DEG-DEUTSCHE INVESTITIONS-UND ENTIWICKLUNGSGESELLSCHAFT MBG v and: [2002] EWCA Civ 484

IN THE SUPREME COURT OF JUDICATURE, CIVIL DIVISION
ON APPEAL FROM THE HIGH COURT, CHANCERY DIVISION
(Rimer J)
[2002] EWCA Civ 484Case No A3/2001/2661, A3/2000/0090, A3/2002/0091 & A3/2002/0094Venue The Royal Courts of Justice, The Strand, London, Monday 11 March 2002
Between
DEG-DEUTSCHE INVESTITIONS-UND ENTIWICKLUNGSGESELLSCHAFT MBGClaimant/Appellantand:(1) THOMAS KOSHY(2) LUMMUS AGRICULTURAL SERVICES COMPANY LIMITES (IN LIQUIDATION)(3) WARRANT TRUSTEES LIMITED SUED AS THE TRUSTEES OF PALMS TRUST(4) HAZE SECURITIES LIMITED(5) CENTEL LIMITED(6) HI-PRO HOLDINGS LIMITED(7) HI-PRO (UK) LIMITED (IN LIQUIDATION)(8) HI-PRO LIMITEDDefendants/RespondentsDEG-DEUTSCHE INVESTITIONS-UND ENTIWICKLUNGSGESELLSCHAFT MBGClaimant/Appellantand:(1) THOMAS KOSHY(2) LUMMUS AGRICULTURAL SERVICES COMPANY LIMITES (IN LIQUIDATION)(3) WARRANT TRUSTEES LIMITED SUED AS THE TRUSTEES OF PALMS TRUST(4) HAZE SECURITIES LIMITED(5) CENTEL LIMITED(6) HI-PRO HOLDINGS LIMITED(7) HI-PRO (UK) LIMITED (IN LIQUIDATION)(8) HI-PRO LIMITEDDefendants/Respondents
Before
Lord Justice ChadwickMr Justice CharlesMR A THOMPSON (instructed by CMS Cameron McKenna appeared on behalf of Deg-Deutsche Investitions-und Entwicklungsgesellschaft MBH and Gwembe Valley Development CompanyDate 11 March 2002
[1]Monday 11 March 2002 LORD JUSTICE CHADWICK: There are listed before us three applications in proceedings brought by DEG Deutsche Investitions and Entwicklungs Gesellschaft GBMH (to which I shall refer to as "DEG") against Mr Thomas Koshy and others; and an application for permission to appeal and for directions in two appeals pending in linked proceedings brought by Gwembe Valley Development Company Ltd against the same defendants.[2]Both proceedings arise out of funding arrangements for a project to develop a cotton farm in Zambia in the late 1980s. The corporate vehicle for that project, Gwembe Valley Development Company Ltd ("GVDC") was, in practice if not in law, controlled by Mr Koshy. DEG, amongst others, provided funding. The funding arrangements were such that in the conversion of Deutschmarks into the local currency (kwacha), Mr Koshy and a company which he controlled, Lummus Agricultural Services Company Ltd (Lasco) were in a position to make a substantial paper profit.[3]The purpose of the proceedings was to call Mr Koshy and Lasco to account for that profit, either at the suit of DEG or at the suit of GVDC itself.[4]The proceedings had a complex procedural history, due in part at least to DEG's attempt to appoint a receiver in Zambia to manage the affairs of GVDC and to pursue the GVDC action in England. But they eventually came to trial before Rimer J in the early summer of 2001. After a trial lasting some two months, the judge delivered a lengthy written judgment on 26 October 2001. By orders made on 12 December 2001 he dismissed the DEG claim against Mr Koshy -- essentially on limitation grounds -- but he ordered an account of profits against Mr Koshy in the parallel action brought by GVDC, by then acting by its court-appointed receiver.[5]The judge gave Mr Koshy permission to appeal from the order for an account which was made against him in the GVDC action. An appellant's notice was filed on 14 January 2002. That appeal (under Court of Appeal reference 2002/0090) is listed for hearing in July 2002. The judge also gave permission to appeal to GVDC against the dismissal of its claim to equitable compensation, and against his decision to limit the order for an account in the way that he did. An appellant's notice has been filed by GVDC in respect of that appeal, and that appeal (under Court of Appeal reference 2002/0095) is listed for hearing with 2002/0090. The only outstanding applications in relation to the GVDC proceedings are, first, an application by Mr Koshy for permission to appeal against the decision of Rimer J that he, Mr Koshy, should pay to GDVC 80 per cent of its costs of that action; and, secondly, an application to stay that costs order.[6]The judge refused DEG permission to appeal from his order in the DEG action. Permission to appeal was refused on paper by this court (Carnwath LJ) on 6 February 2002. The application (under Court of Appeal reference 2002/0094) is now renewed, together with an application to adduce further evidence. The judge refused also Mr Koshy's application for permission to appeal from paragraph 4 of his order in the DEG action, which limited the costs which DEG was to pay to 50 per cent of his costs. Mr Koshy sought permission to appeal from this court (under reference 2002/0091). That application was also refused on paper on 6 February 2002 and it, too, is now renewed.[7]There is a further application in relation to the DEG action. That relates to an order made at a much earlier stage in that action. On 8 November 1996 DEG sought and obtained from Harman J a freezing order against Mr Koshy in the amount of £6.1m. That freezing order has now been discharged by the order made by Rimer J on 12 December 2001 and, subject to the pending appeals in the GVDC action and any appeals in the DEG action, Mr Koshy has liberty to apply for an inquiry as to damages under the cross-undertaking given in 1996 when the freezing order was made. But it is submitted on his behalf that that will not, or may not, compensate him for all the damage which he has suffered as a result of the freezing order. In particular, it is said that the cross-undertaking may not enable him to claim repayment of costs under an order made against him on a subsequent hearing by Harman J. That order was made on 20 March 1998 when Harman J dismissed an application by Mr Koshy and Lasco, by summons dated 18 December 1996, for an order that the DEG action be dismissed as frivolous and vexatious; and dismissed an application, also by Mr Koshy and Lasco, by notice of motion dated 4 December 1996, to discharge the freezing order which had been granted on 8 November 1996. The order of 20 March 1998 required Mr Koshy to pay (subject to the usual legal aid proviso) DEG's costs of the summons and the motion. We were told that those costs, or at least the costs of the motion (the hearing of which extended over many days), were substantial.[8]What is said, in summary, is that the findings of fact made by Rimer J in his judgment on 26 October 2001, following a trial, show not only that the freezing order obtained in 1996 was granted upon a false basis of fact; but, further, that that was known to DEG at the time. Had the true position been disclosed in November 1996 -- or when the application for discharge was heard in 1997 -- Harman J, it is said, could not and would not have made the orders which he did make in respect of costs on 20 March 1998.[9]It is, I think, convenient to address first DEG's renewed application for permission to appeal against the order of 12 December 2001 made in the DEG action; that is the application 2002/0094 with its linked application to adduce further evidence.[10]Put very shortly, the judge found that Mr Koshy had told DEG in 1986 that there was another outside investor, Lummus Industries Inc, a United States corporation with extensive business in cotton ginneries, prepared to invest some US$3m in the project. That was untrue, as the judge found, at paragraphs 207-208 of his judgment. The investment was not to be made by Lummus Industries Inc (an outside investor) but by a subsidiary, Lummus Agricultural Services, in which Mr Koshy had acquired an interest, and from funds to be provided by Mr Koshy's sources.[11]The representation was of importance to DEG, as the judge found, because it provided comfort that there was another independent outside investor prepared to invest on commercial grounds. The judge was satisfied that, had DEG been told at the time that the investment was not coming from an outside investor but from sources close to Mr Koshy, DEG would not have gone ahead with its funding. Further, the judge found that the misrepresentation as to the source of that funding was known by Mr Koshy to be false; and that he deliberately persisted in its falsehood in the knowledge that DEG would not invest if it were told the truth.[12]The first question which arose in those circumstances was, when did the cause of action in deceit arise? A possible answer would have been that the cause of action arose in 1986 when the payments by way of loan and share investment were made by DEG, under agreements which it had executed and which were approved by its board. But, in the light of the decision of the House of Lords in Nyekredit Mortgage Bank PLC v Edward Erdman Group Ltd [1997] 1 WLR 1627 , the judge was satisfied that loss in tort did not necessarily occur when the payments were made but at a date, if later, when the right to recover the whole of the value of the investment had become less than its face value.[13]That conclusion suggested two other possible dates for the accrual of the cause of action. First, when it became impossible to obtain repatriation of funds from Zambia due to exchange control restrictions; or, secondly, when the security for the loans became unenforceable because the property was of insufficient value. The judge held that the cause of action had arisen at the time when the funds became incapable of repatriation due to Zambian exchange control: see paragraph 226 of his judgment. He said this:
"... had DEG realised its securities in 1990, it could not have remitted to Germany the DM5m it had originally lent to GVDC, because it did not have the necessary [Bank of Zambia] consent permitting it to do so. Its realisation of its securities would not, therefore, have put it into the position it would have been in had it not made its loans in the first place. I regard that as meaning that, by November 1990, DEG had suffered damage sufficient to perfect the tort on which it sues."
[14]The significance of November 1990 in that context is that that date was six years before the commencement of the action in November 1996; so that, if the damage had been suffered before November 1990, it would follow that the action was barred by limitation. If, on the other hand, the security remained enforceable at full value until after November 1990 and the proceeds could have been repatriated, then that defence of limitation would not avail Mr Koshy. The judge reached the conclusion that, after 1990, the reason why the loss was sustained was because DEG made a conscious decision to persist in its investment in the hope that it would ultimately bear fruit: see paragraph 195 of the judgment.[15]If the cause of action did indeed arise before November 1990 (because the loss had been sustained before that date through inability to repatriate) then the question arose whether DEG could rely on the provisions of section 32 of the Limitation Act 1980. That section provides, so far as material, that where, in the case of any action for which a period of limitation is prescribed by the Act, the action is based upon the fraud of the defendant, the period of limitation shall not begin to run until the claimant has discovered the fraud or could with reasonable diligence have discovered it.[16]The judge reached the conclusion that DEG could have discovered the fraudulent representations made to it in 1986 as the result of a meeting which took place in September 1989, attended by, amongst others, Mr Schoenfelder and Mr Koshy. If he were right in that, then section 32 would not avail DEG.[17]The first question, therefore, is whether DEG should be given permission to challenge the judge's finding that it had become impossible before November 1990 to repatriate monies from Zambia, so that the cause of action did arise prior to the relevant limitation period. The position is less than satisfactory, because the point was not raised in the pleadings; in particular, it was not raised by Mr Koshy by way of defence, although he did, of course, take a general limitation point. It was raised in cross-examination of two of DEG's witnesses; both of whom were asked whether or not Bank of Zambia consent was required and, if so, whether it had been obtained. Understandably, those questions came as a surprise, because the point had not been identified in advance and there had been no evidence in chief about it. The witnesses accepted, however, that they thought that the Bank of Zambia consent probably was required and probably had not been obtained; although one of them (Mr Schoenfelder, I think) referred to the existence, as he thought, of a treaty between Zambia and Germany dealing with the repatriation of funds.[18]The point was taken squarely in the course of the closing submissions on behalf of Mr Koshy. No objection seems to have been taken by DEG either to the questions put in cross-examination to its witnesses or, perhaps more pertinently, to the point when made in closing submissions. So the matter was before the judge, to the extent that it was being relied upon in closing submissions and there was some evidence about it. It was unfortunate that the matter was not raised expressly in the defence -- and perhaps more unfortunate that no objection was taken to it being raised late and informally -- because (as appears from a witness statement made by Miss Elboz on 14 January 2002) DEG did have available to it at the trial the German/Zambian treaty to which its witness had referred incidentally and in passing. So it would have been possible, had the matter been identified (as it should have been) for the judge to have had the opportunity to hear evidence and to consider argument as to the effect of the treaty.[19]DEG seeks to remedy the situation, first by seeking permission to appeal on that ground and, second, by coupling that application with an application to adduce evidence of the treaty. In my view, those applications should be refused. DEG had sufficient opportunity to raise at the trial the points it wished to make on the treaty if it had wanted to do so. Had it raised these points at the trial, the judge would have dealt with them and this court would then have had the benefit of the judge's findings of fact, not only on the evidence which was before him, but also on the additional evidence which could have been before him. Having chosen to take the course which it did, it seems to me that it is now too late for DEG to seek to raise the matter on an appeal.[20]I approach application 2002/0094, therefore, on the basis that the judge's finding that the funds had become incapable of repatriation before November 1990 is a finding of fact which cannot now be challenged. Two things follow. First, that the question whether or not DEG made a conscious decision to continue with the investment in 1989 or 1990 becomes irrelevant because, even if it had wished to recover its investment, it would not have been able to do so by reason of the exchange control difficulties; and, secondly, that if it is to challenge the judge's decision on the limitation defence it has to be on the basis that he was wrong to conclude that section 32 of the Limitation Act provided no assistance to DEG.[21]In my view the judge's decision in relation to section 32 is capable of challenge in this court. An appeal on that ground can be said to have a real prospect of success. I do not think it appropriate to say more than this: that section 32 requires that the party could not have discovered the fraud with reasonable diligence. The fraud, in the present case, consists not only of the misrepresentation as to the source of funds, but also that Mr Koshy had made that misrepresentation knowing it to be false at the time, or not caring whether it was true or false; or having made it, had failed to correct the misrepresentation in circumstances in which he was under a duty to correct it before the investments were made. It can, I think, be said with some force that the judge did not, at least expressly, address the question whether DEG had knowledge of the fraud; as distinct from the question whether DEG had reason to believe that what it had been told in 1986 might not be true. Knowledge that a representation might not be true is not the same as knowledge that the representation has been made fraudulently.[22]For those reasons I would give permission to appeal in 2002/0094; but I limit that permission to an appeal on the section 32 of the Limitation Act 1980 ground. It becomes unnecessary, therefore, for DEG to pursue its application to adduce further evidence.[23]Permission to appeal in 2002/0094 gives rise to a linked application, 2002/0091, on behalf of Mr Koshy, for permission to appeal against the judge's decision that he should have only half of his costs. The judge reached that conclusion on the basis of his finding, as he said, that Mr Koshy was a dishonest man; in particular, on the basis of his finding that Mr Koshy had made a representation in 1986, knowing it to be false, with the intention that DEG should act upon it.[24]Mr Page, on behalf of Mr Koshy, points out (as it seems to me correctly) that he will be able to take, by way of respondent's notice, the point that the judge was wrong to find his client dishonest and deceitful. He will be able to take that point as a ground upon which the judge's decision in the DEG case can be upheld. If that point is taken, and this court finds it necessary to rule upon it, then it will have before it the material to decide whether or not the judge was in error in denying Mr Koshy his full costs. But it may be, of course, that the court will not find it necessary to address that point. It may dismiss the appeal simply on a consideration of section 32 of the Limitation Act 1980. In those circumstances, the order that I would propose on 0091 is that Mr Koshy's application for permission to appeal from the costs order should be adjourned to the court hearing the appeal in 0094. That enables the point to be kept open without this court giving any encouragement to an appeal against a finding of dishonesty made by a judge who had heard all the evidence, and in particular had heard Mr Koshy give his evidence.[25]I turn then to the application in 2001/2661 for permission to appeal against Harman J's orders for costs in March 1998. The application for a freezing order and the subsequent hearing of the application to discharge were on the basis of evidence put in by DEG: which included two affidavits of David John Kidd, a solicitor and then a partner in the firm of Cameron Markby Hewitt; and an affidavit of Mr John Stanley Ward, a chartered accountant practising in Lusaka who was the receiver first appointed by DEG.[26]Mr Kidd's first affidavit recognised the obvious problem that an action started in November 1996 in relation to payments made some ten years earlier is likely to be faced with the defence of limitation. He sought to meet that difficulty by reliance upon section 32 of the Limitation Act 1980. He said, in terms (paragraphs 96-98 of his affidavit of 8 November 1996), that it was not until June 1996 that the receivers "by chance" discovered an apparently misfiled document which led to the discovery of the true cost to Lasco of the pipeline funds:
"That true cost has been persistently and deliberately concealed from DEG as I have explained above."
He went on to say that he did not believe that DEG should with reasonable diligence have discovered the fraud or concealment at some earlier date.[27]The basis of those assertions is in paragraph 12 of the same affidavit: that on 8 June 1996 the receivers discovered a document -- a telex of 13 May 1986 -- which appeared to show that Lasco had never made a loan to GVDC of several million dollars. It was put to Harman J that the discovery of that letter was really a matter of chance and that diligent search would not have put DEG or its advisers on the track. Rimer J, having heard evidence, did not take that view. He said, at paragraph 78 in his judgment of 26 October 2001, that "by a remarkable coincidence and apparently by the element of telepathy", Mr Kidd and Mr Ward happened to exchange information which they each had in June 1996 with the consequence that DEG realised for the first time that Lasco and Mr Koshy had made a large profit at GVDC's expense. He went on, at paragraph 236 of the judgment, to say this:
"I accept that it was only in and following June 1996 that DEG unearthed documents which told them for the first time the approximate size of the hoped-for profit. But I do not accept that this discovery was a matter of complete chance whilst Mr Kidd and Mr Ward were diligently working away on the current (in fact then rather static) state of play in the ransom strip litigation. I find that it was always obvious to DEG that Lasco was intending to make a profit."
[28]If that were the true position, known to DEG in November 1996, it is said on behalf of Mr Koshy that it is surprising that Harman J was told what he was told; and that the matter should be reopened.[29]On behalf of DEG the point is made with force that it is very unsatisfactory to seek to reopen in the Court of Appeal interlocutory decisions made in proceedings now some five or more years ago; and that the ordinary and proper course would have been to ask the trial judge to set aside the order granting the injunction, together with any associated orders for costs. But there are two particular features in this litigation which take it well outside the ordinary course of litigation. The first is that Harman J's order in March 1998 was not the order by which he granted the freezing order. It was an order made on an application to discharge the freezing order; and so Harman J thought it right to make an order for costs which can be described as an "in any event" order; that is to say, his order for costs was not dependent upon the outcome of the litigation (as would normally be the case in relation to the costs of obtaining a freezing order). Nor is it an order which can be set aside by the trial judge. The only way of disturbing the order of March 1998 is on an appeal. The second feature is that because of the circumstances in which the order was made, it is by no means self-evident that the costs awarded in March 1998 will be capable of being picked up on an inquiry into damages arising from the order made in November 1996. It may well be said that the costs ordered in March 1998 were caused by the independent decision of Mr Koshy and his advisers to challenge the November 1996 order in circumstances in which they did not then have the material which they needed for a successful challenge on the facts.[30]One way of dealing with the matter would be for DEG to accept that the costs ordered in March 1998 should be the subject of (and follow) the inquiry as to damages under the cross-undertaking; but, understandably, no such offer is at present available: and in any event, if DEG's own appeal succeeds, there may not be an inquiry into damages under the cross-undertaking. At the moment, the only way of dealing with the problem that seems to be available is by an appeal against Harman J's order of March 1998. In those circumstances it seems to me that the right course is to give permission to appeal on the basis that the appeal does have a real prospect of success on the material now before this court; but with the possibility well in mind that by the time the matter comes before the Court of Appeal some other -- and more convenient -- way may have been found of dealing with the problem. The permission is given, however, on the express basis that the only material which Mr Koshy will seek to put before the Court of Appeal in support of his appeal against Harman J's order is paragraphs 78 and 236 in the judgment of Rimer J. The judgment will be before the court in any event on DEG's appeal.[31]That leaves, I think, only the application 2002/0090 by Mr Koshy for permission to appeal against the judge's decision in the GVDC action that he should pay 80 per cent of GVDC's costs. The position in that action is that GVDC were successful to the extent of obtaining an order for a limited account but failed to obtain the order for equitable compensation, or a more extensive order for an account, that was being sought. There are appeals on both sides in that action.[32]Mr Koshy's application in relation to the costs point is based primarily on the submission that the judge ought not to have awarded costs against him in circumstances in which it might turn out, on the taking of the account which the judge did order, that there was nothing due from Mr Koshy; in other words, that the whole exercise would have been quite pointless because there were no profits for which he was accountable. There is a subsidiary point that Mr Koshy had in any event provided particulars of the monies which had passed through affidavits of an accountant, Mr Pieris. That subsidiary point was not pressed and it does not impress me.[33]I am satisfied, however, that there is a question of principle in cases of this nature: whether a director who is said to have received a secret profit can be made liable for the costs of requiring him to account if it turns out, at the end of the day, that he has not in fact profited at all? In relation to that point, I would give permission to appeal in 2002/0090.

MR JUSTICE CHARLES: I agree.

ORDER

Permission to appeal refused in 2661 and allowed in 0090 and 0094 on limited grounds, the costs of each application to be costs in that appeal. The application in 0091 to be adjourned to the hearing of 0094. GVDC to be allowed to amend their notice of appeal in a specified respect. Respondents' notices to be filed by 9 April 2002. (Order not part of approved judgment)

Cited in 1 later judgment