Komercni Banka as v Stone and Rolls Ltd

Hearing date: 11 June 2002

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.

The Hon Mr Justice Toulson

Mr Justice: Toulson

Introduction

This action is about an allegedly fraudulent scheme involving letters of credit (LCs) issued by the claimant bank in favour of the first defendant (SR) at the request of a company called BCL Trading GmbH (BCL). The first was issued in December 1997. The 51st and last was issued in July 1999.

The LCs related to purported sales by SR to BCL of large quantities of agricultural products of Russian or Ukrainian origin. A notable feature was that they were all "deferred payment" LCs. Their maturity dates varied from 180 days to 360 days after presentation of the relevant documents,

In 13 cases the LC did not become operative, and in 8 cases the bank was repaid on maturity. The claim relates to the remaining 30 LCs, in respect of which the loss alleged by the bank amounts to $94,720,382.80 (excluding interest). Of these 30 LCs, seven were issued between July and December 1998 and 23 between April and July 1999. Attention during the trial was concentrated mainly on the 30 LCs from which the bank suffered loss, but it is relevant also to look at earlier instances to see how the story began. I will come to that in due course.

There was some variation in the requirements of the LCs, but they all required the presentation of a commercial invoice, confirmation of insurance of the goods and a warehouse "warrant list".

The pattern of events in relation to the operative LCs was as follows. SR as beneficiary would procure the presentation of documents to the bank, via an intermediary bank. The documents presented were accepted by the claimant bank. The LCs were then assigned by SR to a discounting bank or in some cases forfeited by the claimant bank itself. The proceeds were mostly paid over by SR to BCL or connected companies.

The bank's case is that there were no genuine underlying sales of produce lying in Russian warehouses; the invoices and warrant lists presented to it were sham; and SR acted as BCL's puppet and accomplice in a dishonest scheme designed to obtain money from it by false pretences.

The second defendant, Mr Stojevic, is SR's chief executive officer. SR's ultimate ownership is obscure, but Mr Stojevic was in command of its dealings with BCL and the bank. It is the bank's case that Mr Stojevic was responsible for procuring the fraudulent presentation of documents to the bank, and he and SR are therefore jointly liable to the bank.

The action is brought against SR and Mr Stojevic in deceit. There are separate proceedings pending between the bank and BCL in Austria and the Czech Republic.

The defendants deny that there was any dishonesty on their part. BCL proved to be an unreliable trading partner, but SR was not its puppet nor was it complicit in any dishonesty which there may have been on the part of BCL. They say the LCs related to genuine transactions, and the presentation to the bank of the invoices and warehouse warrant lists involved no attempt at deception of the bank.

The defendants also point to grave internal irregularities and shortcomings on the part of the bank. If there was dishonesty by the defendants in the presentation of the invoices and warehouse warrant lists, they deny that this had any effect on the conduct of the bank.

Since the allegations made by the bank are grave, it follows that the evidence required to establish them must be correspondingly strong. The authorities on this point are too well known to need citation.

If liability is established, certain questions of principle arise in relation to the damages claimed. The issues concern alleged benefits for which the defendants say that the bank must give credit.

The protagonists and other relevant parties

The claimant

The claimant was incorporated in the Czech republic in 1990 as part of a privatisation programme in which the former State Bank of Czechoslovakia was split into three parts. The part of the business which went to the claimant included smaller commercial customers who had loans relating to working capital and financing of trade. The Czech Republic was the majority shareholder with a stake of 60 per cent (which it retained until it sold its interest in October 2001); the balance of 40 per cent was privatised. It is one of the largest Czech banks, with over 300 branches in the Czech Republic and abroad, and one of the largest banks in central and eastern Europe.

Its relationship with BCL was a disaster for the bank and led to one of the largest banking scandals in the history of the Czech Republic.

The LCs with which this action is concerned are only a small part of the bank's dealings with BCL. In all, the bank issued 263 LCs on the application of BCL. Its losses from its dealings with BCL exceeded $250 million. Reports by the bank's internal audit department and by the Czech National Bank, in March and April 2000, revealed an astonishing catalogue of deficiencies from the board of directors downwards and resulted in a cull of the bank's senior management. Many of the bank's former officers and senior employees are now facing criminal proceedings in the Czech Republic, some for alleged offences of dishonesty, although it has not been alleged by either party in the present action that there was fraud by any bank officer or employee in relation to the LCs with which I am concerned.

At the time of the events in question the bank's internal organisation was highly bureaucratic and involved a complex network of divisions and departments. In relation to BCL there appears to have been a good deal of muddle and some infighting between departments. The departments with the most direct involvement were 3050, which dealt with trade finance, and its off shoot 3052, which dealt with LCs. The head of 3050 was Mrs Kaplanova until November 1999. The head of 3052 was Mrs Neuhauslova until April 1999. They are facing joint criminal charges, not of dishonesty but of breach of duty in administering another person's assets.

Mrs Kaplanova was replaced as head of 3050 in November 1999 by Mrs Mitkovova, who was new to the bank. One of her main tasks became the investigation of the BCL affair. She gave evidence over three days and was an impressive witness, but she had no first hand knowledge of the circumstances in which the LCs were issued.

The bank called four other employees or ex-employees as witnesses. They were Miss Horakova, Mrs Hermanova, Mr Liss and Mr Palecka. Miss Horakova used to be employed as a cipher in department 3052. Her responsibilities included checking that documents presented under LCs conformed with the bank's requirements. She did so in relation to 28 of the 30 LCs in question. She was able to identify the signatures of the ciphers who had checked the documents presented under the other two LCs.

Mrs Hermanova was head of 4020 and Mr Liss was in the same department. It had been established to assess the risks of particular transactions, using mathematical and statistical methods. This form of risk assessment was not normally applied in the case of transactions involving foreign customers, but 4020 was asked to make an assessment of the standard risk costs for BCL's LC transactions. Mrs Kaplanova (head of 3050) regarded the involvement of 4020 as an unwelcome form of interference. Miss Hermanova and Mr Liss were concerned about the adequacy of the monitoring of the risk to the bank from its LC business with BCL and made recommendations, which were not followed.

Mr Palecka became a director of the bank in October 1999. From February to April 2000 he was its acting chairman, and from April 2000 to October 2001 he was vice-chairman and deputy chief executive. He had not heard of BCL before he joined the board. Thereafter he was involved in attempts to tackle the problem of the bank's exposure which had become obvious.

None of the bank's witnesses was involved in making the decisions which led to its issue of LCs in favour of SR. The absence from the witness box of those who had such responsibility is unsurprising, since they are no longer employed by the bank and some face criminal charges.

The bank also called as witnesses an expert on the Russian grain industry, Mr Day-Robinson; a director of a Moscow private investigation firm, Mr Grigoriev, who carried out investigations on behalf of the bank, in March and April 2000; and Mr Chasty, a chartered accountant and partner in the firm of Moore Stephens, who were SR's auditors.

The defendants

Mr Stojevic was born and grew up in Croatia. He trained to be a naval architect. In the 1980s he moved to Austria. There he became involved in aluminium trading. Towards the end of 1994 that activity ceased to be profitable and he turned his interest to Russian agricultural business.

SR was incorporated in England. It traded in aluminium for a number of years but in 1995 it was dormant. On ₁st October 1995 SR began a new business, under the management and control of Mr Stojevic, as a trader of agricultural produce from the region around Rostov on Don.

The shares in SR are held by an Isle...