Poly Peck International Plc v Nadir and Others

This is an appeal against the grant by Millett J. on 7th November 1991 of a Mareva injunction against the fourth defendant, Central Bank of the Turkish Republic of Northern Cyprus. I shall in this judgment refer to the fourth defendant as "the Central Bank" and to the Republic as "Northern Cyprus".

The plaintiff in the action is Polly Peck International plc ("PPI"). On 25th October 1990 an administration order was made in respect of PPI. Three eminent chartered accountants were appointed joint administrators. The action is being prosecuted at their direction.

PPI is a public limited company incorporated in England which carried on business, and to some extent still does, as the holding company of a group of over 200 subsidiaries, including 80 trading subsidiaries. A substantial part of the trading interests were concentrated on Northern Cyprus and Turkey.

PPI has an issued share capital of over 436 million £1 ordinary shares. The ordinary shares were at all material times listed on the International Stock Exchange, London. PPI is now insolvent. The statement of affairs prepared for the purpose of the application for the administration order estimated the total deficiency as regards creditors of PPI to be in excess of £550 million. If the issued share capital is taken into account the deficiency is in the region of £1 billion.

The first defendant in the action is Mr. Asil Nadir who acquired a controlling interest in PPI in about 1980 and has at all material times since then been Chief Executive of PPI. It is said in the statement of claim that Mr. Nadir was a signatory of all the branch bank accounts of PPI and was in a position to control and direct the movement of funds of PPI to and from the various subsidiaries of the group.

The fifth defendant in the action is Kibris Endustri Bankasi Limited (which I will refer to as "IBK"). IBK was incorporated in Northern Cyprus in 1982 and has at all material times carried on business as a bank. Its head office is in Lefkosa, Northern Cyprus. It is pleaded in the statement of Claim that 399,100 of the 400,000 issued shares of IBK stood in the name of Mr. Nadir. It is, I understand, not in dispute that Mr. Nadir controlled IBK and that IBK provided bank services in Northern Cyprus for the PPI group and had few, if any, customers other than members of the group and members of Mr. Nadir's family.

Northern Cyprus is not recognised by Her Majesty's Government but nonetheless has had de facto control over its territory since about 1974. The Central Bank was incorporated in Northern Cyprus in 1983 and since its incorporation has acted as central bank for Northern Cyprus with the supervisory and regulatory role and powers that would be expected to be enjoyed by a central bank of a sovereign state.

Under the law of Northern Cyprus, every bank operating within the territory must be authorised to carry on business by the Central Bank and, to ensure its liquidity, must hold at least 20 per cent of its foreign currency reserves with the Central Bank. Accordingly, IBK has at all material times maintained a bank account with the Central Bank in Lefkosa, Northern Cyprus.

Neither the Central Bank nor IBK had a branch office in England. But both Central Bank and IBK maintained sterling accounts at Midland Bank International plc's Cannon Street branch.

In the action PPI has made claims against Mr. Nadir in respect of misapplication of the funds of PPI amounting in total to the sum of £378 million and against IBK in respect of misapplication of funds of PPI of £142 million or thereabouts.

The basis of the claim against IBK is that over the period 1st September 1987 to 25th September 1990 funds of PPI, totalling the £142 million odd, were transferred to the account of IBK at Midland Bank International from whence the funds were transferred or paid out or applied otherwise than for the proper purposes of PPI.

The claim against the Central Bank relates to £44,987 million of the £142 million. Over the period September 1987 to October 1990, IBK transferred a total sum of £44,987 million from its own account at Midland Bank International to the Central Bank's account at Midland Bank International in exchange for a corresponding sum in Turkish lira or, in nine instances, in sterling being credited to IBK's account with the Central Bank in Lefkosa, Northern Cyprus. This was done by a series of transactions whereby, save in the nine cases I have mentioned, IBK purchased Turkish lira from the Central Bank and paid in sterling. In the period 1st September 1987 to the end of that year, there were five transactions varying in amount from £150,000 to £300,000 and totalling £1,250,000. In 1988 there were 15 transactions varying in amount from £150,000 to £400,000 and totalling £3,597,000. In 1989 there were 53 transactions, varying from £100,000 to £800,000 and totalling £17,584,000. In 1990 there were 44 transactions, varying from £100,000 to £1,000,000 and totalling £22,561,000. In the books of IBK in Northern Cyprus the transferred sums were, in the main, credited to one or other of PPI's local subsidiary companies. In two instances, one in 1987, the other in 1988, the transferred sum was credited in IBK's books to Mr. Nadir. There are also 21 credits in favour of IBK itself. These include, in particular, the last five transactions totalling £1,100,000 which took place in September and October 1990.

It is not clear from the evidence what finally became of the sums that were placed to the credit of IBK in its Central Bank account in Lefkosa. I will refer later in this judgment to such evidence as there is.

The administrators contend that the scheme whereby PPI's funds in London were transferred via IBK to Northern Cyprus was, at best, in breach of fiduciary duties owed by Mr. Nadir to PPI and, at worse, a dishonest means of diverting PPI's funds to improper purposes. For the purposes of the application before Millett J. and of this appeal, that contention is accepted. It is common ground that the Central Bank assisted in the scheme to the extent that it received the funds transferred to it by IBK in London and made the funds, mainly in Turkish lira but partly in sterling, available to IBK in Northern Cyprus. The administrators contend that the Central Bank either had actual knowledge that the funds in question derived from PPI and were being improperly diverted away from PPI purposes or that the circumstances of the case put the Central Bank on inquiry that that was so. It is common ground that the Central Bank in fact made no inquiries but simply accepted and acted upon IBK's instructions for the purchase of the Turkish lira and for the crediting of the sums to IBK's account in Northern Cyprus.

The critical pleading of the claims against the Central Bank is to be found in paragraphs 24.11 to 24.14 of PPI's statement of claim.

Paragraph 21.11 is in these terms:

"In the premises the Central Bank received the said sums to the Central Bank's Midland Account with actual knowledge that the transfer of the same had been procured by Mr. Nadir in breach of his fiduciary and/or contractual duties to PPI and/or in breach of trust, alternatively, the Central Bank received such sums wilfully shutting its eyes to the source of the said funds and/or wilfully and recklessly failing to make such enquiries as an honest and reasonable banker would have made on receipt of funds of such magnitude and such regularity in that…"

There then follow a number of sub-paragraphs detailing what it was that the Central Bank "well knew".

In paragraph 24.12 it is alleged that Central Bank

"knowingly dealt with PPI funds in a manner inconsistent with the purposes of PPI…"

In paragraph 24.13(ii) it is alleged that Central Bank

"wilfully shut its eyes to the source of the said transfers into [its] Midland Bank Account and/or wilfully and recklessly failed to make such enquiries as an honest and reasonable banker would have made as to the source of such funds."

And in paragraph 24.14 it is pleaded that

"In the premises the Central Bank is liable as a constructive trustee in the sum of £44,987,000 and is liable to compensate PPI in equity accordingly."

The pleaded case against the Central Bank is, therefore, one of constructive trust.

I must now refer to the history of the litigation. The writ was issued on 22nd October 1991. On the previous day an ex parte application was made to Millett J. He granted world wide Mareva injunctions against ( inter alios) Mr. Nadir and IBK. The injunction against Mr. Nadir was limited to £378 million. That against IBK was limited to £141,778,969. In addition Millett J. granted a Mareva injunction in respect of the assets of the Central Bank in this jurisdiction limited to £38,943,707. The matter came back before the court, inter partes, on 29th October 1991. The governor of the Central Bank had sworn an affidavit,...