Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC (a Bahraini corporation) and Others
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Flaux,The Honourable Mr Justice Flaux |
| Judgment Date | 23 October 2013 |
| Neutral Citation | [2013] EWHC 3186 (Comm) |
| Docket Number | Case No: 2010 Folio 1157 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 23 October 2013 |
[2013] EWHC 3186 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Rolls Building
Fetter Lane, London, EC4A 1NL
The Honourable Mr Justice Flaux
Case No: 2010 Folio 1157
Robert Anderson QC and William Edwards (instructed by Hogan Lovells LLP) for the Claimant
Max Mallin (instructed by Archerfield Partners LLP) for the First and Second Defendants
David Mills (with the permission of the Court) represented the Third Defendant
Hearing date: 15 October 2013
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction and background
On the fifth day of the trial of this matter I considered applications by the second and third defendants to amend their Defences (in the case of the second defendant by way of re-re-amendment) and to adduce expert evidence of UAE/Dubai law. On the morning after hearing the applications, I informed the parties that the applications would be refused for reasons which I would set out in a reasoned judgment to be handed down at a later date. This is that judgment.
In order to place the applications in context, it is necessary to consider the broad outline of the case and some of the procedural history. The claimant (to which I will refer as "the Bank") provides banking and financial services in accordance with Islamic law, including short term trade finance or receivables financing. The Bank's claim against the second, third and fourth defendants is a claim in debt for some US$432 million (after giving credit for recoveries) arising under a restructuring agreement ("the RSA") dated 19 August 2007, which was entered into after the Bank discovered it had been a victim of a long standing fraud.
From November 2002 onwards the Bank entered into a series of Agency Agreements with the fifth defendant and its associated company, CCH plc (referred to collectively as "CCH") as the means by which short-term trade finance would be provided to exporters. It is not in accordance with Islamic principles for the Bank to provide trade finance by way of short-term interest bearing loans. Accordingly the model used is so-called murabaha agreements: the Bank itself (through CCH as its agent) would buy the goods from the exporter, then, again through CCH as its agent, would sell the goods to the purchaser. The difference between the purchase price and the sale price represented the Bank's profit on the transaction. The agency arrangements with CCH succeeded similar arrangements dating back to the 1980s under which the third defendant and his then business partner, Guvan Nil, the fourth defendant's father, did murabaha deals with the Bank. After Mr Nil senior died in 2000, the fourth defendant became the third defendant's business partner and they did murabaha deals with the Bank through CCH.
Under the Agency Agreements, once CCH had put the contractual arrangements in place, the Bank was to remit the funds required into an account in the name of CCH. The fact that funds flowed through CCH, rather than directly between the Bank and the exporter and purchaser respectively, enabled the fraud to be perpetrated. When the Bank discovered it had been the victim of fraud in the summer of 2007, it became plain that, of US$501 million outstanding ostensibly advanced for short-term receivables financing, some US$342 million had not been applied in respect of such transactions but instead in unauthorised long term projects. Two such projects are of particular relevance. The Refinery Project was a project by which the second defendant, through a Pakistan incorporated company of which he was 80% shareholder and a director, as was the fourth defendant, proposed to dismantle an oil refinery from the West and rebuild it in Pakistan.
Some US$180 million of the monies needed to finance the Refinery Project came from funds advanced by the Bank for receivables financing, but which the third defendant via CCH advanced to the second defendant for the Refinery Project. Although the second defendant in these proceedings denies being aware that any fraud was being perpetrated, at the time the fraud was discovered when he was interviewed by the Bank and its solicitors, he said that the third defendant told him that false invoices needed to be generated to maintain funding. The second defendant obliged by providing false documentation.
According to the account provided to the Bank and its solicitors by the third defendant at the time the fraud was discovered, the costs of the Refinery Project escalated and CCH attempted to trade out of its difficulties by investing more of the Bank's monies in other unauthorised but shorter term projects. These included the Plantation Project under which in January 2004, Mr Arthur Fitzwilliam had obtained a lease (hereafter referred to as "the Lease") of 1.86 square kilometres of desert land on the outskirts of Dubai (forming part of Dubailand) from the Dubai Development and Investment Authority. A special purpose vehicle, Plantation Holdings (FZ) LLC ("Plantation"), was incorporated (in which Mr Fitzwilliam held a 70% shareholding and the second defendant held a 30% shareholding on behalf of himself and the third defendant, in equal shares) to carry out the Plantation Project, which was to be a world class polo and equestrian centre, with a hotel and luxury residential villas and apartments. It is clear that several million dollars of the Bank's monies were absorbed into the Plantation Project in an unauthorised fashion, notwithstanding which, at the time the RSA was entered in August 2007 (and indeed a year later when the Bank enforced its security) the Project was still in its early stages and construction had barely started, with only some road infrastructure completed and polo fields laid out.
Because the monies provided by the Bank to CCH were supposed to be expended in short-term trade finance transactions, it was necessary, as I have already noted, for false documentation to be created and CCH had to "churn" the Bank's money, that is invent new transactions for which the Bank provided funds, which were then used to pay off the existing fictional transactions. Once the flow of funds was stopped in July 2007 after Mr Naveed Ali took over responsibility at the Bank for the CCH relationship and began to investigate transactions, the almost immediate result was a default on an invoice on the CCH account which should not have occurred if these were independent, genuine, transactions.
Thereafter, negotiations took place with the defendants and Mr Fitzwilliam with a view to a global settlement under which terms would be agreed for the repayment of the US$501 million outstanding and owing to the Bank ("the Rescheduling Amount"). All parties were represented by English solicitors in those negotiations, which eventuated in the RSA, to which the Bank, the two CCH companies, the second, third and fourth defendants, Plantation and Mr Fitzwilliam were parties. In broad terms, the CCH companies agreed to repay the Bank in instalments (CCH Europe for the full amount and CCH plc for US$50 million). However, the obligation to repay the Rescheduling Amount was not only placed upon CCH but, pursuant to clause 7.2, upon all the non-Bank parties except Mr Fitzwilliam to cause non-CCH assets and income streams to be applied against the Rescheduling Amount, specifically the proceeds of the sale of Plantation villas in so far as they exceeded US$150,000 per month.
By clause 6.1 of the RSA, the second, third and fourth defendants assumed two critical obligations: (i) they "jointly and severally and as continuing security guarantee[d] the repayment of the Rescheduling Amount" and (ii) they undertook "jointly and severally [to] indemnify the Bank as principal debtors in respect of any failure or inability to recover the Rescheduling Amount as provided for herein". Detailed provisions concerning the liability by way of both guarantee and indemnity are contained in Schedule 5 to the RSA, limiting the scope of any defence that might otherwise be available. Clause 8 of the RSA set out the security that was to be provided to the Bank to secure the liabilities of the non-Bank parties except Mr Fitzwilliam. In particular, under clause 8.2: "Plantation shall (and Arthur Fitzwilliam shall procure that Plantation shall) grant to the Bank: (a) a first ranking charge, by way of conditional assignment of the Lease".
Clause 18 contained detailed provisions for Events of Default and Enforcement events, including at 18.4 an acceleration clause. It is neither necessary nor appropriate in this judgment to look at these provisions in detail, save to note that, on 4 and 9 June 2008, the Bank served two notices of default under these provisions. Whether or not the Bank was entitled to do so is a hotly contested issue in the current trial.
Finally, under clause 27 of the RSA, that Agreement was governed by and construed in accordance with English law "save in so far as inconsistent with the principles of Sharia law". As a matter of English law, that proviso is of no effect, as a religious law can never apply as the applicable law, so that in construing the RSA, Sharia law is irrelevant: see the decisions of the Court of Appeal in Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC [2004] EWCA Civ 19; [2004] 1 WLR 1784 per Potter LJ at [54]–[55] and Halpern v Halpern [2007] EWCA Civ 291; [2008] QB 195 per Waller LJ at [29]. By clause 27, all disputes under...
To continue reading
Request your trial
-
Fortenova Grupa D.D. (as a Representative of the Interests of the Fortenova Group Companies, Pursuant to CPR 19.8) v LLC Shushary Holding
...and the English courts. Flaux J (as he then was) dealt with this issue in Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC [2013] EWHC 3186 (Comm) in which a debt was created by a contract governed by English law but it was secured by a security assignment governed by Dubai law in ......