Liquidator failed to prove new partners accepted liabilities of solicitors’ firm, judge rules

The liquidator of a multi-million pound hedge fund who raised an action against the company’s solicitors alleging that the firm “breached its fiduciary duties” to its client has failed in a bid to have three of the firm’s new partners included as defenders in the case.

The pursuer also sought to add five former partners as defenders in the action, but a judge in the Court of Session ruled that the liquidator had failed to show that any of the individuals had taken over the liabilities of the firm when they joined the partnership.

Lord Woolman heard that Heather Capital Ltd (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 of Levy & McRae, the first defender, 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.

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 an account with HSBC Private Bank in Monaco held by a Panamanian company.

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.

And in December 2008 a payment of £200,000 was made to the eighth defender, Peter Watson, from Hassans’ client account.

The liquidator pleads 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”.

It stated: “the pursuer having suffered loss, injury and damage by reasons of the defenders’ dishonest assistance of Gregory King in the latter committing breach of his fiduciary duties owed to the pursuer … decree should be pronounced”.

The liquidator is seeking to recover the sum of £28.4 million from the defenders, partners and former partners to the action as they “may be jointly and severally liable for the debts of the firm”.

But the defences stated that three of the defenders – Alasdair Gillies, Andrew Sleigh and Gary Booth – had been “wrongly convened” because they had been assumed as partners after June 2007, and that the matter had caused them “significant reputational damage”.

Section 17(1) of the Partnership Act 1890 states that a person who is admitted as a partner into an existing firm “does not thereby become liable to the creditors of the firm for anything done before he became a partner”, but in their Joint Consultation Paper on Partnership Law (2000), the Law Commission and the Scottish Law Commission stated in relation to Scots law that “there appears to be a general presumption that the new partnership takes over the whole liabilities as well as the assets” where the business taken over is “substantially the same as the old firm” and where that business is “continued without interruption”.

However, in the 1936 case of Thomson Balfour v Boag & Son, the Inner House stated that “it was for the pursuers to prove” that a new partner had accepted liability for the debts of the old business.

The judge observed that in the present case the liquidator had not offered to prove such facts and circumstances. Instead, he stated that “the defenders have been called upon, but failed, to provide to the pursuer the evidence (including a copy of the relevant partnership agreement(s) and copies of the accounts showing capital contributions made by the partners joining the partnership after December 2008) that any new partners who joined the partnership of Levy & McRae have not, in fact, undertaken liabilities of the partnership which were in existence prior to them joining. Accordingly, all the defenders are properly convened.”

Dismissing the case against the third, sixth and seventh defenders, Messrs Gillies, Sleigh and Booth, Lord Woolman’s note stated: “In my view, that averment fails to satisfy the test identified by the Inner House. There are no averments that would allow the liquidator to lead evidence that the three individuals either expressly or tacitly agreed to take over the existing liabilities of the previous firm. It does not set out the basis upon which the three individuals are convened. Instead it inverts the normal rule that the pursuer must plead his case.

“Given the serious nature of the allegations and the size of the claim, the liquidator required to identify the basis upon which each defender had been convened. He also had to differentiate between the acts of those individuals who had been partners at the material time and those who had been assumed after 2007.”

In a minute of amendment, the pursuer had also sought (a) to alter the dates for the partners called as defenders to 4 January 2007 to date; and (b) to add five individuals – Anne Bennie, Calum Anderson, Laura Salmond, Graham Craik and Stephen Hay – all of whom had been partners of Levy & McRae at some stage in that period.

However, the judge noted that there were no substantive averments to indicate the basis upon which these individuals were said to have taken over prior liabilities.

“Accordingly,” he said, “for the same reasons as given in relation to Messrs Gillies, Sleigh and Booth, I refuse to allow receipt of the minute. Standing the very serious nature of the allegations, and the absence of a proper basis for seeking to add the five individuals as partners, I hold that it is not in the interests of justice to follow that course.”

The pursuer further sought an order requiring the defenders to answer questions about the firm’s insurance position, suggesting that the court could use the “wide powers” contained in rule of court 47 to order disclosure, but the judge declined to do so.

Lord Woolman explained: “The details of insurance are a private matter between the insured and insurers. There are major questions involved in disclosure, including the likelihood that it would encourage speculative ‘deep pocket’ litigation.”

The liquidator also asked the court to ordain Mr Watson, to provide a witness statement to explain the circumstances in which the sum of £9.5 million was paid to Hassans and the purpose of the payment of £200,000 made to him from Hassans’ client account, but the judge refused the application, stating that he found “no compelling reason in this case to depart from the normal rule that there should be a simultaneous exchange of witness statements”.