citing him. But the learned author relied for that proposition on Forsyth (above), in which the specification gave the commissioner the task of extracting the relevant documents, and also the older case of Burden v Leitch (1840) 2 D 1380. In this case there was no such provision in the specification, but the havers were charged with the selection of the relevant documents.

[10] In Burden, the defender, who was a solicitor, incurred costs in using his clerks to copy letters from his letter book and, during the currency of the litigation, sought reimbursement of those costs together with a fee for his time in selecting the relevant documents. The First Division allowed him reimbursement of his outlays on the basis that otherwise the pursuer would have incurred the expense of copying the letters but did not allow a fee for his professional time at that stage of the proceedings.

[11] We live in different times and in the context of different technology. I see no good basis for denying a third party haver a reasonable fee for time spent and expenses reasonably incurred in putting voluminous documents into an electronic form in which the relevant papers could be selected for disclosure, if the haver can demonstrate that other methods of selection would in all probability be as or more expensive. I therefore see no objection in principle to the nature of the havers' claim. But it will be for the havers to show that they acted reasonably in their response to the court's order.

[12] I do not consider that the pursuers have made out before me their case that the liquidators would have had to incur the expense, which they claim to have incurred in relation to the specification, in the course of performance of their official duties in Echelon's insolvency even if the court had not ordered the recovery of documents. The exercise, which a liquidator undertakes to familiarise himself with the business affairs of an insolvent company, to ascertain whether the company has valid legal claims and otherwise to recover its assets, may be very different from the task of identifying all documents covered by a specification in compliance with an order of the court. In relation to the former, questions of the relationship between cost and benefit are very relevant as the liquidator has regard to the interests of creditors. Such considerations are not relevant in most cases when a liquidator has to comply with a court order for the recovery of documents.

[13] It appears to me that the Auditor may take into account, in fixing a reasonable fee, the extent, if any, to which the tasks carried out by the havers in complying with the order for the recovery of documents would have been necessary, or at least strongly desirable, in the conduct of the winding up if no such order had been made. Otherwise, the litigating party will be subsidising the winding up. But the fact that the liquidators have statutory duties does not, of itself, begin to justify the pursuers' assertion that no fee is due.

[14] In this context, I find the case of Hill v Tait to be of no assistance as it was concerned with very different circumstances in which the expense incurred by a trustee in organising the relevant papers resulted in large measure from his earlier failure to perform his fiduciary duties.

[15] I turn then to the scale of the fee to be charged. In Cuthbertson v Eliott the First Division held that a solicitor, who was the pursuer in an action, was not entitled to charge a fee on his normal professional scale for his work as a haver in searching for documents to produce at a commission. The court, in the opinion delivered by the Lord President (McNeill), drew a distinction in principle between the charges which a person could make on being instructed in a professional capacity and those which a custodier could recover, whether or not the custodier happened to be a professional man. In that case the court also took account of the fact that the haver was a party to the action and as such had duties imposed on him which would not apply to others. The latter consideration is not relevant in this case.

[16] In the present case, it will be for the Auditor to consider (a) the reasonableness of the way in which the havers responded to the specification and also (b) the reasonableness of the charges which the havers seek to recover. In relation to the latter question it appears to me that it is relevant to take into account not only the principle which the First Division articulated in Cuthbertson but also the extent to which the liquidators, as havers, would inevitably have required skilled assistance in order to respond in a reliable way to the court's order.

[17] I therefore granted the havers' motion and awarded them the expenses of the opposed motion.