A word of warning on disclosure

Posted on 13 July 2015

Mishcon updates leading guide on Disclosure Orders

A recent High Court judgment has brought into sharp focus the difficulty of conducting large hard-copy disclosure exercises. The court effectively threw out a long-running £50 million dispute because of the applicants' failures during the disclosure process.

In the case of Re Atrium Training Services Limited (Smailes v McNally), the applicants were liquidators of a series of companies that, prior to 2006, were part of a large national recruitment business. The liquidations were followed by comprehensive and expensive investigations by the liquidators surrounding an alleged tax shortfall.  Ultimately the liquidators issued proceedings – valued at more than £50 million – in May 2011 against three former officers of the companies for fraudulent and wrongful trading, misfeasance, transactions defrauding creditors and transactions at undervalue. The main respondents were advised by Mishcon de Reya and provided a full defence to the claims.

During the investigation phase, the liquidators had amassed a huge number of hard copy records of the companies, but when they produced their first list of documents in June 2012 it was clear that no search had been carried out. Two further attempts at disclosure were undertaken by which time Mishcon had successful obtained unless orders against the liquidators providing that their claims would be struck out if disclosure was not provided.  In the face of the unless order the liquidators proposed a new disclosure methodology using an e-disclosure provider. More than 80,000 documents were eventually scanned and uploaded to a review platform, before being subjected to Optical Character Recognition software (OCR) to convert the scanned picture into a 'readable' format. Many of these documents were old, handwritten or faded and the OCR caused serious mistransliteration or corrupted large swathes of text.

In July 2014, the liquidators' claims were struck out for failure to conduct a reasonable search in breach of the unless order and the respondents (Mishcon de Reya's clients) were awarded more than £2 million in costs. More recently, last month the High Court rejected a further application by the liquidators for relief from sanction, holding that the OCR issue fundamentally undermined the whole disclosure exercise and the liquidators had failed to provide any satisfactory explanation or proposal as to how to deal with the defects.

This type of case may be considered a dying breed as we move away from a hard copy world.  However, the gravest of the court's criticisms in the context of the relief from sanction application related to the liquidators' failure to respond with urgency or even to acknowledge the obvious failings of their chosen methodology. This is not something that is specific to a large hard-copy disclosure exercise or even to the use of OCR, and therefore provides a clear warning to all applicants on the care needed when undertaking disclosure.

Please contact Hannah Blom-Cooper if you have any queries.

A longer version of this article first appeared on the Practical Law Dispute Resolution blog.



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