Limitation Act 1980 s.32(1): whether a claimant could have discovered fraud with "reasonable diligence" extends to events prior to accrual of the cause of action

The High Court found that, when considering the postponement of the limitation period for the purposes of Section 32(1) of the Limitation Act 1980, the question of whether the claimant could have discovered the fraud with "reasonable diligence" extends to the period before the claimant suffered a loss. (European Real Estate Debt Fund v Treon & Ors [2021] EWHC 2866 (Ch))

Facts

The case arises out of an investment in the European Care Group ("ECG") business by a property debt fund called the European Real Estate Debt Fund (the "Fund"). European Real Estate Debt Fund (Cayman) Limited (in liquidation) (the "Claimant") is the assignee of the Fund. 

ECG had been founded by the First Defendant, Mr Treon, in 2000. ECG was advised for many years by the Second Defendant, financial advisory firm RP&C International Limited (which subsequently changed its name to Arundel Group Limited), and in particular Dr Srinivas, the Third Defendant.

In 2010, ECG decided to issue a series of loan notes in an attempt to raise US$50m. ECG appointed the Second Defendant as placement agents and the Third Defendant as the person responsible for liaising with new investors.

On 24 June 2011, the Fund made its principal investment in ECG in the amount of £11m. Prior to the Fund's investment, the Fund's advisers had engaged in numerous discussions with the First and Third Defendants about the investment and ECG's business and prospects from around January 2011 onwards.

The Fund's advisers discovered that certain financial information about ECG's business and prospects that had been provided by the Defendants was false and misleading and confronted the First Defendant at a meeting in March 2012. The First Defendant was removed as a director of ECG in March 2012. ECG's new management subsequently invited the Fund to make a further investment and the Fund invested another £4.25m in July 2012.

In 2014, ECG went into administration and the Fund lost the entire value of its investment.

The Claimant, as the Fund's assignee, alleged that the Defendants fraudulently misrepresented the recent financial performance and future prospects of the business which were relied upon and subsequently induced the Fund's investment in ECG.

The Claimant issued the claim on 16 October 2017, and sought to rely on s32(1) of the Limitation Act 1980 to seek to postpone the start of the limitation period. The Defendants argued that the claim was statute barred, as it was brought more than six years after the Fund's investment in ECG.

High Court decision

Although the Court noted that it would otherwise have found for the Claimant on most of the claims, it held that the claims were statute-barred.

The court considered s32(1) of the Limitation Act 1980 which provides:

"Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either –

 (a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake

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. References in this subsection to the defendant include references to the defendant's agent and toany person through whom the defendant claims and his agent.

The Court further referred to the judgment in OT Computers Limited v Infineon Technologies AF [2021] EWCA Civ 501, noting in particular:

• the state of knowledge which a claimant must have in order for it to have discovered the concealment (fraud in this case) has mostly been regarded as the knowledge sufficient in order to enable it to bring a claim;
• there will be cases where the discovery of relevant facts involves a process which takes place over a period of time during which a claimant who exercises reasonable due diligence could have discovered enough to plead the claim or embark on the preliminaries before issuing proceedings;
• the question is whether or not the claimant could, with reasonable diligence, have discovered the fraud sooner (the standard for this was not to be judged against the six-year limitation period; instead, the test is how a person carrying on a business of the relevant kind would act if they had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency); and
• the burden of proof is on the claimant to establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take.

The Court noted that s32(1) only becomes relevant once there is a complete cause of action, as that is the point where the limitation period would commence. That said, the Court must examine all of the facts and should not artificially restrict itself to events or circumstances which arose only after the cause of action accrued.

The principal question when determining whether or not s32(1) can be relied upon is whether the claimant either has, or could have, reasonably discovered the fraud without taking exceptional measures. This may well turn on events which occurred before as well as after the loss was suffered.

Applying these principles to the facts of the case, the Court expressed that it expected that the Fund's advisers, who were experienced in analysing and assessing financial and accounting information, would have undertaken due diligence before arranging an investment. The Court held that it was clear to the Fund's advisers that the financial information provided by ECG prior to the Fund's investment was incomplete. The Court further found that the financial information that had been provided prior to the investment would have caused a reasonably diligent investor to ask further questions and demand additional information. Finally, the Court found that if the Fund's advisers (or the putative reasonable investor) had asked further questions and made information requests regarding the financial information that had been provided, they would have discovered sufficient facts to enable the Fund to plead a statement of claim.

In the light of the above, the Court concluded that the Claimant failed to satisfy the requirements of s32(1) and the Claimant's claim was statute-barred.

Comment

In the context of s 32(1) of the Limitation Act 1980, it is clear from this decision that the Court's enquiry as to whether the claimant could have discovered a fraud with reasonable diligence extends to the period before the claimant suffered a loss.

It is the responsibility of the claimant to gather sufficient evidence and material in order to demonstrate and convince the Court that, without exceptional measures, it would not have been possible to discover the fraud. The Court will then consider circumstances arising both before and after the action accrued, particularly whether or not it was reasonable for the claimant to undertake certain diligence.

The decision is a caution to victims of fraud who seek to rely on s32(1) to extend the primary limitation period for a fraud claim. As Mr Justice Miles put it at paragraph 775 of his judgment: "the special statutory postponement of the limitation period […] is not available to all victims of fraud, however careless they may be in attending to and asserting their rights. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there is no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim."