England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25 June 2002

Mr Justice David Steel :

Introduction

1. The claimant (“OMCD”) is an Isle of Man company of which the first defendant (“MS”) is a former director. The second defendant (“Oasis”) is a Dubai company of which the first defendant is a director and shareholder.
2. The claim concerns the purchase by the second defendant of a cargo of about 13,000 tonnes of petroleum coke from Energie, Carbon und Metalle Etas in about October 1995 and its on sale to the Iranian Aluminium Company (“Iralco”) in about November 1995. The original purchase price was $3,406,000. The cargo was on sold for $3,950,125.00
3. The claimant’s case is that this was a corporate opportunity for the claimant for which it provided all the funds. It was common ground that only $1.5m had been repaid to the claimant. The allegation was that the remainder of the proceeds had been wrongly diverted to the second defendant in breach of the first defendant’s fiduciary duties.
4. The defendant’s case is that the transaction was properly that of the second defendant. It was financed by means of a non-recourse profit sharing agreement entered into orally by the first defendant with Mr Mohammed Al-Tajir (“MAT”), a director of the claimant. The defendants contend that pursuant to that the agreement, the claimant and/or MAT were to be repaid the amount of the finance provided on receipt of the sale proceeds from the buyers, together with a profit of $23 per tonne. However, since Iralco had not paid in full, no more than the $1,500,000 already paid was due.
5. The claimant had an alternative claim. On the assumption there was a profit sharing agreement, the claimant contends that a substantial sum is due to it following a further part payment in kind made by Iralco to the second defendant comprising some 1620 tonnes of aluminium delivered between 1997 and 1998. The defendants admit the receipt of the aluminium but contend that only part thereof was sold, the proceeds of which were subsumed by expenses.

Background

6. OMDC was incorporated in the Isle of Man on 24^th August 1989. Its initial directors were MAT and his brother. Later, in 1991, the first defendant was appointed director. In 1998 MAT’s son, Khalid Al Tajir (“KT”) also became a director. The company is beneficially owned by the Al Tajir family.
7. OMDC was authorised to trade in Dubai pursuant to an informal licence granted by Sheikh Maktoum, then the Ruler’s son (now of course the Ruler himself). The focus of much of OMDC’s business was trade with Iran. A frequent customer was Iralco for whom cargoes of petroleum coke were regularly sourced in the early 1990’s. Albeit by the beginning of 1995 the scale of OMDC’s operations had declined to a significant extent, leading to the closure of its Tehran branch, nonetheless it remained active. Draft accounts for the year ending 31^st August 1995 showed sales of US$ 8.5m.

The witnesses

8. KT had been instrumental in setting up the banking facilities for the family businesses. In particular, OMDC had accounts at Citibank and ANZ Grindlays. His involvement in the particular transaction that is the subject of these proceedings was initially confined to seeking to obtain finance pursuant to the requests of the first defendant. He later became involved in attempts to obtain payments from the Iranians.
9. He gave oral evidence before me. He struck me as an intelligent man who gave his evidence in an entirely straightforward manner. In particular I fully accept his evidence, which was scarcely challenged, that he was wholly unaware of any involvement of Oasis in the transaction until June 1996.
10. MAT is a prominent businessman in the UAE and head of the Al Tajir family. He had formerly been Director of the Ruler’s affairs for Dubai, the ruler then being His Highness Sheikh Rashid Al Maktoum, the father of the present ruler. From 1972 until 1987, with a small break in between, he was ambassador to the Court of St James for the UAE. Following his retirement from that diplomatic post, he returned to Dubai and set up various business ventures, including OMDC. Over the years he has wound down his active involvement in his business affairs.
11. MAT gave evidence over a video link with Dubai. He was an impressive witness who was careful to confine himself to matters within his own knowledge. He vigorously rejected the suggestion put to him that he had entered into a partnership with the first defendant in respect of the present transaction. He did so in striking terms. “Mr Sajjad had the honour to work for me, but he was not good enough to be my partner”. I confess that I found this answer wholly convincing, both from the perspective of the manner in which it was given and by reference to the disparity between the stations in life that the two men held.
12. My confidence in being able to rely upon his evidence was fortified by the fact that, when it was suggested to MAT that this was the second occasion on which such a joint venture had been undertaken, the initial one relating to a cargo of pencil pitch, not a single document was produced, let alone put to MAT, by the defendant in support of that proposition.
13. A third witness was called by the claimants, namely Miss Nicola Jones, who was between 1989 and 1996 an employee of Citibank. Her position was that of Relationship Manager for the Al Tajir family businesses. She has since become the Investment Director for the Al Tajir Group. She also gave evidence by video link from Dubai.
14. Her evidence was not seriously challenged yet it was significant in two important respects. First, she confirmed that no mention of Oasis was ever made to Citibank, either by KT in seeking finance or even by the first defendant when he spoke to Nicola Jones in October 1995. Secondly, although there was a US embargo involving Iran, this did not impinge on the decision whether or not to grant an overdraft facility to OMDC. Indeed Citibank had in fact funded a number of transactions for OMDC in respect of minerals which were known to be ultimately bound for Iran.
15. The defendants relied upon the oral evidence of MS. First impressions were that MS was not a reliable witness. To a large extent, this conclusion was formed by reference to the contemporary materials and the probabilities, matters to which I will revert. But in any event, his evidence was full of mutual inconsistencies, sparse on any explanation of matters which should have been peculiarly within his own knowledge and short of detail with regard to the oral contacts with MAT and Citibank.

The transaction

16. It appears to be common ground that in early June 1995, MS obtained an opportunity to sell a parcel of petroleum coke to Iralco. How this opportunity was forthcoming remains wholly elusive. In particular, it remains unclear as to whether MS obtained the opportunity by virtue of his relationship with OMDC and/or MAT.
17. The only relevant document is a pro-forma invoice dated 1^st June 1995 on Oasis letterhead for the sale of 15,000 metric tonnes of coke at a price of US$220 per tonne. The pro-forma invoice was accepted by Iralco on 3^rd June 1995, albeit with a counter-proposal that payment would be made by irrevocable letter of credit.
18. On 13^th June, MS wrote to Iralco on Oasis notepaper chasing for the letter of credit. A further chaser was sent on 27^th June and again on 7^th August. This letter in fact warned that if the cargo wasn’t lifted by 20^th August, port charges would be incurred. Despite a further chaser on 14^th August, no letter of credit was forthcoming.
19. This led to an attempt on 23^rd August by MS to fund the transactions through OMDC’s banking facilities. To this end, on OMDC fax transmission paper, MS wrote to Citibank as follows:

“Further to our discussion yesterday and which followed my telephone conversation with Mr Al Tajir, I have secured an order from our usual customer for 15,000 metric tonnes pet coke from Energy Carbon Und Metal…our traditional supplier for whom you have issued several LC’s in the past few years.”

MS then set out details of the purchase price and sale price, although the latter was surprisingly quoted as $210 per metric tonne.

20. MAT and MS gave evidence about the telephone conversation referred to in that fax. It was MAT’s evidence that MS told him that Iralco were looking for a financier for this transaction. He (MAT) was not particularly keen to furnish finance because Iralco had defaulted on another transaction. However, since MS assured him that the money would be returned within six weeks, he agreed to provide finance and told MS to contact Citibank.
21. It was MAT’s evidence, and I accept it, that there was never any mention of Oasis or the fact that this transaction was being done for MS’s own account, let alone any discussion of a joint venture or partnership. As he understood it, he was being asked to finance, through OMDC, a transaction with a well-established trading partner.
22. MS was not able to give details of the conversation in his oral evidence. The defence was pleaded on the basis that to help MS out, MAT agreed to provide finance because Iralco could not provide a letter of credit and that in return he would accept a profit of $20 per tonne. I am quite unable to accept this version of the conversation for the following reasons:

a) I have already held that MS never mentioned Oasis to MAT.

b) It was MS’s evidence that MAT had actually asked him in August 1995 to help source petroleum coke for OMDC to supply to Iralco. Accordingly OMDC and MS (whether trading as Oasis or otherwise) were commercial rivals on MS’s version. It is difficult to see any reason why MAT would agree to finance on a non-recourse basis a commercial rival, thereby running the risk not only of default by Iralco but also by Oasis.

c) I have already emphasised MAT’s observation about the disparity in station between himself and MS. Yet MS’s version of the conversation would mean that this joint venture would be on terms more favourable to MS than MAT. MAT would supply all the funds and bear all the risk simply for a 50% share of the profits.

d) MS’s version is wholly inconsistent with his fax to Citibank of 23^rd August quoted above. This was in terms of a transaction secured for our “usual customer” to be supplied “by our traditional supplier”. Not only is there no mention of Oasis (and MS accepted in cross-examination that he never told Citibank about Oasis), the actual detail of the transaction is misrepresented, since the sale price details were false. On any view this lay uncomfortably with the pleaded suggestion that MAT had been promised a share of the profit amounting to $20 per tonne.

23. In any event, this original transaction was never completed. On 28^th August 1995, MS sent a fax to KT enclosing a copy of the OMDC fax to Citibank dated 23^rd August and commenting as follows:

“Unfortunately [Citibank] called me late on Friday afternoon to advise me that due to the fact that this material will be destined to Iran, Citibank’s legal department in New York had rejected out proposal on the basis that this violates US sanctions imposed on Iran last May by President Clinton.”

He went on to ask if KT could arrange alternative finance. KT sought to do so but reported back the following day that despite approaching three banks, the time frame was too tight to conclude a deal.

24. The suggestion that Citibank’s legal department had rejected the proposal by virtue of the US sanctions is surprising. There is no indication that MS anticipated any difficulty with Citibank financing a transaction with ‘our usual customer’, something which, by definition, Citibank must have been involved with before. This is fully supported by the evidence of Nicola Jones, already recorded. The point may have some considerable significance in that, later on, MS was to suggest that Citibank had insisted that a third party (Oasis) be involved in the transaction so as to avoid, in some arcane way, the implications of the US sanctions. The true explanation for Citibank’s refusal was probably, as explained by KT, that OMDC’s line of credit was exhausted.
25. Following the loss of the August cargo, in late September Iralco approached MS again, this time with a view to obtaining 10,000 metric tonnes of petroleum coke for prompt delivery. MS immediately contacted his suppliers, Energy Carbon Und Metalle and was informed that such a cargo could be made available in Rotterdam at a price of US$200 per metric tonne FOB provided that an advance payment of 50% of the price was received by 28^th September. MS immediately offered this cargo to the Iranians under cover of a letter dated 27th September at a price of $235 per metric tonne. This was accepted, together with an assurance that payment would be affected promptly.
26. In order to furnish the required deposit, MS once again contacted MAT by telephone. The content of this telephone conversation was also in dispute. It was MAT’s evidence that MS said that the previous deal had been resurrected and that he needed to transfer the sum of $US975,000. He passed on the Iranian’s assurance about payment and indicated that the profit would be about US$23 per tonne. MAT accepted that proposal.
27. The pleaded case of MS was that he told MAT that Oasis had an opportunity to supply cargo with an anticipated profit of $40 per metric tonne and that Oasis would give MAT 50% of the profit if he agreed to finance the transaction on a non-recourse basis. MS claimed that MAT agreed to do this. At some subsequent date it was pleaded that, due to a downward fluctuation in oil prices, the potential profit increased by some $3 per metric tonne, all of which was allocated to MAT.
28. Again, there were several insuperable difficulties about MS’s account:-

1. Once again I accept MAT’s evidence that no mention was ever made of Oasis.

2. Despite the pleaded case, MS’s witness statement contained no reference to a non-recourse loan.

3. In his witness statement, a different explanation was given for the extra $3 per metric tonne. This was said to be attributable to a cheaper charter rate. In fact there was no downward fluctuation in oil prices or any advantageous charter contract.

4. Once again the whole transaction was, from the prospective of MAT, commercially absurd. There was no reason on the face of it for MAT to finance MS’s contract on a non-recourse basis so as to allow MS a profit of 50%.

29. It is not necessary to investigate the matter any further since, although MS obtained sanction to transfer the US$975,000 to the suppliers, this transfer only took place on 29^th September. In the meantime the cargo had been sold by his suppliers elsewhere. (It is worth noting in passing that MS approached Citibank for the transfer by means of a fax on OMDC notepaper on which there is a manuscript note made by an employee of the bank ‘OK subject to room in lines for OMDC’).
31. On 7^th October, the suppliers told MS that they had secured a further cargo of 13,000 metric tonnes which was offered to him at US$202 per metric tonne. The US$975,000 which had been sent from OMDC’s Citibank account was held by the suppliers as a deposit. MS immediately contacted Iralco and offered the cargo to them at US$245 per metric tonne. Iralco appears to have accepted the proposal in a telephone conversation on 10^th October.
32. By a fax dated 13^th October 1995, MS instructed Citibank to send the balance of US$1,651,000 to the suppliers and a further sum of US$780,000 to OMDC’s account in Dubai in respect of the shipping charges. On 2^nd November 1995 MS sent a further fax to Citibank which was copied to MAT. It was written on OMDC letterhead but conspicuously made no mention of Oasis. On the face of it, it was drafted on the basis that it was an OMDC transaction since it referred to the fact that ‘we’ were under pressure to settle the freight cost so as to enable ‘us’ to lodge ‘our’ shipping documents. More strikingly the fax went on to give a summary of the sale transaction. This represented that the sale price was US$225 per metric tonne. This had the effect of hiding the actual gross profit from which, in any event, further deductions were purportedly to be made representing ‘administrative and other miscellaneous costs’ and ‘commission’.
33. The claimant submitted that this fax was only consistent with MS, under the guise of an OMDC transaction in which the true price was concealed, seeking to make his own secret profit of $20 per metric tonne, together with commission and other sums. MS had no explanation for this document to tender during the course of his cross-examination. In my judgment the claimant’s contention is fully made out.
34. The cargo was shipped at Emden on 5^th February 1995. Oasis raised an invoice on 6^th November. Payment was due in accordance with the agreement with Iralco within 30 days. Payment was not made on the due date. MS claims to have chased Iralco for payment. Notably, however, the invoice refers to ‘terms of payment: swap against aluminium’. It was not even suggested by MS that such an arrangement had been mentioned to, let alone agreed by, MAT.
35. A part payment of $500,000 was received by Oasis on 4^th April 1996 which was thereupon transferred to OMDC. Having pressed for payment of the balance on several occasions, on 17^th June 1996 MS entered into a written agreement with Iralco. The effect of the agreement was as follows.

1. that the parties acknowledged that the outstanding debt allowing for the part payment was $3,720,000,

2. that Iralco undertook to pay US$750,000 to Oasis no later than 30^th June 1996 and

3. that Oasis agreed to transfer its right to the balance to MAT, with Iraco undertaking to confirm as much in writing.

36. It was MS’s case that he told MAT about this agreement and that MAT became angry because he wanted MS to continue to be responsible for the collection of the debt. I reject that evidence. In my judgment MAT was never shown this agreement. It was kept secret from him. I am driven to this conclusion not simply by reason of the general credibility of the witnesses to which I have already referred, but also because:-

a) In the contemporary correspondence there is no mention by MS of this agreement. To the contrary, in MS’s letter of 20^th June 1996, he commented: “I am certain that the Iranians accept this debt”. This observation would have been quite unnecessary if, to MAT’s knowledge, he had already entered into an agreement three days earlier in which the debt was accepted. Furthermore, in his letter of 23^rd June 1996, he suggested that the balance of the debt be assigned to MAT. This becomes an astonishing suggestion if he had already presented such an assignment to MAT six days earlier and found that the suggestion had been angrily rejected.

b) The terms of the agreement are so startling that there would be every reason for MS not to show it to MAT and every reason for MAT to remember it if he had. The only immediate beneficiary was MS, who was to receive immediate payment of $750,000. Yet there was no possible justification for payment of such a sum. MS never suggested that Oasis was entitled to more than $20 per metric tonne amounting to US$260,000 from the entire cargo. Furthermore that sum was only payable once MAT had been reimbursed with the price of the shipment in full.

37. I ought to mention that MS suggested that a letter signed by MAT and dated 18^th June 1996 was only consistent with MAT having been aware throughout that Oasis were the intermediary. It was addressed to the Deputy Minister of Mines and Metals, albeit sent to MS for onward transmission. The letter contains the following passage:-

“As you know this shipment was made through the offices of Oasis Trading and thus I would ask you to made (sic) immediate payment of all outstanding monies in US dollars through Mahdi who is in Tehran and is awaiting to collect the funds.”

38. I accept the evidence of MAT that this letter was written at the request of MS. It was only on the 20^th June that MAT was told by MS of Oasis’ role which provoked the immediate response that MAT had not been aware of Oasis’ involvement. MS accepted in cross-examination that it was indeed he who suggested that MAT should write the letter with a reference to Oasis. The likely, but unattractive, explanation of the letter is that MS was anxious to receive his payment of US$750,000 and needed to satisfy the Iranians that payment to him would at least discharge the overall debt in part.
39. Notably, the explanation tendered in the letter of 20^th June for Oasis’ involvement in the transaction was that it was ‘at Citibank’s request to avoid complications from the US’. Indeed MS went so far as to assert in his letter of 23^rd June 1996 ‘from the beginning Citibank were adamant that they could not support this transaction if it was conducted through OMDC. The participation of Oasis was therefore necessary for the transaction to proceed’
41. This explanation for Oasis’ involvement is manifestly untrue. Far from insisting on Oasis’ involvement, Citibank knew nothing of its role. MS had ensured that Citibank remained ignorant of any involvement on Oasis’ part by always corresponding with Citibank on OMDC notepaper. In any event, if and to the extent that Citibank’s objection was that trade was bound for Iran, it would not have advanced matters to put the contract through Oasis. Any objection based on US sanctions would remain precisely the same. Furthermore as Nicola Jones explained, Citibank were not objecting to the transaction, let alone insisting on third party participation.
42. I accept the submission made on behalf of OMDC that the attempt to justify Oasis’ involvement when pressing Iralco to pay in June 1996 is entirely inconsistent with the proposition that MS had made it plain from the outset that it always was an Oasis transaction and had explained as much to MAT. Put another way, Oasis’ letters of June 1996 are wholly inconsistent with earlier informed consent on behalf of MAT.
43. In August 1995 Iraco had paid a further US$1 million but it was not until the 15^th August 1996 that this was transferred, at MAT’s request, to another of his companies, Al Tajir General Trading. No further sums have been paid by MS or Oasis to or for the benefit of OMDC in connection with this transaction. However, in May 1997 MS entered into an agreement with Iralco in which Iraco agreed to pay the majority of the outstanding debt on the transaction by way of a transfer of aluminium.
44. As already noted the sales invoice referred to payment being made by way of a swap, albeit the precise circumstances in which this or the final agreement came to be made are entirely unexplained. By the terms of the agreement Iraco agreed to furnish to Oasis 1,600 metric tonnes of aluminium. The arrangement was that Oasis would sell the aluminium and account for the proceeds to Iralco against the outstanding amount. To this end, arrangements were made for delivery to be made to Lyan Satareh Company in Iran. On 22^nd April 1998 in a letter to Iralco, MS reported that the proceeds of sale amounted to US$3,144,888 which, after allowance of 10% commission, left US$1,383,631 still due as the balance on the account.
45. This agreement, it is common ground, was kept secret from MAT and KT. It was concluded without any reference to OMDC. At no stage did MS inform MAT that he had received any aluminium by way of payment or indeed any sale proceeds. Furthermore, he has not accounted for a single cent. I accept the claimant’s submission that MS attempted during the course of the proceedings to keep the transaction, together with the receipt of aluminium and its proceeds, a secret. Even when forced to admit the existence of the transaction, he claimed untruthfully, that only half of the aluminium had been sold and, equally untruthfully, that the sale proceeds thus obtained had been entirely used up in expenses.
46. By letter dated 26^th February 1999 OMDC’s solicitors wrote to MS’s solicitors as follows:

“As we understand it, Oasis have received substantial metal in lieu from the Iraco in relation to this action, but we have received no indication from your client that he now intends to pay anything back. Please confirm the position.”

The response to this letter was that MS’s solicitors were taking instructions, but no substantive response was ever made.

47. In August 1999 OMDC launched an application for summary judgment, supported by some documents relating to the aluminium that had been received by Oasis. Faced with this evidence, MS admitted the existence of the Iranian deal and the receipt of the aluminium. However, he approached summary judgment on the basis that the arrangement with MAT was not by way of a non-recourse loan. The contention was that MAT had agreed to a joint venture in which all expenses had to be paid first before profits were realised and that the entire proceeds of the sale of the aluminium (said to be US$886,000) had been used up by expenses amounting to US$1.5m.
48. As regards the terms of the transaction, the suggestion that there was a form of partnership is no longer even pursued. As regards the expenses, these on the face of it were entirely bogus. First there was a substantial claim for storage, handling and sale expenses when it is plain that Oasis did not store, did not handle and did not dispose of the aluminium. Second, there is no legitimate basis for claiming Oasis personnel costs of US$567,000, let alone an additional contingent cost of US$500,000 in respect of some unsold part of the aluminium. Not surprisingly, there was no documentary evidence to support any of the expenses claimed. Despite the Master who heard the application for judgment having rejected the expenses claimed as ‘obviously inflated’, there has been no amendment to the pleadings. Remarkably it is supported by ‘a statement of truth’.

Conclusion

49. This is the clearest possible case in which a director has been in breach of his fiduciary duty. MS misappropriated OMDC property to fund his own transaction. He is thus liable to restore to OMDC the money extracted for this transaction, together with interest or an account of profits.