Preserving causes of action in an insolvency context: reasonable diligence and the Limitation Act

What is reasonable diligence when a company has entered an insolvency process and has abandoned its trading functions?

The Court of Appeal considered this issue in OT Computers Ltd v Infineon Technologies Ag & Anor [2021] EWCA Civ 501, in interpreting the statutory postponement of a primary limitation period by s.32 Limitation Act 1980 (“LA 1980”) in circumstances where facts relevant to the cause of action were deliberately concealed from the Claimant/Respondent (“OTC”).  This case is part of a slew of recent reported decisions on limitation issues.

In this case, the wrongdoing giving rise to the proposed claim (the “Relevant Facts”) had occurred when OTC was a trading company, but actual knowledge of the same did not arise until long after OTC had entered administration and ceased trading. The central question for the Court was whether, for the purposes of s.32 LA 1980, the fact that OTC had ceased trading before the Relevant Facts became public knowledge should be ignored by the Court in assessing whether OTC had exercised ‘reasonable diligence’ in that period in seeking to discover the concealed Relevant Facts.

Background

OTC was a company involved in the business of assembling and selling desktop computers. It purchased parts from the Appellants (“Micron” and “Infineon” respectively) for this purpose, before entering administration in January 2002 (pursuant to which its business and assets were sold to competitors). OTC remained a shell entity with neither business nor assets until February 2004 when it entered into liquidation.

Between 1998 and mid-2002, unknown to OTC (and others), Micron and Infineon had participated in a price-fixing cartel in the computer parts industry, in respect of which they were eventually the subject of adverse findings by the European Commission in a decision adopted on 19 May 2010 and resulting in regulatory fines of approximately EUR 331 million (the “Regulatory Decision”).  It was also common ground, however, that events leading up to the Regulatory Decision had begun in mid-2002, including Micron’s subpoena from a Grand Jury and attendant press reports regarding investigations by the US Department and the EU Commission into Micron, Infineon, and others for anti-competitive practices.

On 18 May 2016, OTC and some other customers of Micron and Infineon (the “Granville Companies”) brought ‘follow-on’ proceedings alleging infringements of Art 101 TFEU. The particularly astute reader will have noticed that these claims were issued one day before the expiry of six years from the date of the Regulatory Decision.

Defending the claims, Micron and Infineon argued, inter alia, that the claims were time-barred under the LA 1980, the cause of action having first accrued between 1998 and 2002 during the operation of the cartel.

The section 32 argument

In response, OTC and the Granville Companies relied on s 32 LA 1980 which, they argued, suspended the running of time for limitation purposes (such that their respective claims were not time-barred).

Section 32 LA 1980 provides, inter alia:

(1) […], where in the case of any action for which a period of limitation is prescribed by this Act, […]

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant;

[…]

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it […]

(2) For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty”.

OTC and the Granville Companies therefore contended that, although the cause of action accrued between 1998 and 2002, time had been suspended by s.32 as a consequence of the cartel’s concealment of the Relevant Facts and that time did not begin to run until such time as they discovered the Relevant Facts or could with reasonable diligence have done so.

Foxton J’s first instance decision

The section 32 argument came before Mr Justice Foxton as a preliminary issue.

Foxton J gave particular weight to the classical (and widely applied) formulation of the test given by Millett LJ in Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400, as follows:

“The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.” (emphases added)

Foxton J then identified two further aspects of ‘reasonable diligence’. That:

a. where there is deliberate concealment of a relevant fact, the law makes no assumption that the potential claimant is on notice to investigate. The statutory concept of ‘reasonable diligence’ “will not require a claimant to take steps to discover that fact unless there is something (referred to in the cases as a “trigger”) to put it on notice of the need to investigate” ([35]); and

b. importantly, for the appeal, the concept of ‘reasonable diligence’ must also be qualified by some (but not all) of the particular circumstances of the potential claimant whose actions and/or inaction are under scrutiny.

On the facts as found, Foxton J distinguished the position of OTC from that of the Granville Companies. When information about the cartel first entered the public domain, the Granville Companies remained active purchasers from Micron and had, inter alia, expressed interest in an invitation to join as claimants in a US class action commenced in May 2005. Accordingly, if they had exercised reasonable diligence, they could have pleaded a viable claim at least before July 2005 when the Granville Companies also entered administration. Their claims were therefore time-barred.

The position of OTC was different. OTC had ceased trading and entered administration nearly six months before reports of a Department of Justice investigation began to circulate and never received an invitation to join the US class action. Foxton J held that, although clearly an insolvency practitioner’s role included identifying claims which the company might have, a reasonably diligent administrator of a company which had sold its assets and ceased trading would not be expected to take steps such as monitoring the trade press after it had ceased trading and could not be expected to have retained the same contacts (with the exchange of industry information which inevitably follows).

In these circumstances, Foxton J distinguished OTC from Granville Companies and held that OTC’s claim was not time barred.

Permission to appeal

Permission to appeal was granted on the issue of whether Foxton J was wrong to take account of OTC’s insolvency in considering whether it could with reasonable diligence have discovered enough about the existence of the cartel to enable it to plead a viable claim.

Court of Appeal decision

 The Court of Appeal unanimously upheld Foxton J’s analysis of the statutory concept of ‘reasonable diligence’, finding that the Judge had not erred in taking account of the fact that OTC had become insolvent in determining the point at which OTC ought to have discovered the Relevant Facts giving rise to its cause of action.

A few interesting points emerge from Males LJ’s judgment on this point.

First, Males LJ rejected a submission that the relevant status and characteristics of a claimant are fixed at the time at which the cause of action accrued or wrongdoing occurred.

There is nothing in the statutory language of s.32 LA 1980, nor (as was suggested by the Appellants) the burden of proof s.32 imposes on a claimant or the Paragon Finance decision, that required the Court to artificially assume that OTC was in fact a trading entity in the period following the relevant wrongdoing

Similarly, there was no justification for reading in such a requirement, having regard to the purposes of s.32 LA 1980, noting, inter alia, the analogous comments of Lord Hoffman in Adams v Bracknell Forest Borough Council [2004] UKHL 29, a case concerning s.14(4) LA 1980. Although in that case the House of Lords held the claimant’s claim was time-barred, Lord Hoffmann noted in respect of the assumptions to be made about a particular claimant that:

“Section 14(3) uses the word ‘reasonable’ three times. The word is generally used in the law to import an objective standard, as in ‘the reasonable man’. But the degree of objectivity may vary according to the assumptions which are made about the person whose conduct is in question. Thus reasonable behaviour on the part [of] someone who is assumed simply to be a normal adult will be different from the reasonable behaviour which can be expected when a person is assumed to be a normal young child or a person with a more specific set of personal characteristics. The breadth of the appropriate assumptions and the degree to which they reflect the actual situation and characteristics of the person in question will depend upon why the law imports an objective standard.”

Males LJ favoured at [59] a similar approach to s.32 LA 1980, concluding on this point that:

“Here, the purpose of the section is to ensure that the claimant – the actual claimant and not a hypothetical claimant – is not disadvantaged by the concealment. In achieving that purpose it is appropriate to set an objective standard because it is not the purpose of the law to put a claimant which does not exercise reasonable diligence in a more favourable position than other claimants in a similar position who can reasonably be expected to look out for their own interests. Rather, claimants in a similar position should be treated consistently. However, a claimant in administration or liquidation which is no longer carrying on business is not in a similar position to claimants which do continue actively in business and it is unrealistic to suggest otherwise.”

Second, and accordingly, while the test imposed by s.32 LA 1980 clearly requires a largely-objective exercise in determining what the particular claimant “could with reasonable diligence” have discovered, the central question remains what the claimant could have learned if it had exercised reasonable diligence in the circumstances. That, the Court of Appeal held, must be determined by reference to the actual claimant, rather than a hypothetical one ([48]).

Third, while there remains a single statutory test of ‘reasonable diligence’, it may be useful to divide the ‘reasonable diligence’ enquiry into two parts: (a) was there anything to put the claimant on notice of a need to investigate a cause of action? and (b) what would a reasonably diligent investigation have revealed? Reasonable diligence is not only required once a potential claimant is on notice – it applies throughout the entire period.

 Fourth, if there was any real doubt, there is a single statutory test under s.32. It applies to all cases of concealment, fraud, and mistake. There is no justification in the Court of Appeal’s view for applying different ‘reasonable diligence’ tests to different cases (such as where a claimant is carrying on business).

Comment

A few interesting points emerge from Males LJ’s judgment on the relevance of a potential claimant’s insolvency to the statutory concept of ‘reasonable diligence’.

First, the OTC decision confirms the principle that the focus of the Court’s enquiry in applying s.32 (as with other comparable provisions such as sections 11 and 14) of the Limitation Act 1980 is to assess whether and/or when the claimant exercised diligence which was reasonable in the actual – and not a hypothetical – claimant’s circumstances in seeking to discover and then pursuing the relevant cause of action.

As Lord Hoffmann put it in Peconic Industrial Development Ltd v Lay Kowk Fai [2009] HKCFA 17, “it does not follow that because an objective standard is applied, the claimant must be assumed to have been someone else.” Nevertheless, the courts have also spoken with one voice – including in OTC – to the effect that not all of the claimant’s circumstances and personal characteristics are to be accounted for in a s.32 analysis. As the Court of Appeal said in the OTC case at [38]:

“I would agree that personal traits or characteristics bearing on the likelihood of the particular claimant discovering facts which a person in his position could reasonably be expected to discover, such as whether the claimant is slothful, naïve, shy, nervous, uncurious or ill informed, are not relevant.”

The question then arises: which circumstances or characteristics are relevant to whether and when the actual claimant ought to have discovered the facts giving rise to its cause of action. It is imperative that the claimant is not improperly disadvantaged by reason of being reasonably unaware of circumstances giving rise to a cause of action as a result of fraud, concealment, or mistake.

The OTC decision, while very far from providing final answers on , makes clear that a company’s insolvency (and/or, more likely, its entry into a formal insolvency process) and cessation of trading can be accepted as a relevant circumstance for the purposes of s.32 LA 1980.

That is the real value of the OTC decision for litigators dealing with the claims of insolvent (or previously insolvent) companies. A non-trading claimant in administration or liquidation is not in a similar position to a claimant which is actively carrying on business. The Court of Appeal did not consider it realistic or useful to pretend otherwise.

 Second, and related to the above, the judgment is anchored in an understanding of the clear purpose of s.32 LA 1980 (and similar suspensory provisions).

The central tension sitting at the heart of the LA 1980 is the need to “strike a balance between the competing aims of protecting defendants from stale claims but allowing claimants to overcome the expiry of the ordinary time limit where the statute so provides” (Canada Square Operations Ltd v Potter [2021] EWCA Civ 339 at [29]).

That is (unsurprisingly) consistent with the analysis of the UKSC in respect of s.32(1)(c) LA 1980 specifically, in the FII Group Litigation [2020] UKSC 47 (at [228]):

“… section 32(1)(c), like the equitable rule which preceded it, necessarily qualifies the certainty otherwise provided by limitation periods. It means that the 1980 Act does not pursue an unqualified goal of barring stale claims: its pursuit of that objective is tempered by an acceptance that it would be unfair for time to run against a claimant before he could reasonably be aware of the circumstances giving rise to his right of action.”

It is not difficult to see why there is a compelling need to suspend the running of time in cases where facts central to a cause of action are concealed from a potential claimant. That is particularly so in cases, like OTC’s, where the central allegation is one of (secretive) conspiracy or cartelisation, which feature was noted by the Court of Appeal in the OTC case at [18]:

“It is in the nature of an unlawful price-fixing cartel that it is deliberately concealed from its victims and, in any event, operating such a cartel amounts to deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time.”

Third, while reasonable diligence is a single requirement throughout the period after which the cause of action in fact arose, it may be of use to litigators to adopt the two-staged process endorsed by the Court of Appeal in OTC. These are that:

(a) the claimant must be reasonably attentive so that it becomes aware (or is treated as becoming aware) of the things which a reasonably attentive company in the same (relevant) position would learn; and

(b) the court must determine what facts would have been known to the claimant had such diligence been shown. The claimant will be taken by the Court to know those things which a reasonably diligent investigation would have revealed to it. The Claimant must act with reasonable diligence on those facts.

This gloss has since been applied by Mr Justice Trower in Boyse (International) Ltd v Natwest Markets Plc [2021] EWHC 1387 (Ch) at [39].

James Shaw

21 July 2021