RBG Resources Plc ((in Liquidation)) v Rastogi and Others

JurisdictionEngland & Wales
JudgeMR JUSTICE HART,THE HONOURABLE MR JUSTICE LIGHTMAN,Mr Justice Lightman
Judgment Date24 May 2005
Neutral Citation[2005] EWHC 994 (Ch),[2004] EWHC 1089 (Ch)
Docket NumberHCO 2C1186,Case No: HC02C1186
CourtChancery Division
Date24 May 2005

[2004] EWHC 1089 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Court 19

Royal Courts of Justice

The Strand

London WC2

Before:

Mr Justice Hart

HCO 2C1186

Between:
RBG Resources Plc (in Liquidation)
Claimant
and
(1) Viren Kumar Rastogi (2) Anand Kumar Jain (3) Jay Patel
Respondent

MR STEPHEN SMITH and MR CLIVE JONES (instructed by Lovells) appeared on behalf of the Claimant

MAX MALLIN and REUBEN COMISKEYMR D LORD (instructed by Needleman Treon) appeared on behalf of the First and Third Defendants.

Tuesday, 27th April 2004

(10.00 am)

(JUDGMENT)

MR JUSTICE HART
1

This is an application by the claimants RBG Resources Plc (In liquidation)(RBG) for summary judgment against its former executive company directors Viren Rastogi (VR) and Anand Jain, (AJ), the first and third defendants in the proceedings.

2

RBG was in the metals business. It was established by VR in 1996 and by September 2002 had a turnover of US$1.7 billion. On 30th January 2002 its auditors, PricewaterhouseCooper, resigned giving as their reasons under Section 394 of the Companies Act 1985, the breakdown of trust and confidence between themselves and the directors arising out of their failure to obtain satisfactory explanations for the fact that confirmation of indebtedness from six apparently independent customers of RBG had all apparently been faxed at the same time on the same fax machine from the same address. Further investigations resulted in an application being made on behalf of its principal creditor, West LB, for the appointment of provisional liquidators, an application that was granted on 3rd May 2002. The liquidation revealed a deficit of some $445 million with liabilities of $330 million-odd owed to the banks which had financed its trading. Its assets included some $406 million owed to it by trading counterparties none of which has proved to be recoverable.

3

The essence of the claim is that this situation is the result of a fraudulent scheme which was designed to extract, and succeeded in extracting, several hundred million US dollars from financiers. According to the claimants, the scheme involved the invention of a very large number of bogus metal and other mineral trading transactions. It was implemented by the creation of a world wide network of trading counterparties who were controlled by VR and AJ, by the fabrication of the trading transactions and by the dissipation of the funds extracted. These bogus transactions were presented to financiers as genuine trades with independent trading companies for the purposes of extracting funds. This was done first through the sale to the financiers under receivables agreements of the liabilities purportedly owing to RBG as a result of these trades and, secondly, the raising of trade finance in respect of purported purchases. It is said that by the time the music stopped in May 2002 at least two-thirds of RBG's ostensible trade was the result of these activities.

4

VR has three surviving brothers. Narendra Rastogi was the chief executive of Allied Deals Inc, a US metal trading operation. VR had been an officer, and owner, of Allied Deals Inc before coming to the UK in 1996 when he established RBG, then called Allied Deals Plc. Allied Deals Inc was closed down by the US authorities at about the same time as provisional liquidators were appointed at RBG, i.e May 2002. Narendra has been in custody in the US ever since and has recently entered a plea bargain with the US authorities. He has given evidence to them of similar fraudulent trading by Allied Deals Inc to that which RBG alleges against VR and AJ, and has asserted that VR was complicit with him in such trading both in connection with Allied Deals Inc and in connection with RBG. That allegation is supported by his assistant, Jasprit Basra.

5

The second brother, Ravindra, was involved in a related company in Dubai named Wavesmetco Llc. It is alleged by RBG in these proceedings that Wavesmetco Llc was one of the controlled counterparties. The third brother, Subhash, was involved with similar Singaporean entities who are also alleged to have been controlled counterparties.

6

VR was the chief executive officer and moving spirit in RBG. AJ was the executive director with day-to-day responsibility for the operation of what is alleged to have been the fraudulent scheme. AJ's personal assistant was VR's sister in law, Sheetal Rastogi. Another assistant was Pankaj Sikri. The persons I have just mentioned all operated from RBG's head office in London.

7

The trading counterparties to which the allegation relates were ostensibly located in Hong Kong, Singapore, Dubai, India and the United States. In Hong Kong, RBG's principal agent was Mr Murthy who was assisted by Dhwaraswamy Somasekharan ("Mr Sekhar"), at times assisted by a Mr Vineet Kumar Aggarwal. In Singapore the assistants were Subhash Rastogi, Tarun Kumar Aggarwal and Sanjay Sikri, the brother of Pankaj, the London-based assistant. In Dubai, the assistants were Narendra Rastogi and P K Keerthan. In India, their assistants included Y K Aggarwal and Artul Jain.

8

It is RBG's case that these assistants took their instructions from and reported to VR and AJ, the latter being assisted and sometimes represented by Sheetal. The purported trading with the counterparties was typically done on a matched transaction basis. The sale by one counterparty to RBG was matched by a purchase by another counterparty from RBG. The purported purchases by RBG usually required immediate settlement whereas its purported sales were on credit terms, often 180 days. Trade finance was used to fund purported purchases. The receivables created by the purported sales on credit terms were used to obtain receivables finance, typically 95% of the face value. This finance would then be misappropriated to and for the benefit of the counterparties.

9

The net result, according to RBG, is that when the music stopped it was left with irrecoverable assets in the form of liabilities to it on the part of counterparties in the sum of $400 million-odd and liabilities to the banks who financed the trades of over $300 million. On the footing that the trades were bogus it claims the latter sum from VR and AJ on the grounds that their orchestration of the fraudulent scheme was a breach of their fiduciary duties as directors of RBG which has resulted in that loss. If, on the other hand, the transactions to the counterparties or some of them were real transactions it seeks to make them liable for the amount of the counterparties' unpaid liabilities to RBG on the footing that they are liable as quasi recipients of RBG's property received by the counterparties under the transactions, relying for this purpose on the approach of the court, in Trustor v Smallbone (No 2) [2001] 1 WLR 1177.

10

VR and AJ deny these claims. They say that as far as they were concerned all the transactions between RBG and the counterparties in question were arms length transactions with trading entities which were independent of RBG and, so far as they were aware, independent of each other. The fact that all of the counterparties in question, who number about 250, have in the event failed to respond to any of their liabilities to RBG can be explained by the fact that they were all relatively small businesses which had been unable to trade as a result of the imaginative credit and other terms afforded to them by RBG. Their inability to respond to their liabilities was no more than the consequence of the unexpected shutting down of RBG's business following the appointment of the provisional liquidators. If, and to the extent that it now appeared from the evidence that some or all of transactions reveal an apparently incestuous web of connections between the counterparties inconsistent with their mutual independence, those were matters for which VR and AJ could provide no explanation save to suggest that the responsibility for this state of affairs might lie in the unauthorised actions of RBG's local representatives in Hong Kong, in particular Mr Murthy and Mr Sekhar. Both VR and AJ were adamant that they knew nothing of these matters and were certainly not themselves responsible for controlling the affairs of the counterparties in question.

11

As Mr Mallin has pointed out on behalf of the defendants, the Part 24 application raises allegations of a massive fraud involving over 250 companies and relies on nine voluminous witness statements and thousands of exhibited documents. It is submitted by him that the attempt by RBG to proceed by way of summary judgment application necessarily involves doing that which the courts have repeatedly deprecated, namely using the summary judgment procedure to conduct a "mini trial" on the documents, and moreover doing so in circumstances which are manifestly unfair to the defendants, given that there has been no disclosure by RBG, that the defendants themselves have no access to documentation, that the defendants have no opportunity to test the electronic documentation relied upon and that the defendants' ability to collect evidence overseas has been hampered by the fact that, as a result of the orders obtained in May 2002, their passports have been in baulk. It is additionally pointed out that the summary judgment application is avowedly being pursued because of the high (and possibly prohibitive) costs which would be incurred by the liquidators in bringing the action to a full trial.

12

In support of those submissions, Mr Mallin referred me to the speech of Lord Hope in Three Rivers District Council v Bank of England [2003] 2 AC 1 at paragraphs 95 and 96 (p.p 260-261), to the speech of Lord Hutton in the same case, at paragraph 136, to...

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