CH 1991 S 00242
HC 99 04520
HC 00 00627
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Thursday 26 July 2001
Before
MR JUSTICE LAWRENCE COLLINS
Between
GHASSAN SHAKER Claimant
(The First Action)
and
(1) MOHAMMED AL-BEDRAWI
(2) ABDULLAH MASRY
(3) STEGGLES PALMER (a firm) Defendants
and Between
HC 99 04520 GHASSAN SHAKER Claimant
(The Second Action) and
(1) ABDULLAH MASRY
(2) M.B.C. LIMITED Defendants
and Between
HC 00 00627 GHASSAN SHAKER Claimant
(The Third Action) and
(1) STEGGLES PALMER (a firm)
(2) PETER EDWIN STEGGLES
(3) CHRISTOPHER ANTHONY MAJOR HENNIKER
(4) GEOFFREY EDWARD MORRIS
(5) JOHN BODY QUEBELL
(6) GREGORY PAUL LUNNON Defendants
JUDGMENT
(Approved by the Court for handing down)
Mr Ian Mayes QC and Mr Stuart Ritchie (instructed by Amhurst Brown Colombotti) appeared on behalf of the Claimant (Ghassan Shaker).
Mr Michael Roberts (instructed by Dawson & Co) appeared on behalf of Mohammed Al-Bedrawi.
Mr Andrew Fletcher (instructed by Gouldens) appeared on behalf of Abdullah Masry.
Mr Michael Lyndon-Stanford QC and Mr Guy Newey QC (instructed by Lovells) appeared on behalf of the Steggles Palmer defendants.
Mr Michael Swainston (instructed by Barlow Lyde & Gilbert) appeared on behalf of M.B.C. Ltd Hearing: June 12-14, 19-21, 25-29, 2001
Mr Justice Lawrence Collins
I Introduction
1. Mr Ghassan Shaker is a Saudi national and a distinguished businessman and diplomat. Mr Mohammed Al-Bedrawi was the nephew of Mr Kamal Adham, who was a friend of Mr Shaker and who had been head of Saudi external intelligence. Mr Adham died in 1999. These proceedings arise out of an investment which Mr Shaker and Mr Adham made in Mr Bedrawi's project for television and radio broadcasting in the Arabic language in the United States. Mr Shaker claims that Mr Bedrawi acted dishonestly towards Mr Shaker and Mr Adham (whose rights were assigned to Mr Shaker before his death) when he disposed of the business to MBC Ltd. ("MBC") in 1993 and failed to account for the proceeds.
2. In about June 1989 Mr Shaker was contacted by Mr Adham, who asked Mr Shaker whether he would be interested in investing in a business project which Mr Bedrawi, his nephew, was setting up. After a number of meetings in the course of June and July 1989 Mr Shaker, Mr Adham and Mr Bedrawi entered into an oral agreement ("the investment agreement") under which Mr Shaker and Mr Adham would make an investment in the project and Mr Bedrawi would manage and control it. There is a dispute (which is not relevant to the determination to be made on this hearing) whether, under the investment agreement, the share of Mr Shaker and Mr Adham in the project was (as Mr Shaker asserts) 70% or (as Mr Bedrawi asserts) 37½%. It is common ground that this question does not fall to be resolved on the hearing of the preliminary issue. There is also a dispute as to whether Mr Bedrawi was entitled, as he claims, to re-invest the proceeds of sale in another project, a graphics business, and I will assume in favour of Mr Shaker that Mr Bedrawi was not entitled to do so.
3. Mr Shaker and Mr Adham made advances in the aggregate of $3,840,000. Some of the money was advanced by Mr Shaker and Mr Adham (in the case of the latter in part prior to the investment agreement) to an Isle of Man company, ANA Holdings Ltd., later re-named ANA Ltd. ("ANA Ltd."), and payments from 1990 onwards were made to a Pennsylvania company, Arab Network of America, Inc. (" ANA Inc.").
4. In 1993 Mr Bedrawi had discussions with MBC, which ran a business called Middle East Broadcasting Centre, and had close links with the Saudi royal family, for the sale of the business or some other form of co-operation. Ultimately it was agreed that MBC would buy from ANA Inc. the shares in two new Virginia corporations, ANA Radio Network, Inc. ("ANA Radio") and ANA Television Network, Inc. ("ANA TV"), to which the relevant parts of the business of ANA Inc. were hived down in anticipation of the sale.
5. In the course of the negotiations MBC had offered $10 million for the shares in ANA Inc. (the hive down not yet having been ventilated). In September 1993 a letter of intent was signed for an agreement in principle to acquire the entire issued share capital of ANA Inc. for $9 million. Ultimately when the shares in ANA TV and ANA Radio were sold the ostensible price in the share purchase agreement was $3 million, but a side-letter evidences the payment by the buyer (ANA Holdings, Inc.) to ANA Inc. (as selling stock holder) of an additional sum of $6 million in consideration of the shares and other rights and benefits under the stock purchase agreement.
6. Shortly before the sale Mr Bedrawi procured, through his solicitors Steggles Palmer, the incorporation of Qube Investments Ltd. ("Qube") in the British Virgin Islands. The $6 million referred to in the side-letter was paid to Qube.
7. The principal allegation is that Mr Bedrawi falsely represented the sale price as $3 million, when in fact the true price was $10 million since (a) there was a side letter providing for an additional $6 million to be paid and (b) Mr Bedrawi claims (and Dr Masry denies) that $1 million was paid in cash to Dr Masry, the chief executive of MBC, as a kickback or bribe. The allegation concerning the payment of $1 million arose in stages: in pleadings and affidavits in early 1999 Mr Bedrawi said that $1 million was paid to an agent who assisted in the sale and purchase, and following an order of Master Bowman in April 2000, Mr Bedrawi claimed in the following month that the agent was Dr Masry. Mr Bedrawi says that Mr Shaker was aware at all times of the true purchase price.
8. Mr Shaker claims that the sale proceeds were dissipated, partly by being invested in another project of Mr Bedrawi, a graphics business run by a company called Hot Source Media Inc. (most of whose shares were owned by Arabica Communications Ltd. ("Arabica"), another BVI company established by Mr Bedrawi), and partly by payments to himself and others which have not been satisfactorily explained.
9. Despite many promises Mr Bedrawi did not account to Mr Shaker and Mr Adham for their investment or any part of the sale proceeds. In January 1995 Mr Shaker retained the well known New York firm of Cravath Swaine & Moore to act on his behalf and to ask Mr Bedrawi for information about the sale and to assert his rights as a subscriber and investor in the project. In early 1995 Mr Bedrawi agreed to pay, and did pay, $250,000 to Mr Shaker. On May 15, 1995 Mr Bedrawi signed an undertaking to the effect that the share of Mr Shaker and Mr Adham of the sale proceeds was $6 million, which would be paid by him personally in two tranches (less the $250,000 already paid), and that they were entitled to two-thirds of Arabica, which in turn owned 85% of Hot Source Media Inc., to whose board Mr Shaker's nominees would be appointed with full access to the books.
10. The promised payments were not made, and post-dated cheques were dishonoured. Mr Adham assigned to Mr Shaker his rights and in 1996 Mr Shaker commenced proceedings in the Virginia State court for the sums due pursuant to the undertaking (the "at law" actions) and a chancery action alleging breach of fiduciary duty in failing to account for the proceeds of sale. Judgment for $5,750,000 (plus interest) was entered in the "at law" actions on Mr Bedrawi's failure to respond to motions for summary judgment, and the chancery action was dismissed "without prejudice," i.e. without creating any cause of action estoppel, and retaining the right to bring a further action.
11. In January 1999 proceedings were commenced against Mr Bedrawi (a) in the Queen's Bench Division to enforce the Virginia judgments and (b) in this division for an account of his dealings with what was described as the trust property, an enquiry as to the true sale price and as to the amount due to Mr Shaker, and damages and equitable compensation for Mr Bedrawi's wrongful dealing with the proceeds of sale. In July 1999 Master Ungley gave judgment for almost $8 million (including interest) in the Queen's Bench Division for Mr Shaker on the Virginia judgments, and an appeal from that decision was dismissed by consent. Dr Masry and MBC were joined in the Chancery Division action for the purposes of ancillary relief, but subsequently separate actions were brought against them and against Steggles Palmer. Bankruptcy proceedings have been commenced against Mr Bedrawi in England, and a trustee in bankruptcy was appointed on May 3, 2001.
12. Mr Shaker alleges (inter alia) that MBC and Dr Masry fraudulently misrepresented the sale price, conspired with Mr Bedrawi to enable him to make a secret profit, and were guilty of dishonest assistance in his breach of trust. The allegation against Steggles Palmer is that they were aware that the sale price was at least $9 million, they knowingly received through their client account $5,695,000 from Qube and knowingly participated and/or dishonestly assisted in Mr Bedrawi's breach of trust and/or fiduciary duty, and were also guilty of deceiving Mr Shaker by telling his lawyers that all the money had been dissipated when in fact they subsequently received a further $1.5 million through their client account.
II The proceedings and the order for a preliminary issue to be determined
13. The present preliminary issue arises because the defendants (other than Mr Bedrawi, to whom I gave permission to amend to take the point) have consistently asserted that Mr Shaker had no claim against them because the investment of Mr Shaker and Mr Adham was in corporate vehicles established by Mr Bedrawi, and that the action must fail because of the principles in the decision of the Court of Appeal in Prudential Assurance v. Newman Industries Ltd. (No. 2) [1982] Ch 204, now approved and explained by the House of Lords in Johnson v. Gore Wood [2001] 2 WLR 72. It was, they say, always envisaged that the project would be run through companies, although Mr Shaker and Mr Adham did not wish to appear as shareholders, and may not have cared which corporate vehicles Mr Bedrawi used. The original negotiations and the investment agreement envisaged that the company in which they would invest would be the Isle of Man holding company, ANA Ltd., and the first $1,500,000 of their investment was paid to that company, but subsequently Mr Bedrawi abandoned that plan and operated the business directly through ANA Inc. Relying on Prudential Assurance and Johnson v. Gore Wood, they say that the wrong (if any) was done to the company whose assets Mr Bedrawi is alleged to have misappropriated, and that Mr Shaker and Mr Adham have no cause of action for damage suffered by the company, or to the extent that they have a personal claim against any of the defendants, they suffered no loss which is not "reflective" of the loss suffered by the company.
14. The Prudential Assurance point was taken for the first time by those advising Steggles Palmer in February 2000. Subsequently the point was also taken by MBC and Dr Masry, but not by Mr Bedrawi. As a result the particulars of claim in the first two actions (mirrored by the particulars of claim in the third action) were amended so as to plead that the agreement was to advance moneys to the business through ANA Ltd., that Mr Bedrawi would manage and control the business through ANA Inc., that he would be the sole legal proprietor of the business and of the shareholding in ANA Ltd., and that Mr Shaker and Mr Adham would be beneficially entitled to 70% of the business and of the shareholding, and Mr Bedrawi would have a beneficial entitlement to 30% of the business and of the shareholding; and the trust was one in which Mr Shaker and Mr Adham would be absolutely entitled to 70% of the business and of the shareholding. It was also pleaded that Mr Bedrawi was subject to a fiduciary duty by reason of sums advanced to him by Mr Shaker and Mr Adham, and the totality of his wrongdoing.
15. There was a case management conference before Master Bowman on August 4, 2000. Prior to the case management conference the Steggles Palmer defendants proposed that a number of preliminary issues be determined, principally (and perhaps exclusively) directed to the Prudential Assurance point. This was supported by the other defendants, but it was resisted by Mr Shaker on the grounds (inter alia) that it would not dispose of the actions, principally because the deceit action against Steggles Palmer would continue, and also because factual issues would arise. The master declined to order a preliminary issue, principally (it seems) on the ground that he did not think that there was any likelihood of a real substantial saving of cost by the preliminary issue route.
16. When this matter came on for trial, Mr Mayes QC for Mr Shaker, put in an 87-page opening submission (plus appendices). On pages 71 to 79 he dealt with the Prudential Assurance defence. The principal point made was that Mr Shaker had an interest in the business rather than in the shares, but, to the extent that it was alleged that he had suffered a diminution in the value of a shareholding in ANA Inc., it was said that the Prudential Assurance rule would not operate where the claimant could establish that the defendant was under a personal duty to the claimant, and breach of that duty had caused personal loss, separate and distinct from any loss which may have been occasioned to the corporate body. The loss was said to be separate and distinct for a number of reasons, which were said to be "legal points" which arose quite independently of, and without prejudice to, the contentions of Mr Shaker on the facts that there was a trust and he had invested in a business.
17. In my judgment of June 14, I acceded to the defendants' application for a preliminary issue on the Prudential Assurance point, which was ultimately ordered to be whether, in the light of (a) Mr Shaker's statements of case in the three actions; (b) his witness statement dated April 6, 2001, and (c) an answer in May 2001 to a notice to admit facts, Mr Shaker could proceed against the defendants or any of them in relation to the proceeds of the sale referred to in his statements of case in those actions.
18. I recorded that Mr Shaker's position was that there should be no order for the determination of the preliminary issue because there were substantial questions of fact which could not be resolved without hearing witnesses. Mr Mayes QC relied in particular on three matters which were said to give rise to disputed questions of fact which would require resolution at trial: first, the scope of the original agreement; second, whether the alleged loss to the claimant and Mr Adham was "reflective" of the loss suffered by ANA Inc.; third, what causes of action might be open to ANA Inc. I took the view that the second and third questions were essentially questions of law. I noted that I retained a discretion to order limited oral evidence should it be necessary.
19. In the event, none of the defendants sought to adduce oral evidence, and Mr Mayes QC did not seek to adduce any oral evidence except that of Mr Shaker himself, and solely on the question whether the investment by him was in shares or in a business.
III Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2)
20. The principles are summarised by Lord Bingham in Johnson v. Gore Wood [2001] 2 WLR 72, 94:
"(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding.(3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.
These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that the party who has in fact suffered loss is not arbitrarily denied compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co Ltd. v Newman Industries Ltd. (No 2) [1982] Ch. 204, 223) the loss claimed is 'merely a reflection of the loss suffered by the company'. In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant."
21. The application of these principles to the present case raises a number of questions: first, whether the interest of Mr Shaker and Mr Adham was in shares of ANA Ltd. and/or ANA Inc.; second, if the interest was in shares, whether Mr Shaker has causes of action against the defendants or any of them for breach of a duty independently owed to him and Mr Adham; third, whether the company in which they had shares, or its subsidiary, has a cause of action to recover loss; fourth, if both the company and Mr Shaker have causes of action against the defendants, whether Mr Shaker (and Mr Adham) suffered a loss which is separate and distinct from that suffered by the company, or whether the loss alleged is merely a reflection of the loss suffered by the company.
22. The starting point is that there is an "elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested": Prudential Assurance, at 210. In the context of companies this is the basic rule in Foss v. Harbottle, so that the proper claimant in respect of an action alleged to have been done to a company is prima facie the company itself.
23. But both Prudential Assurance and Johnson v. Gore Wood were, or were treated as, cases in which the shareholder had a personal cause of action against the alleged wrongdoer. In Prudential Assurance one of the claims by the plaintiff was a personal claim by the Prudential against the directors for conspiracy including the distribution of a false circular to shareholders. The Court of Appeal said that the judge had been correct to find that the directors owed the shareholders a duty to give advice to the shareholders in good faith and not fraudulently, and accepted that if directors convened a meeting on the basis of a fraudulent circular, a shareholder would have a right of action to recover any loss which he had been personally caused in consequence of the fraudulent circular.
24. But in such cases the shareholder can only sue in respect of a loss which is separate and distinct from the loss suffered by the company, and is not a mere reflection of the loss suffered by the company. Accordingly, in Prudential Assurance the Court of Appeal said (at 222-223)
"But what [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3% shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company."
25. The Court of Appeal then went on give the example of the key to the cash box, which was the subject of further elaboration by Lord Millett in Johnson v. Gore Wood. The Court of Appeal said ([1982] Ch at 223):
"Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, of which 99 are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff's shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company."
26. After Prudential Assurance and before Johnson v. Gore Wood there were several decisions which sought, in the context of cases in which the shareholder had a personal right of action, to apply the distinction between separate and distinct loss and merely reflective loss. I was not referred to any of them, other than Walker v Stones [2000] 4 All ER 412, C.A. (decided on the penultimate day of the hearing of the appeal in Johnson v. Gore Wood) because most of them are fully discussed in Walker v Stones and Johnson v. Gore Wood, and because the relevant law is now to be found in the latter decision. There are some that are merely illustrative of the principle enunciated by Lord Bingham: Heron International Ltd. v Lord Grade [1983] BCLC 244 (alleged breach of duty by directors in accepting proposals which would reduce value of assets and induce shareholders to accept lower offer for shares: shareholders might recover damages for loss of opportunity to accept higher offer); RP Howard Ltd. v. Woodman Matthews & Co. [1983] BCLC 117 (negligence of solicitors in failing to advise company and its principal shareholder on application for new tenancy under Landlord and Tenant Act 1954; shareholder could recover damages for being forced to accept term that he would not sell his controlling interest without landlord's consent); Stein v. Blake [1998] 1 All ER 724 (alleged breach of fiduciary duty by purchasing company's assets at an undervalue: held, even if personal duty to plaintiff, the only loss suffered by the plaintiff was diminution in value of shareholding).
27. In Johnson v. Gore Wood Mr Johnson conducted his affairs through a number of companies, including Westway Homes Ltd, of which he was managing director and holder of all but two of the issued shares. As Lord Bingham said ([2001] 2 WLR at 76): "For all practical purposes WWH was the corporate embodiment of Mr Johnson." The company had an option to purchase land, and as a result of what was said to be the negligence of the defendant solicitors there was a dispute over the validity of a notice to exercise the option, and although the company ultimately succeeded in proceedings to enforce it, by the time the conveyance was completed, the company had suffered loss (partly as a result of the collapse of the property market). The company commenced proceedings against the solicitors which were subsequently settled. Mr Johnson then commenced his own proceedings against the solicitors, claiming that the solicitors owed him a personal duty of care, and that he had suffered loss as a result of their negligence. A preliminary issue was ordered to be tried on the question (inter alia) whether the heads of damage were recoverable in the light of the ruling in Prudential Assurance.
28. In Johnson v. Gore Wood the House of Lords disapproved the approach of the New Zealand Court of Appeal in Christensen v. Scott [1996] 1 NZLR 273 (applied by the Court of Appeal in Barings plc v. Coopers & Lybrand [1997] 1 BCLC 427) in allowing a personal claim for diminution in the value of shares allegedly caused by the negligence of accountants and solicitors in advising on the company taking a lease of farm land. The company had settled its own claim for what was said to be too low a figure. The diminution in value was held to be a personal loss, and the danger of double recoverability was to be dealt with on a case by case basis, involving stays of one action in favour of the other, or an obligation to account in whole or in part.
29. These decisions are disapproved in Johnson v. Gore Wood by all the members of the House (except Lord Cooke of Thorndon), although it is apparent that Lord Hutton did so with some reluctance. Lord Millett said ([2001] 2 WLR at 121-2):
"The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.
It has sometimes been suggested (see, for example, George Fischer (Great Britain) Ltd. v Multi Construction Ltd. [1995] BCLC 260, 266g-i) that Prudential Assurance Co Ltd. v Newman Industries Ltd. (No 2) [1982] Ch 204 is authority only for the proposition that a shareholder cannot recover for the company's loss, and is confined to the case where the defendant is not in breach of any duty owed to the shareholder personally. That is not correct. The example of the safe-deposit box makes this clear. It is the whole point of the somewhat strained business of the key. The only reason for this is to demonstrate that the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally".
30. What is reflective loss? Lord Millett, in the leading speech (with which Lord Goff of Chieveley agreed) on this point, said (at 125-126):
"Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential Assurance Co Ltd. v Newman Industries Ltd. (No 2) [1982] Ch 204) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company's funds and which the company would not have sustained itself.
The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it."
31. It was accepted for the purposes of the preliminary issue that the firm owed a duty to Mr Johnson personally and was in breach of that duty. The only issue was whether the nature of the damages claimed made the damages, or some of them, irrecoverable. It was held that he could not claim in relation to payments which the company would have made into his pension fund and the diminution in value of his majority shareholding in the company. These claims were merely reflective of the company's loss. But he was in principle able to claim in relation to the enhancement of the value of his pension if the payments had bee duly made, and also the cost of personal borrowings which were necessary as a result of the company's financial position caused by the alleged negligence, and the loss of part of his shareholding in the company which he had transferred to a lender as security and which he was unable to buy back because of lack of funds. He was also able in principle to claim loss flowing from additional tax liability.
32. Walker v Stones [2000] 4 All ER 412 arose out of the collapse of the Brent Walker group. The claimants were the primary beneficiaries of a settlement, the only asset of which was the holding of the entire issued shares of JSR Ltd., which in turn owned directly or indirectly shares in French companies which owned valuable vineyards. When the Brent Walker group got into financial difficulties, the trustees were persuaded to give personal guarantees secured by the shares in JSR Ltd. to support bank loans to JSR Ltd., which were to be used in the purchase of Brent Walker bonds. The beneficiaries sued the trustees for breach of trust in connection with that transaction, but they subsequently learned that there were grounds for an allegation that assets belonging to JSR Ltd. and its French subsidiaries had been wrongly diverted to Brent Walker or Mr George Walker or Birdcage Walk Ltd., a Hong Kong company owned by trusts of which he was a beneficiary.
33. In relation to the diversion, the beneficiaries claimed against the trustees that they had been in breach of duty (a) not to procure or participate in any disposition of the assets of JSR or its subsidiaries which, if the assets had been assets of the trust, would have involved a breach of duty as trustees; (b) to act prudently to preserve the assets and not knowingly stand by idly while the assets were being depleted.
34. The Court of Appeal relied on two earlier authorities in which trustees were held liable to beneficiaries for the diminution in the value of shares held in a trust, on account of their failure to prevent wrongdoing or mismanagement by directors. In Re Lucking [1969] 1 WLR 866 the trustee (who was also beneficially entitled to a large proportion of the shares) had signed blank cheques in his capacity as a director, thus allowing his co-director to misappropriate funds of the company. He was liable to the other beneficiaries with interests in the residuary estate for the loss suffered by the trust shareholding, i.e. their decrease in value. In that case the company had no effective remedy against the director, who was bankrupt. In Bartlett v. Barclays Bank Trust Co. Ltd [1980] Ch. 515 the trust company was liable to the beneficiaries, because it failed to prevent the company whose shares the trust held from engaging in property speculation, with the result that the shares were sold for less than they would have been sold had the company continued to manage family properties. There is no suggestion that the company's move into property speculation was a breach of duty by the directors for which the company would have had a remedy.
35. The Court of Appeal held that on the assumed facts Mr Stones as trustee was in breach of duties owed to the beneficiaries. Consequently there was a cause of action against him. It was also held that the alleged loss was separate and distinct from that suffered by the companies. Three reasons were given. The first was that the causes of action on which the appellants relied as against the trustees were quite different in their nature and would be based on different types of alleged misconduct from those on which any of the three companies would rely in seeking to recover their lost assets. Secondly, in regard to both the allegedly wrongful diversions and the bond issue transactions, the principal defendants in any claims by the three companies would not include the trustees, who could be open to attack, if at all, only as accessories. Thirdly, while there would be some overlap between the amounts recoverable by the beneficiaries in their action and the amounts that would be potentially recoverable by each of the three injured companies, Sir Christopher Slade was by no means satisfied that these amounts would necessarily be the same, having regard to the very different nature and origins of the respective claims. He went on (at 439):
"More generally, I do not think that any of the policy considerations which influenced this court in reaching its conclusions in the Prudential Assurance case and Stein's case apply in the present case. On the contrary, the policy considerations in my judgment point strongly the other way. As counsel for the claimants pointed out, in many, perhaps most, cases where a trustee is found guilty of a breach of his duty to supervise the trust investments in accordance with the Bartlett principle, the company concerned will also have a claim against a director or manager who has mismanaged its corporate affairs (a fortiori if there has been dishonesty on the part of the trustee). If Rattee J's ruling on this point in the present case were correct, it would appear that the Prudential Assurance principle would always afford a defence to the trustee in this situation. I cannot think that would be right."
36. The beneficiaries also sued Mr Hemingway, who was not a trustee, but was a personal adviser to Mr Walker and a director of Birdcage Walk Ltd. They alleged that he had participated in the breaches of trust by the trustees in assisting in the unlawful diversion of money belonging to JSR and its subsidiaries and had thereby become a constructive trustee. It was assumed that there might be causes of action against him, but it was held that the action could not proceed against him because his assumed conduct would not have caused the beneficiaries personal loss separate and distinct from any loss which it caused to the companies. That was because the causes of action would be the same as those by the companies, and would involve investigation of precisely the same facts and would be based on the same facts, and "the proper claimants in respect of these causes of action against Mr Hemingway would be the three companies themselves" (at 456).
37. The beneficiaries were claiming as against the trustees the diminution in value of the trust assets, namely the value of the shares, caused by the diversion of funds from the companies. Prudential Assurance was distinguished (at 436) on the ground that the basis of the decision was that the fraudulent circular had not caused the claimant the particular type of loss for which it was claiming compensation, i.e. diminution in the value of its shareholding. Sir Christopher Slade said that if the fraudulent circular had caused this loss, there was no reason why the claimant should not have had a good cause of action. I doubt that the reasoning in Walker v Stones on this point in relation to the claim against the trustees can stand with Johnson v. Gore Wood.
38. The reasoning was that it had been accepted in Prudential Assurance that the claimant shareholders would have had a right of action against the defendant directors to recover any loss which they had been personally caused in consequence of the fraudulent circular. Consequently, it was said, the reason why the claimants had been denied the right to sue for diminution in the value of their shares was that "the fraudulent circular had not caused the claimants the particular type of loss for which they were claiming compensation (i.e the diminution in value of their shareholdings)" and "if it had caused this loss, there was no reason why they should not have had a good cause of action" (at 436, emphasis in original). Sir Christopher Slade referred to Gerber Garment Technology Inc. v. Lectra Systems Ltd. [1997] RPC 443, Stein v. Blake [1998] 1 All ER 724, and Barings plc v. Coopers & Lybrand [1997] 1 BCLC 427 as supporting the view that it was only the element of causation which might prevent a shareholder from recovering damages for diminution in the value of a shareholding, and that if causation were established the damage would be distinct and separate.
39. But in Johnson v. Gore Wood Lord Bingham (at 95), Lord Hutton (at 113), and Lord Millett (at 124) disapproved the decision in Barings plc v. Coopers & Lybrand. The decision in Stein v. Blake was not based on a causation theory: the shareholder was denied recovery against the director, even if he had had a cause of action, because the only loss suffered by him was a diminution in the value of his shares, and since that loss could be fully remedied by the restitution of the value of the assets, he would have double recovery. This is the basis of the decision in Johnson v. Gore Wood, namely that the Prudential Assurance principle applies even if the breach of duty to the claimant causes the shares to lose value. If the House of Lords had considered that the causation approach had any attraction it would not have disapproved the approach in Christensen v. Scott, where the New Zealand Court of Appeal considered that the negligence of the accountants and solicitors had caused a diminution in the value of the shares of Mr and Mrs Christensen as well as damage to the company in the loss of the farm lease and resultant profits.
40. Consequently the first question is whether the claimant has a personal cause of action against the defendant. In particular, a shareholder does not normally have a direct cause of action against a wrongdoing director who has misappropriated company assets. If the claimant does not have a personal cause of action, then no further questions arise. If the claimant has a cause of action, but the company does not, then there is no bar to an action by the claimant. If each has a cause of action, the shareholder may sue to recover damages in respect of all heads of non-reflective consequential loss which are not too remote, i.e loss which is separate and distinct. So, for example, even if a deceit is practised on the claimant shareholder and reliance on the false representation makes the shares worthless, he cannot sue if the company has a cause of action for the same damage which deprives the shares of all value (the cash box example).
IV The facts
41. In this section I shall set out the relevant events, mainly as reflected in the documents. Most of the background facts are uncontested, but the defendants dispute some of the inferences which Mr Shaker derives from the documents, and deny wrongdoing. The only matter which I have to decide on the facts is the nature of the investment by Mr Shaker and Mr Adham, which is dealt with in section IX and nothing in this section is intended to constitute a finding of fact on any other matter.
(1) ANA Holdings Ltd. and Arab Network of America, Inc.
42. From August 1988 Mr Bedrawi's solicitors, Messrs Wright Webb Syrett, were organising, with Messrs Coopers & Lybrand in the Isle of Man, the incorporation of a resident exempt company as a holding company owning an American corporation to start television station broadcasting throughout the United States aimed at Arabic speaking persons in America.
43. In early September 1988 the Isle of Man registry confirmed name approval to the use of ANA Holdings Ltd., provided that there was written proof that it was a holding company within the meaning of the Companies Act 1974, Isle of Man. It was incorporated on November 10, 1998, with Coopers & Lybrand personnel as the officers. Wright, Webb Syrett subsequently had client accounts in its name, and an account in its name was also subsequently opened at National Westminster Bank, Oxford Street, London W1.
44. On April 24, 1989, ANA Inc. was incorporated in Pennsylvania. Shortly afterwards, Mr Bedrawi was advised that for U.S. tax purposes he should not control any foreign companies. Consequently on May 10, 1989 the board of ANA Inc. (i.e. Mr Bedrawi) resolved that on the advice of the financial planners of the shareholders the shares in ANA Inc. should be issued in their names directly and not in the name of the foreign entity as had been contemplated. A share certificate for 1,000 shares in the name of what was described as Arab Network of America, Ltd. was re-issued in the names of Mr and Mrs Bedrawi. The position of Mr Mayes QC, for Mr Shaker, in these proceedings (Day 9, pp. 70-71) was that there was no evidence that the first share certificate in the company name was ever intended to be effective, and could not have been effective because Arab Network of America Ltd. had never existed as a corporation.
45. From May 1989 the companies registry in the Isle of Man pressed for proof that ANA Ltd. was a holding company. When the evidence was not produced, after several warnings the registry directed in September 1989 that the company should change its name to omit reference to it being a holding company. A resolution to change the name to ANA Ltd. was effected on November 20, 1989, and the change was registered on November 29. In August 1992 ANA Ltd. was struck off the register for failure to file annual returns.
46. There are a number of questions about ANA Ltd. which cannot be resolved on this preliminary issue, and do not need to be resolved in view of the way that Mr Shaker's case has been put. As late as 1991 Mr Bedrawi was telling Coopers & Lybrand that ANA Inc. was a subsidiary of ANA Ltd. and that ANA Ltd. was owned by a Netherlands Antilles company, Mercuzio Corporation, but they were not told who was behind it.
(2) Draft investors' agreement
47. In October 1988 Mr Bedrawi asked Mr Munson of Wright Webb Syrett to draft a short shareholders subscription agreement to raise US$4 million for the company. Mr Munson sent to Mr Bedrawi at the end of October 1988 draft memorandum and articles of association and a draft subscription agreement. The draft contemplated the subscription for shares by investors in ANA Ltd., and was to be conditional on Mr Bedrawi having received in the scheme a minimum sum of unconditional funds, and the figure of $4 million was later inserted as the minimum figure. The scheme was defined as a scheme to raise investment equity in ANA Ltd. for the purpose of initiating the business of a satellite/cable television station in the United States to cater for Arabic speaking consumers. Mr Bedrawi and his colleagues then approached a number of financial institutions as potential investors.
48. It is plain that they also approached Mr Adham, who provided $300,000 in November and December 1998, which was paid into a Wright Webb Syrett client account with National Westminster Bank in the name of ANA Ltd. He seems to have made further payments of about $400,000 in early 1989. Mr Shaker claims that some or all of these monies were paid, on Mr Bedrawi's instructions, to personal accounts in Mr Bedrawi's name, but there is no pleaded allegation that they were not used for the benefit of the business.
49. In June 1989 Mr Shaker was approached as a potential investor. Mr Bedrawi instructed Mr Munson to re-draft the investors agreement, which then went through a number of re-drafts. On June 19, 1989 Mr Bedrawi sent the memorandum and articles of ANA Ltd. and a draft subscription agreement to Mr Shaker. The draft provided that it was conditional on the receipt from the subscribers (i.e. the persons who subscribed for shares by an application letter) of $4 million. Mr Bedrawi's shares were to be allotted in consideration of services rendered, including development work for the business as listed in the schedule: it included under "ANA HOLDINGS LIMITED" the formation of an offshore holding company in the Isle of Man, and under "ANA Inc." the formation and establishment of a subsidiary operating company in the United States. ANA Ltd. was to be a party to the agreement, and the draft contained covenants by it that neither it nor its subsidiaries would (without the consent of shareholders with 75% of voting rights) alter the nature of the business as defined, or commence any new business, or dispose of the company's subsidiaries or their business; and that its subsidiaries would implement and carry into effect activities of the business as from time to time amended with the approval of the board of directors. The business was defined as: "The Business of a satellite/cable television station in the United States of America for the purpose of providing a programming service for the Arab American population catering for Arabic speaking consumers."
50. In his covering letter, Mr Bedrawi said:
"Regarding the Board of Directors, I am strongly in favour of shareholder participation in such matters. You have, however, indicated to me that you may not wish to appear by name on any register of directors, and this I understand. My lawyers have advised me that a shareholders 'Supervisory Board' may be constituted and instructions given by this Board to the Operating Company who will implement these accordingly I believe we should aim to have all the legal details and capital in place by mid-July so that the Operating Company is in a position to commence operations by early August."
51. Following further discussions, an amended draft was produced. Although it defined the subscription monies as a sum intended to be equal to $4 million, the agreement was no longer to be conditional on the receipt of $4 million.
52. On July 21, 1989 Mr Shaker saw Mr Bedrawi and gave him a cheque for $1 million in favour of ANA Ltd. It was then endorsed by Mr Ivor Jones, a director of ANA Ltd. associated with Mr Bedrawi, to Wright, Webb Syrett's account. Mr Adham provided another $500,000 at this time, and Mr Shaker provided a further $1,640,000 by 5 payments to ANA Inc. between May 1990 and March 1993.
(3) Negotiations for the sale of the business
53. ANA Inc. was based in Alexandria, Virginia, a suburb of Washington DC, and it began radio broadcasting in September 1989, and television broadcasting in March 1992. According to a due diligence report commissioned by MBC from Daniels & Associates in April 1993, by then ANA Inc. was the largest programmer of Arabic language radio and television in the United States, and was available to over 72% of the Arabic speaking population in the United States (which was estimated at more than 1 million). It had two primary business operations, a radio programming network, and a television programming network, each originating in the Washington DC area. The licence holder of its flagship Washington DC radio station was WBZE Inc. The television operation had commitments to Atlantic Video of $70,000 per month, and of $55,000 per month to GE for an Americom-Transponder. The radio operation had 6 full time and 5 part-time employees, with a monthly turnover of $400,000. The television operation had 18 full time and part time employees, with a monthly subscription income of $92,000. According to the report (which was based only limited financial information supplied by ANA Inc.) the business was making a small loss.
54. As a result of approaches by the Saudi authorities towards the end of 1992, Mr Bedrawi entered into discussions with Dr Masry, the chief executive of MBC, with a view to a sale of the assets of ANA Inc. to MBC or some form of co-operation between them. On January 13, 1993 Mr Bedrawi sent Mr Shaker a copy of a letter of January 2, 1993 from Mr Bedrawi to Dr Masry, in which he said:
"Because of our efforts, ANA is now poised for substantial growth in the near term, both in terms of the size and diversity of the audience served and the diversity of its programming offerings, as we describe in more detail below. For these reasons, our shareholders are not anxious to prematurely liquidate or dilute their interests in ANA through any kind of stock or asset sale or other collaborative ventures.
Proposal No.1. We propose to sell to MBC all of the assets of ANA with the exception of its name and logo for $30,000,000 U.S.
Proposal No.2. We propose to enter into a 50/50 joint venture with MBC for the production and distribution of a 24-hour per day video programming service in the United States ... MBC would contribute an initial payment of $15,000,000 U.S. to the joint venture to be used to purchase the stock of ANA held by those shareholders who have expressed their unwillingness to participate in the joint venture.
Proposal No.3. We propose to distribute MBC's programming through ANA's network in the United States for a fixed period of time (perhaps four years) as part of the 24-hour per day television programming service described in Proposal No.2 above. The distribution and management fee payable by MBC for this services would be $650,000 per month."
55. For present purposes it is necessary to underline Mr Bedrawi's reference to the concerns of "our shareholders" in the letter, a copy of which was sent to Mr Shaker. The $30 million had been agreed as a ceiling figure between Mr Shaker, Mr Adham and Mr Bedrawi. At the beginning of February 1993, Mr Yassin, the head of the Saudi media office in Washington, said that MBC would pay $6-7 million for the television operation alone. Dr Masry then said that MBC would pay $7 million for the television operation alone, but that if ANA Inc. wished to dispose of the radio operation they would pay $3 million for the radio operation. Mr Yassin subsequently told Mr Bedrawi that $10 million for the whole operation was a final price, although Mr Bedrawi responded that an offer of $10 million for the whole operation was one which "it was doubtful that the ANA shareholders would be able to accept" (according to his letter of February 26 to Sheikh Walid, the chairman of MBC). Again Mr Bedrawi refers to shareholders.
56. MBC and its advisers proceeded to prepare documentation on the basis of a $10 million price for the whole operation. In late May 1993 Mr Bedrawi sought to persuade Mr Kennedy, the deputy chief executive of MBC, to raise the offer to $17 million. On May 28, 1993 Mr Bedrawi reported to Mr Shaker that he had been told $10 million was available to them.
(4) Sale agreed
57. On September 7 Mr Kennedy submitted a draft letter of intent to Dr Masry (with the sale price left blank), and on September 9, 1993 a letter of intent was signed by Dr Masry and Mr Bedrawi for an agreement in principle to acquire the entire issued share capital of ANA Inc. for $9 million. MBC would as a gesture of good faith pay $900,000 to ANA Inc. upon receipt of an irrevocable option to acquire the shares in acceptable terms. $7.2 million would be paid on closing, and $900,000 would be withheld until the earlier of 12 months after completion or the termination by effluxion of time of a consultancy agreement with Mr Bedrawi. ANA Inc. was to procure that at the time of closing all liabilities were paid up to the date of closing and that there were no outstanding bank overdrafts, loans, directors' loans or outstanding creditors.
58. On September 10, 1993 Mr Kennedy asked Daniels & Associates to complete their report and informed them that the agreed purchase price would not appear on any of the documentation. On about September 21, Mr Kennedy wrote a memorandum to Dr Masry enclosing a draft share option purchase agreement. He suggested that in view of his concern about the on-going relationships which ANA hoped to maintain with Egyptian Television, the BBC and others, it might be that they would be better to own the television and radio operations separately and that they should be owned through a US corporation rather than directly by MBC.
59. Mr Aldrich, special assistant to Dr Masry, wrote a memorandum to Mr Kennedy on September 22, 1993 to confirm that Dr Masry had asked Mr Kennedy to ensure that they followed the route of a share purchase, rather than an asset purchase arrangement. Given that a primary asset of the company was its contracts with other broadcasters, it would be unwise to jeopardise these already somewhat tenuous arrangements by changing the entity (i.e. ANA Inc.) involved in those contracts.
60. On September 25, 1993 Mr Bedrawi, as sole director of ANA Inc. consented to the sale of the assets of Inc. to MBC for $3 million and authorised himself to incorporate two new subsidiaries, ANA Radio and ANA TV; and to transfer all radio related contracts to ANA Radio and all television related contracts to ANA TV, and upon completion ANA Inc. would then sell its two subsidiaries to ANA Holdings, Ltd, a MBC affiliate. The new subsidiaries were incorporated on September 29, 1993.
(5) Contract and completion
61. The structure of the sale involved a stock option and pre-closing agreement which was executed on October 13, 1993. In consideration of MBC paying ANA Inc. a deposit of up to $900,000, ANA Inc. granted MBC an option to acquire the shares in ANA TV and ANA Radio for the price set forth as the price in the letter of intent. The option period was to November 1, 1993 or such later date as might be agreed, and ANA Inc. was to transfer all its assets (including contracts, licences etc.) to ANA TV and ANA Radio by October 25, 1993.
62. On November 1, 1993 the Arch-Diocese of Los Angeles consented to the assignment of the air time royalty agreement from ANA Inc. to ANA TV, but subject to a guarantee by ANA Inc. of all of ANA TV's obligations, including the obligation to make monthly royalty payments (which were based on the number of subscribers), and if ANA TV failed to honour any of its duties or obligations under the royalty agreement, action could be brought by the Arch-Diocese against ANA regardless of whether such suit had been commenced against ANA TV. So also on November 9, 1993 GE American Communications consented to the assignment of the Space Net II agreement and other agreement to ANA TV, provided that ANA Inc. would remain responsible for the fulfilment of the financial obligations under the agreement.
63. On November 10, 1993 Mr Shadyac, Mr Bedrawi's lawyer, wrote to Mr Kabler, MBC's lawyer, to say that his understanding was that the purchase price was $9 million. There are two additional copies of that letter. One has that sentence ticked (as if agreed by Mr Kabler); the other has the figure "9" crossed out and replaced by "3 Typo." On the next day Mr Shadyac wrote to Mr Bedrawi following a discussion, and said:
"concerning the purchase price, apparently I am incorrect about the actual purchase price. You have agreed to send me a letter confirming that in fact the purchase price is $3,000,000.00. This purchase price was arrived at after the purchaser completed its due diligence investigation."
64. Mr Kabler then produced a new draft showing the aggregate price as $3 million. On November 18, 1993 Mr Bedrawi made an affirmation that he was the only shareholder of ANA Inc. together with his wife.
65. The completion was on November 25, 1993 in London. The stock purchase agreement was for the purchase by the buyer, ANA Holdings, Inc. from the "Selling Stockholder", ANA Inc., of its two subsidiaries. The aggregate price was $3 million, being $2 million for ANA TV and $1 million for ANA Radio. Mr Bedrawi entered into the agreement to give warranties as President and stockholder of ANA Inc. One of the completion documents was a non-competition agreement, under which ANA Inc. and Mr Bedrawi covenanted not to be involved in Arabic language broadcasting in North and South America for five years.
66. Although it is not in Mr Shadyac's file, one version of the "closing checklist" refers to "SIDE LETTER RE $6.0M PAYMENT." The side-letter is signed by Dr Masry on behalf of ANA Holdings, Inc. and by Mr Bedrawi on behalf of ANA Inc., and evidences the payment by the buyer to the stockholder of an additional sum of $6 million in consideration of the shares and other rights and benefits under the stock purchase agreement.
67. It is not disputed that the price was at least $9 million, but Dr Masry and MBC dispute the contention of Mr Shaker (and Mr Bedrawi) that the true price was $10 million. Dr Masry says that he was able to re-negotiate the price down to $9 million as a result of the due diligence investigation by Daniels and Associates, but Mr Kennedy says he was never aware of any price but $10 million. MBC received $15 million from the Saudi government to cover the acquisition cost and one year's deficit financing. The accounting documents of MBC support the contention that $10 million came in from the Saudi government to fund the purchase. Sheikh Walid says that he never discussed a price of $3 million with Dr Masry. Mr Shaker says that Dr Masry's account that he was able to use information obtained during the Daniels investigation to re-negotiate the price does not bear scrutiny; they reported in April 1993 in draft and were instructed to complete their due diligence only after the $9 million letter of intent, and were not given access to financial information about the business of ANA Inc.
(6) Proceeds of sale
68. The evidence for Mr Shaker is that of $9.2 million (including interest) generated from the sale proceeds, up to $2.92 million was invested in Hot Source Media, Inc., legal fees and other miscellaneous expenditure, but the balance of more than $6 million went through Qube on Mr Bedrawi's personal expenditure and payments to other individuals and transfers to bank accounts which have not been satisfactorily explained, and that $1 million went to Dr Masry. As I have said, Hot Source Media Inc. (formerly called Hot Source Graphics Inc.) was a Virginia corporation owned or controlled by Arabica, a BVI company established on Mr Bedrawi's instructions. Hot Source Media Inc. is in Chapter XI bankruptcy in the United States.
V Mr Bedrawi's May 1995 undertaking
69. From early 1994 Mr Shaker wrote to Mr Bedrawi referring "the sale of ANA in November 1993" and seeking his share of the investment plus profits. In the ensuing months he continued to press for payment, but Mr Bedrawi despite promises failed to make any payments. In January 1995, Mr Shaker retained Cravath Swaine & Moore to "assert his rights as a subscriber and an investor in ANA Holdings, Ltd. and its United States subsidiaries." In late January Mr Bedrawi agreed to pay, and did pay, $250,000 to Mr Shaker.
70. On May 15, 1995 Mr Bedrawi signed an undertaking in which he acknowledged that Mr Shaker had advanced $2.64 million and Mr Adham had advanced $1.2 million and that their share of the sale of the stock of ANA TV and ANA Radio was $6 million; that payment of $250,000 was made in February 1995 and would be deducted, and therefore he was personally indebted in the amount of $5,750,000 and irrevocably undertook the settle the same. By or before August 1995 he would transfer $3.59 million and on or before August 1996 he would transfer $2.16 million. He confirmed that Mr Shaker and Mr Adham were shareholders of Arabica, which in turn owned 85% of Hot Source Media Inc., and Arabica also owned 70% of Aromica (which was said to be a joint venture between Arabica and an entity called Ironic Delights). He would before August 15, 1995 transfer 66.66% of the shares of Arabica to Mr Shaker and Mr Adham, and would appoint directors designated by Mr Shaker to the board of Hot Source Media Inc. with full access to the books.
VI Assignment by Mr Adham to Mr Shaker
71. On July 6, 1996 Mr Adham assigned his rights against Mr Bedrawi to Mr Shaker "to recover the current value of my investment in ANA Holdings Ltd. or any of its subsidiaries, successors or assignees, to seek related damages and remedies and to bring any appropriate ancillary actions or proceedings".
VII The present proceedings
72. These proceedings began on the same day as the proceedings in the Queen's Bench Division to enforce the Virginia judgments. It is of importance, in the light of the principles to be applied on the preliminary issue, to set out the nature of the allegations in some detail.
73. The first action was commenced on January 20, 1999. The material terms of the investment agreement (which were said to be evidenced in part by the draft subscription agreement) were pleaded to be these: (i) Mr Shaker and Mr Adham would advance monies to ANA Ltd. so that ANA Inc. could trade; (ii) Mr Bedrawi would manage and control ANA Inc.; (iii) Mr Shaker and Mr Adham would at all times be entitled to inspect the documents and records of ANA Ltd. and/or of any subsidiary, or any other documents in their control; (iv) Mr Bedrawi would be the sole legal proprietor of the shareholding in ANA Ltd.; (v) in consideration for the sums advanced by Mr Shaker and Mr Adham, each would have a beneficial entitlement to 35% of the shareholding in ANA Ltd.; (vi) in consideration for services rendered and to be rendered Mr Bedrawi would have a beneficial entitlement to 30% of the shareholding. Finally, it was alleged that one of the terms of the investment agreement was that, upon Mr Shaker and Mr Adham making the payments "a trust would be constituted, under which [Mr Bedrawi] would hold the beneficial entitlement in 70% of the Shareholding on trust for [Mr Shaker and Mr Adham], to which the latter were absolutely entitled ('the Trust')," and that upon payment of the sums the Trust was in fact constituted. It was also pleaded that among his duties as trustee of the Trust, Mr Bedrawi was under a duty to account to Mr Shaker and Mr Adham for their 70% share of the profits of the Business and 70% share of any proceeds of sale of any trust property including the shareholding.
74. The allegations made against Mr Bedrawi were, first, that he had failed: (i) despite repeated requests, to provide proper accounts of the beneficial entitlement of Mr Shaker and Mr Adham under the Trust; (ii) at any time to inform them of the sum of the proceeds of the Sale (which was defined to mean the purchase by ANA Holdings Inc. of the shareholdings in ANA TV and ANA Radio); (iii) to pay the proceeds of the Trust fund to Mr Shaker and Mr Adham, despite being requested to do so, and despite their absolute entitlement to such sums. Secondly, he had acted dishonestly and in bad faith in the representations made by him as to the sum of the proceeds of the Sale, and accordingly as to the sum of their entitlement under the Trust.
75. Accordingly, by reason of the conduct of the Sale and Mr Bedrawi's subsequent conduct, Mr Bedrawi had acted dishonestly, in bad faith and in breach of his duties under the Trust, and/or in breach of the terms of the investment agreement; Mr Shaker had suffered loss and damage, which could not be presently quantified, and Mr Bedrawi was liable to account to Mr Shaker for the shares of Mr Shaker and Mr Adham of the proceeds of the Sale (which I describe as the damages claim). It was further alleged that by reason of the admission of personal indebtedness in the May 1995 undertaking it was to be inferred that Mr Bedrawi had acted in breach of fiduciary duty to Mr Shaker and Mr Adham by investing the proceeds of the Sale in Arabica and/or elsewhere, and therefore held such sums on constructive trust for Mr Shaker and Mr Adham.
76. The prayer contained claims for (1) an account of Mr Bedrawi's dealings with the trust property; (2) an enquiry as to the true sum received by him and/or ANA Inc. under the Sale Agreement; (3) an enquiry as to the proportion of the sale price which was payable to Mr Shaker; (4) an order that he repay all sums found to be due on the taking on the enquiry; (5) the damages claim mentioned above; (6) equitable compensation for the breach of fiduciary duty in diverting the proceeds to Arabica and/or elsewhere; (7) such other accounts etc as might be necessary.
77. What is clear about the pleading is (a) that what is alleged is that the trust property was the shareholding, and (b) that all of the material allegations are about the sale of ANA TV and ANA Radio and its aftermath. In particular, although accounts and enquiries are claimed, there is no allegation relating to Mr Bedrawi's conduct, whether it relates to failure to consult, or to account, or breach of fiduciary duty, or breach of contract, which is not directly referable to the sale and his use of the proceeds. I do not accept the suggestion developed in argument by Mr Mayes QC that the primary breach of trust which was being alleged was a failure to account which went back to the first payment which was made and to pre-sale profits.
78. Dr Masry and Steggles Palmer were joined in the action on the Norwich Pharmacal basis that they had become mixed up in the unlawful acts of Mr Bedrawi and/or had come into possession of documents and/or other information material to the determination of the sale price and its whereabouts. Accordingly an order was sought against them that they disclose the sum of the sale proceeds of ANA TV and ANA Radio, and all facts within their knowledge as to the sum and whereabouts of the proceeds of sale, and an order for delivery up of relevant documentation.
79. The second action was commenced in October 1999 against Dr Masry and MBC. By the time this action was commenced Mr Bedrawi had made the allegation that $1 million had been paid to an undisclosed agent, and that the total purchase price was therefore $10 million. It was alleged that Dr Masry and/or MBC knew that the proceeds of sale were not $3 million but were not less than $10 million, and made a payment to Qube of $6 million in the knowledge that neither MBC nor Qube was a party to the stock purchase agreement, and knowing that Qube was not a shareholder in ANA Inc. It was alleged that Dr Masry and MBC knew of the existence of the investment agreement and/or knew that Mr Bedrawi was holding Mr Shaker's interest in ANA Radio and ANA TV on trust his benefit. Alternatively they shut their eyes to the fact that there were shareholders in and/or parties with a legitimate financial interest in ANA Inc.
80. Steggles Palmer had acted for Mr Bedrawi from about 1992, and they arranged for the incorporation of various off-shore companies for Mr Bedrawi, including Qube and Arabica. It is said that from February 1994 they received money regularly from Qube into their client account which they dispersed on Mr Bedrawi's instructions. There was a meeting in early January 1995 between Mr Peter Steggles and Mr Shaker's Lebanese and United States lawyers. It is alleged that Mr Steggles informed Mr Shaker's lawyers that the proceeds of sale had been entirely dissipated in the discharge of liabilities and in investment, and that Mr Shaker would have to wait for his money. Nevertheless, it is alleged, Steggles Palmer received further sums from Qube into their client account in excess of $1.5 million.
81. In January or February 2000 the solicitors for Mr Shaker sought the consent of the solicitors for Steggles Palmer to the amendment of the statement of claim in the first action to add the individual partners of Steggles Palmer and to make substantive allegations against the firm. The amendment alleged that the firm was aware of the stock purchase agreement showing a purchase price of $3 million, but was also aware that the proceeds of sale were at least $9 million, of which $6 million would not be paid to ANA Inc. but would be paid to Mr Bedrawi, and that the balance of $3 million had been or would be dissipated to pay US debts and taxes; that the firm was aware that Qube had been incorporated to receive $6 million, that it was beneficially owned by Mr Bedrawi, who had instructed it to open an account in the United Kingdom into which the $6 million was to be paid.
82. Accordingly, it was alleged, the firm knew or must be taken to have known or was put on enquiry that the true sale price had not been accurately recorded, and that the $6 million was being dealt with in such manner that third parties would be unaware of its existence; that Mr Shaker and Mr Adham both had a beneficial interest of not less than $1 million transferred into each of Qube's account with Aitken Hume Bank plc and/or the firm's bank account, that neither Mr Shaker or Mr Adham had received any sum in satisfaction of their beneficial interest, and that $3 million of the proceeds had been dissipated; that the firm failed to make enquiries as to the extent of Mr Bedrawi's interest in the proceeds, and should have been on notice that Mr Shaker was not, or may not have been, aware of the total amount of the proceeds, and had been or would be misled by Mr Bedrawi as to the total, and that Mr Bedrawi would not, or that there was a risk that he would not, account to Mr Shaker for his full entitlement. It was further alleged that the firm received $5,695,000 from Qube, all of which formed part of the proceeds of sale, and that in January 1995 falsely informed Mr Shaker's lawyers that the proceeds of sale had been dissipated, when in fact at the time Qube retained at least approximately $1.5 million.
83. On February 9, 2000 the solicitors for Steggles Palmer wrote to Mr Shaker's solicitors refusing consent to the proposed amendment. One of the points taken was that the draft pleading took no account of the decision in Prudential Assurance. They said that Mr Shaker contended that Steggles Palmer were liable to him in relation to the proceeds of sale of the shares owned by ANA Inc. in ANA Radio and ANA TV, and on Mr Shaker's case, there would seem to be no question of that money being held on trust for Mr Shaker or Mr Adham. The proposed amendments were not pursued and instead the third action was commenced on February 11, 2000 and the particulars of claim were served on February 24, 2000 making essentially the same allegations as in the proposed amendment.
84. There was, however, one important difference between the pleadings served and the draft amendments, and this change was reflected also in amendments made in the first and second actions in response to the same point being taken by Dr Masry and MBC in their defences in the second action. The original form of the pleadings alleged that ANA Holdings Inc. (the MBC vehicle for the purchase) purchased the shareholdings of ANA TV and ANA Radio. As amended it alleged that ANA Holdings Inc. purchased the business through its purchase of those shareholdings.
85. The pleadings now alleged that the material terms of the investment agreement were as follows: (i) Mr Shaker and Mr Adham would advance moneys to the Business (defined to mean a satellite/cable television and radio business in the United States of America providing a programming service for the Arab American population catering for Arabic speaking consumers) through ANA Ltd. so that ANA Inc., through which at that time the Business was intended to be operated, could trade; (ii) Mr Bedrawi would manage and control the Business; (iii) Mr Bedrawi would be the sole legal proprietor of the Business and the shareholding in ANA Ltd.; (iv) in consideration for the sums to be advanced by Mr Shaker and Mr Adham, each would have a beneficial entitlement to 35% of the Business and the shareholding in ANA Ltd., and in consideration for services rendered or to be rendered, Mr Bedrawi would have a beneficial entitlement to 30%; (v) upon Mr Shaker and Mr Adham each making payments, a trust would be constituted under which Mr Bedrawi would hold the beneficial entitlement in 70% of the Business and the shareholding in ANA Ltd. on trust for them, to which they were absolutely entitled.
86. In addition, in further particulars delivered in September 2000 Mr Shaker claimed that, as the agent of Mr Shaker and Mr Adham in relation to the operation, management and sale of the business, Mr Bedrawi held on trust their interests in the business or the money they had advanced.
VIII The principal contentions
87. The defendants argue that any loss Mr Shaker (and Mr Adham) has sustained is purely reflective of the loss sustained by ANA Inc. In those circumstances, by virtue of the rule in Prudential Assurance, he is not entitled to bring a personal claim to recover such loss; and this is so whether, or not, he has a personal cause of action against the defendants, and irrespective of whether he is a shareholder in ANA Ltd. or ANA Inc.
88. The position put forward on behalf of Mr Shaker has not been a consistent one, and even now it is not always easy to see clearly what is being said on his behalf. Mr Mayes' opening submissions, before the preliminary issue was ordered, proceeded on the following basis: it was said on Mr Shaker's behalf that it was not in dispute that (a) Mr Shaker and Mr Adham had no desire to appear on the face of corporate documentation as directors or shareholders in any company through which the business might operate; (b) so far as Mr Shaker, Mr Adham and Mr Bedrawi were concerned, "the particular corporate entity which carried on the business was irrelevant so long as the business was being pursued in accordance with general parameters"; (c) Mr Bedrawi recognised that they "were entitled to a beneficial interest in the Business, reflected in a beneficial share in such companies as the Business was being operated through at that time"; (d) an interest in the business was "reflected in a beneficial share in such companies as the business was being operated through" (opening skeleton, para. 15). Further it was said that they "simply paid money at Bedrawi's direction, and expected an interest in those companies or corporations through which the Business was operated" and "would invest money in the Business through whichever corporate entity Bedrawi should choose to operate the Business", and accordingly "there was never any finalised subscription for shares in any one company." (ibid. para 131).
89. It was then said that although it was originally envisaged that there would be an Isle of Man holding company, there never was one, and ANA Ltd. never had any assets, and shares in ANA Inc. were never held by ANA Ltd. Mr Mayes QC also repeated in his opening that ANA Ltd. had never owned ANA Inc. and said (as I have mentioned) that the purported issue of shares to Arab Network of America Ltd. was ineffective. In the context of that submission this can only have meant that the relevant proportion of the shares in ANA Inc. was held for Mr Shaker and Mr Adham.
90. In answer to an objection that the claim was in reality a claim for the diminution in value of their shares in ANA Inc., Walker v. Stones was relied on as authority for the proposition that Prudential Assurance does not apply if there has been a breach of duty to the claimant which has caused personal loss separate and distinct from the loss occasioned to the corporate body. It was argued that the loss is separate and distinct because: (i) the causes of action were different; (ii) the loss flowed from breaches of equitable obligations and Mr Shaker and Mr Adham had a proprietary interest in the money. It was not known what remedies might be available to ANA Inc. under Pennsylvania law, but if it were the same as English law, it was unlikely that ANA Inc. would have any right to bring action against Mr Bedrawi: he was the sole director and his was its controlling mind and it would be fixed with his knowledge. He had authority to act on its behalf and it would be taken to have authorised or ratified his actions. He would not have authorised it to take action on his behalf and would have resisted a derivative action on the basis that Mr Shaker and Mr Adham were not shareholders. It was also said that on the sale of the business ANA Inc. ceased to trade, and was no more than a puppet of Mr Bedrawi and a conduit through which part of the proceeds of sale passed to his other nominees. In the light of his fraudulent conduct it was to be regarded as his alter ego and/or agent, such that it was appropriate for Mr Shaker and Mr Adham to take action against him personally. All of those points, described as "legal points" were taken without prejudice to the contention that there was a trust and Mr Shaker had invested in a business, and had no appreciation of the corporate entities through which the business would trade. They all regarded the money as being paid to Mr Bedrawi to run the business "and not as an investment in one corporate entity" (para. 134.5).
91. The submissions for Mr Shaker on the preliminary issue differed in three significant respects from the opening submissions at trial. First, they retreated from the clear admission in the opening submission that Mr Shaker and Mr Adham had beneficial interests in the shares of ANA Inc. Second, they retreated from the apparent admission that the business was carried on by companies by suggesting that to say that a business was carried on "through" companies was not the same as saying that the business was the business of the company. Third, they reverted to the amended pleaded case that Mr Shaker and Mr Adham had interests in the business and in the shares in ANA Ltd.
92. It was also said that the court could not determine whether the loss was reflective without making findings of fact as to the terms of the investment agreement, and the computation of benefits in May 1995 undertaking. The latter point had not been raised when an order for a preliminary issue had been resisted, and was not persisted in. For the first time it was suggested (but never pleaded) that the claim against Dr Masry might not be limited to the money said to have been misappropriated from ANA Inc. Mr Mayes QC also sought to develop the point that the corporate structure could be disregarded on the basis of an alter ego/sham/façade theory, and I gave reasons for refusing an amendment to raise these issues in my judgment of June 29. He had also suggested, notwithstanding that a preliminary issue had been ordered without his having suggested that questions of fact might arise on that issue, that the court might not be in a position to decide that issue on the preliminary question. He made a similar submission in relation to a new point that the court could not determine without making findings of fact whether ANA Inc. would have a cause of action against Steggles Palmer for deceit.
93. The answer of the defendants is, broadly, this. First, the overwhelming evidence, including that of Mr Shaker in the witness box, is that Mr Shaker and Mr Adham had interests in companies, and not a direct interest in the underlying business; and Mr Shaker had accepted in proceedings in the United States and in England that the interest was in ANA Inc. Second, if they did have an interest in companies, none of the points made for avoiding the application of Prudential Assurance had any validity: in particular, it was irrelevant that Mr Shaker and Mr Adham might have personal causes of action against Mr Bedrawi; and there is no reason to suppose that ANA Inc. would not itself have a cause of action against Mr Bedrawi for having misappropriated the funds, and against the other defendants for accessory liability.
94. It is accepted that the principal questions which will determine the preliminary issue are these: (1) whether Mr Shaker had an interest in the shares of ANA Ltd. and/or ANA Inc.; (2) whether the loss claimed is reflective of a loss suffered by ANA Inc.; (3) whether ANA Inc. has a cause of action in respect of that loss.
IX The nature of the agreement
1. Written evidence for Mr Shaker
95. In an affidavit of November 26, 1998 sworn in the first action in support of an application for preservation and delivery up of documents and for disclosure of information, he said that the draft subscription agreement formed the basis for negotiations and went on:
"There were certain aspects of the Draft Subscription Agreement, however, with which both Mr Adham and I were unhappy. Bedrawi had been unable at the first meeting to give any firm indication of the sums which we would be required to provide. We were therefore unhappy that we would only receive shares in the Business upon the payment of US$4 million (see clause 9). Bedrawi had informed us of the efforts which he had made to market the Business (evidenced in Schedule 1(2)). Nevertheless, in view of the Business's uncertain financial requirements, we considered that such a commitment, with no tangible benefit for us was too onerous. Further, I formed the view that once the Business started, it would attract investment from Arab governments which finance the operating costs of the Business.
In subsequent discussions, shortly after receiving the letter of 19th June, we therefore orally agreed that we would provide funds for the Business as and when they were required by Bedrawi to finance the initial set up costs and the operating costs until the Business funded itself. In turn, upon payment, it was agreed that Mr Adham and I would each receive a 35% share in the Business. In return for time and effort invested by Bedrawi and his continued management of the Business, he would receive a 30% share in the Business. We confirmed that Bedrawi was to manage the Business, for our benefit in those proportions."
96. On January 20, 1999 Mr Deal, who is employed by Mr Shaker's solicitors, swore an affidavit in support of Mr Shaker's application in the Queen's Bench Division for a Mareva injunction and ancillary relief. In that affidavit he said (paragraph 16.1):-
"The Plaintiff and the Defendant's uncle agreed to invest money in a radio and television broadcast business known as the Arab Network of America in return for which they both received a 35% interest in the business. The Defendant, who was not financing the project had a 30% share of the business on the basis of the work he had already [done] in connection with the business and the fact that he would be managing the business. It was agreed that the Defendant would hold all the stock of Arab Network of America Inc. in his own name."
97. Taken together, these statements demonstrate that Mr Shaker's case was that the investment agreement was based on the original draft agreement for the subscription of shares in ANA Ltd., that he objected to his investment being conditional on the subscription of $4 million, and that ultimately his interest was in the shares of ANA Inc.
98. In his first witness statement, March 13, 2000, in support of his application to amend to deal with the point taken against him that his only interest was in shares, Mr Shaker said:
"Mr Bedrawi invited me to provide capital for an Arab television and radio broadcasting business in the United States of America in return for which I would have a 35% [sic] of the business. Both Mr Bedrawi's uncle, Mr Kamal Adham and I agreed to invest in the business but we told Mr Bedrawi that we did not wish to take an active role in it nor did we want to be a Director of the company through which the business operated. Mr Bedrawi agreed to this.
In 1989, when he first discussed the project with me, Mr Bedrawi had intended to run the business through a holding company called ANA Ltd. in the Isle of Man and an operating company in the United States called Arab Network of America Inc. I was not concerned with the manner in which Mr Bedrawi wished to set up the business as I did not wish to be involved in the running of the business. Mr Kamal Adham and I agreed that Mr Bedrawi would manage the business in return for a 30% share."
99. Mr Shaker's main witness statement in these proceedings was made on April 6, 2001. In that witness statement he made the following points: (a) at the first meeting with Mr Bedrawi, Mr Bedrawi told Mr Shaker and Mr Adham that he had set up companies in the Isle of Man and in the United States through which the business would be operated; (b) Mr Adham and Mr Shaker had made clear that they did not wish to have an active role in the business and would not serve as directors of any companies through which the business operated; (c) Mr Shaker and Mr Adham agreed between themselves that they would provide Mr Bedrawi with funds to set up the business and cover the operating costs, and in return they would receive a share of the business; but they did not wish to be openly connected to the project.
100. Mr Shaker went on:
"Over a long business association, that was how we usually operated. We invested together in ventures such as an air-conditioning company, a bottling plant, a bank in Egypt and property in the U.S. Although this was the first time I had been involved with an investment in television or radio, the investment which we made was typical of the sums we put into other ventures. In none of those ventures did we sign formal agreements, receive shares, or appear on the face of formal company documentation. We were silent partners. I was not interested in taking a shareholding of a company and did not have the time to take any active role in the business. I was willing to give Mr Bedrawi money to run the business in return for which I would receive a share of the profits. As far as I was concerned, how Mr Bedrawi conducted the business was a matter for him. From my discussions with Mr Adham I know that he held the same views as me. The agreement was sufficiently straightforward that there was no need to enter into any written agreement. I was investing with a long-term friend and business partner in a business to be managed by his nephew.
We did not sign a written agreement as to the sums of money which we would invest in the business. As far as we were concerned, we had reached agreement that we would have an interest in the business in return for funding it. We were prepared to invest our money through whichever corporate vehicles Mr. Bedrawi chose to use. Mr. Bedrawi had told us that the business would be run through an off-shore company, hence the use of the Isle of Man company. My only concern was that the business should not be operated through an English company. I was aware that, despite my diplomatic status in this country, I might be required to pay tax on any business venture operated through an English company. Provided no English company was involved, I had no interest in the corporate structure he used,"
101. After the preliminary issue had been ordered to be determined, Mr Shaker was given permission to put in a further witness statement. In this witness statement he sought to clarify what he had previously said about the interests which he and Mr Adham had had in other business ventures. In particular, he referred to his statement that in none of those ventures did they receive shares or appear on the face of company documentation, and that he was not interested in taking a shareholding of a company. In his new witness statement he said that what he meant by that was that he did not want, and did not get, a shareholding - either directly or indirectly. He knew that his investment was going to be managed by Mr Bedrawi through various companies but it did not follow that he agreed to have an interest in shares in a company as a result. He was aware from what Mr Bedrawi told him that he was proposing to run the company through an Isle of Man company and a US company. He did not agree to have an interest in shares. He told Mr Bedrawi that when he presented the subscription agreement to him.
102. Mr Adham and he had often given money to a promoter/agent so that he could run his business with a free hand, in return for which they would receive accountable returns on their investments. Their agreement was with Mr Bedrawi the promoter/agent. Mr Adham and Mr Shaker had agreed to provide Mr Bedrawi with money to enable him to pursue the proposed business venture. In return for his investment, Mr Bedrawi agreed to return to him his agreed share of the profit of the venture and net proceeds of sale.
2. Mr Shaker's oral evidence
103. Mr Shaker was cross-examined at some length by counsel for Dr Masry, MBC and Steggles Palmer. There is no doubt that he is a very distinguished businessman with considerable experience of banking and insurance. He is well aware of the nature of corporate personality and of the difference between having a direct interest in a business and an interest in shares. He understands the tax implications of trading through a partnership as compared to owning shares, and he is well aware that a person with a direct interest in a business may be liable for its debts and liabilities, but that a shareholder in a limited liability company is not liable. My impression of him in the witness box was that, although he did not tell any untruths, he was at times somewhat evasive when he became aware that it was being exposed that his agreement was to invest in companies. He is of course not a lawyer, and I have endeavoured to leave out of account answers to questions, the legal implications of which he might not have understood.
104. The overall effect of his evidence was overwhelmingly to the effect that he and Mr Adham agreed to invest in companies to carry on the business, but that they did not want to be seen as shareholders or directors. In particular Mr Shaker accepted that he envisaged that the business would be operated through companies. He was prepared to invest his money through whichever corporate vehicles Mr Bedrawi chose to use. After some equivocation he accepted that the draft subscription agreement had formed the basis of the discussions, and that he accepted that ANA Ltd. would be the holding company.
105. He did not mind if the corporate vehicle was changed from the Isle of Man company to another company: "As long as our investments were safeguarded and the objectives of the investment are safeguarded, it did not make a difference for us." That was subject only to the qualification that he did not want the company to an English company, because he was an accredited diplomat in England and did not want to be subject to taxation in England, nor an entity in any country in which he might be taxed.
106. But he also said that he had shares in a business, or business proposal, or an interest in the business of the companies and not a shareholding. He denied that he agreed that Mr Bedrawi should be a shareholder and that he and Mr Adham would have an interest in those shares behind that legal front, because if that had been his understanding he would have signed the subscription agreement. He said that he had made it clear to Mr Bedrawi that he and Mr Adham did not want shares. But I am satisfied that what he meant is that he did not want to be a registered shareholder. He said he did not want formal ownership of the shares. He did not wish to be named as shareholder. He did not own shares in ANA Ltd. or ANA Inc. and if his lawyers had said that, it was an error. "I am not a shareholder in any of the companies, I have not subscribed." That was for reasons of confidentiality. They did not sign the subscription agreement because the last thing they wanted to do was to put their names on documents in connection with this company. That was why Mr Bedrawi would be their "representative." He would be the shareholder. Mr Shaker accepted that the shares would be "held on trust to use that interest, his shareholding, for the benefit of the three of you, in particular when profit was extracted through it" and that "Mr Bedrawi's interests in the company, through his shareholding, was held on trust for the three of you.".
107. He was well aware of the nature of corporate personality, and of the fact that a company would make its own contracts, and that the liabilities would not be his liabilities; and that a return for investors could only come through distributions. He would have expected ANA Inc. to pay tax. He would not have expected to pay tax as if it were a partnership or be liable for damages for libel. If ANA Inc. were sued for enormous punitive damages for libel in the United States "our only exposure would be the loss of our investment."
3. Conclusions on the nature of the investment agreement
108. I have no doubt that Mr Shaker (and there is no reason to suppose that different considerations apply to Mr Adham) intended to invest in, and receive interests in, corporate vehicles established by Mr Bedrawi, and that they did not intend (except in the loosest commercial sense) to have an interest in a business. The significance of the definition of business in the documents is to set the limits to the nature of the business which Mr Bedrawi might carry on in the corporate vehicles which he used (although what those limits are I do not have to decide).
109. The evidence that Mr Shaker intended to, and did, invest in companies is overwhelming. Not only does it emerge clearly from his written and oral evidence, it is absolutely clear from the contemporaneous documents, and from the position he took in the United States proceedings and in the English proceedings to enforce the Virginia judgments. Prior to the Prudential Assurance point being taken, his whole case was that the draft subscription agreement, which plainly contemplated taking up shares in ANA Ltd., had formed the basis for negotiations, but that it was not acceptable because (a) it contained a condition that $4 million be raised before it was effective and (b) he and Mr Adham did not wish to appear as shareholders.
110. When he was first told about the proposals from MBC to buy the business Mr Bedrawi sent him a copy of a letter to MBC, from which it is clear that (a) Mr Bedrawi had told Dr Masry about the concerns of "our shareholders" and (b) the business was that of ANA Inc. (i.e. not that of the shareholders).
The American proceedings
111. The significance of the Virginia proceedings is that they show very clearly that Mr Shaker's case was that he had held an investment in ANA Inc. When Cravath Swaine & Moore wrote to Mr Bedrawi on January 13, 1995, they stated that Mr Shaker had retained the firm to assert his rights as a subscriber and an investor in ANA Ltd. and its United States subsidiaries. Mr Shaker commenced proceedings against Mr Bedrawi in the Virginia State Court. There were two actions "at law" (96-725, which was Mr Shaker's claim in relation to his original investment, and 96-861, his claim as assignee of Mr Adham) and an action in chancery (96-468).
112. The actions at law were based on Mr Bedrawi's undertaking of May 15, 1995. The complaints in the actions are not available in the papers, but in the motions for summary judgment (June 27 and July 31, 1996, respectively) the undertaking is said to include $2.64 million and $1.15 million respectively in "in cash advances for the purchase of stock in Arab Network of America, Inc. ('ANA'), a Pennsylvania corporation. Specifically, the plaintiff has advanced the sums . ..... to ANA Holdings, Ltd., an Isle of Man corporation, which was later reformed as Arab Network of America, Inc. ('ANA') an Pennsylvania corporation, which owned two operating subsidiaries, ANA Television Network, Inc. ('ANA TV'), a Virginia corporation, and ANA Radio Network, Inc. ('ANA Radio'), a Virginia corporation".
113. The motion for judgment goes on to say that in consideration of the advances Mr Shaker and Mr Adham were each granted a one-third ownership of all of the shares of ANA Inc.., and Mr Bedrawi was give a one-third interest as promoter. The motion in the first action then sets out Mr Shaker's advances, in each case stated to be made to "ANA", i.e. ANA Inc.
114. The bill of complaint in the chancery action (July 10, 1996) states that Mr Shaker advanced funds totalling $2.64 million to Mr Bedrawi "in return for a one-third ownership of the media company known as Arab Network of America, Inc. ('ANA') a Pennsylvania corporation. Specifically, the complainant has advanced the sums of $2,640,000 in cash to ANA Holdings, Ltd., an Isle of Man corporation which was later reformed as Arab Network of America, Inc., ('ANA') a Pennsylvania corporation." The complaint then goes on to say that Mr Bedrawi without first disclosing to Mr Shaker the existence or terms of the sale, sold ANA and its two subsidiary, ANA TV and ANA Radio, to ANA Holdings Ltd, Inc. for at least $9 million in cash; and that Mr Bedrawi owed Mr Shaker a fiduciary duty to account for the disposition of the $9 million proceeds of sale, and has refused Mr Shaker access to the books of accounts and records of the corporations which he controls "which were funded by [the] complainant".
115. Final judgments were entered on October 1, 1996 (action 96-725) and September 30, 1996 (action 96-861). In the former the judgment was for $2.875 million together with interest from May 15, 1995 and in the second for $2.875 million together with interest from the same date. These figures were the acknowledgement of $6 million less a credit of $250,000.
116. The bill of complaint in the chancery action was amended on October 2, 1996. The original plea that the advances were made to ANA Holdings Ltd, Isle of Man, later reformed as ANA Inc. was amended to allege that Mr Shaker advanced the sums to Mr Bedrawi in return for the one-third ownership of the media company known as ANA Inc.
117. In November 1996 Mr Shaker issued a motion to compel discovery, which came before Judge Kendrick on December 6, 1996. The court refused the motion for discovery because Mr Shaker already had a judgment, and it did not make "any sense to get bogged down in an accounting because it doesn't matter what the accounting shows." On November 2, 1998 the chancery action was dismissed "without prejudice".
118. In order to enforce the Virginia "at law" judgments Mr Shaker proceeded to seek to administer "debtor interrogatories" (equivalent to the examination of a judgment debtor under English law). There was an oral hearing before Mr Birken, a Commissioner in Chancery of the Virginia State Court, on August 12, 1997. Mr Bedrawi was examined by Mr Stump, who represented Mr Shaker. Mr Stump having asked Mr Bedrawi whether Mr Shaker was a shareholder in ANA Inc. then said to Mr Bedrawi "However, we agree, don't we, that you were not, in fact, the beneficial owner of all those shares?", to which Mr Bedrawi replied "That's correct" and Mr Stump went on "and I thought that probably in choosing between trustee, fiduciary and nominee you probably would have said that you were the nominee for the true owner of certain shares". Mr Bedrawi replied: "In that particular incident, yes."
119. These proceedings plainly show that his position was that his original investment was in ANA Ltd. and its subsidiaries, that ANA Ltd. was replaced by ANA Inc., and that Mr Bedrawi held part of the shares in ANA Inc. as nominee for Mr Shaker and Mr Adham.
Queen's Bench Division proceedings to enforce the American judgments
120. The significance of the English proceedings to enforce the Virginia judgments is that Mr Shaker obtained his English judgment against Mr Bedrawi on the explicit basis that he and Mr Adham had been investors in ANA Inc. On January 20, 1999 proceedings were commenced in the Queen's Bench Division to enforce the final judgments in law actions 96-725 and 96-861. A Mareva injunction was obtained, together with a world-wide disclosure order. Summary judgment was granted by Master Ungley on June 23, 1999. The judgment of Master Ungley records that the judgment was being attacked on the basis (inter alia) that the underlying assignment from Mr Adham to Mr Shaker was invalid. It is apparent from the evidence filed on behalf of Mr Bedrawi that what was being said on his behalf was this: the assignment related to Mr Adham's "investment in ANA Holdings Ltd. or any of its subsidiaries, successors or assignees," but ANA Ltd. was never used as a holding company, and Mr Shaker and Mr Adham did not invest in ANA Ltd. They invested in ANA Inc., which was not a subsidiary, successor or assignee of ANA Ltd.
121. Mr Shaker did not put in evidence in reply. The application had been supported by (inter alia) an affidavit of Mr Deal, who is employed by the firm of solicitors acting for Mr Shaker. In his affidavit he said:
"The Plaintiff and the Defendants' uncle agreed to invest money in a radio and television broadcast business known as the Arab Network of America in return for which they both received a 35% interest in the business. The Defendant who was not financing the project had a 30% share of the business on the basis of the work he had already done in connection with the business and the fact that he would managing the business. It was agreed that the Defendant would hold all the stock of Arab Network of America Inc in his own name."
122. Notes made at the hearing indicate that counsel for Mr Shaker relied upon that passage. The skeleton argument of counsel for Mr Shaker was made available at this hearing, and what was said on his behalf was that the Virginia court determined on the merits that Mr Shaker was entitled to make his claim in Law Action 96-861 in his capacity as assignee, and that the assignment was before the Virginia court, having been exhibited to the motion for judgment. By granting judgment the Virginia court had determined on the merits that the cause of action fell within the scope of the assignment and that the assignment was valid.
123. In the motion for judgment in Virginia Law Action 96-861 it had been said:
"Bedrawi is justly indebted to the assignor of plaintiff for $3,000,000 by virtue of defendant's written undertaking as hereinafter more fully set forth, including $1,150,000 in cash advances for the purchase of stock in Arab Network of America, Inc. ("ANA"), a Pennsylvania corporation. Specifically, plaintiff has advanced the sums of $1,150,000 to ANA Holding, Ltd., an Isle of Man corporation, which was later re-formed as Arab Network of America, Inc. ("ANA"), a Pennsylvania corporation, which owned two operating subsidiaries, ANA Television Network, Inc. ("ANA TV") , a Virginia corporation, and ANA Radio Network, Inc. ("ANA Radio"), a Virginia corporation. In consideration of said advances totalling $1,200,000 plaintiff's assignor was granted a one-third ownership of all of the shares of ANA. Bedrawi was given a free one-third interest as promoter; another one-third interest was given to another investor (collectively the "original stockholders")."
124. Consequently what was being said (which was consistent with Mr Deal's affidavit) was that Mr Adham's investment was in ANA Inc., and that the Virginia court had accepted that the assignment was effective to assign Mr Adham's interest even though it referred only to ANA Ltd. and its subsidiaries, successors and assignees. It is plain that Master Ungley accepted that argument when he said:
"... the judgment is attacked on the basis of the validity of the assignment to Mr. Shaker from Mr. Adham. The assignment itself refers to ANA Holdings Limited, the history of which I have already briefly dealt with but it does refer to subsidiaries or successors. The subsidiaries mentioned in the agreement which was never executed do include ANA but I am satisfied that, in the context of this case and particularly having regard to the wording of Mr. Bedrawi's own affidavit ... the intent behind this oral agreement is, in my view, sufficiently clearly that it should be the company that ultimately turned into ANA Incorporated.
...
It ultimately was not the Isle of Man company. They were not the holders of shares but quite clearly, as Mr. Bedrawi says, it was intended that the beneficial ownership should be theirs."
125. Accordingly Master Ungley had been invited by Mr Shaker to hold, and did hold, that Mr Bedrawi held the shares in ANA Inc. on trust for Mr Shaker and Mr Adham, and it was successfully argued that the Virginia court had conclusively decided that the assignment applied to Mr Adham's interest in those shares. As a result, Master Ungley was persuaded to decide that Mr Shaker and Mr Adham had the beneficial ownership of shares in ANA Inc. An appeal against the decision of Master Ungley was dismissed by consent on July 27, 1999.
126. Mr Bedrawi had appeared in the Virginia proceedings, and the Virginia judgments were therefore prima facie enforceable at common law. The mere fact that the Virginia court had misconstrued the assignment would not have been a defence to the action to enforce the judgment. The other grounds on which the judgments were unsuccessfully attacked were irregularities in service and an allegation that the undertaking had been extracted under duress. It may therefore be that the decision based on Mr Shaker's argument that he held shares in ANA Inc. does not give rise to an issue estoppel as between him and Mr Bedrawi (a matter on which I did not hear argument). But it seems to me to be very close to an abuse of the process for Mr Shaker, having obtained a judgment on which he presented a bankruptcy petition, and having obtained that judgment on the basis of an argument, and evidence sworn on his behalf, that he had an interest in the shares of ANA Inc., now to argue that he had no such interest.
Position taken in these proceedings
127. I have also set out in detail how it was that, prior to the Prudential Assurance point having been taken, Mr Shaker's position was that he had an interest in shares (albeit of ANA Ltd.). But after the point was taken, as late as trial it was being said on behalf of Mr Shaker in the opening written submissions of Mr Mayes QC (para. 131):
"[Mr Shaker and Mr Adham] simply paid money at Bedrawi's direction, and expected an interest in those companies or corporations through which the Business was operated…Under the terms of the Investment Agreement, the Claimant and Adham would invest money in the Business through whichever corporate entity Bedrawi should choose to operate the Business."
128. The opening submissions also questioned the degree of comfort that Shadyac & Shadyac, Mr Bedrawi's U.S. lawyers, could have had that Mr Bedrawi and his wife were the only stockholders of ANA Inc. This is plainly a submission that Mr Bedrawi and his wife were not the only people interested in the stock of ANA Inc. In addition, the opening submissions in relation to the case against Steggles Palmer proceeded on the basis that Peter Steggles was informed inter alia of the interests of Mr Shaker and Mr Adham in the shares of "the U.S. company", i.e. ANA Inc.
129. I also heard extensive submissions on the effect of a reply by Mr Shaker's solicitors on May 24, 2001 to a notice to admit facts served on May 18 by the solicitors for Dr Masry. The first three matters which were the subject of the notice were designed to elicit admissions that the true purchase price was $9 million and that Dr Masry had not received an additional $1 million. The solicitors for Mr Shaker in their reply of May 24 did not admit those facts. Three other matters were plainly designed to deal with the Prudential Assurance point. The first of the points asked Mr Shaker to admit that "The true purchase price .... in respect of the Sale Agreement ... was due to ANA [Inc]". The other two matters were that if Mr Bedrawi had caused or procured any misappropriation or breach of trust in respect of the proceeds of sale, ANA Inc. had a cause of action against him and any other person liable in law or in equity; and that if ANA Inc. had asserted such claims against Mr Bedrawi the rights (if any) of Mr Shaker and Mr Adham as beneficiaries and/or shareholders in ANA Inc would thereby have been protected and they would have suffered no loss.
130. In their answer Mr Shaker's solicitors said in relation to the first of these matters:
"As a result of the defendants' (excluding the Steggles Palmer defendants') decision to transfer all of the assets and goodwill of ANA to the newly created companies, ANA Radio and ANA TV and to purchase the shares of ANA Radio and ANA TV instead of the shares of ANA had been envisaged at all times prior to September 1993, it is admitted that the sale proceeds were due to ANA. For the avoidance of doubt, the Claimant was not informed or aware at any material time of the mechanism by which the Business was to be sold or the existence of ANA Radio and ANA TV, which were merely conduits by which the Business was transferred. Further, it was always anticipated by the relevant defendants that upon the sale of the Business, ANA would either be sold to MBC or (following the change in the mechanism of the sale), no longer be trading in connection with the Business and that the shareholders of ANA would be the ultimate recipients of the sale proceeds."
131. In relation to the other two matters they said that those were not matters capable of admission as facts, but were assertions of law and/or argument, but were in any event denied. They said that on the face of the documents, ANA Inc. was managed and wholly controlled by Mr Bedrawi who was its directing mind; it was the creature of and alter ego of Mr Bedrawi. Mr Bedrawi and his wife were the only legal shareholders of ANA Inc. Accordingly it was fixed with the knowledge of Mr Bedrawi. Because it was wholly controlled by and not independent of him as a matter of fact it would not have authorised the commencement of any claim, and Mr Shaker and Mr Adham had no legal basis to compel ANA Inc. to take action against him. The only course available was to take action directly against him and third party accessories.
132. The defendants say that once it was accepted that the sale proceeds were due to ANA Inc., it must have been accepted that the assets sold were the assets of ANA Inc., namely the shares in ANA TV and ANA Radio; that the beneficial interest in the business was in ANA Inc., and the interests of Mr Shaker came via shareholdings in ANA Inc. In the light of that admission, it was argued that a case that he had a beneficial interest in the underlying assets, namely the business or the shares in ANA TV and ANA Radio, was inconsistent with a right to claim the proceeds personally. Mr Mayes QC's answer was that the admission did no more than admit that by the structure adopted by Mr Bedrawi, Dr Masry and MBC, the payment was due to ANA Inc., and that given the express terms of the sale agreement to which they were tied by the way in which the notice to admit was put, they had no option but to admit that that was what the document said.
133. I am quite satisfied that the context (particularly the explanatory material purporting to show how the corporate structure can be disregarded) indicates that the answer was an admission that the business belonged to ANA Inc. But I do not decide this aspect of the case on that admission, since there is abundant other material to support the conclusion that Mr Shaker and Mr Adham had interests in companies and not in the underlying business.
134. A number of points were made on behalf of Mr Shaker to suggest that he did not have an interest in shares, none of which in my judgment has any substance. First, it was suggested that the terms of the draft subscription agreement were irrelevant to the terms of the oral investment agreement. But it is plain from Mr Shaker's own evidence (and his pleading) that the oral agreement was based on the draft subscription agreement. Second, it was said that the articles of ANA Ltd. excluded recognition of interests in shares held on trust. But this is a normal provision and does not affect trusts as between the shareholder and the beneficiary.
135. Third, it was said that a number of matters gave rise to an estoppel, which precluded Mr Bedrawi from resiling from the assumption of Mr Shaker and Mr Adham that upon their investment they would not derive rights to a return on their investment as shareholders, but rather that Mr Bedrawi assumed a personal obligation to account to them for the returns on their investment. In particular reliance is placed on (a) Mr Bedrawi's acknowledgement in the May 1995 undertaking that he was bound to account for $6 million; (b) the fact that it indicates that Mr Shaker and Mr Adham had interests in the shares of Arabica as showing that they had direct interests in the proceeds of sale of the assets of ANA Inc.; and (c) the payment of $250,000 and the unfulfilled promises to pay more. In my judgment my finding that Mr Shaker and Mr Adham had interests in companies rather than in the business, and the way that Mr Shaker has consistently put his case, especially in the Virginia proceedings and in the summary judgment application before Master Ungley, is completely inconsistent with the alleged assumption which, it is said, Mr Bedrawi is estopped from denying. In any event, I do not consider that the undertaking has any bearing on these issues. The fact that Mr Bedrawi acknowledged a personal undertaking to pay or purported to give Mr Shaker and Mr Adham direct rights in assets does not in my view affect the nature of the interests which they acquired or the construction of the investment agreement, nor vary that agreement. There is no basis for an argument that the elements of estoppel are made out.
136. In my judgment the terms of the agreement were that Mr Shaker and Mr Adham left the corporate structure to Mr Bedrawi and were to have whatever was the appropriate interest in the relevant corporation. It was not necessary for that corporation to be identified. If a holding company were used, they would have an interest in that company. If there were no holding company but only directly owned operating companies, they would have a direct interest in any such company. The parties envisaged at all material times prior to the investment agreement that the business would be run through companies; and the operating company would be ANA Inc. Nothing was said or done to vary that intention at any time thereafter. Mr Shaker and Mr Adham were indifferent to what corporate structure was in fact used; but Mr Shaker did not want a company to be used which was incorporated in any country in which he might have to pay tax. ANA Inc. was a properly constituted and registered Pennsylvania corporation, which entered into substantial contractual commitments, many of which subsisted after the hive down.
137. It is common ground that at the time of the sale, the only legal shareholders of ANA Inc. were Mr Bedrawi and his wife. In these circumstances, equity would impose on the legal title of Mr Bedrawi and his wife (as his nominee) to those shares implied trusts, resulting from the discussion and agreements between Mr Shaker and Mr Adham and Mr Bedrawi, coupled with their advance of money on the basis of those discussions and agreements: see, e.g.. Snell's Equity, 13th ed McGhee, 2000, para. 9-27; Grant v. Edwards [1986] Ch 638. This was precisely the position which Mr Shaker's lawyer put on his behalf to Mr Bedrawi in the examination before Commissioner Birken in Virginia.
138. It follows in my judgment that the company in whose shares Mr Shaker and Mr Adham had a beneficial interest was ANA Inc. Mr Mayes QC disclaimed any suggestion that ANA Ltd. was ever a shareholder in ANA Inc. But it does not matter for present purposes whether ANA Ltd. did own those shares. Nor does it matter whether Mr Shaker and Mr Adham continued to have an interest in the shares of ANA Ltd. after their initial investment. It is not suggested on behalf of Mr Shaker that the money originally entrusted to ANA Ltd. (and paid into the Wright Webb Syrett client account and later to Mr Bedrawi) was not used to fund the business operated by ANA Inc. Mr Bedrawi plainly had the right under the investment agreement to choose what corporate entities ran the business. Mr Shaker cannot complain if money advanced to ANA Ltd. was later transferred to the operating company which had been envisaged from the outset. Even if a transfer from ANA Ltd. to ANA Inc. which was not a loan or a subscription for shares was in breach of duty to ANA Ltd. (and there is no such allegation), the Prudential Assurance principle would preclude a claim by Mr Shaker in his own right.
X Consequences
139. In this section I shall assume that Mr Shaker is right in his claims that (a) Mr Bedrawi misappropriated the proceeds of sale; (b) Dr Masry took a $1 million kickback; (c) MBC, Dr Masry and Steggles Palmer dishonestly assisted Mr Bedrawi's breaches of fiduciary duty; (d) Steggles Palmer were guilty of deceit when they informed Mr Shaker's lawyer in January 1995 that the proceeds of sale had been entirely dissipated, and had grounds for knowing that funds which they received through their client account had been misappropriated.
140. In Burland v. Earle [1902] AC 83, Lord Davey said: "… it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself." On the assumed facts, there can be no doubt that ANA Inc. would have claims for breach of fiduciary duty against Mr Bedrawi, and wholly adequate causes of action in dishonest assistance and knowing receipt against the other defendants. The position for present purposes is not affected by the fact that Mr Bedrawi controlled ANA Inc.: Birch v. Sullivan [1957] 1 WLR 1247. If a director of a company, in breach of his duties to the company, makes off with company property in the manner alleged, then a person who dishonestly assists in that breach is liable for dishonest assistance: see e.g. Heinl v. Jyske Bank [1999] Lloyds Rep Bank 511; Walker v. Stones [2000] 4 All ER 412, 455-6.
141. Mr Bedrawi would also have been liable for making unlawful distributions. ANA Inc. is a Pennsylvania company, but there is no pleading or evidence that Pennsylvania law is substantially different, and although it may seem rather artificial to apply the provisions of the Companies Act 1985 to a foreign company, the relevant provisions reflect general principles of corporate law. The accounting documents which are available show (profit and loss account and balance sheet as October 31, 1993) that there were no distributable reserves. The misappropriation of $6 million was an unlawful distribution, prohibited by Part VIII of the 1985 Act: see especially sections 263, 270 et seq., 277.; and a distribution prohibited by these statutory provisions is ultra vires: see Re Exchange Banking Co. (Flitcroft's Case) (1882) 21 Ch D 519; Precision Dippings Ltd. v. Precision Dippings Marketing Ltd. [1986] Ch 447; Bairstow v. Queen's Moat Houses plc, unreptd CA, 2001.
142. It was said in Mr Mayes QC's opening written submissions (but not pleaded, as it should have been: Birch v. Sullivan [1957] 1 WLR 1247) that ANA Inc. would not have had a claim because Mr Bedrawi's actions would be taken to have been authorised or ratified, since Mr Bedrawi was President of the company and he and his wife were the only shareholders. But the point was not pursued in oral argument, although (rather unhelpfully) Mr Mayes QC said that it was not being dropped. I will deal with the point very shortly, at the risk of over-simplification, since I accept the submissions for the defendants that there is nothing in the point.
143. A breach of duty which is dishonest and involves misappropriation of property from a company cannot be ratified: Gower, Modern Company Law, 6th ed. Davies, 1997, at p.644-648; Pavlides v. Jensen [1956] Ch. 565. Where the act consists of an application of the company's property in a way that might have been intra vires if done properly, there may be ratification provided that there is no risk of prejudice to creditors (including a foreign revenue authority). The evidence suggests that ANA Inc. was in a poor financial condition prior to the sale, and that thereafter there were unsatisfied judgment creditors. These would have been matters which would have required investigation if the point had been pleaded and pressed. But it was neither pleaded, nor was it pressed. In any event, an unlawful distribution cannot be ratified: Re Exchange Banking Co. (Flitcroft's Case) (1882) 21 Ch D 519; Precision Dippings Ltd. v. Precision Dippings Marketing Ltd. [1986] Ch 447; and Aveling Barford v. Perion Ltd. [1989] BCLC 626.
144. I have summarised in section VII the pleaded allegations. In context the claim for an account of Mr Bedrawi's dealings with the trust property is a claim based on the theory that Mr Shaker and Mr Adham had a direct interest in the assets of ANA Inc., as is the claim for an enquiry as the sums realised by the sale (and the proportion due to each of them), and payment of sums found due. It follows from my conclusion that Mr Shaker and Mr Adham intended to have, and did have, interests in companies, and that ultimately their interest was in ANA Inc., and not in its assets or business, that in principle they would not have a cause of action against Mr Bedrawi for the alleged misappropriation of its assets, unless Mr Shaker were able to establish independent duties in contract, tort, or equity which Mr Bedrawi owed to them.
145. Accordingly, Mr Shaker would have no basis for his claim against Mr Bedrawi for an order for payment of a proportion of the sale price or equitable compensation for breach of fiduciary duty in diverting the funds to Arabica and elsewhere. If I were wrong in my conclusion that on the principal claims Mr Shaker had no cause of action, the proceedings would still be barred on the basis that the damages were purely reflective of the company's loss.
146. In principle, therefore, in view of my finding that Mr Shaker and Mr Adham had only interests in shares, Mr Shaker has no cause of action against Mr Bedrawi for an account or in constructive trust which would enable him to develop the accessory liability of the other defendants. The reality of the matter is that the object of these proceedings is to make the other defendants liable. Mr Shaker has had for two years a very large English judgment (almost $8 million) against Mr Bedrawi, and has collected nothing. It was said in argument that Mr Shaker believes that Mr Bedrawi may have large sums hidden away, but if Mr Shaker had that belief it is hard to see why Mr Bedrawi was not examined as a judgment debtor, and why he waited so long to present a bankruptcy petition. I was informed that some of the inactivity was due to discussions in which Mr Adham was involved prior to his death.
147. It would, however, be possible to construct from the statement of claim in the action against Mr Bedrawi some arguable personal causes of action (particularly based on breach of the investment agreement), even if, in accordance with what I have decided about the nature of the investment, the references to an interest in the business were stripped out. But, taken together with allegations in the body of the document (which relate exclusively to the events surrounding, and following on, the sale), analysis of the actual claims made in the prayer reveals that there is either no viable claim or a claim which relates only to the loss caused to ANA Inc.
148. The preliminary issue is expressly limited to the question whether Mr Shaker can proceed in relation to the proceeds of sale. But in any event there is no allegation that Mr Bedrawi misapplied the money originally advanced by Mr Shaker and Mr Adham. Although it is not expressly alleged, the claim for damages for breach of contract may be taken to encompass a claim that Mr Bedrawi was in breach of the investment agreement in claiming that he was entitled to manage the business by investing in the graphics business after the sale. But the only damage which would flow from that breach would be the diminution in the value of the shareholding and (in the words of Lord Millett at 125) "payments which the shareholder might have obtained from the company if it had not been deprived of its funds." So also the claim for equitable compensation is based exclusively on the sale and the events following it. Consequently, the only loss capable of being asserted by Mr Shaker would be the diminution of the value of his and Mr Adham's beneficial interest in the shares of ANA Inc. (or perhaps in ANA Ltd.), which would be wholly reflective of the loss sustained by ANA Inc. Therefore (and subject to the point made in the next paragraph) the Prudential Assurance principle operates to preclude him from asserting these claims.
149. The claims against Dr Masry and MBC are (1) for damages for (a) inducement of breach of, or wrongful interference with the performance of, the investment agreement; (b) facilitation of, or conspiracy enabling, Mr Bedrawi's secret profit and/or unjust enrichment; (c) knowing assistance in Mr Bedrawi's breach of trust and/or fiduciary duty and/or unjust enrichment; and (2) an order for an account of dealings with the trust property and the sums realised under the sale. With the exception of the claim for inducement of breach of, or interference with, the investment agreement, these are not claims open to shareholders when the accessory liability is claimed to be to the liability of a director for breach of duty. Even if that were wrong and the claims were open to Mr Shaker, they relate exclusively to the sale and the misappropriation of the proceeds, and the only damage would reflect damage to the company. It is true that there is a purely theoretical possibility that a court may find that the only wrong committed by Mr Bedrawi was a breach of the investment agreement, and the only wrong committed by MBC and Dr Masry was inducement of breach of, or interference with, that agreement. In such a case there might be a claim for diminution of the value of the shares, because (on the hypothesis that those were the only wrongs) the company would not have a cause of action. But it is wholly theoretical, not least because, despite the assertion that "by reason of the facts and matters set out" in specified paragraphs it is to be inferred that MBC and Dr Masry knew of the investment agreement, the facts and matters set out are not capable of raising such an inference. No doubt that was why there was no mention of inducement of breach of contract in Mr Mayes QC's opening submissions at trial, and why no more was said other than that Dr Masry and MBC were aware, or should have been aware, that there were shareholders other than Mr Bedrawi.
150. The same is true of the claim against Steggles Palmer, which is for knowing receipt and knowing assistance, as a result of which (it is alleged) they became constructive trustees of the whole of the purchase price, and for deceit arising out of the statements allegedly made to Mr Shaker's lawyer in January 1995, as a result of which (it is alleged) Mr Shaker lost $1,595,000 paid out thereafter or the opportunity of preventing further dissipation. The claim for knowing receipt and knowing assistance is not available to shareholders, and the claim in deceit against Steggles Palmer is specifically related to the residue of the $6 million, and reflects the damage to the company. Although ANA Inc. would not have had a remedy in deceit, the relevant alleged conduct would have amounted to dishonest concealment, for which ANA Inc. would have had a cause of action.
151. In the argument for Mr Shaker on the preliminary issue it was suggested that the claims may go beyond the $7 million, i.e. the $6 million paid to Qube and the $1 million allegedly paid to Dr Masry. It was suggested that recovery from Dr Masry by Mr Shaker was not to be limited to the Qube US$6 million (plus US$1 million) in the event that the court found that a breach of trust by Mr Bedrawi went wider than the net sale proceeds of ANA TV and ANA Radio and found material assistance by Dr Masry. It was also suggested that the claim for an account might encompass what were said (implausibly) to have been very large profits made by ANA Inc. and never accounted for. Strictly this is not a point covered by the order for a preliminary issue. No such case was pleaded, and I have already expressed the view that I do not accept the submission developed in argument for the first time that the primary breach of trust which was being alleged was a failure to account which went back to the first payment and to pre-sale profits. In any event, in view of my conclusion that the interest was in shares in a company, a restitutionary claim or damages would not be available.
152. It follows that the answer on the preliminary issue is that Mr Shaker cannot proceed against the defendants or any of them in relation to the proceeds of sale. It was suggested on behalf of Mr Shaker that the court should of its own motion join ANA Inc. in these proceedings and convert them into a derivative action. But CPR 19.9 (replacing RSC Ord. 15, r. 12A) contains a procedural code for derivative claims made on the application of a claimant, and no reason has been given why the court should institute this procedure for the benefit of a claimant on its own motion, particularly in a case where the company is foreign and where permission to serve outside the jurisdiction would be involved. Mr Shaker and his advisers have been aware of the point for a year and a half, and it was for them to take their own view on what they should do to redress the wrong which Mr Shaker says he has suffered.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~