REUTERS | Alex Domanski

When should you throw in the towel? Contempt: a step too far

I had the pleasure of sitting with Akenhead J on 22 February 2013 as part of the marshalling scheme run by the TCC, a scheme which I would thoroughly recommend.

The court heard the next round in the long-running dispute of Berry Piling Systems Limited v Sheer Projects Limited. This dispute has been through the process of adjudication, arbitration, and enforcement proceedings in the TCC, culminating in an application for committal for contempt against two of Berry’s directors.

Enforcement proceedings

In the earlier enforcement proceedings, Berry was seeking to enforce the adjudicator’s award of approximately £20,000. Sheer sought a stay of execution (in the event the summary judgement application was successful) on the grounds that Berry would be unable to repay the judgment sum in any subsequent proceedings to finally determine the dispute. In doing so, Sheer relied upon an expert report concluding that Berry was unable to pay its debts. In response, two of Berry’s directors provided witness statements dated January and February 2012 confirming, among other things:

  • Berry was well able to repay the sum.
  • Berry had a full order book.
  • Berry’s management accounts showed a profit.

Edwards-Stewart J held that there was no defence to the enforcement application. Despite the expert evidence proffered by Sheer, the judge held that, given the statements made by Berry’s directors as to the full order book and management account profits, Berry would be able to repay the debt.

The directors subsequently approached administrators at the end of March 2012, who were eventually appointed in May 2012.

Sheer concluded that the statements made a few weeks earlier by the directors as to Berry’s financial position were surely false and sought permission to make an application for committal for contempt against the directors.

Committal application

The arguments

In support of the committal application, Sheer procured a further expert report. This analysed certain past debts owed to Berry and concluded that at the time of making the witness statements, these debts were bad debts, which the directors should have taken into account to reach a conclusion that Berry was unable to pay its debts. The report concluded that the directors’ witness evidence was:

“…incompatible with what they knew (or should have known) about the finances of the Company.”

Berry contended that the report did not go far enough. It was not enough that the directors should have known or were careless in their particular statements: Sheer had to show that they actually knew what they were saying was false.

The judgment

The court held that it can be contempt of court for a witness to make a statement, supported by a statement of truth, recklessly as to its truth. It was not necessary to prove actual knowledge of its falsity.

In order to permit the application it was necessary to consider whether:

  • There was a strong prima facie case (an assessment made while not straying into the merits of the case).
  • The public interest required the committal proceedings to be brought.
  • The proceedings would be proportionate and in accordance with the overriding objective.

On the facts, the court held that, while at best Sheer may have established a prima facie case, they had failed to establish a strong prima facie case. The court concluded that the expert was unable to say either way whether the witness evidence was incompatible with what the directors knew “or should have known”. If it was incompatible with what the directors “should have known”, this was not enough. What was missing from the expert’s evidence was the conclusion that the directors must have known the debts were bad.

The court also held that it was wholly disproportionate for the matter to proceed to a committal hearing given the £20,000 sum which had been the subject of the enforcement proceedings and given the substantial costs likely to be incurred in any committal proceedings.

The court also offered some advice to those bringing committal proceedings, arising from Sheer’s procedural failures in bringing the application:

  • Given the quasi-criminal nature of the proceedings, it was vital that the respondent knew the case it had to answer and that the statements which were said to be false were clearly set out by the applicant (Sheer had initially failed to do this).
  • A party cannot refuse to disclose instructions given to its expert (as Sheer had tried to do).

Concluding thoughts

With the absence of cross examination of witness evidence in adjudication enforcement proceedings, witness evidence is often taken at face value. It is therefore vital that those making statements appreciate these may well be acted upon by the court in such proceedings. To the extent a party makes a statement that it knows to be untrue or makes one recklessly as to whether or not it is true, that party may well face contempt of court proceedings.

That said, it is clear that the applicant party must establish a strong prima facie case and that the proceedings must be proportionate. In establishing a strong prima facie case the burden is high given the criminal nature of the proceedings, which require the case to be proved beyond all reasonable doubt. In this dispute, the pursuit of committal proceedings in the context of such a small underlying claim, procedural irregularities and a failure to establish a strong prima facie case led the court to reject the application.

It is not certain what personal benefit Sheer had in pursuing a committal application in that it would have unlikely been able to recover the £20,000 as a result of the proceedings.

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