When does the limitation clock on concealed claims start ticking for companies in liquidation?
Published on 19th Apr 2021
An appellate court judgment will bring comfort to liquidators of insolvent companies in respect of the limitation periods applicable in cases of fraud or deliberate concealment
The Court of Appeal has handed down an important judgment (14 April 2021) that confirms an insolvent company will not be treated as being aware of concealed claims that it would only have discovered had the company continued to trade. However, this does not change the fact that once an insolvent company is aware of the need to investigate a potential claim it will be expected to do so, irrespective of the insolvency.
Although the appeal related to a cartel damages claim, the decision also has important implications for claimants of all sorts seeking to claim in cases where they have suffered damage arising as a result of wrongdoing that has been deliberately concealed. Osborne Clarke acts for the insolvent claimant (represented by Nick Wood, insolvency practitioner at Grant Thornton) in the case.
What was it about?
In February 2020, the Commercial Court had to consider how the Limitation Act 1980 applied to a case where cartel damages claims were brought by companies in liquidation. One of those companies, OT Computers (OTC), ceased to trade and went into administration before any information about the cartels became public.
At first instance, the High Court judge (Foxton J) found that there was no reason for a company which had ceased trading and entered into administration to be treated as being on notice of a potential claim until (in this case) the publication of the European Commission decision that the cartel participants had infringed EU competition law.
This finding put OTC in a different position to claimants who were still trading companies at the time that certain information about the cartel was made public. The defendants in the claim (Infineon Technologies AG and Micron Europe Limited) appealed the judgment arguing that OTC should not benefit from a longer limitation period by virtue of it having entered into insolvency at an earlier stage than the other defendants.
The Court of Appeal has now affirmed the High Court judgment, finding that "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".
What was the legal issue?
In normal circumstances, claimants who have suffered loss because of tortious conduct have six years to bring a claim from the date of the loss. However, where they were unaware of the wrongdoing and/or loss because the wrongdoing (in this case the infringement of competition law) was deliberately concealed, the special rule in section 32 of the Limitation Act 1980 applies. The limitation clock does not start running until a claimant, acting with "reasonable diligence", could have discovered the loss.
The conclusion in the Commercial Court, which the defendants appealed, was that the standard of reasonable diligence, which is an objective one, was different for a company in liquidation and a trading company.
The defendants argued that it was unfair for a different rule to apply to liquidators, and claimed that the "characteristic" of being in insolvency was a subjective one that should be ignored in judging reasonable diligence. They pointed to the previous case law, particularly Paragon Finance Plc v DB Thakerar & Co  1 All ER 400, in which judicial guidance stated that subjective characteristics such as shyness and risk-aversion, as well as a lack of resources, should be disregarded.
OTC, responding to the appeal, pointed to the fact that a company in liquidation could no longer be considered to be "carrying on a business of the relevant kind", for the purposes of the guidance in Paragon Finance. It would be inappropriate to treat a company that had ceased trading by the time that there was any information available about the cartel as if it had continued to trade and interact in the market. Furthermore, and importantly, administrators and liquidators are subject to statutory duties (and professional guidance) that govern the investigations that they are required to carry out. Accordingly, it could not be right that the standard of "reasonable diligence" applied by the Limitation Act would require insolvency practitioners to make themselves aware of information that they would only have encountered if they had been managing the company and it had continued to trade – this would run the counter to their statutory and professional duties.
What did the Court of Appeal decide?
The Court took the view that:
- The judgment in Paragon Finance provides guidance only and should not take precedence over the statutory wording, particularly since, in that judgment, the Court was not considering the circumstances that arise in this case;
- What matters are the language and purpose of section 32 of the Limitation Act, and therefore it was necessary to consider whether treating OTC as if it had continued to trade would give effect to or defeat the purpose of section 32; and
- That purpose was to ensure that claimants "in a similar position" should be treated consistently, not that all claimants should be treated in the same way.
The Court of Appeal therefore unanimously agreed with the first instance decision of Foxton J. and rejected the appeal.
The implications of the judgment
This judgment underlines that the focus of the court when judging what constitutes "reasonable diligence" should be on the circumstances of the claimant, and the specific facts of the case. This might therefore have repercussions where the limitation defence is raised in group or collective actions, where those circumstances may differ, although the judgment does not mean that every claimant will be treated as an individual case. The approach to the objective test has not changed fundamentally comparable claimants will still be held to the same standard but whether those claimants are comparable will depend on the situation of the claimant at the time that the information could have been discovered.
In affirming the judgment of Foxton J, the Court of Appeal has also quashed the suggestion that an administrator duty to identify claims, once it becomes clear that the company cannot be rescued, could mean that the administrator must actively monitor the trade press and maintain industry connections as if s/he is running the company. Such an outcome would have put insolvency practitioners in an impossible position where compliance with their statutory and professional duties would risk claims relating to concealed wrongdoing becoming time-barred (because of the standard expected by the Limitation Act).
Osborne Clarke comment
The Court of Appeal did not consider the interaction of the recent limitation rules introduced by the EU Damages Directive (implemented in the UK in 2017), as the claim in question fell outside that regime. It is interesting to note, though, that the fact-specific enquiry implied by the judgment might be at odds with the new regime in some cases.
The position is potentially further complicated by the fact that, following Brexit, future European Commission cases will not cover the UK aspects of Europe-wide infringements. The factual question will therefore arise as to whether information about a European infringement is sufficient to trigger knowledge of a UK infringement.
It is not yet known whether the appellants will pursue their appeal in the Supreme Court, but it is clear that even if they do not, the application of limitation law to cartel damages claims will continue to give rise to difficult issues.