Shierson and Another v Rastogi and Another
| Jurisdiction | England & Wales |
| Judgment Date | 09 November 2002 |
| Neutral Citation | [2002] EWCA Civ 1624 |
| Docket Number | Case No: CHBKI/A2/2002/1677 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 November 2002 |
[2002] EWCA Civ 1624
Lord Justice Peter Gibson
Lord Justice Mance and
Lady Justice Hale
Case No: CHBKI/A2/2002/1677
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Laddie J.
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr. Stephen Smith Q.C. and Mr. Clive Jones (instructed by Messrs Lovells of London) for the Respondents
Mr. Philip Heslop Q.C. and Mr. Paul Greenwood (instructed by Messrs Orchard of London) for the Appellants
Peter Gibson L.J.:
RBG Resources plc ("the Company") is in compulsory liquidation. On 8 May 2002 the Company by its provisional liquidators commenced proceedings in the Chancery Division against four individuals, alleging fraud and claiming damages or compensation in excess of US $400 million. On 12 June 2002 the liquidators applied for an order under s. 236 of the Insolvency Act 1986 ("the 1986 Act") against the First Defendant, Viren Kumar Rastogi, who was an executive director and chief executive officer of the Company, the Second Defendant, Gautam Krishna Majumdar, who was another director of the Company, and the Third Defendant, An and Kumar Jain, who was also an executive director of the Company and had overall supervision of the trading activities of the Company. Mr. Majumdar submitted to a consent order. Mr. Rastogi and Mr. Jain opposed the making of an order, but on 25 July 2002 an order was made against them by Laddie J. Thereby they were directed to attend before the Companies Court Registrar to be examined in connection with the assets and affairs of the Company. Mr. Rastogi and Mr. Jain sought but were refused permission to appeal by the judge, but such permission was given by myself as the single Lord Justice considering the application on paper.
The issue before this court is whether the judge, in ordering the examination of Mr. Rastogi and Mr. Jain after the commencement of proceedings against them by, in effect, the liquidators, erred in the exercise of his discretion by making such an order.
The background to this case is set out clearly and accurately in the judge's judgment. I will only repeat the salient features of that account. The Company was incorporated on 21 May 1996. At all material times Mr. Rastogi and Mr. Jain were senior executives. The Company had a metal merchanting business with customers round the world. The growth in its business appears to have been nothing short of phenomenal. But the liquidators say that the Company purported to carry out a large number of bogus trade transactions through a network of trading counterparties controlled or used by Mr. Rastogi and Mr. Jain. Those transactions were presented as genuine to financiers, the liquidators say, for the purpose of extracting funds through the sale to the financiers under receivables agreements of the liabilities purportedly due and owing to the Company as a result of those transactions. By May 2002 the Company's indebtedness to financiers was more than US $400 million.
The accounts of the Company were audited by Pricewaterhouse Coopers ("PwC"). In the last audited financial statements for the group of which the Company is the holding company the group's turnover exceeded $1 billion and its operating profit was $29 million. In the course of the 2001 audit, on 30 January 2002 PwC resigned as the relationship of trust and confidence between themselves and the directors of the Company had broken down. The cause of the breakdown was the directors' inability to provide PwC with satisfactory information concerning the legitimacy of transactions between the Company and 6 counterparties. The debts of those counterparties to the Company have been assigned to Westdeutsche L and esbank Girozentral ("Westdeutsche"), one of the financiers of the Company. When PwC resigned, Westdeutsche carried out its own investigations through Arthur and ersen, who concluded that a substantial part of the Company's indebtedness was likely to be fictitious.
Westdeutsche presented a winding-up petition on 2 May 2002 and two partners in Grant Thornton, Malcolm Shierson and Michael Jervis were appointed provisional liquidators by Laddie J. early the next day. Against undertakings to issue proceedings forthwith, they obtained freezing and disclosure orders from the judge against each of the four Defendants as well as an order to disclose forthwith to the provisional liquidators all information known to that Defendant concerning the nature, location and value of the Company's assets, to swear an affidavit deposing to the truth of that disclosure and to deliver up any documents of the Company in his possession or control. Each Defendant was restrained from leaving the jurisdiction and was required to deliver up his passport. The orders were executed simultaneously with raids by the Serious Fraud Office on the Defendants' homes.
A claim form commencing the Chancery proceedings was issued on 8 May. On 12 June the Company was compulsorily wound up and the provisional liquidators (Mr. Jervis was replaced on 24 May by another Grant Thornton partner Kevin Mawer) were appointed the joint liquidators.
In the Particulars of Claim served on 24 May, it was pleaded that Mr. Rastogi and Mr. Jain owed fiduciary duties and a duty of care to the Company. In para. 16 a receivables agreement called the Compass Receivables Agreement was pleaded and in para. 17 reference was made to other receivables agreements. In para. 38 it claimed that a scheme was operated whereby bogus transactions were created for the purpose of procuring finance under the Compass Receivables Agreement and the other receivables agreements involving the operation of a world-wide network of controlled or compliant counterparties, that the finance so procured was misapplied and misappropriated, that the accounting records and trading documentation of the Company were falsified and that the Defendants sought to conceal the scheme from, amongst others, PwC. In para. 45 various matters were pleaded as evidencing the fact that trades were bogus. In para. 47 other matters were pleaded as establishing certain dishonest activities there set out. In para. 48 it was alleged that each of Mr. Rastogi and Mr. Jain knowingly participated in or turned a blind eye to and concealed the dishonest activities. In para. 50 it was pleaded that each of Mr. Rastogi and Mr. Jain acted in breach of his fiduciary duties and his duty of care as director of the Company and in breach of his employment contract. In para. 52 a claim of fraudulent conspiracy was pleaded against Mr. Rastogi and Mr. Jain.
By their Defence Mr. Rastogi and Mr. Jain asserted that the Company developed a substantial, genuine and profitable global business. They said that the Company's case was based on fundamental misconceptions as to the nature of the markets in which the Company operated, its activities and its method of financing. All of the allegations of fraud and falsification of documents were denied.
The liquidators had two meetings, each for an hour, with each of Mr. Rastogi and Mr. Jain. On 15 May on the advice of their solicitor they declined to answer questions on certain topics. Those topics included trading with the counterparties, who number more than 100. The liquidators have had no response from the vast majority of the counterparties. Mr. Rastogi and Mr. Jain through their solicitors told the liquidators that they were willing to provide any information reasonably required by the liquidators concerning any aspect of the affairs of the Company subject to one caveat. The caveat was expressed by a solicitor acting for Mr. Rastogi and Mr. Jain, William Sutton, in this way in his second Witness Statement:
"subject to their right – on the advice of their lawyers – to refuse to cooperate when to do so might trespass on to the territory of the issues raised in the Chancery proceedings with possible consequent prejudice to their position as Defendants in that action."
That was not acceptable to the liquidators. On 12 June they issued their application for an order under s. 236 so that they might be at liberty to examine the first three Defendants "respecting all information known to them respectively concerning:
(a) the nature, location and value of the assets and property of the Company;
(b) the promotion, formation, business, dealings or affairs of the Company."
In their Statement of Grounds the liquidators set out the basis on which they claim to need the assistance of those Defendants. Under the heading "Asset Deficiency", they set out the deficiency for creditors, estimated at some $350 million. They said that the Company was insolvent and that those Defendants had not provided information to explain the difference between that deficiency and the net asset position of $45 million shown in draft financial statements for the period ended 30 September 2001 which the directors had endorsed immediately prior to the provisional liquidation. The liquidators referred to the Chancery action and stated that they were "struggling to identify how much of the outst and ing receivables are collectable, which of those receivables are due and how to go about effecting their collection." Under the heading "Missing Monies" they said that they wished to examine those Defendants to obtain information which would assist or enable the liquidators to recover the monies paid to the Company in consideration for the assignment of the outst and ing receivables. Other areas of enquiry are specified under the heading "Other Information", to three of which I shall...
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