Shierson & Anor v Rastogi (A Bankrupt) [2007] EWHC 1266 (Ch)

[2007] EWHC 1266 (Ch)Case No CH/2006/PTA/0806IN THE HIGH COURT OF JUSTICECHANCERY DIVISIONIN BANKRUPTCYVenue Royal Courts of Justice, Strand, London, WC2A 2LLDate 25 May 2007
Before
THE CHANCELLOR OF THE HIGH COURT
Between
MALCOLM SHIERSONAppellantsJONATHAN BIRCHVIREN KUMAR RASTOGI (a bankrupt)Respondent
MR STEPHEN SMITH QC & MR CLIVE H JONES (instructed by Messrs Holman Fenwick & Willan) for AppellantsMR CHARLES PURLE QC (instructed by Bivonas Limited) for RespondentHearing Hearing dates: 15 – 17 May 2007
JudgmentThe Chancellor :Introduction
[1]RBG (Resources) plc (“RBG”) was established by the respondent Viren Rastogi (“the Bankrupt”) in May 1996. It traded in metals. By September 2001 it had a turnover of US$1.7bn. Its auditors, PwC, resigned on 30th January 2002 due to a breakdown in trust and confidence between themselves and the directors. On 3rd May 2002 Mr Malcolm Shierson and Mr Jervis, partners in Grant Thornton LLP, were appointed joint liquidators of RBG, a petition for its compulsory winding up having been presented to the High Court by a creditor the day before. On 8th May 2002 such provisional liquidators issued proceedings in the name of RBG against the Bankrupt and another in respect of alleged breaches of their duties as directors of RBG. Their application for summary judgment succeeded. On 27th April 2004 Hart J gave judgment against the Bankrupt for US$307,463,954 in respect of breaches of his fiduciary duties as a director. The basis of his judgment was “that a fraud of precisely the kind alleged by RBG’s liquidators was being perpetrated both on RBG and its financiers.” On 26th November 2004 the Court of Appeal refused the Bankrupt permission to appeal from the decision of Hart J.[2]On 2nd February 2005 Mrs Registrar Derrett made a bankruptcy order against the Bankrupt on the petition of RBG based on his failure to satisfy the judgment of Hart J. The appellants Mr Malcolm Shierson and Mr Jonathan Birch (“the Trustees”) were appointed joint trustees in bankruptcy. The Bankrupt was due to be discharged at the expiration of one year from the date of the bankruptcy order when, on 23rd December 2005, the Trustees applied for an order under s.279(3) Insolvency Act 1986 to suspend the running of that period. By s.279(4) the court may make such an order “...only if satisfied that the bankrupt has failed or is failing to comply with an obligation under this Part.”[3]The Trustees contended, so far as still relevant, that the Bankrupt had failed and was continuing to fail to comply with his obligations under that part, specifically ss.291, 311, 312 and 333 Insolvency Act 1986, in three respects. As summarised by Mr Shierson in his witness statement made on 23rd December 2005 they were:(1) failure to explain or account for the disparity between the amount of the judgment awarded by Hart J and the value of the assets disclosed by him,(2) failure to disclose or account for the proceeds of sale of shares in Allied Deals Inc, and(3) failure to disclose a beneficial interest in Regent’s Trust, Portman Trust or Clipter Holdings Ltd.[4]The application was heard by Registrar Jaques on 23rd March and 25th July 2006, an interim order having been made by Chief Registrar Baister on 26th January 2006. On 27th October 2006 he handed down judgment dismissing the application. I shall refer to his reasons in more detail later but, in summary, he concluded that(1) the judgment of Hart J was inadmissible to prove the fraud at the root of the Trustees’ complaints,(2) there was no evidence sufficient to establish that the Bankrupt had ever received any of the proceeds of sale of shares in Allied Deals Inc and(3) the contentions in respect of the trusts and Clipter Holdings Ltd were based on suspicion, not evidence.[5]This appeal of the Trustees is brought with the permission of Patten J, Registrar Jaques having made a further interim order on 27th October 2006. They contend that the Registrar was wrong on all three grounds on which they rely. I will deal with each in turn but first it is necessary to refer to the relevant statutory provisions and to describe the facts in more detail.

The statutory provisions

[6]The part referred to in s.279(4) Insolvency Act 1986 is Part IX dealing with Bankruptcy. Chapter I deals with petitions, orders, discharge and annulment. It includes s.279 which deals with the duration of the bankruptcy. By sub-section (1) discharge occurs automatically at the end of the period of one year from the making of the order unless an order to suspend the running of time is made under that section. An application for such an order may be made by the official receiver or the trustee in bankruptcy and the running of time may be suspended until the end of a specified period or the fulfilment of a specified condition, which may include a condition that the court is satisfied as to a specific state of affairs. As prescribed by s.279(4) such an order may only be made if the court is satisfied that the bankrupt has failed or is continuing to fail to comply with an obligation under Part IX.[7]A discharge from bankruptcy has various consequences. It releases the bankrupt from the debts prescribed in s.281. It removes the disqualification imposed by s.11 Company Directors Disqualification Act 1986 from being concerned in the promotion, formation and management of a company without the leave of the court. Acts or omissions of the bankrupt occurring after discharge cannot constitute a bankruptcy offence under Chapter VI, see s.350(3). Accordingly a bankrupt may, after his discharge, obtain credit or engage in business, see s.360. But discharge from bankruptcy does not affect the continuing obligations of a bankrupt to assist the official receiver or the trustee in bankruptcy with to the provision of information and the recovery of assets. Those are the obligations on which the Trustees rely in this application.[8]S.291 imposes duties on the bankrupt to deliver possession of his estate to the official receiver and to deliver up to him all books, papers and other records “which relate to his estate and affairs”. When a trustee has been appointed the official receiver is obliged by s.312(2) to pass on to the trustee the property, books and papers obtained by him. Chapter IV then applies and it is the duty of the trustee to get in, realise and distribute the bankrupt’s estate (s.305(2)) and the bankrupt’s estate vests in the trustee on his appointment (s.306). The trustee is required to take possession of all books, papers and other records which relate to the bankrupt’s estate and affairs and which belong to him or are under his control (s.311) and the bankrupt is required to deliver them up to him (s.312).[9]S.333 provides that the bankrupt:
“shall...give to the trustee such information as to his affairs...as the trustee may for the purposes of carrying out his functions under any of this Group of Parts reasonably require”
. Failure to perform that duty before discharge may result in the commission of the offences prescribed by ss.353 to 356. The concern of the Trustees on this application is that the obligation of the bankrupt under this section may continue to be backed by criminal sanctions and its performance encouraged by a wish to be relieved of the disabilities to which I have referred in paragraph 7 above.[10]In that connection I should, for completeness, point out that the remedy of a bankruptcy restriction order, which was introduced by Enterprise Act 2002 to balance the reduction of the period before an automatic discharge to one year, is not available in the circumstances of this case. First, the remedy is not available to a trustee in bankruptcy, see Insolvency Act 1986 Sch.4A para 1(2). Second, the circumstances in which such an order may be made, as prescribed by para 2, are materially different to those of s.279(4). Third, events occurring before 1st April 2004 may not be taken into account, see The Enterprise Act 2002 (Commencement No.4 and Transitional Provisions and Savings) Order 2003 SI 2003/2093 reg.7.

The Facts

[11]I have already given the factual outline of this appeal and will subsequently deal with the facts in more detail when considering the particular grounds of appeal. Nevertheless it is convenient at this stage to set out the chronology of events occurring after the commencement of the winding up of RBG in more detail. The relevant winding up petition was presented by a substantial creditor on 2nd May 2002. This enabled the appointment of Mr Shierson and Mr Jervis as provisional liquidators of RBG on 3rd May 2002 and the immediate grant, on their application in the name of RBG, of a world-wide freezing order against the Bankrupt. These events coincided with a ‘dawn raid’ carried out by the City of London police, in exercise of powers conferred by the Police and Criminal Evidence Act, on the premises of RBG and the Bankrupt in which all available documents were removed. The Bankrupt did not receive an inventory of the documents removed from his home until 16th December 2005.[12]On 8th May 2002 the Bankrupt swore the affidavit required by the freezing order made against him on 3rd May 2002 disclosing his personal assets. He pointed out that all documentation relating to his personal affairs had been seized by the police from either his home or the offices of RBG and therefore had nothing from which to refresh or confirm his recollection. In the letter exhibited to his affidavit he disclosed assets under 13 headings. Further details of those assets were given in letters dated 23rd and 24th May 2002. The Bankrupt made a second affidavit dated 7th August 2002 in response to complaints of inadequate disclosure made by the solicitors for RBG in which he disclosed the existence and constitution of Regent Trust and the Portman Trust. The first was set up by him on 27th January 1997, the second by the trustees of the first by a declaration of trust made on 16th July 1999. In each case the trustee was the Caribbean Trust Corporation. This was the only disclosure at that time relevant to any of the matters on which the Trustees now rely.[13]On 22nd July 2002 Laddie J made an order for the examination of the Bankrupt under s.236 Insolvency Act 1986 in relation to the affairs of RBG. The appeal of the Bankrupt from that order was dismissed by the Court of Appeal on 8th November 2002. The examination so ordered took place over 8 days between 28th January and 5th February 2003. It was then adjourned and remains adjourned sine die. The relevant answers of the Bankrupt to questions put to him are described by the Trustees in evidence on this application as “less than frank”.[14]The liquidators then applied for summary judgment under CPR Rule 24.2 in respect of their claim issued on 3rd May 2002. The particulars of claim alleging fraudulent breaches of trust and fraudulent conspiracy had been served on or about 24th May 2002. The essence of the claim was described by Hart J, before whom the application came, in paragraphs 2 and 3 of his judgment thereon delivered on 27th April 2004 in these terms: “2. RBG was in the metals business. It was established by VR in 1996 and by September 2001 had a turnover of US$1.7 billion. On 30th January 2002 its auditors, PricewaterhouseCoopers, resigned giving as their reasons under Section 394 of the Companies Act 1985, the breakdown of trust and confidence between themselves and the directors arising out of their failure to obtain satisfactory explanations for the fact that confirmation of indebtedness from six apparently independent customers of RBG had all apparently been faxed at the same time on the same fax machine from the same address. Further investigations resulted in an application being made on behalf of its principal creditor, West LB, for the appointment of provisional liquidators, an application that was granted on 3rd May 2002. The liquidation revealed a deficit of some $445 million with liabilities of $330 million-odd owed to the banks which had financed its trading. Its assets included some $406 million owed to it by trading counterparties none of which has proved to be recoverable.[3]The essence of the claim is that this situation is the result of a fraudulent scheme which was designed to extract, and succeeded in extracting, several hundred million US dollars from financiers. According to the claimants, the scheme involved the invention of a very large number of bogus metal and other mineral trading transactions. It was implemented by the creation of a world wide network of trading counterparties who were controlled by VR and AJ, by the fabrication of the trading transactions and by the dissipation of the funds extracted. These bogus transactions were presented to financiers as genuine trades with independent trading companies for the purposes of extracting funds. This was done first through the sale to the financiers under receivables agreements of the liabilities purportedly owing to RBG as a result of these trades and, secondly, the raising of trade finance in respect of purported purchases. It is said that by the time the music stopped in May 2002 at least two-thirds of RBG's ostensible trade was the result of these activities.”[15]The material before Hart J consisted of the pleadings, various witness statements and voluminous exhibits. There was no oral evidence or cross-examination of any deponent. None of those documents has been adduced in evidence before me but all of them are in the possession of the Trustees. Hart J then described the various individuals involved (paras 4 to 6). In paragraphs 7 to 9 he considered the counterparties with whom RBG dealt. He said: “7. The trading counterparties to which the allegation relates were ostensibly located in Hong Kong, Singapore, Dubai, India and the United States. In Hong Kong, RBG's principal agent was Mr Murthy who was assisted by Dhwaraswamy Somasekharan ("Mr Sekhar"), at times assisted by a Mr Vineet Kumar Aggarwal. In Singapore the assistants were Subhash Rastogi, Tarun Kumar Aggarwal and Sanjay Sikri, the brother of Pankaj, the London-based assistant. In Dubai, the assistants were Ravindra Rastogi and P K Keerthan. In India, their assistants included Y K Aggarwal and Artul Jain.[8]It is RBG's case that these assistants took their instructions from and reported to VR and AJ, the latter being assisted and sometimes represented by Sheetal. The purported trading with the counterparties was typically done on a matched transaction basis. The sale by one counterparty to RBG was matched by a purchase by another counterparty from RBG. The purported purchases by RBG usually required immediate settlement whereas its purported sales were on credit terms, often 180 days. Trade finance was used to fund purported purchases. The receivables created by the purported sales on credit terms were used to obtain receivables finance, typically 95% of the face value. This finance would then be misappropriated to and for the benefit of the counterparties.[9]The net result, according to RBG, is that when the music stopped it was left with irrecoverable assets in the form of liabilities to it on the part of counterparties in the sum of $400 million-odd and liabilities to the banks who financed the trades of over $300 million. On the footing that the trades were bogus it claims the latter sum from VR and AJ on the grounds that their orchestration of the fraudulent scheme was a breach of their fiduciary duties as directors of RBG which has resulted in that loss. If, on the other hand, the transactions to the counterparties or some of them were real transactions it seeks to make them liable for the amount of the counterparties' unpaid liabilities to RBG on the footing that they are liable as quasi recipients of RBG's property received by the counterparties under the transactions, relying for this purpose on the approach of the court, in Trustor v Smallbone (No 2) [2001] 1 WLR 1177.”[16]Hart J then turned to the defence of the Bankrupt. In paragraph 10 he recorded it in these terms:
“10. [The Bankrupt and his co-defendant Mr Anand Jain] deny these claims. They say that as far as they were concerned all the transactions between RBG and the counterparties in question were arms length transactions with trading entities which were independent of RBG and, so far as they were aware, independent of each other. The fact that all of the counterparties in question, who number about 250, have in the event failed to respond to any of their liabilities to RBG can be explained by the fact that they were all relatively small businesses which had been enabled to trade as a result of the imaginative credit and other terms afforded to them by RBG. Their inability to respond to their liabilities was no more than the consequence of the unexpected shutting down of RBG's business following the appointment of the provisional liquidators. If, and to the extent that it now appeared from the evidence that some or all of transactions reveal an apparently incestuous web of connections between the counterparties inconsistent with their mutual independence, those were matters for which [the Bankrupt and Mr Jain] could provide no explanation save to suggest that the responsibility for this state of affairs might lie in the unauthorised actions of RBG's local representatives in Hong Kong, in particular Mr Murthy and Mr Sekhar. Both [the Bankrupt and Mr Jain] were adamant that they knew nothing of these matters and were certainly not themselves responsible for controlling the affairs of the counterparties in question.”
[17]Hart J then considered a submission made on behalf of the Bankrupt that the claim was inappropriate for summary judgment because it raised “allegations of a massive fraud involving over 250 companies and relies on nine voluminous witness statements and thousands of exhibited documents”. Hart J rejected that submission. He considered that (paragraphs 13 and 14): “13....the fraud alleged by RBG was both massive and complex. Its proof, however, seems to me to depend on RBG being able to establish the truth of one central proposition, namely that the counterparties were not independent of RBG or of each other but were in fact controlled by [the Bankrupt and Mr Jain]. Unless [the Bankrupt and Mr Jain] can show a realistic prospect of demonstrating at trial that that was not the case, it seems to me that RBG is entitled to judgment against them, at least so far as liability is concerned. RBG seeks in its evidence to go further and to assert that not only were the counterparties so controlled but that all the transactions with which they entered with RBG were, as it is put in the evidence, "bogus". This does not appear to me to be a necessary element of RBG's claim to hold the defendants liable for breach of fiduciary duty. Whether or not the transactions were "bogus" in the sense of being merely the product of the generation of a transactional paper trail, the mere fact that they were presented by the defendants to RBG's auditors and its financiers as being transactions with apparently independent counterparties will be sufficient to establish breach by the defendants of their fiduciary duties as directors of RBG.[14]If that is right, then the ability of the defendants to show a realistic prospect of success on the "control" issue should be determinative of this application so far as liability is concerned. The litigation disadvantages on which they rely (absence of disclosure or independent sources of documentation and so forth) have to be seen in that context.”[18]Hart J then considered the evidence before him in that context. He referred in particular (paragraph 16) to evidence as to the discovery in a warehouse in Sha Tin, Hong Kong of a cache of documentation and described the documents so found. He observed in paragraph 17:
“The existence among the Sha Tin documentation of the paraphernalia necessary for the successful execution of a scheme such is alleged by RBG in these proceedings; e.g. the statutory books, accounts, banking and other documents for the Hong Kong counterparties, the blank letterhead paper (some pre-signed), the company chops (again sometimes pre-signed) shipping documentation, shows (as [the Bankrupt and Mr Jain] recognise in their evidence), that Mr Murthy has some explaining to do if one is to avoid the conclusion that he was centrally involved in a fraudulent scheme of precisely the character alleged by RBG. The most damning documentation however is that which evidences that Mr Murthy and Mr Sekhar not only had no need to explain themselves to [the Bankrupt and Mr Jain], but regularly accounted to them throughout the period in which the scheme was operated for their actions in operating it.”
[19]Hart J then referred (paragraphs 18 to 31) to the documentation which demonstrated these conclusions and to further contentions advanced on behalf of the Bankrupt before concluding in paragraphs 31 to 33: “31. This response does not however explain the fact of the existence, in the form in which they do exist, of the Keerthan reports. As with the Sekhar reports, these reports only make sense as an accounting to someone of funds which are being paid by RBG to various counterparties and then being used by other counterparties to discharge their liabilities to RBG or its financiers, or transfer to one or other of the Rastogi brothers, the net balances being accounted for as RBG's money. That form of accounting presupposes that the counterparties are mere creatures of RBG, who have no independence whatsoever in relation to transactions to which the relevant entries relate. The conclusion from these reports is, in my judgment inescapably, that the counterparties were not independent of RBG or of each other, and that a fraud of precisely the kind alleged by RBG's liquidators was being perpetrated, both on RBG and its financiers. The only refuge for the defendants is to say that if that was the case, then it had nothing to do with them. That assertion is however, in my judgment, simply incredible in the face of the direct documentary evidence of their involvement, sparse though that is. Its relative scarcity is easily explained from RBG's point of view by the suggestion that there must have been a systematic destruction of documentation at the London end, following PricewaterhouseCoopers' resignation in January 2002, and prior to the appointment of provisional liquidators in May 2002. But such of the documentation as does survive makes it quite simply unbelievable that the persons at the centre of the web were not the very persons to whom the Sekhar and the Keerthan reports were expressly addressed. In my judgment, there is no realistic prospect of the defendants being able to demonstrate the contrary at trial.[32]As indicated earlier, their protestation that it is unfair to them to have to respond to the allegations without the benefit of disclosure from RBG has to be seen in the context of that which they have to refute, namely the lack of independence of the counterparties and the fact that it was they who were orchestrating the transactions. It is difficult to see how any amount of disclosure will enable them to displace either of those conclusions. On the other hand, proof in relation to any one of the alleged counterparties that it was in fact independent, at least in relation to a transaction where one of the reports points to it as having been a mere creature of RBG, would go a long way to removing an essential premise of the liquidator's case in relation to all the alleged counterparties, at least so far as summary judgment is concerned. So far as such an approach is concerned, the defendants have, if their denials are to be believed, a huge pool of independent evidence upon which they could draw in order to provide the telling counter-example. The pool consists of a list of ostensibly independent counterparties listed in the schedules which appear at pages 328 to 340 of Volume 2 of the application bundle. No such example has, however, been relied upon. [the Bankrupt and Mr Jain] were the chief operating officers of RBG throughout the period during which this ostensibly massive trading was going on. If any of the counterparties was a genuine independent trader, it is quite simply incredible that [the Bankrupt and Mr Jain] have not been able to produce, or even point to, some third party source which would corroborate that fact.[33]For these reasons, I have reached the conclusion that RBG is entitled to summary judgment against the defendants.”[20]Hart J then considered issues arising on quantum. RBG had claimed that the measure of liability was, in the alternative, the amounts due from the counterparties if the transactions were genuine or the amounts due by RBG to the financiers. Hart J held that the latter was the appropriate measure. In paragraphs 36 to 39 he explained why in the following terms: “36....once it is accepted, as I have accepted, that RBG through [the Bankrupt and Mr Jain] were controlling both sides of the transactions in question, the question whether and in what further sense, they may have been "bogus" transactions is academic. The orchestration of the transaction in question would have been fatal to, if nothing else, the validity of the credit insurance on which the receivables finance was based, even if otherwise compliant with the warranties given in the relevant finance agreements. It may be objected that this is not squarely addressed by the evidence but it is, in my judgment, obvious.[37]The second answer is that if the transaction in question was "a real one" even though it was secretly orchestrated by the defendants, the loss which RBG had suffered is ostensibly a greater one, namely its inability to collect the "real debt" owed to it by the shell counterparty in question.[38]My conclusion is that once RBG has established that [the Bankrupt and Mr Jain] controlled the counterparties, it is entitled to claim damages on the footing that, notwithstanding the non-recourse provisions, it is liable to the financiers in the sums for which they have lodged proofs in the liquidation. By parity of reasoning, unless RBG is able to assert that the transactions were real ones, it is not entitled to claim damages by reference to the sums which it ought to have received as a result of those transactions.[39]Accordingly, the sum in respect of which RBG is entitled to summary judgment is, in my judgment, the sum measured by reference to its apparent liability to the financiers; i.e., a figure either of US$307 million odd or US$333 million odd, mentioned earlier as being a point on which I would welcome the further assistance of counsel.”[21]In the light of that further argument Hart J gave summary judgment to RBG in the sum of US$307,463,954 with interest and costs. As I have already indicated, the Court of Appeal (Longmore and Jacob LJJ) refused permission to appeal. In doing so Jacob LJ, with whom Longmore LJ agreed, having dealt with the specific points raised by leading counsel for the Bankrupt said (paragraphs 19 and 20): “19. If one stands back in this case, the materials put before the judge in detail cry out for an explanation; indeed they do more than that. It seems impossible that there can be any rational explanation as to how these materials exist other than they evidenced dealings with counterparties controlled by the defendants. None of the matters which it is suggested might turn up on the way to trial displace that overwhelming inference.[20]That being so, I can see no reason or point in granting permission to appeal. The case is all one way.”[22]Bankruptcy proceedings quickly followed and a bankruptcy order was made against the Bankrupt on 2nd February 2005 and the Trustees were appointed on 5th February 2005. On or about 15th March 2005 the Bankrupt answered the routine questionnaire submitted by the Official Receiver. In his answers the Bankrupt stated that he did not own the house in which he lived with his family but that it was a jointly owned family home. He said that he paid no rent or mortgage repayments in respect of it. He estimated his monthly outgoings to be £9,900 which were being discharged out of his wife’s savings and investments. On 6th June 2005 and as and when asked to do so thereafter the Bankrupt provided the Trustees with a letter of authority enabling them to obtain information relating to him from financial advisors, trust companies, banks and other similar institutions.[23]On 27th September 2005 the Bankrupt was interviewed by the Trustees in accordance with his obligations under s.333 Insolvency Act 1986. I shall hereafter refer to various passages in connection with the specific matters on which the Trustees now rely. In their evidence on this application the Trustees described the Bankrupt’s answers as vague and non-committal.[24]On 28th October 2005 the Bankrupt was charged, with others, with conspiracy to defraud “lending institutions by inducing them to provide finance to RBG Resources plc....(“RBG”) secured upon RBG’s metal transactions by dishonestly representing to such lending institutions that:[1]All such metal transactions represented the genuine sale of metal and/or;[2]Such metal transactions were at arms length to RBG and/or;[3]Such metal transactions were with counterparties not connected to or otherwise controlled by RBG.” I understand that the trial is fixed for September 2007 and is estimated to last at least three months.[25]On 15th November 2005 the solicitors acting for the Bankrupt wrote to the Trustees with explanations, originally promised in the course of the interview on 27th September 2005, concerning the Regent and Portman Trusts. I shall refer to that in greater detail when considering the Trustees concerns regarding the alleged failure of the Bankrupt to disclose a beneficial interest in Regent Trust, Portman Trust or Clipter Holdings Ltd.[26]The application of the Trustees which came before Registrar Jaques was issued on 23rd December 2005. The original relief sought was the suspension of the running of time for the purposes of s.279(1) for a period of 18 months from 2nd February 2006 to 2nd August 2007 or until the Trustees were satisfied that the Bankrupt had properly accounted for the application of the sum of US$307,463,954 set out in the order of Hart J. It specified the grounds on which such an order was sought as those set out in the witness statement of Mr Shierson made on the same day. The notice of opposition required by IR 6.215 was given by the Bankrupt on 20th January 2006 and was verified by his witness statement made on 30th January 2006.[27]Witness statements were duly exchanged and the hearing before the Registrar commenced on 23rd March 2006 and was adjourned part heard, in the event, until 25th July 2006. In the meantime, on 8th May 2006, the Zurich District Court determined applications of RBG against Clipter Holdings Ltd and the Bankrupt, originally made on 7th June 2005, for the attachment of three bank accounts in the name of Clipter Holdings at Cantrade Privatbank AG of which RBG alleged that the Bankrupt was the beneficial owner. RBG relied on the judgment of Hart J, the facts it revealed and certain other documents. The judge in the Zurich District Court considered the attachment claims to be sufficiently substantiated and made the orders sought by RBG. These judgments were introduced into the evidence before the Registrar by a witness statement made by a solicitor employed by the solicitors acting for the Trustees. Appeals from these judgments were dismissed by the Civil Division of the Higher Court of the Canton of Zurich on 6th February 2007. I was informed at the hearing of the appeal before me that an application for permission for a further appeal had been rejected by the relevant court.[28]The hearing before the Registrar concluded on 25th July 2006 when he reserved his judgment. Before he gave judgment on 27th October 2006 the examination of the Bankrupt pursuant to s.333 Insolvency Act 1986 resumed on 13th September 2006. Notwithstanding the opposition of counsel for the Bankrupt I admitted the part of the transcript on which the Trustees sought to rely. That included passages in which the Bankrupt continued to assert that the metal trading transactions were genuine and to deny the validity of the judgment of Hart J on the basis that he had not had an opportunity to give his analysis of the documents or to explain the transactions alleged to be fraudulent. That, of course, is quite inconsistent with the suggestion now made by his counsel that he has told the Trustees and the Court all he knows.[29]The Registrar handed down his written judgment on 27th October 2006. For the reasons he gave he dismissed each of the complaints of the Trustees save for two cases of non-disclosure in the past which, he concluded, were insufficient to justify the relief sought by the Trustees. The Trustees now appeal but only on the more limited basis to which I have referred in paragraph 3 above. I will now consider the three grounds on which this appeal is based. Failure to explain or account for the disparity between the amount of the judgment awarded by Hart J and the value of the assets disclosed by him.[30]This point was explained in paragraphs 64 and 65 of Mr Shierson’s first witness statement. It was rejected by the Registrar because he considered that the judgment of Hart J was not admissible on the application against the Bankrupt before him. He dealt with the point at various stages of his judgment. In paragraphs 1 to 6 he set out the nature of the case and the specific matters on which the Trustees relied. In paragraph 5 he said:
“Counsel for [the Bankrupt] accepted that the allegation at the heart of the case against his client was that he was a party to fraud and that he had extracted assets from [RBG] which he was hiding. He submitted, however, that the findings of fraud and extraction of assets made against his client in the English proceedings that I have mentioned, and in certain foreign proceedings mentioned later in this judgment, are not admissible against him in the application before me. For the reasons hereinafter appearing, I accept that submission.”
[31]The Registrar returned to this point in the context of the allegation that the Bankrupt had failed to disclose his interests in Regent Trust or Clipter Holdings Ltd. In that connection he referred in paragraph 12 of his judgment to the witness statement of the solicitor employed by the solicitors for the Trustees exhibiting the judgment of the District Court of Zurich on the application for attachment orders I have referred to in paragraph 27 above. In addition he accepted the submission of counsel for the Bankrupt “that it is well established that [the Trustees] cannot rely on the findings made in the proceedings which bear on this allegation: Secretary of State for Trade and Industry v Bairstow [2004] Ch.1”. He rejected the submission of counsel for the Trustees that that case was irrelevant to the exercise on which he was engaged. He could see no basis for not applying the principle of that case to the case before him.[32]In paragraph 15 of his judgment the Registrar referred to the core allegation made against the Bankrupt “namely that he was a party to fraud and had extracted assets from [RBG] which he was hiding”. He pointed out that much of Mr Shierson’s second witness statement was devoted to that topic and that reliance was placed by him on, amongst others, the judgment of Hart J. He concluded:
“Whether or not any of the evidence relied on in those proceedings actually proves that [the Bankrupt] was a party to fraud or that he has extracted assets from [RBG] is not a question I have to consider. Suffice it to say that that evidence is not before me and the findings made in those proceedings are inadmissible in the proceedings before me for the reason I have already given.”
[33]The Registrar evidently considered that a proper application of the decision of the Court of Appeal in Secretary of State for Trade and Industry v Bairstow [2004] Ch.1 precluded the admission of the judgment of Hart J in evidence on the application before him for any purpose. Thus there was no evidence before him to implicate the Bankrupt in any fraudulent conspiracy or other breach of fiduciary duty. Counsel for the Trustees submits that the Registrar was wrong so to conclude and that his conclusions on the other grounds on which the Trustees rely was infected by that error. The submissions of counsel for the Trustees may be summarised under three heads, namely, the decision of the Court of Appeal in Bairstow is(1) distinguishable,(2) inapplicable to issues arising between privies to the original judgment and(3) cannot be relied on if so to do amounts to an abuse of the process. I will consider these submissions in due course, but, first, it is necessary to understand the principle of Hollington v Hewthorn [1943] 1 KB 587 and the circumstances of Bairstow in which it was applied.[34]In paragraphs 15 and 16 of my judgment in Bairstow, with which Potter and Hale LJJ agreed, I described the circumstances in Hollington and pointed out that its only relevance was on the first ground of decision in that case, namely “that the opinion of the court exercising the criminal jurisdiction as evidenced by the certificate of conviction was not relevant” to the issues in the second action being a claim for damages for negligence.[35]In paragraph 17 I quoted the material passage from the judgment of the Court given by Goddard LJ. I need not do so again. It is sufficient to repeat the concluding sentence:
“So on the trial of the issue in the civil court, the opinion of the criminal court is equally irrelevant.”
I then considered the later authorities and concluded that that proposition was still good law and rejected the submission that it applied only to cases in which the earlier decision is that of a criminal court. I concluded in paragraph 27 that the “factual findings and conclusion of Nelson J in the earlier proceedings are not admissible as evidence of the facts so found in these proceedings”. The Court of Appeal followed the decision in Bairstow on this point in Simms v Conlon [2006] EWCA Civ 1749.[36]In Bairstow the earlier proceedings had been a claim by Mr Bairstow for damages for wrongful dismissal which had been tried by Nelson J over a substantial period and involved a good deal of oral evidence. The Secretary of State sought to use the extensive judgment of Nelson J as evidence of the facts found by him in proceedings against Mr Bairstow for a disqualification order under the Company Directors Disqualification Act 1986. At a pre-trial review Pumfrey J had directed that both the Secretary of State and Mr Bairstow be bound by the judgment of Nelson J. Mr Bairstow appealed.[37]The Secretary of State sought to escape from the conclusion indicated by Hollington by contending that Mr Bairstow’s refusal to accept the conclusions of Nelson J in the later disqualification proceedings was an abuse of the process. In that connection I referred to a number of authorities which dealt with the proposition that a decision, otherwise than in rem, only bound the parties thereto and their privies. Thus a refusal by one who was not a party or the privy of a party would only amount to an abuse of the process of the court if(i) it would be manifestly unfair to a party to the later proceedingsthat the same issues should be relitigated or(ii) to permit such relitigation would bring the administration of justice into disrepute (para 38).[38]Counsel for the Bankrupt contends that the decision of the Court of Appeal in Bairstow is applicable in this case because, he submits, the Trustees are not the privies of the Bankrupt and even if they are they are not bound by a judgment obtained against the Bankrupt before his bankruptcy intervened. In relation to the second proposition counsel relies on the well established principle that in the bankruptcy of a party the court in bankruptcy is entitled to go behind the judgment to ascertain whether the debt it appears to establish is truly due, see per Etherton J in Re:Menastar Finance Ltd [2003] 1 BCLC 338, 346 paras 43 to 51. Thus I accept that in cases of suspected fraud, collusion or miscarriage of justice a trustee or liquidator is entitled to go behind the judgment. But unless and until he does so the judgment is as binding on him as it is on the bankrupt because he is the legal assign of the bankrupt.[39]In Gleeson v J Wippell & Co Ltd[1977] 1 W.L.R. 510 at 515 (approved by Lord Bingham in Johnson v Gore Wood[2002] 2 AC 1 at 32) Sir Robert Megarry considered that any constraint on a party, whether by way of cause of action estoppel, issue estoppel or abuse of process, applies also to his privy. He considered that the principle to be applied was whether having due regard to the subject matter of the dispute, there is a sufficient degree of identification between the two to make it just to hold that the decision to which one was a party should be binding in proceedings to which the other is a party. Such a principle would evidently apply to proceedings between RBG and the Bankrupt and between RBG and the Trustees, see for example Halsbury’s Laws of England 4th Ed.Reissue Vol.16(2) para.999 and Spencer Bower, Turner & Handley 3rd Ed. para 231. It seems to me to be obvious that in those circumstances the same principle is applicable to proceedings between the Trustees and the Bankrupt. This was the conclusion of Gloster J in Re Struth [2006] 1 BCLC 294, 303 para 31 and of Mr Thomas Ivory QC, sitting as a deputy High Court judge of the Chancery Division in Singla v Brown [2007] EWHC 405 (Ch) para 29. I agree with them.[40]Accordingly I reject the submissions of counsel for the Bankrupt and accept that of counsel for the Trustees that for the purposes of considering any cause of action estoppel, issue estoppel or abuse of process arising from the judgment of Hart J they are to be considered as the privies of the Bankrupt. They have not asserted, indeed could not assert, that the judgment was in any way suspect as being the product of fraud, collusion or miscarriage of justice. Accordingly they are bound by it to the same extent as any other privy of the Bankrupt would be.[41]It is in that context that, having accepted the second, it is appropriate to consider the first submission of counsel for the Trustees I summarised in paragraph 33 above. He submits that the principle established in Hollington,as applied in Bairstow, is based on the proposition that the decision of the court in the first of the cases is irrelevant to the resolution of the dispute in the second. No doubt this is true where the parties to the second are not the parties or privies of the parties to the first. But where they are the judgment is relevant to establish the extent of the estoppel arising from the order.[42]Thus, as explained in Halsbury’s Laws of England 4th Ed. Vol.37 para 1224, a judgment is conclusive between the parties and their privies of its existence, date and legal consequences and precludes relitigation of the same cause of action or issue. To establish what matters were in issue it is permissible to examine the pleadings and the judgment. It must follow that the conclusion of Hart J, and the reasons therefor, that on the pleadings and evidence before him there was no real prospect of the Bankrupt establishing a defence to the claim of the Trustees as formulated in the particulars of claim is relevant in order to ascertain the extent of any issue or cause of action estoppel. Accordingly the judgment must be admissible and conclusive as between the Bankrupt and the Trustees for that purpose. The case is quite unlike either Hollington or Bairstow. In each of them the conclusion of the jury or judge was based on the oral evidence adduced at the first trial which one party in the second had had no opportunity, by himself or his privy, to challenge.[43]Accordingly, in my judgment, the Registrar was wrong to exclude the judgment of Hart J on the basis that it was not admissible or on any other basis. It established conclusively, as between the Bankrupt and the Trustees, that the Bankrupt had participated in a fraudulent scheme such as Hart J described in paragraph 3 of his judgment, that none of the counterparties to the various metal transactions was independent of RBG and that the Bankrupt had orchestrated their activities in such a manner and to such an extent that he was liable for breach of duty as a director in committing RBG to the transactions with the financiers in the amount of US$307m. In these circumstances it is unnecessary for me to deal with the third point on which counsel for the Trustees relied, namely, abuse of process.[44]It is true, as the Registrar pointed out in paragraph 5 of his judgment that the issues before him were whether it had been established to his satisfaction that the Bankrupt had failed to perform his obligations under Part IX. Those obligations included the provision to the Trustees of documents, information and explanations relating not only to the estate of the Bankrupt but also his “affairs”, see s.291(1)(b), 311(1) and 333(1)(a) and Haig v Aitken [2000] 3 AER 80, 88h. Further the findings of Hart J entitle the Trustees to investigate whether it is appropriate to pierce the corporate veil shrouding the counterparties, see Trustor AB v Smallbone (No.2) [2001] 1 WLR 1177. In those circumstances it is clear that the Bankrupt has failed to comply with the obligations imposed on him by Part IX. Indeed the contrary was not argued.[45]For these reasons I accept the submissions of the Trustees that the principal ground on which they relied before the Registrar and before me, namely that the Bankrupt failed to explain or account for the disparity between the amount of the judgment awarded by Hart J and the value of the assets disclosed by him has been made out. But I must also consider the other two grounds and whether on all the grounds made out it is appropriate in my discretion to grant the relief sought.[46]The Bankrupt once held shares in Allied Deals Inc, a company incorporated in the United States. They were not referred to by the Bankrupt in his disclosure affidavit in answer to the world wide freezing order made against him on 3rd May 2002. In the course of his examination under s.236 Insolvency Act in January and February 2003 he told the liquidators of RBG that he had sold them to his brother Narendra for about US$30m. In his response in February 2005 to the questionnaire submitted by the Official Receiver the Bankrupt did not mention these shares or any proceeds of sale of them. He was questioned about this shareholding during his interview with the Trustees on 27th September 2005. On that occasion he suggested that only US$4m to US$6m had been paid. He explained the absence of any relevant entry in his bank accounts by suggesting that the money had been paid to RBG Holdings or RBG Enterprises. In his witness statement made on 23rd December 2005 Mr Shierson pointed out that there was no relevant entry in the books of those companies either.[47]Under cover of a letter dated 30th January 2006 the solicitors for the Bankrupt sent to Mr Shierson a copy of an agreement dated 16th November 1998 and made between the Bankrupt (1) and Allied Holdings Ltd (2). It recited that the Bankrupt was “the legal owner of Allied Deals Inc shares” and had agreed to sell 200 to Allied Deals Holding Ltd. The Agreement provided that title to the shares should pass on the signing of the contract. Clause 2 provided:
“The consideration payable by the purchaser in respect of the sale and purchase hereby agreed shall be USD53,000,000...The payment instructions to the purchaser shall be given by vendor separately.”
[48]In his witness statement on this application the Bankrupt claimed that he had never received any part of the proceeds of sale personally. He explained that the shares had been acquired with ‘family money’ and that he had left his father and brothers to decide what should be done with the proceeds of sale. He claimed to have answered all the questions put to him as fully as he was able and could not do more.[49]In paragraph 11 of his judgment the Registrar rejected the complaint of the Trustees to the effect that the Bankrupt had failed to disclose the proceeds of sale of shares in Allied Deals Inc. He said:
“In his witness statement [the Bankrupt] denies ever receiving the proceeds of sale of any shares in Allied Deals Inc. This tallies with his evidence in his s.333 interview, when he said, “that money, I think, has either gone to RBG Enterprises or has gone to RBG Holdings”
. There is no reliable evidence that [the Bankrupt] personally received any part of the proceeds of sale of any shares in Allied Deals Inc.....Given [the Bankrupt’s] denial, the truth of which has not been tested by cross-examination, and in the absence of any reliable evidence to contradict it, I do not consider that a case has been made out to justify the suspension of the running of the discharge period.”[50]The Trustees contend that the Registrar took too narrow a view of the obligation of the Bankrupt and failed to appreciate the extent of the inconsistency in the Bankrupt’s evidence. Counsel for the Bankrupt supported the conclusion of the Registrar and the reasons he gave.[51]In my judgment the Registrar did take too narrow a view of the obligations of the Bankrupt. As I have already pointed out in paragraph 44 above the duties of the Bankrupt extend beyond matters relating to his estate to matters relating to his financial affairs generally. At the very least he was obliged to give the Trustees full details of the payment instruction he was entitled to give to the purchaser under clause 2 of the Agreement.[52]Further the Bankrupt’s evidence is full of inconsistencies, which the Registrar seems to have overlooked, as to the amount of the purchase price and the identity of the recipient. The Agreement, to which the Registrar did not refer, specifies a price of US$53m, in his s.236 examination in January and February 2003 the Bankrupt said it was only US$30m and in his s.333 interview on 27th September 2005 he said only US$4m to US$6m was paid. The contractual purchaser was Allied Deals Holding Ltd. In his s.236 examination on 28th January 2003 the Bankrupt said that the purchaser was his brother Narendra and that he, the Bankrupt, had received at least some of the purchase price. In his witness statement he said that he had left it to his father and brothers to decide who should get the shares and for how much. There is confusion as to who received the purchase price, whatever it was.[53]In my judgment the Trustees have made good their allegation that the Bankrupt has failed and continues to fail to comply with his obligations under Part IX in respect of the dealings in Allied Deals Inc shares. Failure to disclose a beneficial interest in Regent Trust, Portman Trust or Clipter Holdings Ltd.[54]The position in relation to these trusts and Clipter Holdings Ltd is no less confusing. Rather than trace the course of the Trustees elucidation of the facts I will start from the position as it now appears to be. 19 Orchard Court, London, W1 is a property of substantial value in which the Bankrupt and his family have lived for ten years or more. It was bought by Clipter Holdings Ltd in February 1997 for £1.5m. £1.125m was obtained by a loan from Bank of Scotland secured on Orchard Court, the balance being provided by Clipter Holdings Ltd and RBG Holdings Ltd. The Trustees have obtained a draft, but unsigned, document dated 12th May 1997 purporting to license the Bankrupt to live in Orchard Court in consideration of a licence fee of £1,750 per month. There is no evidence that such a charge was ever paid. The loan from Bank of Scotland was repaid by three payments of US$500,000 each made between 3rd October 2000 and 10th January 2001. The Trustees believe that these payments were made by RBG Holdings Ltd and were financed by a payment of US$1.725m from Hong Kong by a counterparty to metal transactions undertaken by RBG.[55]According to the Bankrupt, the Regent Trust was set up by him in 1997 and the Portman Trust by the trustees of the Regent Trust in 1999. In the letter from the Bankrupt’s solicitors dated 15th November 2005 they stated that in October 1999 the Bankrupt and his wife were excluded as beneficiaries under the latter trust and a document dated 12th October 1999 executed by Caribbean Corp. Trust Ltd purporting to achieve that result has been produced. The same letter claims that by the end of 1999 the assets of the Portman Trust included the issued share capital of Clipter Holdings Ltd. But the Trustees have also obtained a letter dated 9th November 2001 signed by the Bankrupt’s father claiming to be the principal beneficiary of the Portman Trust and recording his wishes as to its future administration. These include a wish that the Bankrupt should be consulted concerning any distribution to his children and the investment and management of the Trust Fund.[56]The only other assets of Clipter Holdings Ltd or the Portman Trust were certain bank balances with Cantrade Privatbank AG, none of which was disclosed by the Bankrupt. These are the accounts over which RBG obtained the attachment orders from the Swiss Courts to which I have referred in paragraph 27 above.[57]The Registrar rejected the Trustees contention. In paragraph 11 of his judgment, after referring to the relevant paragraphs in the various witness statements, he said:
“The short, and to my mind, conclusive answer to this allegation was provided by [counsel for the Bankrupt], when he pointed out that [the Bankrupt] denies having an interest in either of the Trusts (a denial, I would add, that has not been tested by cross-examination) and [the Trustees] have produced no evidence in these proceedings that he does have such an interest. [Counsel for the Bankrupt] submitted, and I accept, that Mr Shierson’s evidence on this issue amounts to no more than conjecture, suspicion and surmise, which is no substitute for hard evidence.”
In paragraph 12 the Registrar, on the authority of Bairstow, rejected the orders in the Swiss proceedings on the grounds that they were brought by the liquidators of RBG rather than the Trustees.[58]The Trustees submit that, once again, the Registrar fell into error by taking too narrow a view of the obligations of the Bankrupt under Part IX. As I pointed out in paragraph 44 above the obligation extends to information and documents relating to the Bankrupt’s financial affairs. It is no answer to point to the Bankrupt’s denial of an interest in the Portman Trust when it is clear that he once had one and his continued rent free occupation of 19 Orchard Court suggests that, at least, he is treated by the trustees as if he still did.[59]Counsel for the Bankrupt complains that this goes beyond the complaint made by the Trustees in the original application. I do not agree. Though the heading to this part of Mr Shierson’s first witness statement refers to “Failure to disclose beneficial interest in Regent Trust, Portman Trust and Clipter Holdings” in later paragraphs the Trustees make it plain that their complaint of lack of co-operation is much wider. Thus, in paragraph 56 of his first witness statement Mr Shierson complains that the letter from the Bankrupt’s solicitors dated 15th November 2005 “does not provide detailed disclosure and/or evidence of how the Trusts’ assets were settled and how they were funded”. In paragraph 58 he said:
“Despite [the Bankrupt] appearing to be removed as a beneficiary of the Portman Trust I want to investigate whether he ultimately has an interest therein, since I firmly believe that his removal as a beneficiary of the Trust in 1999 was designed to put assets beyond the reach of RBG’s creditors.”
[60]The transcript of the interview of the Bankrupt conducted by the Trustees on 27th September 2005 indicates the unreliability of the information given by the Bankrupt. The subsequent correspondence hardly allays their concerns.[61]With regard to the bank balances with Cantrade Privatbank AG the judgment of the Swiss courts is binding on the Bankrupt. There is no suggestion that there is any ground on which the Trustees might seek to go behind it. Accordingly, for the reasons I have already given in paragraph 40 above, in my view it is binding as between the Bankrupt and the Trustees in these proceedings. The translation of the judgment shows that the Court paid close regard to the judgment of Hart J. It found, on all the evidence before it, that the Bankrupt was the beneficial owner of the credit balances. But its conclusions were conclusions on the application of the relevant Swiss law to the facts as proved to it. In those circumstances I do not think that the judgments of the Swiss Courts, albeit admissible, add anything to the complaints made by the Trustees in this application.[62]Nevertheless I conclude that the complaints of the Trustees are sufficiently made out with regard to the Portman Trust and Clipter Holdings Ltd. It is not necessary to reach any conclusion with regard to the Regent Trust.

Discretion

[63]Having concluded that there have been and still are substantial failures by the Bankrupt to comply with his obligations under Part IX , in addition to the two past failures which the Registrar found to have been established, the question arises whether to make an order under s.279(3) Insolvency Act 1986 and if so what. The form of order suggested in the original application has been largely overtaken by events. The order the Trustees now seek is that the discharge of the Bankrupt shall be postponed until 12 months after the conclusion of the criminal proceedings to which I have referred in paragraph 24 above. They accept that the Bankrupt cannot be expected to provide much further information on the eve of and during his trial but suggest that the order they propose will provide a period of a year after its conclusion in which the continuation of the disabilities I referred to in paragraph 7 above may provide the necessary incentive to complete co-operation on the part of the Bankrupt.[64]Counsel for the Bankrupt submits that if I make no order it will not prejudice the Trustees as the obligations of the Bankrupt will continue just the same. He points out that the Bankrupt has co-operated at least to the extent that three of the matters on which the Trustees initially relied but were rejected by the Registrar have not been renewed. He points out that there has already been a suspension for some 15 months and contends that the court should be slow to use its power to suspend discharge lest it is used to compel submission to the Trustees claims rather than the elucidation of information and documents.[65]It is clear from the terms of s.279 that postponement of discharge is linked to a failure to comply with the obligations imposed on a bankrupt by Part IX. But is the purpose of the power to postpone a discharge to provide an incentive to full compliance? Or is it that the disabilities arising from being an undischarged bankrupt should, in the public interest, continue until there has been full compliance? I doubt whether, on the facts of this case, it is necessary to reach a final conclusion on those questions. But in my view the purpose of the power is the latter, even though its effect may be to achieve the former. Were it otherwise I would have expected Parliament to have made discharge conditional on full compliance.[66]Given either purpose, in my judgment it is plain that I should make the order now sought. No order has yet been made under the Company Directors Disqualification Act 1986. If the Bankrupt is discharged he will be free, as his counsel told me he wishes to be, to incur credit and carry on business, whether incorporated or not. Given the period in which the relevant events occurred the alternative remedy of a bankruptcy restriction order is not available to the Secretary of State or the Official Receiver. As the three areas I have explored in this judgment show there are many important respects in which there is still a lack of information on matters which ought to be within the knowledge of the Bankrupt. In my judgment it is essential that the Bankrupt is not freed from the disabilities to which an undischarged bankrupt is subject until they have been clarified.

Conclusion

[67]For all these reasons I will allow the Trustees’ appeal and order that the period of one year prescribed by s.279(1) Insolvency Act shall not expire until a period of one year from the conclusion of the trial of the Bankrupt to which I have referred ( including any appeals) shall have elapsed.

Cited in 8 later judgments