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

JurisdictionEngland & Wales
JudgeMr Justice Laddie
Judgment Date20 December 2002
Neutral Citation[2002] EWHC 2782 (Ch)
CourtChancery Division
Docket NumberCase No: HC 02001186
Date20 December 2002

[2002] EWHC 2782 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

The Honourable Mr Justice Laddie

Case No: HC 02001186

Rbg Resources Plc
(in Liquidation)
Claimant
and
(1) Viren Kumar Rastogi
(2) Gautam Krishna Majumdar
(3) Anand Kumar Jain
(4) Jay Patel
Defendants

Mr Stephen Smith QC and Mr Clive H Jones (instructed by Messrs Lovells for the Claimant)

Mr John McDonnell QC and Mr Timothy Sisley (instructed by Messrs Magwells for the Fourth Defendant)

Hearing dates: 28, 29 November, 2–4 December 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.

Mr Justice Laddie Mr Justice Laddie
1

This is an application brought by the fourth defendant, Mr Jay Patel, to extract himself from litigation brought against him and a number of others by RBG Resources Plc ("RBG"). The proceedings arise out of the collapse of RBG which the claimant says is due to the existence of an enormous hole in its finances. That is said to have been caused by the misappropriation of some $400M which, according to the company's liquidators, was effected by obtaining loans from a number of banks for the purpose of funding a large number of trading transactions entered into by the company, the overwhelming majority of which now appear to be bogus.

The Parties

2

RBG was incorporated in May 1996 with the name Impactworld plc. It changed its name to Allied Deals plc in July 1996. It commenced its business in or about August 1996 and changed to its current name in September 2001. It claimed to be an international metal and minerals merchanting company specialising in the mining, smelting, refining, manufacture, sourcing, warehousing, distribution and financing of, in particular, non-ferrous, precious and minor metals for a broad spectrum of clients from around the world.

3

At all times, RBG's most senior director and chief executive officer was Mr Viren Kumar Rastogi, the first defendant. He was a major shareholder in RBG and appears to have been regarded by the other directors as the ultimate controlling shareholder. The second defendant is Gautam Krishna Majumdar. He appears to have joined the company in late 1997 and at all times thereafter he was a director and the Deputy Chief Executive Officer of the claimant. The third defendant, Mr Anand Kumar Jam, was first employed by the company in April or May 1999. From 7 June of that year he was an executive director. He was responsible for the day-to-day trading activities conducted on the first floor of the company's premises at Piccadilly, London. Although I will have to return to consider in more detail his qualifications and employment history, at this stage it is sufficient to note that Mr Patel joined the company in 1997 as the financial controller and subsequently became its "Senior Vice President —Structured Finance".

A short history of RBG

4

By far and away the major part of the company's business consisted of the purchase and sale of consignments of non-ferrous metals. The consignments were sold to counter-parties who then owed to the company the consideration for their purchase, called "receivables". At some risk of over-simplification, the business was funded in two ways. First the company obtained funding from banks either in the form of receivable finance for or by selling to the banks the receivables. Second, the company obtained trade finance to facilitate its purchase of metals which it would then sell on to counterparties.

5

The company's business grew, or appeared to grow, exponentially and with it grew the funding made available to it by the banks. The bank with the largest exposure was Westdeutsche Landesbank Girozentrale ("West LB"). It entered into a Receivables Purchase Agreement with RBG and a company called Compass ("the Compass Receivables Agreement") at the beginning of 1999. It also entered into a Commodity Trading Finance Facility Agreement with RBG in October of last year. By the time of RBG's liquidation West LB's exposure was in the region of $200M.

6

It now appears, from investigations carried out by the liquidators, that almost from the beginning a large part of RBG's business was fictitious. The transactions which passed through the company's books and which were used to justify the ever larger sums obtained from the banks, were paper transactions only. Very little metal was bought or sold. Nevertheless, to the outside world, RBG appeared to be a vibrant and growing company. This outward picture changed dramatically in the early part of this year.

7

The company's auditors were PricewaterhouseCoopers ("PwC"). On 30 January of this year, PwC took the unilateral decision to resign while in the course of carrying out the audit for the 14 months to 30 September 2001. Pursuant to s394 of the Companies Act 1985, on that date PwC sent a letter to the directors of the company explaining their reasons for resigning. It reads as follows:

"In accordance with Section 394 of the Companies Act 1985, we set out below the circumstances connected with our resignation as auditors of RBG Resources plc, registered number 3201372 ("the Company"), which we consider should be brought to the attention of the members or creditors of the Company.

In the course of our audit of the Company for the 14-month period ended 30 September 2001, we sent letters directly to a number of the Company's trade debtors and trade creditors ("counterparties") for the purposes of seeking confirmation of the outstanding balances due to/from the Company. In relation to six of the counterparties, our letters had been sent to their respective business addresses in Hong Kong, Belgium and Switzerland. Details of those business addresses were provided to us by the Company. PwC Romania also sent a letter to one of the six counterparties in respect of a material transaction between that counterparty and a subsidiary of the Company. Subsequently, PwC Romania received fax replies to each of the letters from the said six counterparties, all of which were sent on the same date and sequentially at the same time, from the offices of one of those counterparties and which bore the fax header of only the one counterparty from whose fax machine the letters were sent. Management of the Company's subsidiary in Romania immediately sought the return of the fax from PwC Romania.

In view of this unusual event, we decided to undertake some additional audit procedures. We undertook searches of corporate and business registers and certain other public records available in Hong Kong, Belgium and Switzerland in relation to the six companies. We also arranged for visits to be made to the current and certain previous addresses recorded in the Company's records as being or having been the business premises of the six companies.

The results of these searches and visits indicate that the Company's said six. counterparties' addresses and previous addresses are principally those of business centres which provide convenience addresses on behalf of a number of "nameplate companies" and there is little evidence to suggest to us that business activities consistent with the transactions recorded in the books and records of the Company are being conducted from these premises by any of the said six counterparties.

We also discussed with the directors the Company's relationship with the six counterparties, the nature of the outstanding balances and the unusual features of the faxed confirmations we had received. In addition, we reviewed the information held in the Company's credit and transaction files for each of the six counterparties and discussed the nature and extent of this documentation with the Company's directors.

However, we were unable to satisfy ourselves that business transactions consistent with those recorded in the books and records of the Company had been conducted by these six counterparties or that the commodities said to form the basis of the Company's transactions with the six counterparties existed. In relation to four of these counterparties, we could not satisfy ourselves as to the identity of their respective owners. We were also not satisfied by the Company's explanation as to why the replies to the confirmation letters we had requested were received from a single source and on the same date.

We are also concerned that the material transaction entered into by the Company's Romanian subsidiary with one of the six counterparties does not appear to us to have been undertaken on an arms length basis.

Furthermore, on a separate matter, contrary to the representations made to us by certain of the Company's directors, we became aware that the Company appears to have entered into transactions with a related party.

In view of the above, we do not consider that we have received all of the information and explanations from the Company concerning the matters referred to above that we required for audit purposes. In the light of this we consider that the relationship of trust that should exist between an auditor and the Company and its directors has broken down. We are therefore unable to complete our audit of the Company's accounts for the 14-month period ended 30 September 2001."

8

RBG responded to this on 11 Feb 2002 by a letter, the contents of which I will touch upon later. The resignation of the company's auditors was, of course, a serious matter and particularly so in the light of the reasons given for that resignation. The London Metal Exchange circulated a copy of the PwC letter of resignation to its members. This was described by the financial press at the time as almost unprecedented. Furthermore Reuters reported that the City of London Police fraud squad began monitoring the situation.

9

In any event, RBG needed to appoint...

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