HABIB BANK LTD v ABBEYPEARL LIMITED FURNWELL LIMITED MOHAMMED ALI DAWOOD [2001] EWCA Civ 62

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MERCANTILE COURT AT
MANCHESTER
(Judge Kershaw QC)
[2001] EWCA Civ 62Case No Case No: A3.2000/6461 & A3/2000/0522Venue Royal Courts of Justice, Strand, London, WC2A 2LL, Friday 26th January 2001
Between
HABIB BANK LTDClaimant/ AppellantABBEYPEARL LIMITED FURNWELL LIMITED MOHAMMED ALI DAWOODFirst Defendants Second Defendants ThirdDefendant/ Respondent
Before
Lord Justice WardLord Justice BrookeSir Christopher SladeRobert Moxon-Browne QC and Paul Downes (instructed by Berrymans Lace Mawer for the Appellant)Robert Sterling (instructed by Linder Myers for the Respondent)Date 26 January 2001

LORD JUSTICE BROOKE :

This

[1]is an appeal by the claimants Habib Bank Ltd against an order made by Judge Kershaw QC in the Mercantile Court at Manchester on 14th December 1999 when he directed that the statements of case of the claimants and of the first and third defendants in these proceedings should be struck out pursuant to his powers under CPR 3.4(2)(c). The judge found that there had been failures to comply with rules of court and court orders and that a fair trial was no longer possible. He rejected the submission by the claimants that this was a "documents only" case. He said that one of the major reasons for his decision was that recollection was important, and that this case was concerned not with the recollection of the people principally involved but also with possible corroborating witnesses. He added that although this was not the most important factor in his mind, he did not accept that the claim could be ready for trial in the very near future. So far as the second defendants were concerned they had been struck off the register of companies in December 1993, and the judge directed that the claimants should not take steps to have that company restored to the register without first giving 14 days' notice to the first and third defendants or their solicitors.[2]On the hearing of the appeal it was common ground that the central issue for us to determine was whether the judge was clearly wrong when he decided that a fair trial was no longer possible. It was accepted on both sides that this was the relevant test in the circumstances of this case, whether regard was had to the Civil Procedure Rules or to Article 6(1) of the European Convention on Human Rights.[3]This action was started by a writ issued in the Birmingham District Registry on 25th November 1991. The defendants all filed an acknowledgement of service on 6th December, and on 16th December an application was made for summary judgment pursuant to RSC Order 14. I heard that application myself as a high court judge sitting in Birmingham on 14th April 1992 when I gave all three defendants unconditional leave to defend. I also gave directions, at the claimants' request, tailored to lead to a trial of the action in the first half of 1993. Events, as I shall record, did not follow the pattern of my directions, and when the first and third defendants applied to the court on 10th August 1999 for an order striking out the claimants' statement of case, the claimants had for all practical purposes taken no steps in the action for over four years. A review of the evidence before me on the summary judgment proceedings, and a summary of the reasons I gave for granting unconditional leave to defend, provide a valuable insight into the issues we have to decide on this appeal.[4]The original Statement of Claim endorsed on the writ, was comparatively brief. It recorded that the first and second defendant companies maintained current and deposit accounts at its branch in Wilmslow Road, Rusholme, Manchester (later described as "the Manchester branch"). It also referred to a guarantee by the first defendants for the second defendants, and a guarantee, limited to £4 million, exclusive of interest and charges, by the third defendant for the first defendants. It is this guarantee, dated 10th October 1989, which is of central importance in the present proceedings, and there is no longer any need to refer to the claimants' claim against the second defendants (which was in any event quite small) or to their claim against the first defendants, except in so far as they are relevant to the third defendant's liability under his guarantee.[5]The Statement of Claim goes on to record that by letters written in November 1991 the claimants' solicitors made formal demands on the first and second defendants in respect of their outstanding liabilities on their various accounts, and on the first defendants in respect of their guarantee liability for the second defendants. Then, by a letter dated 18th November 1991, they made a formal demand on the third defendant for his guarantee liability for the following amounts:(i) First defendants' sterling current account: Principal £1,331,652.49 Interest £352,814.55(ii) First defendants' US $ account: Principal US$ 4,417,817.67 Interest US$ 636,678.90(iii) First defendants' guarantee liability for second defendants: Principal £19,782.47 The writ, which claimed accruing interest, followed seven days later.[6]The claimants' application for summary judgment was supported by an affidavit sworn by Mr Ali Hasnaim Naqvi, a vice-president of the bank and one of its internal auditors at its UK head office in Cannon Street. He formally exhibited the documents supporting the bank's claim, and said that Mr Dawood, the third defendant, effectively controlled the first defendants, Abbeypearl Ltd, as sole director and the only individual shareholder, the other shares being held by corporate nominees, presumably on Mr Dawood's behalf. This evidence was confirmed by the form completed when Abbeypearl opened its current account with the bank in 1993, by a company search, and by Mr Naqvi's own investigations of the bank records.[7]For the reasons he set out in his affidavit Mr Naqvi accepted that there were indeed issues to be tried between the bank on the one hand and Mr Dawood and Abbeypearl on the other in relation to more than half the bank's claim. This concession covered a sum of £2,465,425. On the other hand, he said that there was no defence to the balance of the claim, amounting to £2,109, 478.14 or to the small claim based on the second defendants' indebtedness.[8]The story Mr Naqvi told was a remarkable one. The manager of the bank's Manchester branch between July 1983 and 12th February 1990 was a man called Sohail Butt. In due course Mr Naqvi had become personally involved in investigating irregularities in the conduct of a number of the accounts at the branch, and as a result of his investigations Mr Butt and two of the bank's other employees at the branch were charged by the police with a number of serious offences of theft and false accounting. Mr Naqvi added that the police had told him that Mr Dawood had also been charged with conspiring with Mr Butt and the other two men, and the brief details he had received suggested that these charges were connected with the events he outlined in his affidavit.[9]Mr Naqvi said that during his investigations he had considered certain transactions involving Abbeypearl and other customers of the bank . Funds for these transactions appeared to have been provided either by Abbeypearl, with its full knowledge, or by other customers, not necessarily with their knowledge or consent. These funds were provided either by diverting funds coming in for the credit of their accounts at the clearing stage, when they would not be credited to the proper account in the bank's books, or sometimes by transferring them from a customer's account without the customer's knowledge. Charges were made to the parties who received the benefit of these funds. These charges were then credited to the accounts from which sums had been misappropriated in order to pay the interest which would normally have been due. Alternatively, they were credited to other accounts opened by Mr Butt and his associates for their own benefit, or to accounts in the names of people called Khalida Rehman and Amin Latif (for whom see paragraph 12 below).[10]So far as repayments of capital from the "unauthorised borrowers" were concerned, Mr Naqvi said that these were either credited to the accounts of customers whose funds had been used or, sometimes, to other accounts. The latter course was adopted either for the purpose of concealing previous misappropriations or of providing further unauthorised facilities to borrowing customers. He said that his investigations were hampered for two reasons. The first was that a great deal of the documentation evidencing genuine transactions on the various accounts had been destroyed. The second was that in order to conceal irregularities Mr Butt had falsified statements, passbooks and other documentation.[11]Mr Naqvi said that at an early stage of his investigations he detected a large number of what he called unauthorised transfers of substantial sums to the Abbeypearl sterling fixed deposit account. These sums totalled £1,369,000. Of this sum, £262,900 represented alleged transfers from accounts in respect of which there was no actual credit which could be transferred. He reversed all these unauthorised entries and transferred the sum of £1,107,000 protectively into a "sundry creditors" account. Mr Naqvi described what Mr Butt had told him about the underlying transactions, but the bank has made it abundantly clear that it does not intend to rely on evidence from Mr Butt in these proceedings. Mr Naqvi's investigations disclosed, however, that a number of advances said to have been made with Abbeypearl funds appeared to have been made by using cheques or transfers direct to the account of third party borrowers: other advances were made by transfers to such borrowers out of the Abbeypearl fixed deposit account. Most of these advances had been repaid, with interest, to Abbeypearl, while the balance represented the recent unauthorised transfers to which he had earlier deposed.[12]Mr Naqvi had also traced payments which, according to Mr Butt, represented commission or charges for the making of the loans. Included among these payments were sums paid to non-resident accounts opened in the names of Mrs Khalida Rehman, who was Mr Butt's sister-in-law, and Mr Amin Latif, who Mr Naqvi understood to be an employee of Mr Dawood. £353,416.49 was credited to the first of these accounts and £169,141 to the second. He said that these two accounts were operated by Mr Dawood, allegedly as authorised agent for the account holders.[13]Mr Naqvi then set out the essence of the bank's case against Mr Dawood and Abbeypearl in relation to these transfers:
"As a result of my investigations I formed the view that Mr Dawood and Abbeypearl were willing parties to the making of 'unauthorised transfers' with Abbeypearl funds and that their motive had been to obtain the much higher interest rates charged on the 'unauthorised loans' than was available on funds on deposit in the normal way with the bank, together with the other charges paid to the non-resident accounts."
[14]He explained that this type of fraud by customers and bank officials was sometimes called "parallel banking". It exposed a bank to substantial risk in that depositors whose funds had been used would claim repayment from the bank, and the bank would in all probability be unable to make full recovery from the unauthorised borrowers. He said that the bank faced a substantial loss in this case whatever the outcome of the current proceedings, and that it might well in due course sue Abbeypearl and/or Mr Dawood for any extra losses.[15]Mr Naqvi then gave his reasons for conceding that there was a triable issue relating to a total of £2 million (plus accrued notional interest of £465,425) in relation to advances made out of Abbeypearl funds which had not been repaid to that company, together with interest. He said, however, that the bank had recently met its obligations amounting to about £3,400,000 under letters of credit opened by Abbeypearl, and that these sums had been debited to one or other of Abbeypearl's accounts.[16]On 23rd March 1992 Mr Dawood swore a 62-page affidavit in reply, to which he exhibited a draft defence and counterclaim. His story was a straightforward one. He was born in 1949 in Karachi, where his family still lived, and educated in England. He named the English public school and the English university which he had attended, and added that he had also obtained a post-graduate degree in finance at Columbia University, New York. He had been conducting business in Manchester since 1973. He had first run a company owned by his uncle which was engaged in the purchase and wholesale of grey cloth, through which he built up substantial contacts in the international market. In 1976 he started a company of his own which conducted a similar business on a local basis. In 1983 he sold that company to his uncle, and thereafter he conducted an extremely successful business of his own through the agency of Abbeypearl, which he formed for that purpose. He said that Abbeypearl became the third largest grey cloth importer in the United Kingdom and took about 40% of all exports of this commodity from Pakistan. Its annual turnover between 1983 and 1989 ranged between £10 million and £15 million, and its net worth grew to about £1.9 million in September 1989.[17]He said that Abbeypearl maintained its main current account with ABN Bank in King Street, Manchester, but it also had a letter of credit facility of £1,500,000 at the Manchester branch of the claimant bank. In April 1987 Abbeypearl had obtained a credit licence from the Department of Trade and Industry, and since that time the making of loans became an increasing part of its business. It had recourse for this purpose to its own funds realised from cloth sales and to its ABN Bank overdraft facility.[18]Mr Dawood explained that Abbeypearl's sterling and dollar accounts at the claimants' Manchester branch were regularly funded and that they remained in credit, save for an overdraft facility of £100,000 used to cover the claimants' charges for meeting the letters of credit. Abbeypearl never had a cheque book from the claimants and, except for this single purpose overdraft facility, never had occasion to borrow funds from them. He believed that from the mid 1980s it was the largest customer of the claimants' Manchester business and that it accounted for the greater part of its gross turnover. Indeed, he said, the branch was doing little or no commercial business for anyone else.[19]He said he had enjoyed a close working relationship with Mr Uppal, who had been the manager of the branch prior to July 1983. Mr Butt then took Mr Uppal's place, on a transfer from the bank's Rochdale branch. Mr Dawood learned that Mr Butt had no knowledge of dealing with international letters of credit and no commercial banking experience of any kind, but eventually, however, he developed a good working relationship with him, on a professional rather than a social basis. In due course Mr Butt came to learn about Abbeypearl's credit licence because he knew that the company could lend direct to its customers without involving his bank.[20]Mr Dawood explained that the bulk of Abbeypearl's business was related to the supply of cloth to the summer fashion trade. Orders for fabric were placed in October-November, and letters of credit were opened through the claimants in about December for payment between 60 and 90 days after the arrival of the goods. The goods were shipped from January onwards to arrive in February onwards in time for the summer season. In those circumstances Abbeypearl was occasionally "cash-rich", usually in the July-August period, when it made fixed term investment deposits with ABN Bank. Mr Butt became aware of this fact, and on various occasions Abbeypearl made fixed term deposits at his branch at Mr Butt's request, at a rate higher than it could obtain with ABN Bank.[21]Mr Dawood said that it was against this background that Mr Butt came to see him at Abbeypearl's office in late 1988 or early 1989. He told him he would like Abbeypearl to place more deposits with his bank. He was now opening more letters of credit than the bank's London branch, and he would like to be taking more deposits. At first he said he would pay interest at base rate, and then at 1% above base rate. Mr Dawood said that this was no use, since Abbeypearl would be paying interest at that rate to ABN Bank on the overdraft facilities it would have to use to fund the fixed term deposits during the majority of the year when cash was unavailable. Mr Dawood said he therefore asked Mr Butt for 10% above base rate because this was the level of interest which Abbeypearl was obtaining in respect of its lending to its own customers under its credit licence. Mr Butt replied that the bank could not pay interest at more than 1% above the base rate. He added, however, that the bank could pay Mr Dawood an extra 7½% for the period of each deposit by way of commission for introducing the deposit from Abbeypearl. These terms were then agreed.[22]Mr Dawood then explained the circumstances in which the Latif and Rehman accounts were used for receiving these commission payments. Because his family was quite well known in Pakistan, he did not wish to maintain an account in his own name with an overseas branch of a bank owned by the Pakistan Government. It was therefore arranged that the commission should be paid into an existing nominee account under his control, kept in the name of Mr Latif (a Dawood family employee), which Mr Dawood was already using for the payment of 5% trade commission to family companies in respect of business which they introduced to his companies.[23]For tax reasons, these arrangements were changed in July 1989, and at Mr Butt's suggestion two new accounts were opened, one at his bank and one with the ABN Bank, in the name of Mr Butt's sister-in-law Mrs Rehman who was in this country. Mr Dawood said he was not introduced to Mrs Rehman but took it from what Mr Butt said that she was agreeable. He exhibited to his affidavit the mandate forms relating to these accounts.[24]The essence of Mr Dawood's defence, in relation to the deposit transactions, is contained in paragraph 9 of his affidavit:
"I should like to make it very clear that it never occurred to me that Mr Butt was acting outside his authority or in any improper way in agreeing that, in respect of the intended fixed term deposits from Abbeypearl, the bank should pay interest at 1% over base rate to the company and commission at a rate of 7½% to me for their introduction. The bank was not forced to take Abbeypearl Ltd's fixed term deposits and I presumed that, as it was prepared to pay me these rates, it was obtaining better rates on its own loans elsewhere. It is to be borne in mind that Abbeypearl Ltd was obtaining rates equal to and in excess of these from its own customers to which it lent under its credit licence. I was quite open about the matter. Because Abbeypearl would have to use its overdraft facilities with ABN Bank I sought permission and advice from Mr Wynn Morrell and also its Treasury Manager Mr Brian Careeny about these arrangements before they went into operation."
[25]Mr Dawood then set out a list of all the fixed term deposits made by Abbeypearl at the claimants' Manchester branch from August 1987 onwards. Nine deposits, totalling £6 million, were made before the arrangements mentioned in paragraph 21 above came into effect on 21st March 1989. 15 deposits, totalling nearly £5 million, were then made up to the end of October 1990, and a further 15 deposits, totalling £6.86 million, were made in the next three months.[26]Mr Dawood then described what happened in practice under the new regime. Mr Butt would ring him to ask whether Abbeypearl was in a position to make a deposit. If ABN's overdraft facility permitted it, Mr Dawood would draw a cheque on Abbeypearl's account at that bank and send it across to Mr Butt, drawn in favour of his bank. Mr Dawood would write a note of each deposit which Mr Butt was asked to sign. He usually made a note of the maturity date in his diary, and the claimants would repay the money, with interest at 1% above base rate, on that date, and would also credit the 7½% commission to the Latif or Rehman account. He exhibited to his affidavit all the documents he had been able to find which related to these fixed term deposits. He said he was not concerned by the fact that the claimants did not issue statements for the fixed term deposits because, so far as he was aware, this was not their usual practice, and it did not matter so long as the terms of the deposit were clear and there was adherence to the arrangements that had been made. He added:
"At the same time I was certainly not agreeable to Abbeypearl Ltd's fixed term deposits being diverted to any other customers or to the making of any transfers from its fixed deposit account, Had I known that this was apparently taking place then I would have ceased to make the fixed term deposits at once. Indeed the position would have been the same were I to have been aware of the apparent mismanagement of the [claimants'] Manchester branch and the abysmal control which I now know was exercised over it by the [claimants'] London head office."
[27]In paragraphs 13-23 of his affidavit Mr Dawood gave a graphic description of the difficulties faced by Abbeypearl once the claimants started to investigate what was going on at its Manchester branch in January 1990.[28]In paragraphs 24-25 he described a transaction with a Mr Javed Akhtar on 19th February 1990, which resulted in a loss to Abbeypearl of £250,000 exclusive of interest. He then went on to describe the way his solicitors had handled the matter on his behalf from May 1990 onwards, and his dealings with the police and the Crown Prosecution Service. He exhibited an attendance note by his solicitor dated 17th May 1990 in which he told a detective that he had been instructed to give "full information" at a projected meeting. He also exhibited the charge-sheet relating to the charge of conspiracy to defraud which had been made against him and Mr Butt on 16th November 1990. Five particulars were given of the alleged offence:
"(i) dishonestly omitting to credit accounts of customers of the Bank with funds deposited with the Bank by those customers; (ii) dishonestly lending such funds to customers of the Bank who were not good credit risks; (iii) dishonestly charging repayments of principal and payments of interest to the accounts of customers of the Bank who were not liable to make such payments; (iv) dishonestly omitting to credit repayments of principal and payments of interest to the appropriate accounts maintained by the Bank; (v) dishonestly crediting repayments of principal and payments of interest to accounts controlled by persons not entitled to receive such payments."
[29]Mr Dawood then responded in detail to the case the CPS intended to make against him at the committal stage of the criminal proceedings. This was to be based only on 17 cheques emanating from Abbeypearl which were not paid into the Abbeypearl fixed deposit account at the claimants' Manchester branch at all, but were credited to other customers. He accepted that this practice appears to have occurred, but he said it was wholly unauthorised by Abbeypearl, and entirely irregular. He then showed how Mr Naqvi's evidence against him, contained in a statement he exhibited, was founded merely on Mr Naqvi's belief that he, Mr Dawood, was actively and knowingly involved in all these transactions because of the commission arrangements made through the Rehman and Latif accounts, of which the nominal account holders said that they knew nothing.[30]Mr Dawood then drew attention to the fact that Mr Naqvi had said in his statement to the police that in the audits he had conducted in March 1988, November 1988 and April 1989 he had found numerous occasions where he had detected that Mr Butt had granted unauthorised and unsecured advances, sometimes hugely in excess of the amount approved by Head Office, and that in some cases false computer entries had been made reflecting Head Office approval of far larger advances than those that had been sanctioned. Mr Naqvi said that Head Office had considered replacing Mr Butt in April 1989, but a suitable replacement did not become available until January 1990.[31]In paragraph 33 of his affidavit (which covers seven pages) Mr Dawood made a detailed response to a number of the allegations that had been made against him. He said that Mr Naqvi's statement was riddled with errors because he had no personal knowledge of the material transactions, and the claimants' own records, maintained by Mr Butt and his associates at the bank, were either false or inadequate. One of the points he made was that it was inherently improbable that Abbeypearl would have knowingly made a loan to a company in compulsory liquidation, as Mr Naqvi's evidence implied.[32]In paragraph 34 of his affidavit Mr Dawood made a strong complaint about the claimants' unwillingness to produce documents which evidenced their allegation that the monies diverted or transferred to other customers were those which had been the subject of fixed term deposits by Abbeypearl, whether consistently or at all. He said that the committal proceedings had had to be adjourned three times due to the absence of these documents, which the CPS had agreed, on counsel's advice, should be produced before those proceedings took place. He also complained of the claimants' dilatoriness in providing the bank statements for the accounts in respect of which the present proceedings were brought.[33]In paragraphs 36-44 of his affidavit Mr Dawood described the catastrophic effect which the bank's failure to repay Abbeypearl more than £200,000 in respect of the last three deposits. These were deposits of £500,000, £1.2 million and £500,000 which it had made on 22nd and 23rd January 1990. In paragraph 13 of his affidavit Mr Dawood had described the circumstances in which these deposits were placed, following a telephone call from Mr Uppal at the bank's head office and a number of telephone calls from Mr Butt. It is sufficient for present purposes to say that Mr Dawood's description of Abbeypearl's plight in 1990 would be extremely difficult to disentangle at a trial more than ten years later, compounded as it is on the one side by the fact that the bank honoured its obligations under Abbeypearl's letters of credit when they fell due, and on the other by the fact that although Mr Dawood started trading through another company after Abbeypearl ceased to trade on 30th September 1990 that company's fortunes were seriously damaged by a circular issued by the bank in Pakistan on the day Mr Dawood was charged with conspiracy, which led the major Pakistani exporters stopping their supplies. It is sufficient to say that it was the existence of these claims which led me eight years ago to consider that Abbeypearl and Mr Dawood might have a viable defence to the whole of the bank's claim and not merely to the amount conceded by Mr Naqvi for Order 14 purposes.[34]After setting out the second defendants' defence in relation to the comparatively small indebtedness on its account, which was founded on credible allegations of charging errors and overcharged interest, Mr Dawood turned in paragraphs 47-50 of his affidavit to the guarantee which he was alleged to have signed in October 1989. He made two main points about this guarantee, which he did not recall signing. The first was that Mr Naqvi's statement showed that Mr Butt had forged a client's signature on this guarantee on at least one occasion and that there were features of his alleged signature which appeared to be suspicious. The second was that even if he did sign it, the insertions "M/S Abbey Pearl Ltd", "£4.0 MILL" and "10th ... October 1989" were made at a later date. After making some technical points about the form of the completed document and its two typewritten insertions, Mr Dawood went on to say that he often signed forms provided by the claimants in blank as, to his knowledge, other customers did, too. He trusted Mr Butt implicitly when he asked him to sign documents in blank.[35]Mr Dawood went on to observe that in October 1989 Abbeypearl already had a facility with the claimants for its letters of credit limited to £1.5 million, and that it was its practice to provide advance funds to the claimants to meet the letters of credit. In those circumstances there was no reason for the bank to call for a personal guarantee limited to £4 million, since there was no facility in this amount, and in any event the claimants knew that he could not give a worthwhile personal guarantee in this amount because his only real personal assets were his Abbeypearl shares, and that company's net worth was about £1.9 million. He said the claimants would never have taken a guarantee in that amount without some form of collateral security, or at least some form of inquiry as to whether he would be able to meet it.[36]Mr Dawood made similar assertions, much more briefly, in relation to the Abbeypearl guarantee for the Furnwell account in the sum of £1 million in October 1989, a time when the Furnwell overdraft was only about £20,000 and the account was practically dormant.[37]He maintained that even if these guarantees were valid and enforceable, they had been discharged owning to the claimants' serious breaches of their banking contract with Abbeypearl. He said he was also entitled to take advantage of any available set-off to limit any liability under the guarantees. After referring, in brief, to the triable issues he had identified, he said:
"These fairly triable issues cannot be avoided by a simple deduction from the whole claim against Abbeypearl Ltd of the outstanding £2,000,000 fixed deposit with interest. The plaintiff's wrongful acts alleged in the draft Defence and Counterclaim affect the whole balance of the claim against Abbeypearl Ltd, the entire claim against Furnwell Limited, and the very question of whether there is a liability as surety upon me for Abbeypearl Ltd or upon Abbeypearl Ltd for Furnwell Ltd. I respectfully say that these are substantial issues which ought to be tried, especially as they involve questions of fraud."
[38]Mr Naqvi exhibited to his affidavit in reply a number of different documents dated 10th October 1989 relating to a possible liability of £4 million which appear to have been signed by Mr Dawood either personally or on behalf of his companies. He also produced a Sanction Advice from the claimants' head office dated 29th November 1989, sanctioning an overdraft limit of £4 million in relation to the liabilities of Abbeypearl and Furnwell on letters of credit. The security required for this overdraft facility included the personal guarantee of the companies' directors, an inter-company guarantee, and a lien on £1 million in an Abbeypearl account against an additional facility of £1 million. This sanction was said to replace an earlier sanction with a limit of £1.5 million which had been given in November 1987.[39]Included with the court's papers is a transcript of the short oral judgment I gave at Birmingham in April 1992. It is clear that I was persuaded by the defendants' contentions that a company which was earning £750,000 a year profit should be allowed to cross-claim damages for breach of the bank's duty to manage their affairs honestly, efficiently and properly, and that that set-off, if established, would extinguish the bank's claims. Although I had received arguments drawing attention to the circumstances in which the bank honoured its obligations under the letter of credit, I said that I would be very reluctant to disregard Mr Dawood's contentions in a case involving sums of money on this scale, where the manager of the relevant branch of the claimants' bank had been behaving in a thoroughly dishonest way, on his employers' own admission. I expressed little enthusiasm for suggested defences based on the non-signature of the guarantees or on the effect of a circular published in Pakistan after Abbeypearl had ceased to trade.[40]In granting unconditional leave to defend I made it clear that I placed reliance on two recent cases: Vavasseur Trust Co Ltd v Ashmore (unreported, 1976, CAT No 157) and National Westminster Bank v Riley (1986) BCLC 268. These two Court of Appeal decisions are authority for the proposition that a repudiatory breach or a substantial or fundamental departure by a creditor of or from its principal contract with its debtor will discharge the debtor's surety. In the latter case May LJ said at p 276 that a non-repudiatory breach would not have that effect unless it could be shown to amount to a departure from a term of the principal contract which had become "embodied" in the contract of guarantee. The gist of my reasoning was that it could hardly be suggested that if a bank manager dishonestly plays ducks and drakes with funds deposited at his bank, without the knowledge or approval of the depositor, the depositor's guarantor could not be heard to say "this is not the bargain I made".[41]The transcript of my discussion with counsel following the delivery of my judgment shows that Miss Caws QC, who then appeared for the bank, asked me to give timetabled directions because her clients desired to proceed to trial as expeditiously as possible. Since the defence and counterclaim was already available in draft, I allowed 21 days for its delivery, and a further five weeks for the exchange of any further pleadings. Miss Caws told me that she and her solicitor wished to be allowed six weeks thereafter for discovery, to ensure that they were "doing an A1 job". I allowed this, together with 14 days for inspection of documents, and over two months thereafter for the exchange of accountants' reports. In this respect Miss Caws told me that on their side her accountants had "already done most of the work". Witness statements were to be exchanged on 30th November 1992, and I made it clear that I was anxious that the trial should take place early in the New Year. There would be liberty to apply for an adjournment of the civil proceedings if Mr Dawood was committed for trial in the criminal proceedings.[42]I see that in paragraph 93 of his statement made on 18th November 1999 Mr Colin Bishopp, the partner in Berrymans Lace Mawer who assumed responsibility for this action in early 1995 (when his firm took the action over from the claimants' previous solicitors), said that with the benefit of hindsight it was obvious that my directions imposed a wildly optimistic timetable. That timetable had been laid down at the express request of leading counsel instructed on behalf of Mr Bishopp's clients in April 1992, who had great experience in banking litigation, and it contained directions which were there to be obeyed. Unfortunately, the claimants and/or their former solicitors treated them as so much waste paper.[43]Nearly seven and a half years then elapsed before the present application was made. It is not necessary to set out the melancholy history of this period in any detail. Without any reference to the court the claimants decided to amend their Statement of Claim, partly to rely on the earlier, 1987, guarantees as a fall-back position and partly to place express reliance on all the bills of exchange drawn and accepted by Abbeypearl in connection with the letters of credit. They took nearly seven months to prepare and serve this pleading. The Defence and Counterclaim, despite the fact that an earlier version had been available in draft in April 1992, was not served until 2nd August 1993, and it then took the claimants over a year to serve a Reply and Defence to Counterclaim,. The pleadings were formally completed by the service of a Rejoinder and Reply to Defence to Counterclaim on 25th July 1995. These pleadings, although they took over three and a half years to complete, did not add very much to any understanding of the issues which could have been gleaned from the affidavits exchanged in April 1992. In particular the Reply and Defence to Counterclaim does not show that the claimants intended to rely on anything other than the inferences they contended should be drawn from Mr Dawood's willingness to make deposits on the terms he admitted. A detailed chronology shows substantial delays by both sides, although in 1995 the claimants' solicitors had to obtain two court orders before further and better particulars of the defence and counterclaim (requested over a year after the service of that pleading) were delivered.[44]At all events on 21st July 1995 a district judge at the Manchester District Registry (to which the action had been transferred) set out a new directions timetable for the future conduct of proceedings. In effect discovery was now to take place by 1st September 1995, the exchange of expert witnesses by 8th January 1996, the exchange of witness statements by 19th February, and the action was to be set down for trial by 21st February 1996.[45]These new directions were also totally ignored. Apart from serving notices of intention to proceed on 26th September 1996 and 20th May 1998 and obtaining an order for the transfer of the action to the Manchester Mercantile Court on 10th January 1997, Mr Bishopp's firm did nothing to carry this action forward. No list of documents. No accountants' report. No witness statements. Nothing. Whether the fault lay with his firm, or with his clients, or with a combination of the two, is not apparent from his long statement, which does not condescend to very much particularity in relation to the four year period between July 1995 and August 1999 when nothing at all occurred.[46]Mr Dawood, who was by now seven years older, made a new statement in support of the strikeout application. Most of it was taken up with a chronology of events in the action. In so far as his statement contained new material, he said that Furnwell had been struck off the register, and that Abbeypearl had been kept alive although it had not traded for seven years. The CPS had discontinued the criminal proceedings against all four defendants in July 1992. He maintained, in general terms, that it would be difficult for him or for any witness he intended to call, to recollect events so long after they had occurred. The bank's continued delay in disclosing its documents had delayed his identification of the witnesses he might wish to call, and he feared that many of them would have destroyed documents they once had.[47]Mr Bishopp's 34-page statement contains a useful summary of the issues in the action, most of which had already been ventilated in the affidavits exchanged seven years earlier. He clearly enjoyed access to documents which his clients had not yet disclosed eight years after the commencement of the proceedings. In paragraphs 3.11 to 3.14 of his statement he makes it clear that the bank's case is based on the inferences it seeks to draw from Mr Dawood's conduct, and not from any direct evidence. He said, among other things, that the assertion that Mr Dawood did not want to hold an account in a Pakistan bank outside Pakistan was simply incomprehensible: in paragraph 16 of his statement in reply Mr Dawood gives an entirely believable explanation of the reasons why he, and all the other members of his family, chose not to hold personal accounts in any Pakistan bank outside Pakistan.[48]Mr Bishopp described the claims with which the bank had had to deal once Mr Butt's activities had been uncovered. In paragraphs 9.8 and 9.9 of his affidavit he described the strains that this litigation had placed on the resources of the bank. Although it was the largest Pakistan bank, with about 1600 branches in Pakistan, it had only about 200 staff in this country, and it was in the business of banking, not of litigating.[49]Mr Bishopp joined issue with a number of Mr Dawood's assertions. Although he accepted that the bank had not yet made discovery in the present proceedings, he said that much of the documentation disclosed by the bank in parallel proceedings involving Mr Dawood's alleged liability under a guarantee in favour of a Mr McColgan represented the documentation Mr Dawood now maintained that he had not seen for many years. He was also critical of the defendants for not taking steps to pursue their counterclaim.[50]Although Mr Dawood served a long statement in response, it added little new factual material. The bank had served a list of documents at long last in November 1999, but he complained that it was both defective and inadequate.[51]In a careful judgment the judge placed weight on the fact that because Mr Butt had been so dishonest the bank could not be sure when it could safely rely on its own documents. Nor could it work out its own position from the documents because it accepted that some of the documents simply were not there. He reminded himself that the events in question in the action went back to the late 1980s, and the action was still nowhere near ready for trial. From the feel of the case which he had obtained, it seemed to him that this was a very strong example of a case where both the claim and counterclaim could not be justly disposed of. A court would be entitled to feel that it was not in a position to do justice between the parties on such limited and stale material.[52]The judge said that recollection about a particular document was important when a case went back a long way. He accepted the defendants' submission that the claimants' list of documents was manifestly incomplete, and that it looked like a list prepared by somebody who had just gone through the documents and listed those which were available without regard to the existence of documents which as a matter of commonsense and thought must have been available or must still be available elsewhere. He gave by way of an example some obvious omissions from the list.[53]The judge then directed himself correctly on the law he should apply, and said that he thought that a fair trial was clearly no longer possible, for the reasons I have summarised earlier in this judgment.[54]Mr Moxon-Browne QC made a valiant attempt both orally and in writing to challenge the judge's reasons, but in my judgment this effort was doomed to failure from the outset. The judge was correct to consider both the claim and the defence and counterclaim, containing as it did a set-off which if valid would extinguish the claim. What would be in issue, on the claimants' case, would be Mr Dawood's truthfulness when he maintained that in the late 1980s he did not believe that Mr Butt had no authority to act as he did, and that he had no idea that Mr Butt was behaving in such an extraordinary way with the deposits Abbeypearl was making. He would be saying that in those boom years, when his company was being extremely successful, he did not find the concept of fixed term loans at such a high rate of interest particularly surprising. It would be far more difficult for him to adduce evidence to support this contention than it would have been if this very long delay had not occurred. Similarly, Mr Dawood maintained that he had sought advice in 1987 about the appropriateness of what he was doing, and it would be far more difficult for him to adduce convincing evidence from those he consulted, even if they were still available.[55]Mr Moxon-Browne sought to show that the judge was mistaken in saying that the question whether or not Mr Dawood was fraudulent permeated the whole case. He said that there was no uncertainty as to the state of the defendants' primary indebtedness to the bank, but merely as to certain specified entries on the account, and that the evidence relating to parallel banking, which only affected part of the overall case, was either uncontentious or documentary.[56]The trouble with this argument is that it overlooks what is the essence of Mr Dawood's defence. His defence was first that the bank should have restored the £2 million to the Abbeypearl's account, with accrued interest, in early 1990 at the end of the fixed term period of each deposit, and secondly that the nature of the bank's fundamental breach of its duty to deal honestly with the Abbeypearl account not only discharged him of his obligations under his guarantee but also, if its effect did not go so far, caused Abbeypearl, a successful company, to be destroyed so that it suffered losses which had the effect, when the £2 million was added to them, of extinguishing the claimants' claim.[57]I do not consider that the fact that similar issues may arise in the case concerned with the McColgan guarantee, which is currently proceeding to trial, assists the claimants in this action. Nor do I attach much attention to dicta in cases decided in the pre-CPR regime when the courts had to operate within the straitjacket imposed by the need to show that the claimants had breached the court's process. Nor do I attach any attention to the thought that if the claimants had delayed nearly six years before issuing their writ they might have averted this strikeout. Mr Moxon-Browne is not entitled to rewrite history in an attempt to salvage a case which cannot now be tried fairly.[58]CPR 3.4(2)(c) gave the judge power to strike out the claimants' case if it appeared to him that there had been a failure to comply with a court order. He was right to find that the claimants had completely flouted my order and treated it as if it did not exist. They evinced the same attitude three and a half years later to the next timetable order in this action. The judge was bound, in exercising his discretion, to take into account the overriding objective in CPR 1.1. This required him to deal with the case justly. In my judgment it could not sensibly be maintained that the judge was clearly wrong when he held that a fair trial of both claim and counterclaim was no longer possible. On the contrary, he was clearly right.[59]For these reasons I would dismiss this appeal. SIR CHRISTOPHER SLADE:[60]I agree.

LORD JUSTICE WARD:

[61]I also agree.

Order

Appeal dismissed; application to extend time dismissed; costs of appeal subject to set-off; detailed assessment; payment in account of £9,000; permission to appeal refused. (This order does not form part of approved judgment)

Cited in 1 later judgment