Limitation in finance litigation: What would the reasonably diligent investor do?
Judgment has recently been given in two cases related to limitation in the context of alleged misconduct in the financial and foreign exchange markets. In Allianz Global Investors ("Allianz") v RSA Insurance Group Limited ("RSA")1, the Court rejected a summary dismissal/strike out application on the grounds of limitation, finding that the reasonably diligent institutional investor would not have had sufficient knowledge to plead its fraud/s90A of the Financial Services and Markets Act 2000 ("FSMA") claim at an earlier time. By contrast, in ECU Group Plc ("Ecu") v HSBC Bank Plc ("HSBC") & Ors2, the Court dismissed claims for misuse of confidential information in relation to currency trades, finding that ECU had sufficient knowledge to plead its claim in 2006.
While there are substantial differences between the two claims, they provide a detailed analysis of the law on limitation and in particular, the "developing and difficult legal question" of the application of s32(1) of the Limitation Act 1980 (the "Act") and the "reasonable diligence" test3.
Allianz v RSA
Allianz, one of over 70 institutional investor claimants, issued three sets of proceedings; one in 2019, and two in 2021 (specifically, 11 May and 18 June, the "2021 Claims") against RSA. The claims are brought under s90A FSMA and allege losses arising out of misconduct by an Irish subsidiary of RSA which had been publicly disclosed in late 2013, resulting in a substantial drop in RSA's share price. Allianz claimed that RSA's failure to disclose and publish details of the misconduct earlier (between 2009 and 2013 when, Allianz alleges, RSA's senior executives knew of the misconduct, but dishonestly or recklessly delayed disclosing it to market) resulted in Allianz suffering harm as a result of acquiring / continuing to hold shares in RSA between 2009 and 2013 on the basis of relevant published information.
Limitation in Allianz v RSA
RSA applied for strike out/summary dismissal of the 2021 Claims on the grounds of limitation. It argued that there was sufficient publicly available information about the misconduct in: i) news reports from late 2013; and ii) its own media announcements in January 2014 to enable a reasonably attentive investor to be in a position to bring the claim well before 11 May 2015, meaning the 2021 Claims were time-barred.
Allianz argued that the publicly available information was insufficient to allow it to plead its claims. It contended it was only after publication of an Employment Appeal Tribunal (EAT) decision on the misconduct in June 2015 that information relating to the knowledge of relevant individuals at RSA (which information was necessary to bring the claim) became available. As a general point, it also submitted that it was not possible to decide the limitation issue on a summary basis (and prior to disclosure) because the institutional investors had differing approaches to investment decisions and strategy. This, it argued, meant that what would be considered "reasonable diligence" would differ for each claimant and disclosure would be necessary from all parties before a decision could be reached.
Miles J agreed with Allianz that it had insufficient information to plead its claims until after the EAT decision. He highlighted the following points:
- The lack of evidence about the way institutional investors generally monitor their investments made an "unduly fragile" evidential basis for summary judgment. The Court's approach to what an institutional investor acting with reasonable diligence would normally do would have been assisted by such evidence (per Granville Technology Group Limited (In Liquidation) v Infineon Technologies AG  EWHC 415 (Comm)).
- It cannot simply be assumed that it is market practice for institutional investors (even reasonably attentive ones) to read official market announcements in relation to their investments.
- The absence of evidence regarding institutional investors' monitoring of press reports was similarly unhelpful. It was easy "with hindsight to see the significance of some articles" but Miles J found there was a "real question" about the way in which a reasonable investor would have monitored the press and / or conducted searches at the time.
- Issues of reasonable discoverability are factual. The Court can, in appropriate circumstances, make summary conclusions on issues arising in respect of s32 of the Act without disclosure, but in this case, it would not be appropriate.
- There was a realistic case that the position under s32 of the Act may be different for different institutional investors (e.g. those holding an interest through a tracker fund as compared to those holding an interest directly, and those allegedly suffering losses in the thousands compared to those whose loss extended to £23m). It was not "plain and obvious" that they should all be "lumped together".
ECU v HSBC
ECU managed multi-currency loan facilities on behalf of its clients through a debt management programme. One of the services it provided was to make currency switches based upon what, in its opinion, would provide "the greatest perceived benefit" to its clients. To effect these switches, ECU issued two types of instructions to banks (including HSBC): i) a "market order", which required an immediate switch; and ii) a "stop loss order", which was a conditional switch triggered only where the prevailing foreign exchange spot rate hit a specified trigger level.
ECU alleged that HSBC: i) failed to act in accordance with its instructions; ii) engaged in "front running", a process by which trades were undertaken with knowledge of ECU's stop loss orders in order to trigger those stop loss orders at a profit for HSBC; iii) wrongfully added a margin to the rate at which they traded in the market and included that margin in the rate provided to ECU causing it loss; and iv) was liable for wrongful trading by individual HSBC traders on their own account with knowledge of the ECU orders ("Confidence Claims").
HSBC argued that all of ECU's claims were time-barred (as well as that no wrongdoing took place and, if this was held to be wrong, such wrongdoing did not cause any loss). It contended that ECU had sufficient knowledge to plead its claims by 4 May 2006 at the latest, when it made a formal complaint (which it subsequently elected not to pursue) to HSBC regarding certain transactions.
By contrast, ECU contended that it did not discover the relevant facts prior to 4 February 2013. It argued that its claims, which were based in fraud, could not be pleaded on the basis of "mere suspicion or belief held by one or more persons within ECU" and that it was only when it received trading data via a pre-action disclosure application made in 2017 that it was able to properly particularise its claim.
Moulder J dismissed ECU's limitation defence, making the following findings in relation to "sufficient knowledge" and "reasonable diligence" under s32 of the Act:
- "Sufficient knowledge" to plead dishonesty does not require evidence in "admissible form". She considered that it is sufficient to have "material of such a character as to lead responsible counsel to conclude that serious allegations could properly be based upon it." On the facts, she was satisfied that the information to plead the front running claim was available to ECU in 2006.
- Given the "paucity" of the current pleaded case regarding the Confidence Claims, there was no sustainable argument that "sufficient knowledge" was not available in 2006. The claims were arguably insufficiently pleaded to be advanced in any event.
- HSBC accepted that the evidence available to ECU in 2006 in relation to the margin claim was less than the supporting evidence for the front running claim. On a detailed review of the facts, Moulder J determined that on balance, ECU did not have "sufficient knowledge" to plead the margin claims in 2006 within the meaning of s32 of the Act.
- Moulder J considered the application of the "reasonable diligence" test in relation to the margin claim, and in case she was wrong on the "sufficient knowledge" test, the Confidence Claims. She held that if ECU had been "reasonably attentive", it would have sought legal advice and taken steps to pursue the front running claims in 2006, rather than dropping its complaint, holding that: "reasonable diligence means not the doing of everything possible, but it means objectively exercising reasonable diligence".
- Had ECU brought its front running claim within the normal limitation period, the necessary data to advance the margin claim would have become available through disclosure. Moulder J rejected ECU's argument that bringing such proceedings would have amounted to a "device" to obtain disclosure and held that the exercise of reasonable diligence can encompass issuing substantive proceedings.
- If issuing substantive proceedings were not part of the "reasonable diligence" test to secure sufficient information to bring a separate claim, Moulder J concluded that reasonable diligence could also encompass making an application for pre-action disclosure, which ECU had failed to do.
In dismissing ECU's claim, Moulder J ordered it to pay HSBC's costs on the indemnity basis, making it clear that ECU's Chief Executive and Chief Investment Officer of ECU, Michael Petley: "knew ECU had a problem with limitation and, no matter how sincerely he may have believed in the underlying accusations against HSBC, he set out to rewrite history."
What does reasonable diligence involve?
It is clear from the judgment in Allianz that while technically possible, the Court will be reluctant to make findings on the difficult question of "reasonable diligence" on a summary basis. This case also demonstrates that to decide what the reasonably diligent institutional investor would or should have done, the Court will need to understand what the normal practice is for that type of institutional investor. While the test under s32 of the Act is an objective one, its purpose is to ensure that the actual, and not a hypothetical, Claimant, is not disadvantaged by the concealment. The judgment is likely to be welcomed by Claimants not only because it makes it more difficult to obtain strike out/summary dismissal on the basis of limitation issues arising under s32 of the Act but because it also suggests that what constitutes "reasonable diligence" may be different for different types of institutional investors.
The judgment in ECU, on the other hand, will be welcomed by financial institutions seeking to rely on limitation defences. While the claims in this case were found to have caused no loss in any event (and ECU's principal witness was found to have been evasive and unreliable in his evidence), the judgment reaches firm conclusions about the scope of the "reasonable diligence" test. Here, Moulder J held that, in appropriate circumstances, it could even extend to issuing substantive proceedings, to elicit information necessary to bring other claims, and / or making a pre-action disclosure application.
Whatever the future holds for the reasonable diligence test, this case (and the recent decision in European Real Estate Debt Fund v Treon4summarised here) highlight the draconian consequences of leaving it too late to issue your claim. While particular care must be taken in pleading fraud, still more care needs to be applied to limitation, which, in and of itself, creates challenging tensions for solicitors and barristers given the countervailing professional obligations engaged.
1  EWHC 2950 (Ch)
2  EWHC 2875 (Comm)
3 Which is, per Millett LJ in Paragon Finance Plc v DB Thakarar & Co. (A Firm)  1 All ER 400 at [p418] "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."
4  EWHC 2866