Riyad Bank v AHLI United Bank Plc
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Moore-Bick |
| Judgment Date | 01 March 2005 |
| Neutral Citation | [2005] EWHC 279 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 01 March 2005 |
| Docket Number | Case No: 2002 Folio 1323 |
[2005] EWHC 279 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
The Honourable Mr. Justice Moore-Bick
Case No: 2002 Folio 1323
Mr. Michael Brindle Q.C. and Mr. Simon Colton (instructed by Slaughter & May) for the claimants
Mr. Michael Lyndon-Stanford Q.C. and Mr. Dominic Chambers (instructed by Lovells) for the defendant
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 Moore-Bick
1. Introduction
As is generally known, the principles of Islam impose certain important restrictions on the circumstances in which money may be invested to produce a profit. It has therefore been necessary for banks and other institutions seeking to provide financial services to Islamic clients to develop new types of investment vehicles carefully structured to ensure that no part of their income is derived in ways that are incompatible with those principles. Such vehicles are often known as 'Sharia-compliant' funds. In 1994 the defendant, Ahli United Bank (UK) Plc, then known as The United Bank of Kuwait Plc, established through its Islamic Investment Banking Unit an income fund whose assets were invested entirely in operating leases of equipment, thereby rendering it Sharia-compliant. Most of the leases in which the fund invested related to equipment used by large commercial organisations in the United States. The fund was known as the "IIBU II Fund" and was marketed to the bank's customers in Kuwait and elsewhere. During the period with which these proceedings are concerned the defendant was known as The United Bank of Kuwait and throughout the proceedings themselves it has been referred to by that name, or by the abbreviation "UBK". For convenience, therefore, I shall continue to refer to the defendant as UBK and to the IIBU II Fund as "the UBK Fund". The person primarily responsible for the day to day operation of the UBK Fund at the time in question was Mr. Derek Weist.
The first claimant, Riyad Bank, is a major commercial bank based in Saudi Arabia. The second claimant, RBE London Ltd ("RBE"), is a wholly-owned subsidiary of Riyad Bank which was incorporated in England for the purposes of carrying on the private banking business of Riyad Bank, both in this country and elsewhere. From 1993 it began to develop products which were marketed through Riyad Bank's network of branches in Saudi Arabia. Its customers included many wealthy individuals and RBE was therefore particularly interested in developing Sharia-compliant investment products in order to meet their requirements. At the time of the events giving rise to this action Mr. Keith Scott was managing director of RBE and chairman of its Product Development Committee. Ms. Najwa Al-Tunisi was manager of the Investment Department.
The head of UBK's Islamic Investment Banking Unit ("IIBU") was Mr. Duncan Smith. He and one of his assistants, Mr. Richard Thomas, became acquainted with Ms. Al-Tunisi when they worked together at another bank some years prior to the events with which I am concerned. In about December 1995 Mr. Smith and Mr. Thomas approached RBE through Ms. Al-Tunisi to enquire whether Riyad Bank would be interested in marketing the UBK Fund through its branches in Saudi Arabia. Following discussions and a formal presentation by Mr. Smith and Mr. Thomas to various senior members of RBE, including Mr. Scott and Mr. Nabil Al-Ajroush, Mr. Scott's deputy, a proposal along those lines was put to RBE's Investment Committee, but the committee was not willing to market a product bearing the name of UBK because it feared that promoting a fund established by a smaller competitor would damage its standing with Saudi investors.
However, the idea of a leasing fund as a form of investment vehicle suitable for Islamic investors still held strong appeal for RBE and further discussions soon took place to see whether it could be developed in a different way. Mr. Smith and Mr. Thomas suggested that RBE should set up its own fund on the same lines as the UBK Fund using IIBU as its technical adviser. Several months of discussions eventually culminated in the signing of Heads of Agreement in November 1996 setting out the framework under which RBE and UBK, acting through the IIBU, would co-operate in the establishment of a leasing fund in the form of an Irish-domiciled variable capital company. The services that it was intended UBK should provide in connection with the project included devising a suitable structure for the fund and workable documentation, recommending and engaging suitable lease managers, recommending suitable custodians, administrators, legal advisers and auditors for the fund, devising suitable operating procedures and, most importantly, providing technical services in connection with the operation of the fund, such as recommending suitable leases for purchase by the fund and the analysis of lease managers' estimates of residual values and lease renewals. For its part it was intended that RBE should draw up a business plan for the fund, review and approve the fund documentation and administrative procedures drafted by UBK and act as general investment adviser to the fund.
During the next few months the parties devoted themselves to setting up the structure of the fund. As a first step RBE and UBK entered into a Technical Services Agreement dated 30 th May 1997 which defined in some detail the services which UBK was to render in connection with the operation of the fund. A company was then acquired to embody the fund itself and on 14 th October 1997 its name was changed to RBE Ijara Fund Plc., the third claimant in these proceedings. At the same time changes were made to its memorandum and articles of association to enable it to act as an open-ended investment fund. On the same date the company (to which I shall refer as "the Fund") entered into an Administration Agreement with International Fund Managers (Ireland) Ltd ("IFMI"), a Custodian Agreement with Barings (Ireland) Ltd ("BIL") and an Investment Advisory Agreement with RBE under which RBE agreed to act as its general investment adviser. Also on 14 th October 1997 the Fund published its prospectus setting out essential information about its structure, the nature of its proposed investments and the manner of its operation. The Fund's structure was in all respects closely modelled on that of the UBK Fund. Its directors were Mr. Scott, Mr. Basel Algadhib (a senior employee of Riyad Bank in Riyadh), Ms. Al-Tunisi, Mr. Victor Holmes (the managing director of IFMI) and Ms. Neena Aeri (an accountant employed by IFMI).
The administration of the Fund revolved around 'Dealing Days' on which investors could purchase and redeem shares, distributions were made to existing shareholders and new leases were acquired for investment purposes. The first Dealing Day was 25 th November 1997 when the Fund purchased its first leases and the first investors bought shares. Dealing Days occurred thereafter throughout the life of the Fund, generally at quarterly intervals, but sometimes more frequently. The last Dealing Day on which new leases were acquired was 29 th February 2000, although none were acquired on the advice of UBK after 24 th August 1999.
The Fund continued in operation until the first signs of impending difficulties emerged in April 2000 when UBK informed RBE that some of the leases in the UBK Fund had not performed as well as had been expected and that as a result the value of the fund had been overestimated. UBK had commissioned a valuation of the whole of its fund's portfolio and suggested that it might be prudent for RBE to do the same. Although they were not unduly concerned at that stage, on 24 th April 2000 the directors instructed Independent Equipment Company ("IEC"), a well-respected American equipment appraiser, to carry out a valuation of the Fund's assets. IEC's report delivered on 19 th May suggested that the value of the Fund might be over-stated by as much as 20%. On 24 th May the directors instructed another specialist appraiser, Murray Devine, to carry out a second valuation, intending to await its report before making a decision on the Fund's future, but the next Dealing Day was 30 th May and applications had already been made for redemption of shares in an amount of about US$7 million. Given the difficulties in establishing the true value of the Fund, the board decided at a meeting held on 30 th May to suspend the Fund immediately.
Murray Devine's report was received on 2 nd June. It was a little more optimistic than that of IEC since it valued the assets at somewhere between 85% and 105% of the figure which the Fund itself had previously placed on them. Nonetheless, given the range of values indicated by Murray Devine, it appeared quite likely that there would be a shortfall. In these circumstances Riyad Bank decided in the interests of preserving its relationship with the existing investors and its wider commercial reputation to offer to purchase all the shares in the Fund at their par value of US$100 a share. The bank, which already owned shares in the Fund with a par value of US$1 million, thereby acquired the whole of the remaining share capital at a total price of a little under US$75 million.
The general economic environment prevailing immediately before and during the period in which the Fund was established and remained open to investors forms a backdrop to the events with which this case is concerned and it is convenient to refer to it briefly at this point. It was generally agreed that the leasing market in the United States...
To continue reading
Request your trial
-
Riyad Bank v AHLI United Bank Plc
...Dyson I agree [2006] EWCA Civ 780 [2005] EWHC 279 (Comm)" class="content__heading content__heading--depth1"> [2006] EWCA Civ 780 [2005] EWHC 279 (Comm) IN THE SUPREME COURT OF JUDICATURE COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION (COMMER......
-
Galliford Try Infrastructure Ltd v Mott Macdonald Ltd and another
...of his negligence.” (Pages784E-785D) 189 Some reliance has been placed by MCL on the Court of Appeal decision in Riyad Bank and others v Ahli Bank (UK) Plc [2006] EWCA Civ 780. In this case, RBE (second claimant) was a wholly owned subsidiary of Riyad Bank (first claimant) which marketed pr......
-
John F Hunt Demolition Ltd v ASME Engineering Ltd
...the case of economic loss, “something more is needed”. Finally, for completeness, I should also note that I was also taken to Riyad Bank v Ahli United Bank PLC [2006] 2 Lloyd's Law Reports 292, a decision of the Court of Appeal in which they upheld the approach, in a case like this, of cons......
-
BP Plc v AON Ltd and Aon Risk Services of Texas Inc.
...this proposition Mr Popplewell relied both on Lord Goff's speech in Henderson v. Merrett and on the judgment of Moore-Bick J. in Riyad Bank v. Ahli United Bank [2005] 2 Lloyd's Rep 409 at p418 para 26. 58 As to the first question, Aon London had represented to BP that it would undertake the......