Lexi Holdings v Luqman & Anor [2008] EWHC 1639 (Ch)

[2008] EWHC 1639 (Ch)

Case No HC06C04067

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 16/07/2008

Before

MR JUSTICE BRIGGS

Between

LEXI HOLDINGS (IN ADMINISTRATION)Claimant

(3) MONUZA AKTHAR LUQMANDefendants

(4) ZAURIAN PARVEEN LUQMANDefendant

Mr Philip Marshall QC and Ms Ruth Holtham (instructed by DLA Piper UK LLP, 3 Noble Street, London EC2V 7EE) for Claimant

Mr Paul Chaisty QC and Mr Nigel Bird (instructed by Turner Parkinson LLP, Hollins Chambers, 64a Bridge Street, Manchester M3 3BA) for Defendants

Hearing Hearing dates: 10 th− 19 th June 2008

Judgment

INTRODUCTION

[1]On 16th November 2007 I handed down judgment on applications for summary judgment pursuant to CPR Part 24 against the second, third and fourth defendants. They are respectively the brother and sisters of the first defendant, one Shaid Luqman (“Shaid”). In paragraph 4 of that judgment I said:

“… the claim, if it is well founded, describes a fraud which is truly shocking in its scale and audacity. It is alleged that, over a period of little more than three years, Shaid misappropriated in excess of £53 million from the Claimant and in addition caused further substantial loss by loans to and transactions with parties connected with the directors, all under the noses of the claimant’s auditors, solicitors and funding bankers, while at the same time gaining the award of Young Entrepreneur of the Year, by the abuse of trust, confidence and esteem conferred upon a person with a serious prior criminal record of dishonesty for which he had been twice imprisoned during the 1990s. A full trial of all the issues would be a very major undertaking indeed.”

[2]The second defendant (“Waheed”) was at all material times a shadow director of the claimant company (“Lexi”). The third defendant (“Monuza”) was a director of Lexi from 14th October 2003. The fourth defendant (“Zaurian”) was a director of Lexi throughout.

[3]As originally pleaded, Lexi’s claim against each of these defendants was that they were liable in respect of the whole of the consequences of their brother Shaid’s misconduct, as having authorised or permitted it. By the time of the five day hearing of the summary judgment applications (in October and November 2007), Lexi had refined its case. As against Waheed the case was that he had been sufficiently actively engaged in Lexi’s business activities for it to be a proper inference that he had authorised and permitted Shaid’s misconduct throughout. As against Monuza and Zaurian it was said that they had incurred liability not by way of active authorisation or permission, but rather by their wholesale neglect in the performance of their directors’ duties, by taking no part in the management or supervision of Lexi’s business, and by taking no steps to appraise themselves of the manner in which it was being conducted.

[4]By advancing its claims against Waheed, Monuza and Zaurian in that general way, it was incumbent upon Lexi to establish (to the high standard required for the purposes of summary judgment) that the large scale fraud which Lexi alleged against Shaid had indeed been committed by him. By the time of the summary judgment hearing, Shaid’s defence had been struck out and he had been barred from defending the claim against him, by reason of repeated failures to comply with court orders against him, for which he had also been committed to prison for contempt of court, for a maximum period of two years. The summary judgment applications against Waheed, Monuza and Zaurian therefore took place in Shaid’s absence, but they adopted a substantial part of his earlier defence, so that it was necessary for Lexi, before it could establish accessory liability on the part of these defendants, to establish its primary case against Shaid in the presence of, so as to be binding upon, these defendants.

[5]The outcome of the hearing of the summary judgment applications may be summarised as follows:(1) As against Shaid: (a) Lexi did establish the bulk, albeit not the totality, of its claims against Shaid as to misappropriations of assets, as to loans contravening section 330 of the Companies Act 1985, as to property transactions contravening section 320 of the same Act, and as to the creation of a fictitious directors’ loan account: see paragraphs 195 to 199 of my November judgment. (b) In relation to a small number of misappropriations alleged against Shaid there were arguable defences available to these defendants, even though Shaid was barred from defending. (c) In relation to some of the alleged infringements of section 330 there were triable issues whether the borrowing companies, Lexus, Halfway, KNJ and Beauchamp were connected in the relevant sense with Shaid or with any other director of Lexi, and no evidence in relation to an alleged loan of £425,000 to Serton. (d) In relation to the alleged infringements of section 320, the same triable issues as to the relevant connection arose in relation to transactions with the same four companies, Lexus, Halfway, KNJ and Beauchamp. (e) There was a triable issue whether the fictitious loan account had caused Lexi any greater loss than that caused by the misappropriations for which Shaid used the loan account as a cover.

(2) As against Waheed: (a) He was liable to the same extent as Shaid for having authorised or permitted all Shaid’s misappropriations and infringements of sections 330 and 320, subject to the exceptions mentioned above. (b) There was to be money judgment against Waheed for £41,388,993.16 in relation to those specific misappropriations, and an account and inquiry as to loss suffered by Lexi, or profit made by him arising from the remainder of the misappropriations and the loans and other transactions infringing sections 330 and 320. See paragraph 249(1) and (2) of my November judgment.

(3) As against Monuza and Zaurian: (a) They were to have leave to defend all the claims made against them, save for the allegation that, by their total inactivity while directors, they had committed breaches of their duties. See paragraph 249(3) of my November judgment.

[6]The reason why I was not satisfied that Monuza and Zaurian’s breaches of duty gave rise to any entitlement of Lexi to a money judgment against them was because I considered that there were triable issues whether their inactivity had caused Lexi any loss. This was because I was not satisfied to the standard required by a summary judgment application that, had they performed their duties, they would either have discovered Shaid’s misconduct or, even if they had discovered it, that they would have been able to bring it to an end: see paragraphs 225 to 228 of my November judgment in relation to Monuza and paragraph 247 in relation to Zaurian. Aspects of the way in which the case had developed against Monuza and Zaurian also led me to the conclusion that it would not have been procedurally fair to either of them to resolve the question of causation against them at that stage.

[7]The outcome of that judgment was that it was necessary for me to give directions for a trial of the outstanding issues, both as between Lexi and Waheed, leaving aside the very large monetary judgment which they had obtained against him and, as between Lexi, Monuza and Zaurian, save only in relation to my finding of breach of duty. Those directions contemplated and were designed to enable all necessary preparation to be made for a single trial of all outstanding issues between Lexi and those three defendants. I gave those directions on 23rd November 2007.

[8]Thereafter, on 6th December Lexi obtained default judgment against Shaid for just under £60 million, together with orders for accounts and inquiries (mainly in relation to the section 330 and section 320 infringements). On 21st February 2008 the Court of Appeal dismissed an application for permission to appeal by these three defendants against my November judgment and consequential orders. On 6th March Waheed informed Lexi that he no longer intended to continue to contest their claims and on 17th March a bankruptcy order was made against him on his own petition.

[9]On 21st April 2008, largely due to Waheed’s departure from the case, a consent order was made between Lexi, Monuza and Zaurian, the effect of which was to extract from the trial, for further consideration thereafter, all quantum issues arising out of the alleged infringements of sections 330 and 320. The consent order also recorded, without resolving, a disagreement between those parties as to whether a further issue, by then pleaded in paragraph 37 of Points of Claim pursuant to my directions in November 2007, should or should not be determined at the trial. That disagreement remained un-determined at the beginning of the trial, and after hearing argument I ruled that the issue (“the paragraph 37 issue”) should be determined at the trial, Lexi’s case in relation to it having been sufficiently deployed by means of the Points of Claim to give Monuza and Zaurian time to respond to it, and falling within the general allegation in paragraph 9 of the re-amended particulars of claim (“RAPOC”).

[10]With that introduction, the issues for determination at the trial may therefore be summarised as follows:(1) Causation: did the breach of duty constituted by Monuza and Zaurian’s total inactivity as directors cause any, and if so which, of the losses suffered by Lexi as the result of (a) Shaid’s misappropriations; and (b) the transactions infringing sections 330 and 320?

(2) Misappropriation Losses: Other than those in respect of which Lexi has already obtained summary judgment (rather than default judgment) did any of the further alleged misappropriations cause Lexi loss, and if so how much?

(3) Improper Receipts: Did either Monuza or Zaurian receive money, property or benefits from Lexi for which they are liable to account or pay compensation in respect of Lexi’s loss or their profit?

(4) Section 330/320: (a) Did Lexi make a loan of £425,000 to Serton? (b) Were any of Lexus, Halfway, KNJ and Beauchamp companies connected with a director of Lexi? (c) Did either Monuza or Zaurian incur a direct liability as an authoriser under sections 341(2) and 322(3) of the Companies Act 1985 in respect of any of the impugned loans or transfers? This issue incorporates the paragraph 37 issue.

[11]Lexi did not pursue at trial its claim that Shaid’s fictitious loan account had caused loss in excess of, or separate from that caused by his misappropriations. That issue does not therefore arise at trial, but the existence of the fictitious loan account remains relevant, in particular to the causation issue.

[12]This is not a case in which it is either necessary or convenient to set out all my findings of fact, before addressing the issues. A large number of the relevant facts are already decided, as set out in my November judgment, which is necessary reading at this stage by way of introduction to any newcomer to this case. Rather, each issue raises its own discrete questions of fact, which I shall therefore address on an issue by issue basis. Save in relation to causation the outstanding factual questions are relatively narrow in compass.

[13]It is however convenient for me to express at the outset my conclusions on the quality of the oral evidence and the demeanour of the witnesses. Lexi called three witnesses to give oral evidence, and tendered Civil Evidence Act statements from two others. The witnesses came from Barclays, its investigating accountants KPMG, and from the board of Lexi itself. All except one gave both evidence of fact and opinions as to what might have happened differently, had facts about which they were ignorant at the time been revealed to them. The primary purpose of the deployment of their evidence was to show that Shaid’s fraud would have been prevented or at least stopped if Monuza or Zaurian had revealed what they are alleged to have known about their brother’s background, financial circumstances and conduct.

[14]It has been necessary for me to bear in mind that all Lexi’s witnesses had reason to wish to tailor their evidence to suit their own agenda or that of their respective employers. Barclays suffered a large loss as a result of its lending to Lexi, and its decision to continue to allow Shaid to run Lexi’s affairs unsupervised after being told by the company’s former auditors of their suspicions that he was a fraudsman, and of judicial findings that he was a perjurer and forger, late in 2004, despite the urging of its syndicate partner Lloyds TSB not to do so, was something which called for explanation. KPMG advised Barclays to cooperate with Shaid after conducting an investigation into Lexi’s Loan Book in late 2004 and early 2005, at a cost in excess of £0.5 million. The agenda of Lexi’s other directors, all of whom claim to have been wholly unaware of Shaid’s fraud, is obvious. Against that background, it has been necessary to approach the evidence of all Lexi’s witnesses with caution. This is particularly true of hypothetical assertions as to what would have happened if further information had been made available to relevant advisors or decision makers. As Colman J put it in North Star Shipping v Sphere Drake Insurance

[2005] 2 Lloyds Rep 76

, at paragraph 254:

“it is important to keep firmly in mind that all their evidence is necessarily hypothetical and that hypothetical evidence by its very nature lends itself to exaggeration and embellishment in the interests of the party on whose behalf it is given. It is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information. For this reason, such evidence has to be rigorously tested by reference to logical self-consistency, and to such independent evidence as may be available.”

[15]First to be called was Mr Clive Gresham, who was at the material time a director in the Business Support department of Barclays Bank plc and who had responsibility for the day to day conduct of the bank’s relationship with Lexi between December 2004 and March 2006. His witness statement signed on 9th June 2008 replaced an earlier, shorter, unsigned but approved draft which had been served on the defendants on 29th May 2008. Comparison between the two showed that Mr Gresham’s recollection had been considerably refreshed by his being given sight during the intervening period of relevant contemporary documents produced both by Barclays and by Lloyds TSB, pursuant to third party disclosure orders obtained by the defendants shortly before trial.

[16]Making due allowance for the risks inherent in ‘refreshed’ evidence (for which see Transview Properties Ltd v City Site Properties Ltd

[2008] EWHC 1221 (Ch)

at paragraph 15) I found Mr Gresham to be an apparently honest, helpful and generally reliable witness, who made a careful distinction between what he could and could not remember, and whose answers during a long cross examination demonstrated a genuine desire to assist the court in understanding a history of events from which, as he frankly acknowledged, his employer did not always emerge with distinction. There were occasions when he became evasive, and when he appeared to avoid the gist of an uncomfortable question by descent into generalities, but not to an extent sufficient seriously to undermine his evidence as to what actually occurred, as to which his account was, after he had read them, generally consistent with the documents, subject to one exception which I shall later describe.

[17]Mr Gresham’s general reliability as a witness of objective fact, his seniority and involvement in events during part of the critical period under review qualified him to express necessarily speculative opinions as to what Barclays would or might have done (differently from what it actually did) had it known matters about Lexi and Shaid in particular which Lexi claims that the defendants should have brought to Barclays’ attention, directly or otherwise. Mr Gresham’s apparent objectivity went some way to counterbalance the need to treat the evidence of the team leader of a mismanaged relationship with caution. But in the end my conclusions as to what Barclays would have done if better informed have been mainly derived from my findings as to what it actually did, and in my judgment spectacularly failed to do, with the information which it did have at the time.

[18]Lexi interposed Mr Richard Jewson during Mr Gresham’s cross examination. He was a non-executive director of Lexi between November 2004 and April 2006. He had by then acquired considerable experience as a director and chairman of a number of public and other companies engaged in a diverse variety of businesses including, during the ten years before his appointment to the board of Lexi, Savills plc. This gave him considerable experience of the property market. He was also, while a director of Lexi, Lord Lieutenant of Norfolk and a lay magistrate.

[19]Having been a non-executive director of Lexi at a time when Shaid was perpetrating a massive fraud on the company and its bank lenders without his having even suspected it, Mr Jewson must have found the giving of evidence about his stewardship of Lexi’s affairs a highly embarrassing experience. Furthermore, because it still remains unclear whether disqualification proceedings may be brought against him, Mr Jewson had no doubt the most powerful motive to give evidence favourable to the preservation of his own high reputation for business competence. Nonetheless he gave his evidence fully and frankly, without seeking to justify his own conduct or to blame others, readily acknowledging that he had been totally deceived by Shaid into thinking that he was an independently wealthy, public spirited, honest and well-motivated man. I found his evidence of fact (which was not seriously challenged) to be wholly reliable, and his necessarily speculative views as to what he might have done if he had known more about Shaid’s background (in particular his previous convictions) to be persuasive, although in the end, after cross examination, it amounted to little more than saying that he would have taken legal advice as to his duties in the circumstances, and then acted in accordance with that advice, before resigning at the earliest lawful opportunity.

[20]Lexi’s final oral witness was Mr Brian Green, one of its joint administrators and a partner in KPMG. Apart from acting as the conduit for recently discovered documentary evidence about the use of Lexi’s money in the purchase of property by Monuza and Zaurian, his main role and value as a witness was in describing his part in an investigation conducted by KPMG mainly under his leadership in late 2004 and 2005 into Lexi’s Loan Book, on the instructions of Barclays as manager of the syndicate of bank lenders to Lexi. Mr Green is a highly experienced insolvency practitioner, and I found him to be a reliable witness of fact. His opinions as to what would have happened differently if he had known critical facts about which KPMG were ignorant at the time also commanded careful attention, not least because Barclays relied heavily upon KPMG’s advice at the time. My reservation with the reliability of Mr Green’s opinions as to what would have happened arose from an apparently steely determination on his part not to say anything critical of Barclays, even when, as I shall describe in due course, the circumstances cried out for it. In this one respect I am afraid that he put loyalty to his firm’s client above his duty of complete frankness to the court. Although an isolated occurrence which did not detract at all from the reliability of his evidence of fact, it did so some extent undermine the reliability of his opinions as to what might have been.

[21]Lexi relied upon a witness statement from Mr Malcolm Davis, another director of Lexi until he resigned in February 2006 in order to retire and live abroad. Prior to joining Lexi he had thirty five years’ experience as a banker employed by a succession of banks in corporate lending work. He was not called to give oral evidence because of a combination of residence in Northern Cyprus, alleged ill-health and the alleged non-availability of convenient video conferencing facilities. He received encouraging testimonials from Mr Gresham and Mr Jewson, but I bear in mind that both of them would have said the same for Shaid at the time. No-one submitted that I should regard him as having dishonestly conspired with Shaid. Nonetheless, the result is that I have in the absence of cross-examination of Mr Davis been unable to place significant reliance upon his testimony. As an executive director working three days a week in Lexi’s main offices, his failure to discover anything about Shaid’s fraud must have been the most powerful motive for tailoring his evidence to protect himself. Whether he did or not is impossible for me to determine.

[22]Finally, Lexi attempted to rely upon hearsay statements from a Mr Norman Hill, another director of Lexi at the material time, made in the course of a Section 236 interview. Hearsay rather than oral evidence was relied upon because of what the administrators described in correspondence as their inability to secure his cooperation. He appears to have been resident in England during the trial and therefore susceptible to a witness summons, of which Lexi declined to avail itself. I can therefore place no weight at all upon Mr Hill’s hearsay statements. As the person apparently responsible for Lexi’s day to day administration throughout the period of Shaid’s fraud, he had every reason to say anything which might protect him from liability, regardless of its truth or falsity.

[23]The defendants both lodged evidence in the form of witness statements, but during the trial Zaurian decided not to submit to cross examination. The result was that the only witness for the defendants was Monuza, there being no attempt to justify Zaurian’s absence with evidence showing grounds which might have made it appropriate for reliance to be placed on her statements as hearsay.

[24]Monuza was at all material times, and remains, the Chief Executive of the Bury Metro Racial Equality Council, a full time job with responsibility for a staff of six, a budget of between £0.5 m and £1m per annum, and reporting to a board of 12 directors, with the assistance in financial matters of an honorary treasurer. Her work, according to her own evidence, involved close liaison with the Home Office, the police and with other government agencies. A particular task of hers was fund raising.

[25]Against that background I found Monuza to be a most unsatisfactory witness. She appeared to have come to court determined to make good a few factual propositions, if necessary by constant repetition, and to do so regardless whether a particular question called for that response. Despite a ready tendency to avoid answering questions based on documents by asserting (usually truthfully) that she had not seen the document before, and a frequent recourse to an absence of recollection, such evidence as she did give on matters of any detail was constantly at variance with the contemporary documents, and all too often with her own previous testimony, either in witness statements or in a s. 236 interview under oath in December 2006. Some of it appeared to have been invented on the spot, to extricate her from obvious difficulties.

[26]I found it initially difficult to decide whether the apparently chaotic inconsistency and unreliability of Monuza’s evidence was the result of a dishonest desire to conceal what she knew or merely a combination of very poor memory and suggestibility to advice from her brothers as to what she should say. By the end of her evidence a sufficient number of her clearly incorrect or inconsistent answers had been shown to be self-serving (in the general sense of protecting herself and her family), to make it probable that she had indeed resorted on a number of occasions to deliberate untruth. Mr Marshall submitted that she had reached a stage of pathological self-denial, and that I should find that her evidence was the dishonest product of a member of a dishonest family. In my judgment Monuza decided at an early stage in these proceedings to put family loyalty above her duty of honesty to the court. From the outset of these proceedings she must have appreciated that the Administrators’ pursuit of Lexi’s claims threatened utter ruin for her family. She allowed herself to be guided as to her evidence and her conduct with reference to the proceedings generally by reliance on directions from her dishonest brothers. The result is that with a very small number of exceptions where her account independently carried the ring of truth, I found it impossible to place any significant weight on her evidence, written or oral, save where it was either corroborated by reliable evidence, or consistent with the balance of probabilities derived from the other evidence taken as a whole.

[27]I make it clear that I do not mean to imply from those conclusions that Monuza acted dishonestly at the material time, i.e. prior to Lexi going into administration, in particular in relation to the circumstances giving rise to the present claims against her. That has not at any stage been pleaded against her, nor in any event does the evidence persuade me that, before she appreciated the peril facing her family, she had embarked upon a course of dishonesty.

ISSUE 1 - CAUSATION

[28]The question whether a breach of duty constituted by total inactivity causes a particular loss raises issues of law, fact and hypothesis. The law serves to define the relevant duty, and the steps which that duty required these defendants to take is ascertained by the application of those legal principles to the relevant factual background including, importantly, the particular knowledge, experience and skill which each of Monuza and Zaurian actually had. Thereafter, the court must construct a necessarily hypothetical edifice so as to ascertain what would probably have happened if the relevant duties had been performed, so as to ascertain whether in that event the losses actually suffered by Lexi would, probably, not have been suffered. Subject to any relevant questions of remoteness and (in relation to a duty of care) contributory negligence, the difference between Lexi’s actual financial position and its hypothetical financial position derived from an assumption that the relevant duties had been performed represents the measure of the loss caused by the defendants’ breach of duty.

[29]It is convenient first to summarise the legal principles applicable both to the precise identification of the relevant duties, and to the process of construction of the hypothetical analysis predicated upon an assumption that those duties had been performed.

[30]The starting point is that every director of a company has a responsibility, shared with the other directors, for the management of the whole of the company’s affairs. This responsibility is imposed upon the directors not only by the general law, but by the standard form Articles of Association, to which those of Lexi were no exception.

[31]For present purposes the relevant aspect of the management of Lexi’s affairs for which its directors were responsible is succinctly summarised in the following extract from Lexi’s directors’ report for the year ended 31st December 2003, signed by Zaurian:

“They (the directors) are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.”

[32]The most pertinent judicial analysis of the nature and extent of that particular duty is to be found in the decision of Jonathan Parker J (as he then was) in Re Barings plc & others (No 5) Secretary of State for Trade and Industry v. Baker & others

[1999] 1 BCLC 433

, at paragraphs B1 to B7. That was an application under the Company Directors Disqualification Act 1986 in relation to the conduct of the affairs of a bank which had suffered catastrophic losses as the result of the fraud of one of its employees. A number of the bank’s directors, including its chairman, were found to be unfit by reason of their failure to supervise the discharge of delegated functions. The present case is about a fraud by the managing director of Lexi, which went undetected by his fellow directors. The analogy is therefore not precise, but in my judgment there is no fundamental distinction between the duty to supervise management functions delegated to employees, and the duty to supervise management functions delegated to a fellow director.

[33]At paragraph B1 Jonathan Parker J cited the following dicta of Lord Woolf MR in Re Westmid Packing Services Limited

[1988] 2 BCLC 646

at 653 and 654:

“Each individual director owes duties to the company to inform himself of its affairs and to join with his co-directors in supervising and controlling them.” “It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities.”

He continued, at paragraph B2:

“This does not mean, of course, that directors cannot delegate. Subject to the Articles of Association of the company a board of directors may delegate specific tasks and functions. Indeed, some degree of delegation is almost always essential if the company’s business is to be carried on efficiently: to that extent there is a clear public interest in those charged with the responsibility for the management of a business. As the Earl of Halsbury LC put it in Dovey v. Cory [1901] AC 477 at 486: ‘The business of life could not go on if people could not trust those who are put in a position of trust for the express purpose of attending to details of management.’”

At paragraph B3 he continued:

“But just as the duty of an individual director as formulated by the Court of Appeal in Re Westmid Packing Services Limited does not mean that he may not delegate, neither does it mean that, having delegated a particular function, he is no longer under any duty in relation to the discharge of that function, notwithstanding that the person to whom the function has been delegated may appear both trustworthy and capable of discharging the function. As Sir Richard Scott V-C said when making a disqualification order against Mr Hawes (in the same case): ‘Overall responsibility is not delegable. All that is delegable is the discharge of particular functions. The degree of personal blameworthiness that attach to the individual would be overall responsibility, on account of a failure by those to whom he has delegated particular tasks, must depend on the facts of each particular case….’” ‘The business of life could not go on if people could not trust those who are put in a position of trust for the express purpose of attending to details of management.’” ‘Overall responsibility is not delegable. All that is delegable is the discharge of particular functions. The degree of personal blameworthiness that attach to the individual would be overall responsibility, on account of a failure by those to whom he has delegated particular tasks, must depend on the facts of each particular case….’”

[34]Jonathan Parker J summarised the relevant general legal proposition in paragraph B7 of his judgment as follows:

“(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors. (ii) Whilst directors are entitled (subject to the Articles of Association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director of a duty to supervise the discharge of the delegated function. (iii) No rule of universal application can be formulated as to the duties referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company.”

[35]The standard of care to be expected of directors in the discharge of their duties is relatively well settled. Section 214(4) of the Insolvency Act 1986 encapsulates, albeit only for the purposes of the determination of wrongful trading liability, the standard of care generally applicable to directors, in the following form:

“For the purposes of sub-sections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions that he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both− (a) the general knowledge, skill and experience that may be reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.”

[36]This standard was accepted by Hoffmann J as applicable to the standard of care to be expected of directors, in the context of a misappropriation of money by a co-director, albeit without argument on the point, in Norman v Theodore Goddard and others

[1992] BCC 14

. The editors of Palmer’s Company Law describe the section 214(4) test as encapsulating the modern standard, and as the model from which the general standard now laid down in section 174 of the Companies Act 2006 was derived (albeit not in force at the material time), and as involving first an objective and secondly a subjective test.

[37]The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has.

[38]To that analysis may be added the principle, established for example in Re City Equitable Fire Insurance Company Limited

[1925] Ch 407

that, because of the essentially fiduciary nature of the office, a director is expected to apply to the management and custodianship of the company’s property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property.

[39]The fiduciary nature of the office also affects the question whether, and if so when, resignation may be an appropriate response by a director to circumstances coming to her attention. Prima facie a director who no longer wishes to perform her duties, or who finds it impossible to do so, may properly resign; see Re Galeforce Pleating Co Ltd

[1999] 2 BCLC 704

, at 716 c-d. But a director who wishes to retire may nonetheless be required to take steps to deal before departure with a pressing matter calling for attention, or to put her continuing colleagues on the board in possession of information known to her relevant to the matter in question, so as to enable them to deal with it. Exceptionally, a director may upon departure be obliged to put relevant information in the hands of the company’s shareholders or other stakeholders, if not satisfied that continuing colleagues on the board have the inclination or the ability to deal with a matter of concern.

[40]The first stage in the causation analysis is therefore to ascertain what steps, relevant to the preservation of Lexi’s assets from fraud by their brother, each of Monuza and Zaurian would have taken, had they complied with those duties to the requisite standard, rather than adopted an attitude of total inactivity. For that purpose, the court does not assume a bare minimum compliance on the one hand, or an ideal compliance on the other. The question is simply one of probability: see per Lord Hoffmann, in the context of professional negligence, in South Australia Asset Management Corporation v. York Montague Limited (and associated appeals)

[1997] AC 191

, at 221–222.

[41]The first question is whether either Monuza or Zaurian had any general knowledge, skill or experience beyond the minimum reasonably necessary to qualify them for taking up the office of directors in a company engaged in the business of making loans secured on real property. Monuza was, by the time of her appointment in late 2003, the Chief Executive of the Bury Metro Racial Equality Council, a position of some considerable responsibility which must have called for significant management abilities. By contrast there is no evidence that Zaurian had any relevant general knowledge, skill or experience.

[42]The specific functions entrusted to both Monuza and Zaurian by their fellow directors Shaid and Mr Davis were limited to occasional attendance at the company’s offices for the purposes of signing documents. Since Mr Hill also put documents before them to sign on occasion, it is a fair inference that this was a function entrusted to them by the board as a whole, albeit not on any single occasion or at a board meeting as such. Again, that specific function did not call for any general knowledge, skill or experience beyond that required of a person acting as a director of Lexi. Since the present case is concerned with that part of a director’s duties which consists of the safeguarding of the company’s assets and the taking of reasonable steps to prevent fraud, it does not seem to me that Monuza’s experience of managing a racial equality commission should be taken to impose on her duties beyond that of the objectively ascertained minimum, nor were either of them entrusted by the board with any executive function in that regard. The executive responsibility for the carrying on of the management of the company was, throughout the period when Zaurian and Monuza were directors, evidently delegated by the board as a whole primarily to Shaid as managing director, with part-time assistance of Mr Davis, with his long experience in banking, and with the administrative assistance of Mr Hill. The sisters’ role was therefore, at least in relation to the custody of assets and prevention of fraud, essentially supervisory.

[43]Their case was that since there were fellow directors on the board with greater and more relevant business experience than they had, they were entitled to rely upon them for the necessary supervision of Shaid’s work as managing director. Mr Davis and (when he joined the board) Mr Jewson plainly out-ranked them in relevant experience, while Mr Davis’s and Mr Hill’s executive functions and regular presence in the company’s offices better qualified them for on-going supervision of Shaid. Mr Chaisty QC for Monuza and Zaurian relied upon the evidence of both Mr Jewson and Mr Davis that, despite their greater experience, they never discovered nor suspected Shaid’s misconduct, and he pointed to the fact that, to date, despite the most vigorous recovery campaign, the administrators have not caused Lexi to begin proceedings for alleged breach of duty against either of them. In that context Mr Jewson told me that although the administrators had never stated in terms that he would not be proceeded against, he had gained an understanding by inference from the content of telephone conversations that they would be most unlikely to do so.

[44]Lexi’s case as to what Monuza and Zaurian should have done is pleaded under five headings, by reference to matters which they either knew by virtue of being members of Shaid’s close-knit family, or should have found out in the course of appraising themselves to the requisite extent about the company’s business and affairs. I must deal with each heading in turn, but first with a point of general application concerning Zaurian, namely that she should have used her powers as shareholder of Lexi to dismiss or at least control her brother.

[45]Zaurian undoubtedly was at all material times the legal owner first of the majority and later of the entirety of Lexi’s issued share capital. That is not in dispute. The factual issue is whether she was also, as Lexi alleges, beneficial owner or, as she alleges, but has not entered the witness box to prove, a mere nominee for her brother.

[46]The scant documentary evidence about this gives clear support to Lexi’s case as to beneficial ownership. In particular, Lexi’s Directors’ report for the year ending 31st December 2004, signed by Zaurian, admits of no other interpretation. For that and the other documents tending to identify Zaurian as beneficial owner, see paragraphs 167 to 170 of my November judgment.

[47]The oral evidence displayed no uniformity on this issue. Monuza maintained in cross-examination that her sister was her brother’s nominee, identifying Zaurian and Shaid as the sources of her understanding. Mr Gresham said that Shaid had a substantial investment in the company to protect, an investment reflected both in his loan account and his equity in the company, by which he clearly meant his shareholding. The documents show that Barclays was aware that shares had been transferred to Zaurian, but this does not appear to have affected Mr Gresham’s view as to the identity of the real beneficial owner of the company. Mr Jewson described Lexi as Shaid’s organisation, but Zaurian rather than Shaid as the owner of the shares. Mr Davis described Lexi as a family company.

[48]In my judgment the oral evidence did not displace the clear indication to be derived from the documents that Zaurian was the beneficial owner of the Lexi shares. Nonetheless the effect of the evidence, taken as a whole, was that Shaid was so clearly the dominant family member in relation to Lexi that his domination must also have extended, as a matter of family understanding, to Zaurian’s exercise of her rights as shareholder. In other words, although on any particular day Zaurian was the beneficial owner, I have no doubt that, if asked by Shaid to do so, she would readily have transferred the shares to him, or to some other member of the family, or exercised her rights as shareholder at his bidding.

[49]It follows that it is probably unnecessary for me therefore to decide the question mentioned in paragraph 247 of my November judgment, namely whether a director has a duty to exercise powers available to her as a shareholder rather than by virtue of her fiduciary office, to avoid being in breach of duty as a director. The general principle is that shareholders’ powers are beneficial rather than fiduciary, and Mr Marshall could point to no authority directly to the contrary, although he continued to rely (as he did during the summary judgment hearing) on Re Queensway Systems

[2006] EWHC Ch 2496

, as containing an implicit assumption to the contrary. I do not consider that the Queensway case went that far. There was no considered analysis of what, if correct, would have been a novel proposition. In his closing submissions Mr Marshall’s argument was not that a director/ shareholder is bound to use her rights as shareholder in furtherance of her duties, but rather that Zaurian’s beneficial ownership of the Lexi shares made it practicable, as a matter of board politics, for her and her sister to have taken effective steps to bring Shaid under proper control or, if necessary, to dismiss him.

[50]I disagree. If Zaurian had purported to exercise her powers as a shareholder to dismiss or control Shaid, I have not the slightest doubt that he would have required her to transfer those shares either to him or to some more compliant family member, and that she would have had no practical alternative other than to comply. Shaid was the founder, builder and de facto controller of Lexi. It was his organisation, and as a matter of practical family politics I conclude that he could have prevented Zaurian from exercising shareholder rights against him, without her being thereby in breach of her duties as a director. There is no shortage of evidence that Zaurian was under Shaid’s domination in relation to the affairs of Lexi. For example she, like her sister, adopted Shaid’s defence in relation to the case against him. Not only was his case false and inherently improbable, but his sisters’ involvement in Lexi’s affairs can have given them no proper basis for making their own judgment whether or not to adhere to his case. In fact they exercised no judgment at all. They just did what he told them. I return therefore to the five headings under which Lexi pleads that both Monuza and Zaurian would, if acting in accordance with their duties, have done something effective to prevent Lexi’s loss from Shaid’s fraud.

(i) Previous convictions/bad character of Shaid

[51]Shaid was twice sentenced to imprisonment for offences of dishonesty during the 1990s. In 1993 he was convicted on four counts of attempting to obtain property by deception and one count of obtaining property by deception and sentenced to 21 months imprisonment. In February 1997 he was sentenced to 2 years imprisonment for attempting to obtain property by deception. Lexi alleges that Monuza and Zaurian were aware of this, and relied both upon their family relationship with Shaid and upon an article in the Manchester Evening News in September 1996 identifying Shaid as responsible for the perpetration of an advance rental and deposit fraud in relation to student accommodation.

[52]Both Monuza and Zaurian admit in their Points of Defence having been aware that Shaid had been convicted of criminal offences related to his business activities in 1993 and 1997, for which he had been imprisoned. It is in fact not clear whether Shaid’s 1997 conviction related to his business activities at all. In their witness statements they each acknowledged, in identical terms, awareness that he had served 7 months imprisonment. In her cross-examination Monuza sought rather unconvincingly to rely on the passage of time for her inability to recall the effect upon her and her sister of the news that her brother had been first arrested and later imprisoned, and professed no more knowledge of the nature of the offences than that Shaid had got himself into trouble in connection with his business activities. She denied any knowledge of the student letting scam reported in the Manchester Evening News, although acknowledging that she herself had been letting one or more of her properties to students at the time.

[53]In my judgment, for present purposes, Monuza and Zaurian’s admissions are sufficient. Anyone with Monuza’s management experience, and any reader of the crime sections of any national newspaper would naturally assume that imprisonment for unlawful business activities must have involved significant dishonesty rather than, for example, violence or criminal damage. Repeated convictions for business offences involving dishonesty plainly give rise to the most serious apprehensions as to the suitability of the convict to be entrusted with the management of a substantial business, unless that person is subjected to the most rigorous scrutiny and supervision.

[54]It may in principle have been both permissible and sensible for Monuza and Zaurian to entrust that process of scrutiny and supervision to fellow directors better suited to the task than they were, both by reason of greater business experience and independence from the family. Nonetheless, delegation of that task crucially required an explanation to those who were to carry it out of the circumstances known to Monuza and Zaurian which called for close scrutiny and supervision, namely Shaid’s previous criminal convictions and imprisonment for dishonesty in business. It seems to me elementary that if a fiduciary is to delegate a task to another, it is incumbent on her to put that other in possession of relevant information, relevant that is both to the need for the carrying out of the task delegated, and the rigour with which it needs to be done.

[55]In my judgment therefore, Monuza and Zaurian should have informed their fellow directors on Lexi’s board of what they knew about Shaid’s criminal convictions in the 1990s, if they were not personally to supervise Shaid’s day to day conduct of the company’s affairs. They had no reason to suppose that their fellow directors knew the relevant facts. It was special knowledge which, despite their family ties, their duty to Lexi required them to communicate to their colleagues on the board.

[56]Lexi goes further and alleges that Monuza and Zaurian should, with that knowledge, have prevented Shaid from being appointed as a director or as managing director, prevented him from having any mandate or authority to operate any company bank account, to conclude any company contract or to dispose of or deal with any company asset, and that they should have informed Barclays as syndicate agent or Price Waterhouse Coopers (“PWC”) or KPMG as syndicate advisers of those facts.

[57]I am not persuaded by any of those allegations. It seems to me that the reasonable and probable response of Monuza and Zaurian to their knowledge about their brother’s previous convictions, if minded to do their duty, was to inform their fellow directors, and then to seek their advice, from the stand point of their greater business experience and independence, as to what to do.

[58]Furthermore, I doubt the practicality of Monuza and Zaurian either preventing Shaid from becoming managing director, or preventing him from having relevant bank mandates or authority. Lexi was, for all practical purposes Shaid’s organisation, so that an attempt by Monuza and Zaurian to take such steps would in my judgment simply have led to their removal. It is true that Lexi’s articles enabled the board to dismiss a director if at the same time dismissing him as an employee, but that does not impact significantly upon the practicalities of the matter.

[59]Nor does it seem at all obvious to me that Monuza and Zaurian owed a duty to Lexi to inform Barclays or its advisers of Shaid’s previous convictions, unless Lexi was itself under some obligation to Barclays to do so, such that breach of that obligation would have been contrary to its best interests. In that context, Mr Gresham’s evidence was that Barclays did not at the time, and does not now, ask questions of its prospective customers as to their (or their directors’) criminal records. No such questions were asked of Lexi at any time either prior to or during Barclays’ banker/customer relationship with Lexi, and the contract constituted by the loan facility agreement was not uberrimae fidei. I shall deal in due course with the question what probably would have followed Monuza and Zaurian’s report of Shaid’s previous convictions to their colleagues on Lexi’s board. It is convenient first to establish the totality of that which Monuza and Zaurian should have done. (ii). Loan Account

[60]I have already concluded, as part of my November judgment, that Shaid’s Loan Account was fictitious. It was necessary to address that question because of Shaid’s reliance upon it by way of defence to the misappropriation claims against him, and these defendants’ adoption of his defence: see paragraphs 64 to 82 of my November judgment. Lexi’s case under this heading is, in summary, that a proper appraisal of the company’s affairs by Monuza and Zaurian would have revealed to them that Shaid purported to have invested enormous sums by way of loan account, whereas their knowledge of the family’s financial circumstances would have shown them that this was impossible, such that the loan account must have been bogus. Armed with that knowledge, they should, it is said, have taken the same steps as are alleged in relation to Shaid’s previous convictions, and, in addition, informed the police or threatened some such steps sufficient to ensure his proper conduct.

[61]The earliest audited accounts in which Shaid’s loan account appears specifically identified as a Director’s Loan Account are those for the year ended 31st December 2003, signed by Zaurian on 26th August 2004. At note 19 it is identified in amount at £22.08 million odd in 2003 and £4.66 million odd in 2002. In the 2002 accounts the £4.66 million is the only entry under the heading “amount falling due after more than one year”, with a nil figure for 2001.

[62]It follows that a mere reading of the company’s accounts before approval by the directors would not have identified a large director’s loan account earlier than August 2004. Nonetheless, I am prepared to assume for present purposes that a reasonable discharge of Monuza’s and Zaurian’s duty to appraise themselves of a basic outline of the company’s affairs would have led to them being told, probably by Shaid, that the company’s business was supported by a loan account of his, in addition to bank lending. I have no reason to suppose that he would have lied to his sisters about the amount of his loan account.

[63]Both Monuza and Zaurian have admitted on the pleadings knowing at all material times that:

“There was no significant source of funds available to their family to advance to the company.”

They also knew that their father Mohammed had been an undischarged bankrupt since October 2001. In her cross-examination Monuza tried repeatedly to back-track on that admission by referring to Shaid and her father as successful businessmen with substantial property portfolios, and to Shaid as having wealthy business contacts both in the UK and abroad, mentioning the UAE and Saudi Arabia. I have little doubt that Shaid did acquire and manage a significant amount of residential property during the 1990s, particularly for letting to students, and that, before he was made bankrupt, Mohammed may have done the same. Nonetheless that activity came nowhere near explaining investment at the rate suggested by the loan account (e.g. £17.42 million in 2003 alone). In his closing submissions Mr Chaisty sought to explain the admission in the Points of Defence as relating to the resources of the Luqman family other than Shaid. That is clearly not the correct interpretation of the pleadings, and the admission was not withdrawn. More importantly, I did not in the end find that Monuza’s evidence carried sufficient weight to undermine it.

[64]I am not however persuaded that a comparison by Monuza and Zaurian of those two apparently conflicting pieces of information (that is the amount of the loan account and the absence of sufficiently large family resources) would of itself have satisfied them that the loan account was bogus. It would however have required them to ask searching questions of Shaid, before being reasonably satisfied as to the accuracy of the company’s accounts, at least for the financial periods from December 2003 onwards. The question therefore arises whether on the balance of probabilities Shaid would have been able to persuade them to their reasonable satisfaction that the loan account was legitimate.

[65]Shaid’s explanation to others, such as Mr Jewson and Barclays, was that the large investment represented by his loan account was derived from substantial family property assets built up over many years. Barclays and KPMG both knew of his father Mohammed’s bankruptcy by early 2005, and that fact does not appear to have shaken their faith in Shaid’s explanation as to the source of his investment. He would not have of course been able to offer that explanation of his investment to his sisters, because they would have known of its falsity. The question is whether they would probably have been satisfied (to an extent not reasonably requiring them to explain their concerns to their colleagues on the board) by some other necessarily false explanation.

[66]Mr Marshall’s submission on this point was that, if asked by either Monuza or Zaurian about his loan account, Shaid would simply have told them the truth. They were, he said, three dishonest members of a dishonest family, so that Shaid would have had no hesitation in revealing to his sisters that the loan account was both bogus, and an instrument in a colossal fraud. I consider that submission to be unrealistic. The hypothesis is that Monuza or Zaurian would have questioned Shaid, not as fellow conspirators, but as directors seeking to do their duty. Faced with such an approach, (a necessary hypothesis however improbable in fact), I think it inconceivable that Shaid would have taken his sisters into his confidence and revealed all. To do so would have been to expose himself to unnecessary risk, and his sisters to the thankless task of choosing between family loyalty and some form of whistle-blowing.

[67]Shaid has from time to time made considerable use of a dishonest attribution of very substantial payments to the credit of Lexi to funds paid to him by investors in Pakistan for onward investment by him into Lexi. As appears from paragraph 41 and following of my November judgment, it was the main plank in his attempt to explain why the Lloyds TSB Account was not a Lexi account, and he persisted in that explanation in circumstances which led him to be committed to prison first for 18 months and then, upon review, for 2 years for contempt of court. For present purposes, the relevance is not the gravity of his perjury, but the persistence with which he advanced that false explanation over a substantial period of time, and the trouble to which he went in concocting evidence in support of it, including the perversion of the course of justice arising from his fabrication of evidence from a Mr Cheema, the supposed Pakistani intermediary.

[68]In my judgment Shaid would have satisfied any questions from his sisters as to the authenticity of his loan account by a similar and equally false explanation that the funding for the investment represented by that account had come to him from investors abroad, in Pakistan or elsewhere. The critical question is whether he would have satisfied them to such an extent that it would not have been reasonably incumbent upon them to raise the matter with their colleagues on Lexi’s board, who would of course have recognised that Shaid had given two substantially different explanations as to the source of his investment in the company, both of which could not simultaneously be true.

[69]It is for the claimant to prove every aspect of its case on causation, and in my judgment, albeit on a fairly narrow balance, I am not persuaded that, after Shaid’s best endeavours to deal with any concerns expressed by his sisters about the loan account, they would still have been left in sufficient doubt as to require them to refer the matter to their colleagues. One thing that emerges from the sorry account of Lexi’s affairs with complete clarity, is that Shaid was a persuasive, sophisticated, charming and highly intelligent liar. On that issue, Mr Jewson’s and Mr Gresham’s evidence was in unison. Furthermore, the fact that Shaid was able to talk his way out of the tight corner constituted by having his misconduct in and before 2004, by then the subject of grave judicial findings, reported to Barclays by Lexi’s former auditors (as I shall describe in more detail in due course) speaks for itself. By comparison with the difficulties which he successfully evaded on that occasion, satisfying his sisters as to the genuineness of his loan account would in my judgment have been for him a relatively easy task.

[70]It follows that my construction of what, hypothetically, Monuza and Zaurian would have done in compliance with their duties in relation to Shaid’s fictitious loan account produces a nil return. They would without breach of duty probably have been fobbed off by lies from Shaid, as so many others were. (iii). Misuse of company funds on the UNB Account

[71]Lexi’s case under this heading is in two parts. Both parts are based upon the allegation that Monuza and Zaurian knew that the UNB Account was a Lexi account. From that starting point, it is first alleged that they should have known that the mere opening of that account involved Lexi in a breach of its obligations to Barclays under the facility agreement, so that they should have taken steps designed to prevent its opening, to bring about its closure, or to report the matter to their fellow directors, or to Barclays.

[72]That part of Lexi’s case depends critically upon the allegation that it was the duty of Monuza and Zaurian to appraise themselves of the detailed provisions of the Facility Agreement, which indeed contain a regime requiring Lexi in substance to operate its loan business through a series of Barclays’ accounts.

[73]Important as the facility agreement undoubtedly was for the successful carrying on of Lexi’s business, it was not in my judgment a duty of non-executive directors in the position of Monuza and Zaurian to scrutinise the terms and conditions of that facility agreement. In so far as Lexi’s proper compliance with that agreement at Shaid’s direction required supervision and scrutiny, (which it did), Monuza and Zaurian were in my judgment reasonably entitled to assume that with his substantial banking experience, Mr Davis would carry out that particular task. By contrast with their special family-derived knowledge of Shaid’s previous convictions, there was nothing in the circumstances in which they played a modest part in the opening of the UNB Account to suggest to them that Mr Davis was unaware of its existence, or to suggest that its opening might represent a breach of Lexi’s contract with its lending bank.

[74]Although not conclusive, I am comforted in my conclusion that the duties of Monuza and Zaurian as non-executive directors did not include a detailed perusal of the facility agreement by Mr Jewson’s frank acknowledgement, in response to my question, that he did not peruse it either, even though part of his specific function was to assist Shaid in developing Lexi’s business. Mr Jewson assumed from his great experience in the property business that some such restriction on accounts with other banks formed part of the terms of Lexi’s facility from Barclays, but of course neither Monuza nor Zaurian had that experience, despite some modest dabbling in residential lettings, largely managed for them by their brothers. Accordingly this limb of Lexi’s case fails at the outset.

[75]The second limb of Lexi’s case under this heading is that, knowing that the UNB account was a Lexi account, Monuza and Zaurian should fully have investigated its operation and obtained copies of bank statements, from which they would have discovered that substantial payments out of that account, for no apparent benefit to Lexi, were made to Shaid, Waheed, Mohammed, Imaan, Charyn, LPF and Mr McGarry. That, it is suggested, would have revealed prima facie misappropriations, about which Monuza and Zaurian would have taken appropriate steps, of the type which I have already described in relation to the loan account.

[76]Monuza and Zaurian both denied knowing that the UNB Account was a Lexi account, or having any reason whereby they should have known that fact. The UNB Account undoubtedly was a Lexi account: see paragraphs 28 to 38 of my November judgment. Furthermore, Zaurian was one of the three signatories to the account opening form for that account, which clearly identified it as a Lexi account. She did not give evidence to displace the natural inference that she must thereby have appreciated that the UNB account was indeed a Lexi account.

[77]As for Monuza, a case that she knew about the UNB account was not pursued, either in cross examination or in submissions. Mr Marshall maintained the submission that she ought to have known about it.

[78]The difficulty with this limb of Lexi’s case lies in the absence of any persuasive basis for the suggestion that non-executive directors in these defendants’ position were under a duty to scrutinise the operation of the UNB Account, or obtain bank statements in relation to it. Mr Jewson did not regard himself as being obliged to scrutinise Lexi’s bank accounts, or even to ask what bank accounts Lexi had. Furthermore, even if Monuza and Zaurian had thereby ascertained the payments to their brothers, father and other entities recorded in those bank statements, I am, again, not persuaded that Shaid would have found it difficult to give some false explanation of the payments sufficient to satisfy his sisters’ reasonable inquiries. Accordingly, this part of Lexi’s case fails for those reasons. (iv). Misuse of company funds on the Lloyds TSB Account

[79]In terms of structure, Lexi’s two part case under this heading is substantially the same as it is in relation to the UNB Account, but of course the facts relied upon for the allegation that Monuza and Zaurian knew that the Lloyds account was a Lexi account are different, as are the misappropriations from the account which it is alleged should have caused them to take preventative steps. Equally, both limbs of Lexi’s case fail, for the same reasons. In summary, I find that both Monza and Zaurian knew that the Lloyds TSB account was a Lexi account, but that they were under no obligation which, if performed, would have disclosed to them that the opening and use of the account was a breach of the facility agreement, that they were under no obligation to scrutinise the operation of the account and that, in any event, Shaid would have satisfied them as to its operation by plausible lies.

(v) Unlawful loans

[80]Here, Lexi’s case is that Monuza and Zaurian knew that Imaan and Serton were companies beneficially owned by Shaid, so that loans made by Lexi to those two companies were made in contravention of section 330 of the 1985 Act, with the consequence that they should have taken the same steps in response as is alleged in relation to the fictitious loan account. There is persuasive evidence that Zaurian must have known that Imaan was beneficially owned by Shaid. She was Imaan’s company secretary, and even personally guaranteed loans made by Allied Irish Bank to Imaan, on the basis (according to one of her witness statements) that if they were called upon Shaid would take care of it. Zaurian has not given evidence to displace the obvious inference arising from those materials, to the effect that she knew that Imaan was beneficially owned by Shaid.

[81]There is a less powerful documentary case that Monuza knew that Serton was beneficially owned by Shaid, arising from the fact that in June 2005 Monuza signed a fax instruction on behalf of Serton, thereby identifying herself as its agent. The inference is that she appreciated that the company was family controlled. I was not persuaded by Monuza’s evidence to the contrary.

[82]Lexi’s case depends upon showing that Monuza’s and Zaurian’s fiduciary duties required them to appraise themselves of loans being made by Lexi to either of those companies and that if they had reached the stage of knowing facts suggesting a prima facie breach of section 330, the result would have been that they were duty bound to take steps which would have revealed Shaid’s misconduct. The question whether the first of those requirements is met depends upon the extent to which non-executive directors should have studied Lexi’s Loan Book. I consider that they should have made some study of the Loan Book, since it lay at the heart of any understanding of the company’s business. Even a cursory study would probably have revealed loans to Imaan and Serton, and that this would therefore have revealed to a director in their position cognizant of the law, that there was a prima facie infringement of section 330. This would have required a dutiful director to raise the matter with the board, but not to inform Barclays, still less the police (whatever may have been their duties as citizens). I shall address later the probable consequences of a report to the board. (vi). Voidable transfers of property

[83]The case under this heading is similar to that under heading (v) and depends upon showing that Manuza and Zaurian ought to have appreciated that property sales to Imaan, Serton, Chartley and Monaro contravened section 320, on the basis that Imaan, Serton and Monaro were beneficially owned by Shaid and that Chartley was beneficially owned by Zaurian herself.

[84]Here again, there is powerful documentary evidence, which Zaurian has not given oral evidence to challenge, that she was indeed the beneficial owner of Chartley, and some documentary basis for a finding that she knew that Monaro was beneficially owned by Shaid. I have already held in my November judgment that these were connected companies for the purposes of section 320. Again, Monuza knew of the relevant connection between Serton and the family: so that a director in their position cognizant of the law would appreciate that a property sale to one of these companies prima facie contravened section 320. Monuza executed transfers by Lexi of properties by way of sale to Serton, and Zaurian did the same in relation to the sale of one property by Lexi to Monaro.

[85]In this respect, section 320 is only infringed if the relevant transaction is not first approved by a resolution of the company in general meeting. It is a shareholder protection provision. In the present case it seems to me clear that the duty of a director who is appraised of an intended breach of section 320 would first be to seek shareholder consent. Plainly, that would require discussion at board level, but I can see no reason why it should have required a report to Barclays, still less, as alleged by Lexi, a report to the police. If the breach of section 320 had occurred before Monuza and Zaurian became aware of it, then the question for the board would be whether the transaction could be ratified by shareholders after the event, and that would have called for a discussion at board level, probably requiring taking of legal advice, in relation to Lexi’s solvency at the material time, for reasons set out in paragraphs 191 to 193 of my November judgment. (vii). Conclusions as to what Monuza and Zaurian should have done

[86]The outcome of this necessarily lengthy analysis is, in my judgment, that due compliance with their duties as directors in relation to the matters alleged would have required Monuza and Zaurian to raise with their colleagues on Lexi’s board first, Shaid’s previous convictions , as matters critically relevant to the need for his supervision, and secondly, some loans and transactions with connected companies which suggested contraventions of section 330 and 320. I am not persuaded that Monuza and Zaurian’s duties to Lexi required them to report any of those matters to Barclays, or its advisers, still less to the police. I can see no reason why a reasonable appreciation of Lexi’s best interests would have required any of those additional steps to be taken. (viii). What then?

[87]The next stage in the causation analysis is to determine what, on the balance of probabilities, would have been the consequence of Monuza and/or Zaurian reporting to Lexi’s board the matters which I have summarised above. Would Shaid have been brought under effective supervision and control? Alternatively, would those matters have been reported to others with power to take effective steps and, if so, would steps effective to prevent the loss, or any further loss, have been taken, and if so, when?

[88]Monuza and Zaurian’s colleagues on the board, other than their brother, were Mr Hill, Mr Davis and, but only from November 2004, Mr Jewson. In this context it is pertinent to bear in mind the relevant chronology. Zaurian was appointed a director of the company in June 2001. Monuza and Mr Davis were both appointed on the 14th October 2003. Mr Hill and Mr Jewson were both appointed on the 15th November 2004. Mr Davis resigned on 24th February 2006, and Mr Jewson resigned on 27th April 2006. The first relevant unlawful loan to either Imaan or Serton was that made to Imaan in January or February 2004. The first loan to Serton was in October 2005. The first unlawful property transfer to any of Serton, Chartley or Monaro was that to Serton in October 2005. The cumulative loss-making effect of Shaid’s misappropriations had reached £5.19 million by the time of Monuza’s and Mr Davis’s appointments. It had reached £18.48 million by the time of Mr Jewson’s and Mr Hill’s appointments. The cumulative total passed the £10 million mark in May 2004, the £20 million mark during March 2005 and the £30 million mark during December 2005. It passed £40 million by June 2006.

[89]Much the most important piece of information calling for communication to the board by Monuza and Zaurian was that relating to Shaid’s previous convictions, and this was known to each of them throughout their respective times as director. At the latest therefore, it should have been reported to Mr Davis upon his appointment in October 2003, and again to Mr Jewson upon his appointment in November 2004.

[90]In his witness statement admitted as hearsay evidence without cross-examination, Mr Davis gave this account of what would been his response had he learned of Shaid’s criminal record: I have no previous knowledge of Shaid’s criminal record. Until I saw the certificates of conviction, these offences had not been brought to my attention. I am absolutely astounded to discover the nature of these convictions. As a former banker, I am particularly aware of a borrower’s duty to disclose such convictions to a potential lender and therefore I would have immediately sought to inform Barclays, who I knew to be the head of the syndicate of banks, which made available the Company’s facility that assisted in advancing its business. I would have also taken further steps to ensure that the board of directors would have been made aware of this position so that they could facilitate the removal of Shaid as director and/or managing director and that any mandate or authority which Shaid had been given to operate the Company’s bank account had been removed. In so far as the board was not prepared to take any action which inhibited Shaid’s control as a director, I would have resigned from the board of directors, notified Barclays and notified the Company’s auditors.”

[91]In a similar vein, Mr Jewson said this in his witness statement:

“Until I saw the certificates of conviction, I was not aware of Shaid’s criminal record; none of the offences mentioned above were brought to my attention during my period as a director of the Company, including by Monuza or Zaurian. I was horrified to discover that Shaid had previous convictions. Further, had I become aware of these offences during my tenure as a non executive director, I would have immediately sought legal advice from my solicitors, and subject to that advice would have referred the matter to all of the Company’s directors, summoned a board meeting, and taken steps to ensure that Shaid was removed as a director and/or managing director and that any mandate or authority which Shaid had which enabled him to operate the Company’s bank accounts was removed from him so that he could no longer deal with the Company’s assets. In addition, if so advised, I would have required that the matter was brought to the attention of the auditors and Barclays, whom I knew to head the syndicate of banks which made available to the Company the facility which enabled it to advance bridging loans. If the Board was not prepared to take this action I would have resigned and sought to ensure that the auditors and Barclays were fully aware of the position.”

[92]In cross-examination of Mr Jewson, it became clear to me that his witness statement represented an over-elaboration of a more simple approach. He said that his desire to protect his reputation from being soiled by working alongside someone with convictions and imprisonment for dishonesty would have led him to seek to resign as soon as possible, so as to have nothing more to do with Shaid. Nonetheless he made clear his understanding that, as he put it:

“If I had smelt a rat … that would not have allowed me just to walk out of the door, I would have had to [do something] to protect the various stakeholders in the business.”

By the end of his cross-examination his evidence was that he would have sought to resign at the earliest opportunity, but that, first, he would have taken advice from his solicitors (probably Mills & Reeve in Norwich) as to what his duties required of him in the circumstances, and followed that advice. Again, as he put it:

“If I had discovered that [Shaid’s previous convictions] I should have been extremely perturbed and would have wished personally to have nothing to do with it, and therefore I think I would have gone to lawyers and said what are my duties, can I resign or do I have to do things.”

Later, in re-examination, he said this:

“My reputation is the only thing that counts for me and I do not wish my reputation to be sullied, as it now has been, by associating with dishonest people …”

And, slightly later:

“I would have wanted to get out of the company as quickly as I could and I would have taken advice about what my duties in getting out of the company on the facts known to me at that point in time.”

[93]I have no hesitation in accepting Mr Jewson’s oral evidence on this hypothetical question and, to the extent that it conflicts with his witness statement, accepting his oral evidence in preference to his written evidence.

[94]As for Mr Davis’s written evidence I have to be more cautious, since he was not cross-examined. In particular, I have reservations with Mr Davis’s evidence about “a borrower’s duty to disclose such convictions to a potential lender” as the basis for his belief that he would have immediately informed Barclays. As I have said, Mr Gresham’s evidence was that neither Barclays, nor banks in general, make inquiries of potential borrowers about their (or their directors’) previous convictions.

[95]More generally, I am not persuaded by either Mr Davis’s or Mr Jewson’s written evidence that either of them would have taken steps to remove Shaid as a director, or to deprive him of his authority to run Lexi’s business. Shaid was, to both Mr Davis and Mr Jewson, the prime mover behind Lexi and the originator and controller of its business. Lexi was, as Mr Jewson put it, Shaid’s organisation. Furthermore, I doubt that either of them would have considered it practicable to bring Shaid under the level of rigorous control sufficient to reduce the risk of dishonesty in his handling of Lexi’s business to an acceptable level. Shaid effectively dominated Zaurian’s rights as shareholder, as I have described.

[96]In my judgment it is more likely that if appraised of the information that Shaid had served a substantial aggregate period of imprisonment for offences in connection with his business activities, each of them would have sought to resign as soon as possible, to protect their reputations. The critical question is whether they would have passed on that information, and if so, to whom. So far as Mr Jewson is concerned, that resolves itself into the question what he would have been advised to do. As for Mr Davis, his previous career in banking might have led him to inform Barclays, regardless of advice, even if he had sought it, always assuming (and the contrary has not been suggested) that he was honest, and not in any respect improperly in cahoots with Shaid.

[97]No doubt, before taking any other steps, both Mr Davis and Mr Jewson would first have spoken with Shaid himself. Again, Shaid would I am sure have endeavoured to put some dishonest gloss on the facts, by way of mitigation. I am satisfied that this would not have worked with Mr Jewson, not least because his solicitors would, if necessary, have advised as to appropriate checks. I am less certain in relation to Mr Davis, but on balance and in an evidential near-vacuum, I do not think that he would have been persuaded to do nothing either.

[98]The question remains, to whom would Mr Jewson and (had he sought advice) Mr Davis had been advised to pass on what they had learned about Shaid’s criminal background. In my judgment they would have been advised to inform Lexi’s auditors who, as statutory watchdogs (rather than bloodhounds) had a supervisory duty in relation to the company’s accounts. In my judgment, the company’s interests could only have been served by its auditors being appraised of matters calling for the maximum diligence in the fulfilment of audit checks. That information would also have been relevant to the extent to which the auditors could properly rely upon explanations as to the company’s affairs provided by Shaid.

[99]I do not think that Mr Jewson or Mr Davis would have been advised to pass on that information to Barclays. Most questions as to whether a director should or should not take a particular step are best answered by reference to the question which of the available alternatives would best serve the interests of the company. Barclays was, by the time Monuza and Mr Davis became directors in October 2003, already the company’s principal lender pursuant to a facility agreement made in July 2003 providing for lending up to £50 million. By the time of Mr Jewson’s appointment in November 2004, the lending limit had been increased, in April that year, to £100 million on term loan and £20 million on overdraft. On the assumption that Monuza and Zaurian would have informed each of them of their brother’s previous convictions at the first available board meeting after their respective appointments, there would have been nothing to show either Mr Davis or Mr Jewson that Shaid had in fact been guilty of any dishonest misappropriations of assets from Lexi itself. Lexi had throughout its brief existence enjoyed unqualified audit reports and by November 2004 it had been routinely inspected by PWC on the lending syndicate’s behalf on no less than three occasions, in February, March and September 2004. Although those reports expressed certain qualifications about the quality of Lexi’s internal controls, the general picture which they presented was fairly summarised by Mr Jewson during cross-examination as demonstrating steady improvement, consistent with the growth in the company’s business. In the meantime, Shaid appears to have successfully concealed from both Mr Jewson, Mr Davis and from the lending syndicate the reasons for the resignation in January 2004 of Lexi’s then auditors Horwath Clark Whitehill (“HCW”), about which I will have much to say in due course.

[100]Whereas informing Lexi’s auditors might have appeared to solicitors advising Mr Davis or Mr Jewson as a sensible way of sensitising an independent watchdog of the need to conduct rigorous audit checks in order to ascertain whether Shaid was succumbing to his earlier propensity to dishonesty, without any corresponding disadvantage to the company, reporting Shaid’s previous convictions to Barclays carried with it the obvious threat of destabilizing or destroying the company’s relationship with its lending bankers, with potentially catastrophic effects upon its business. Against that, Mr Davis or Mr Jewson might have been advised (or might have appreciated without the need for advice) that only Barclays, among the company’s stakeholders and officers, had the practical ability to require Shaid to submit himself to rigorous day to day scrutiny, under the threat that he would otherwise be put out of business. The difficulty with that analysis (as is exemplified by what subsequently occurred) is that the day to day monitoring of an entrepreneurial controlling director of a customer company is by no means an easy task for a lending bank, nor one conducive to a constructive relationship. Both Mr Davis, Mr Jewson and their advisers would probably, if informed of Shaid’s previous convictions, realistically have concluded that passing that information on to the bank would set in motion a process ultimately destructive of the company’s ongoing business.

[101]Faced with those alternatives, I am not persuaded that Mr Davis or Mr Jewson would have been advised to report Shaid’s previous convictions to Barclays, at least in the absence of any evidence known to them that Lexi’s solvency was at risk, such as to make its creditors its principal stakeholders. Nothing in the company’s audited accounts, or in PWC’s periodic reports, suggested that this was so, (although it probably was in fact, due to Shaid’s concealed fraud). By the same token, it would not have been the duty of either Monuza or Zaurian to do so either.

[102]It follows in my judgment that the probable consequence of a decision by Monuza or Zaurian to report their knowledge of Shaid’s previous convictions to their fellow directors would have been only that those directors would probably have looked for a way to resign, and that they would have passed on that information to Lexi’s auditors before leaving. Lexi did not either plead or engage with any analysis of the question of what the auditors, thus informed, would themselves have done, or whether that information would have led the auditors to adopt sufficiently rigorous audit checks to unmask Shaid’s fraud sooner than it was in fact unmasked. No witness was called from any of the three audit firms successively engaged by the company, nor was the court provided with any material from which to conduct its own analysis of that hypothetical question. For present purposes, the critical issue is whether and if so when information about Shaid’s previous convictions, once communicated to the auditors, would have reached Barclays as the company’s principal lender (until April 2004) and syndicate leader thereafter.

[103]Considerable light is thrown on that issue by the available evidence as to how HCW, who had been Lexi’s auditors until January 2004, did respond to aspects of Shaid’s misconduct which actually came to their attention. The relevant information is to be found in HCW’s Statement of Circumstances connected with their resignation, dated 29th January 2004, treating it as admissible hearsay evidence which has not been challenged by anyone other than Shaid himself (as I shall describe in due course). His challenge may safely be rejected, as has every other aspect of his wholly unsuccessful attempt to justify his conduct.

[104]The Statement of Circumstances stated that Lexi had, at Shaid’s direction, sought to register itself for VAT, with the stated intention of making a taxable supply by undertaking a residential property development, so as to obtain a basis for reclaiming input taxes, otherwise unavailable to a company engaged merely in the provision of bridging loans. For that purpose Shaid had informed HCW that Lexi was in the process of demolishing and rebuilding a property known as 27 Willoughby Road, but he initially supplied builder’s invoices evidencing only a refurbishment rather than a rebuilding. On it being pointed out by HCW that refurbishment rather than new building was insufficient for VAT purposes, Shaid then stated that the invoice must have been made out incorrectly, and undertook to provide a correct replacement invoice. In the meantime, in December 2003 HCW prudently inspected the exterior of 27 Willoughby Road and discovered that there was no evidence of the building having been demolished or rebuilt. Thereafter on 15th January 2004 HCW were supplied with an invoice for £830,000 odd dated 4th June 2003 apparently for the demolition and rebuilding of 27 Willoughby Road, together with apparently relevant architect’s drawings of the intended new building.

[105]HCW then faced Shaid with the fruits of their research, only to be told that there had been a mistake, and that the building which had been demolished was 32 Willoughby Road. HCW then inspected 32 Willoughby Road, which appeared to be a Victorian building with no evidence of recent demolition or reconstruction. Despite this Shaid then produced a letter from the builders purporting to state that their earlier invoice wrongly misdescribed the subject matter of their activities at 27 Willoughby Road. These exchanges took place in December 2003 and January 2004, and were followed by Shaid presenting HCW with a letter from Lexi dismissing them as auditors with effect from 26th January 2003. Their Statement concluded as follows:

“In the light of the circumstances described above, we do not believe we have received satisfactory explanations of the questions that we raised with the company. We, therefore, believe we have not received the information and explanations we were entitled to under section 389A(1) CA 1985 and in particular information and explanations which would have reasonably have been required from the officers of the company for the performance of our duties as auditors. Accordingly, we have resigned from our position as auditors of the company on 29th January 2004. We wish to bring the above matters to the attention of members and creditors of the company.”

[106]Although politely phrased, the Statement of Circumstances shows that HCW had caught out Shaid in the commission of an attempted VAT fraud, and that he had upon their inquiry attempted to cover his tracks, either by procuring self-serving letters from builders in cahoots with him or, more simply, by fabricating those letters.

[107]I consider it very probable that, if by then aware of Shaid’s previous criminal record, HCW would have made reference to it in their Statement of Circumstances. It is of course possible that, had HCW been appraised of Shaid’s criminal record much earlier, an occasion would have arisen for their reporting it to the company’s creditors earlier than they did, but in the absence of any evidence from them, or other analysis of that question, it is not possible for me to conclude that Shaid’s criminal record would have been the subject of a report to creditors earlier than in January 2004.

[108]HCW’s Statement of Circumstances did not however come to the attention of any of Lexi’s creditors, or even of its directors other than Shaid himself, before November 2004. In that context I accept Mr Jewson’s evidence that he was entirely unaware of it at any time while he was a director, and I have no reason to suppose that Mr Davis’s similar denial, although untested by cross-examination, should be disbelieved. I also accept Mr Gresham’s evidence that Barclays was unaware of the Statement of Circumstances, or of the matters reported in it, until the Statement was sent under cover of a letter from HCW dated 12th November 2004.

[109]Shaid achieved this remarkable cover-up of HCW’s resignation statement by an application under section 394(6) of the Companies Act 1985, pursuant to which:

“If the court is satisfied that the auditor is using the statement to secure needless publicity for defamatory matter− (a) it shall direct that copies of the statement need not be sent out, …” (a) it shall direct that copies of the statement need not be sent out, …”

[110]Shaid’s case was (necessarily) that the contents of the Statement of Circumstances were untrue. To make that case good he made a witness statement and produced further documents. The proceedings were not finally determined until 27th October 2004, before HH Judge Howarth, sitting as a deputy High Court Judge in the Manchester District Registry. By that time, having successfully gagged HCW while negotiating a doubling of Lexi’s loan facility, and the syndication of its loans, Shaid had caused Lexi to abandon the claim, and the issue before Judge Howarth was whether HCW, as defendant, should obtain an order for indemnity costs, in relation to which Lexi was not represented, nor Shaid present at the hearing, although both the court documents and HCW’s evidence and skeleton argument had been duly served.

[111]After hearing submissions from counsel for HCW, and thoroughly reading the documents, Judge Howarth made an order for indemnity costs, upon the basis that Lexi’s claim under section 394(6) was, from start to finish, an abuse of process. He said this:

“ It seems to me that these proceedings were as clear an abuse of the process of this court as it would be possible to find. This case is a very much stronger case than Jarvis v. Price Waterhouse Cooper was. Whatever may or may not be the case with Jarvis, it was not a case of dishonesty, and certainly not a case where fraudulent documents were being created, was certainly not a case where there was any form of perjury. It seems to me that this is as clear a case involving those as any I have come across for a long time. In the circumstances I have no hesitation in awarding indemnity costs.”

He continued:

“I have invited a representative of the Crown Prosecution Service to sit in the back of this court. It seems to me that there are a number of criminal offences which a judge, in exercising his public duty, simply cannot turn a blind eye to. I am proposing to pass over to the Crown Prosecution Service the two bundles of documents that have been lodged. It may be that they will in due course think it right to bring proceedings for a number of criminal offences, including perjury against Mr Luqman.”

[112]Freed from the gag constituted by the existence of those proceedings, HCW reported to Barclays on 12th November by letter, including both a copy of their Statement of Circumstances and a copy of the transcript of the proceedings before Judge Howarth, including his judgment. I have little doubt that, had HCW been aware of Shaid’s previous convictions, they would have drawn attention to them at this stage.

[113]I conclude therefore, at the end of a necessarily long and tortuous analysis, that if Monuza or Zaurian had complied with their duty to inform their fellow directors of Shaid’s previous convictions, those would probably have come to the attention of Barclays in mid-November 2004, but probably not earlier.

[114]The next question is what would Lexi’s non-family directors have done if the unlawful loans and property transfers had been reported by Monuza or Zaurian. Had she studied Lexi’s Loan Book, Monuza would have known of a single unlawful loan to Imaan at some time in the first half of 2004. If it was on commercial terms, the board should have considered whether it might qualify under s. 335(2), which permits certain loans to connected persons in the ordinary course of business. If not, and if Shaid was not prepared to rectify the matter, then I would expect the independent directors to have reported it to the auditors, just as in relation to Shaid’s previous convictions, before resigning.

[115]All the other loans and property transactions which Monuza or Zaurian should have realised were unlawful occurred after the date when the independent directors would have resigned on account of the disclosure of the previous convictions. It therefore becomes a matter of pure speculation when (if at all) they would have come to the attention of Barclays. In any event I consider that infringements of section 320 would have been regarded as easily curable by shareholder ratification, on the basis that the board had at the time no reason to doubt Lexi’s solvency.

What would Barclays have done?

[116]It is tempting to conclude, without any in-depth analysis, that upon being informed of Shaid’s previous convictions, Barclays would have done everything in its power to bring Shaid under control. That is, more or less, what both Mr Gresham and Mr Green urged that I should conclude, in their evidence. But the hypothetical question what Barclays would have done if better informed, needs to be addressed by reference to a full appreciation of what Barclays did, or rather, failed to do, with the information which it received from HCW in mid-November 2004. In bare outline, although aware by the end of January 2005 that there were breaches of the Facility Agreement sufficient to enable it to demand immediate repayment and therefore to take control of Lexi, Barclays in fact chose to pursue a cooperative approach with Shaid, the consequence of which was to leave him in unfettered and unsupervised control of Lexi’s affairs until administrators were finally appointed in October 2006.

[117]It might be thought at first sight surprising that a syndicate of the UK’s largest clearing banks, advised in detail by corporate restructuring/insolvency experts in a pre-eminent firm of accountants should have adopted this course, when it is borne in mind that the obvious import of HCW’s November letter and its enclosures was that Shaid had, during the whole of the process of the negotiation of the syndication of its facility, and a doubling in the lending limit, successfully concealed from Lexi’s creditors, including Barclays, an auditor’s statement showing that they had been purportedly dismissed after discovering an apparently serious fraud by Shaid, and that this concealment had been achieved, to the satisfaction of a judge sitting in the High Court on an application duly notified to Lexi, by the combination of abuse of process, perjury and forgery. It may seem all the more remarkable that Barclays adopted a policy of cooperation with Shaid at a time when, after permitting a brief visit by KPMG to the company’s offices, he had then terminated that permission on 18th January 2005, such that he was not fully cooperating in fact. That summary raises the most serious question whether the communication to Barclays, in addition to the very serious findings of Judge Howarth, of the fact that Shaid had previous convictions in the 1990s, would have made any difference. It is necessary therefore to describe in some detail the circumstances in which Barclays decided not to take steps to bring Shaid under control.

[118]The person responsible for the management at Barclays’ end of its relationship with Lexi at the time of its receipt of the 12th November letter from HCW was a Mr Marcus Palmer. It is evident that, prior to this date, he had failed even to apply and maintain the modest controls over Lexi available to Barclays pursuant to the Facility Agreement, pursuant to which redemption monies reclaimed by Lexi from its borrowers should all have been paid into a designated receipts account, rather than, as had become habitual, into its ordinary overdraft account with the bank. This was one of Mr Palmer’s apparent failings which later caused his suspension from duty while under disciplinary investigation. He later resigned, I infer, under a cloud. The result was that he did not give evidence.

[119]Mr Palmer followed up his receipt of HCW’s letter by an immediate telephone discussion with Shaid (the contents of which have not been revealed) and then a lengthy email containing a number of searching questions, prompt response to which was said to be relevant to the then proposed increase in the lending limit to £150 million, and also to a continued funding line of £100 million. Shaid was, in particular, told that Mr Palmer thought it prudent that there should be a “full, transparent, detailed audit trail on the source of all monies that had entered the company either as equity or as directors’ loans.” A meeting to review Shaid’s response was proposed for early December.

[120]Before this could take place, Mr Palmer was replaced as manager of Barclays’ end of the relationship by Mr Gresham, from its Business Support Department, and Lexi was at the same time placed on Barclays’ “Early Warning List 2”, which meant that its business was regarded as being at risk, that Barclays had serious concerns about it, but not, at that stage, an expectation that it would lose money on its lending.

[121]The matter was reviewed at a meeting between representatives of the syndicate banks on 16th December, at which it was decided to appoint KPMG to investigate the state of Lexi’s Loan Book. At the same time Barclays instructed solicitors (DLA) to advise, in particular on the question whether an event of default under the facility agreement was available to the banks, to enable the lending to be demanded early, and enforcement measures taken, if that became the preferred strategy.

[122]The handling of the agreed response lay in the hands of Barclays, as syndicate leader, and it retained KPMG. Notwithstanding Mr Palmer’s earlier reference to the need for a full audit on the source of all monies entering Lexi, KPMG was instructed to investigate only the Loan Book. Quite extraordinarily in my view, Barclays did not reveal to KPMG the reason why it had been retained. It emerged only from the cross-examination of Mr Green (who gave evidence after Mr Gresham), that all KPMG knew about the HCW affair was that HCW had resigned as auditors, and that there had been some disagreement between HCW and the company about VAT. KPMG were left entirely unaware that the “disagreement” related to a suspected fraud by Shaid, and were wholly unaware of Judge Howarth’s findings about Shaid’s forgery and perjury, or of his successful gagging of HCW for most of 2004. When asked by Mr Chaisty QC whether he knew why KPMG had been thus kept in the dark by Barclays, Mr Green said that he could not comment. When I asked him why he could not comment he prevaricated. By that time Mr Gresham, who could have provided an explanation, had left court, and he was not recalled.

[123]Mr Gresham’s evidence did however reveal that he had at some time in December begun conversations with Shaid about the HCW affair, from which he understood that Shaid’s response was that HCW had resigned as a result of a personal disagreement between Shaid and a partner in that firm, including issues of conflict of interest, that the matters raised in the Statement of Circumstances had been remedied, and a subsequent unqualified audit report obtained (as it had been in fact). Mr Gresham said that Shaid had “explained away the judge’s comments on the basis that this was only a costs hearing which he did not consider it necessary to attend”, so that the judge had not heard Shaid give evidence, or heard his side of the case.

[124]On the basis of that wholly inadequate but, in the event, highly successful piece of prevarication by Shaid, Mr Gresham and his team at Barclays appeared to have taken the view that Judge Howarth’s findings should be regarded as mere “allegations” about which Barclays could not form a view, one way or the other, in the light of Shaid’s denial of them. They therefore regarded Barclays’ previous trust in Shaid’s integrity as having been put into question, but not destroyed. In the meantime, Mr Palmer’s searching questions had been referred by Shaid to Lexi’s solicitors Howard & Howard, who conducted a correspondence with DLA which, so far as I have been able to ascertain, led to no conclusive result. Privilege was claimed throughout in relation to DLA’s advice to Barclays. There was no attempt to investigate the sources of monies entering Lexi, as Mr Palmer had told Shaid there should be.

[125]One can only marvel at the manner in which Shaid must have employed his formidable skills of charm and fraudulent deception during those conversations. The objective reality was that Shaid, through Lexi, had been given every opportunity to challenge HCW’s case deployed at the hearing before Judge Howarth by way of witness statement and skeleton argument, all served on Lexi in advance, and that Shaid chose not to do so. The result was that, faced with judicial findings which ought, objectively, to have caused Barclays’ prior faith in Shaid’s integrity to have been wholly destroyed, Barclays nonetheless chose to treat that issue as undecided, and to leave him in wholly unsupervised control of Lexi’s affairs for the best part of two further years.

[126]Barclays made no attempt to ascertain the understanding of Lexi’s other directors, who by then included both Mr Davis and Mr Jewson, about the HCW affair. Had it done so, it would have ascertained that Shaid had managed so completely to deceive his own board that they were, even after HCW revealed the truth to Barclays in November, and remained thereafter, entirely unaware of any aspect of it. Neither Mr Jewson nor (according to his witness statement) Mr Davis had any knowledge of the attempted VAT fraud revealed by the Statement of Circumstances, or of Shaid’s successful gagging of HCW, or of the proceedings which culminated in Judge Howarth’s judgment.

[127]It is significant mitigation of what in an internal memorandum Lloyds TSB later described as Barclays’ “relaxed attitude” that there were indeed unqualified audited accounts of Lexi prepared by respectable accountants (KLSA) and signed off in August 2004, in relation to Lexi’s year ended 31st December 2003. Nonetheless, there is no evidence that Barclays made any inquiry of KLSA whether it had received HCW’s Statement of Circumstances, and if so what its inquiries, if any, had been in relation to the attempted VAT fraud. Although no evidence from KLSA was forthcoming, I infer that Shaid successfully concealed HCW’s Statement of Circumstances from KLSA as well.

[128]KPMG began its limited investigation by visiting Lexi’s offices shortly before Christmas 2004, with further brief visits in early January 2005 but, on 18th January, Shaid refused then further access to Lexi’s offices or documents, complaining that Lexi’s new auditors (by then PKF) were due to start their work on the accounts for the year ending 31st December 2004, and that to have two firms of accountants in the offices at the same time would be unduly disruptive. By this time KPMG had uplifted or copied most but not all of the office files relating to the fifty loans chosen for investigation out of Lexi’s Loan Book. Thereafter KPMG’s investigation was limited to the review of those files at their own offices with such assistance from publicly available records (for example at HM Land Registry) as they could obtain.

[129]Barclays appears to have done nothing to protest this obvious lack of cooperation on Shaid’s part. It had by then been advised that there existed a solid basis for relying upon defaults by Lexi under the terms of the Facility Agreement, so that it was in a position to call the tune, if it wished to do so.

[130]KPMG proceeded rapidly towards a conclusion of its investigation of the sample loans from the Loan Book, constrained both by its exclusion from Lexi’s offices, and from any contact at all with Lexi’s management (including Shaid himself) for the purposes of obtaining explanations of the incomplete material found during their brief visits to Lexi’s offices. They expressed their findings in a series of provisional draft reports between 17th January and 11th February 2005, and by giving advice orally at one or more syndicate meetings. Their findings revealed a disquieting absence of complete security documentation in Lexi’s files, leading to their advice that if the syndicate chose to enforce its rights by appointing receivers or administrators, the incoming office-holders would find if very difficult adequately to enforce Lexi’s rights against its borrowers, those being the principal rights to which the lending syndicate would need to have recourse in making a significant recovery. Furthermore, KPMG’s findings revealed that, in flagrant breach of its obligations under the Facility Agreement, Lexi had been lending not merely on short-term bridging loans, but on an extended basis, to fund speculative property transactions and developments.

[131]KPMG offered a range of possible ways forward, which may be broadly divided into two categories, using their own headings “cooperative/consensual” and “enforcement route”. Their advice was firmly in favour of the cooperative/consensual route, mainly because they anticipated (correctly as it turned out two years later) that a hard line enforcement route would lead to an absence of cooperation by management, and a risk that, in particular in relation to suspected loans by Lexi to parties connected with Shaid, steps would be taken positively to hinder the bank’s recoveries. They advised that the return obtained from an enforcement route might be as low as 25p in the pound, on a worst case analysis.

[132]KPMG were, as I have said, unaware of the circumstances which had led to their appointment, and therefore they understandably under-emphasised the risks, which ought nonetheless to have been obvious to Barclays, of leaving Shaid in control during any period of cooperation. The most that was said by way of advice about those risks may be ascertained from the following extract from their draft report dated 27th January 2005:

“ Any delays to allow time to cooperate increase the risk of ‘leakage of value’.  Our experience to date indicates that management attitudes would have to change considerably to achieve cooperation.”

[133]By ‘leakage’ it is apparent both from the reports and from Mr Green’s evidence that KPMG had in mind deterioration in the value of the security due to inefficient management at Lexi, rather than fraud, although aspects of the latter were not entirely ruled out as a theoretical possibility.

[134]Mr Green was asked in cross examination how, if at all, knowledge of Judge Howarth’s findings might have affected KPMG’s advice to the syndicate. He said that it “could” (rather than would) have made a difference, but that there were information gaps in the syndicate’s knowledge about Lexi’s affairs that might better have been filled by taking the cooperative approach, in preference to immediate enforcement. He did not say that knowledge of Judge Howarth’s findings would have led to KPMG advising in favour of enforcement.

[135]Shaid was in the meantime doing his skilful best to ensure that Barclays chose the cooperative rather than the enforcement route. He made noises about a complete re-financing and, in the meantime, proffered a property which he described as owned by a company of his as additional security, which appeared to Barclays at the time (on valuation advice) to be worth a potential £30 million. That property had to Barclays’ knowledge been financed by a loan of £6.7 million from Lexi to Shaid’s company Ten Acre Limited by a transaction plainly in breach of s.330, and there were inadequate security documents in relation to the loan. It was therefore to Barclays’ knowledge a large unlawful loan, but this does not appear to have increased Barclays’ perception of the risks inherent in leaving Shaid in control.

[136]With these inducements, and with the support of its partner HBOS, Barclays chose the cooperative route, pursuant to which it sought to restructure the syndicate lending to take account of the fact that Lexi had on-lent a substantial part of it otherwise than on bridging loans. KPMG’s investigation was terminated, the previous periodic inspections by PWC were not reinstated, either by PWC or KPMG, and Barclays continued to rely upon the production of unqualified audited accounts for Lexi, as in fact subsequently occurred.

[137]Mr Gresham described this as having been a “finely balanced decision” between cooperation and enforcement. In my judgment, having looked in particular at the whole of the KPMG series of reports, and bearing in mind that Barclays did not at that stage make any formal provision in its accounts reflecting any expected (rather than merely possible) loss on its lending to Lexi, the decision does not appear to me to have been finally balanced at all. Barclays proceeded on the basis that it persuaded itself that the cooperative route would probably produce a 100% recovery, in light of advice that the enforcement route might produce as low as a 25% recovery. On that analysis, the choice was clear.

[138]The only sense in which it seems to me the decision was finally balanced is that Barclays’ other syndicate partner, Lloyds TSB, vigorously opposed it, favouring the taking of a much tougher line with Lexi, and on the basis of its own perception that Shaid’s conduct had entirely destroyed any prospect of any further trust in his integrity. Lloyds’ tougher attitude appeared in early 2005 to have given rise to a perception on the part of Barclays (and, I assume, HBOS) that Lloyds might break ranks and pursue an enforcement route of its own, thereby necessarily destroying Barclays’ preferred cooperative strategy. To avert this, Barclays bought out Lloyds’ share in the lending syndicate for a net 72.5p. in the pound, an amount which, internally, Lloyds regarded as substantially in excess of the then value of its lending, and therefore reflecting an outcome heavily dependent upon Lloyds’ potential nuisance value. The result was, of course, that Barclays thereby substantially increased its own exposure to default by Lexi, as the price of pursuing its preferred strategy. Mr Gresham explained that while taking on Lloyds’ share in the syndicate, which amounted to approximately 25%, increased Barclays’ exposure, it reduced its risk. This reinforces his evidence that Barclays expected the cooperative route to produce a much better outcome than the early enforcement route, on KPMG’s advice. Part of that strategy also included making a further secured loan to Lexi to facilitate a tax saving strategy (necessary so it was thought for Lexi’s continuing cash flow solvency), secured on Shaid’s personal guarantee, which was, in the event, repaid in full.

[139]Mr Gresham’s evidence, supported by Mr Green, was that if Barclays had known any of the matters which it is Lexi’s case that Monuza and Zaurian should have reported by way of blowing the whistle on Shaid, Barclays would have resorted forthwith to an enforcement route, and thereby put an end to Shaid’s continued depredations upon Lexi’s assets. For present purposes, in the light of my findings as to what Monuza’s and Zaurian’s duties required of them, and as to what would then have happened, the relevant question is what different steps Barclays would have taken if notified by November 2004 of Shaid’s previous convictions, and if in addition, notified of there having been at least some infringements of sections 330 and 320, by loans to and transactions with connected companies. I have already concluded that, probably, the earliest date upon which any of those communications would have reached Barclays was indeed November 2004, by way of addition to the matters contained in HCW’s warning letter to Barclays, which I have described in detail. Nonetheless, since a higher court might take a different view on some part of that necessarily hypothetical analysis, I shall briefly describe what I consider Barclays would probably have done differently if notified of Shaid’s previous convictions at an earlier date.

[140]In short, my conclusions are as follows:(1) Barclays would probably not have increased its lending to Lexi once appraised of Shaid’s previous convictions.

(2) Barclays might have instituted an investigation of the type actually instituted in late 2004, at an earlier date, but with the same conclusion to cooperate rather than enforce at the end of it.

(3) Barclays would not simply have enforced, merely upon being told about Shaid’s previous convictions.

(4) The result is that Shaid’s depredations would have continued, albeit with access to a possibly smaller pool of borrowed funds.

[141]I have reached those conclusions notwithstanding both Mr Gresham’s and Mr Green’s evidence to the contrary. In my judgment, actions speak louder than words, in particular where the words are spoken about hypothetical matters with the benefit of hindsight, by persons with an agenda. Judge Howarth’s findings concerned Shaid’s conduct in 2004, all of which was part of his mismanagement of Lexi’s affairs. In particular, his abuses and dishonest conduct of the gagging proceedings against HCW was in Lexi’s name, for which Lexi ultimately paid indemnity costs. Furthermore the principal victims of the gag were Barclays and its syndicate lenders, which increased their combined term lending to Lexi from £50 million to £100 million during the period while that gag was being successfully applied. I cannot conceive any reason why Barclays should have taken news of previous convictions in the 1990s, in relation to matters entirely unconnected either with Lexi or with its lenders, more seriously than the shocking findings of Judge Howarth. Mr Green did not say, when asked, that KPMG would have recommended immediate enforcement, if told about Judge Howarth’s findings.

[142]Much more difficult is the question whether Barclays would have persisted in its cooperative strategy if HCW’s report of Judge Howarth’s findings had, in November 2004, been accompanied by a reference to Shaid’s previous convictions. In that context I do not regard a reference to a possible breach of section 330 (namely the loan to Imaan) as adding a great deal of fuel to the fire, even bearing in mind that by causing Lexi to make loans to connected parties, Shaid would have been perceived as acting contrary to both the letter and spirit of the Facility Agreement, in a manner likely to undermine Lexi’s banking relationship with its lenders. I bear in mind in that context Barclays’ knowledge of the much larger and equally unlawful loan to Ten Acre, which did not cause it to depart from a cooperative strategy.

[143]It is temptingly easy with the benefit of hindsight, and the application of reasonable businesslike common sense at a high level of generality, to conclude that faced not merely with findings of current dishonesty, but an allegation that this was a recurrence of an earlier dishonest career in business, Barclays and its syndicate partners would have had no practical alternative but to intervene. Furthermore, if KPMG had been advised of those facts, it could not sensibly have advised as strongly as it did in favour of cooperation, or treated the potential downside of that strategy in terms of ‘leakage’ as lightly as it did. Lloyds’ hand, in advocating a much tougher approach, would of course have been greatly strengthened if (as I assume would have occurred) that additional information had been shared round the syndicate. Although it is pure speculation, HBOS might have changed sides, and supported Lloyds.

[144]But my account of what actually did occur, albeit on more restricted information as to Shaid’s misconduct, gives me the most serious reason to pause for thought. Shaid would, again, have been asked about the alleged previous convictions, and would no doubt have attempted some skilful gloss by way of mitigation (perhaps by reference to a misspent youth). Much more importantly, he would still, no doubt, have proffered the Ten Acre property as valuable additional security, but only on the basis of an agreed cooperative strategy. He might have proffered more. Proper third party security for the whole of Lexi’s debt over property believed to be worth £30 million is not to be blinked at, in particular in circumstances where KPMG’s advice that enforcement might produce no more than 25p in the pound would have been the same, or possibly even gloomier. A recovery of 25p in the pound (against lending of £120 million) would be no more than the £30 million property being offered as additional security (assuming as Barclays did that there was no proper security over the same property in place for Ten Acre’s debt to Lexi), and even if a cooperative route later failed, at some time after the Ten Acre security had been put in place, some part of that 25p in the pound might be reasonably be supposed to be still available after a later enforcement. In that context, I was told by Mr Marshall in response to my enquiry that the administrators’ recoveries to date amount to some £57 million (inclusive of the Ten Acre property) and that the final outcome (before allowing for costs and expenses) may go as high as £94 million, against secured creditors of £105 million. I am aware from my involvement in the litigation arising from the administration that a number of security properties have been recovered, and a number sold, notwithstanding resistance from proprietor companies connected with Shaid, and the scorched earth policy applied by Shaid and Waheed to the company’s documentation, when the administrators were appointed.

[145]The only way in which Lexi’s case as to causation can be established is that Barclays, a powerful stakeholder with no duty to protect Lexi would, in its own interests, have stepped in to control or remove Shaid by enforcement of its security rights, once appraised of the special facts known to Monuza and Zaurian. Shaid was, by offering security directly to Barclays as part of a cooperative route, seeking to satisfy Barclays’ not Lexi’s interests, and his success enabled him to continue on a course of defrauding Lexi, because the price of his cooperation was leaving him in control.

[146]After lengthy deliberation on this very difficult question, my conclusions are as follows:(1) Had HCW’s letter to Barclays in November in 2004 included an allegation or information about Shaid’s previous convictions, together with notification of the (by then) only unlawful loan which they would have been told about, I do not consider that this would have led to immediate intervention by Barclays. Those additional facts would not, on their own, have constituted grounds for an immediate demand, so that it would have been necessary for Barclays to take legal advice, as in fact it did, as to its available remedies.

(2) With that necessity to take time, Barclays would have instructed KPMG to investigate and at the same time sought Shaid’s explanation. In that context, I bear in mind that it is not always easy to ascertain the truth or otherwise of a report that a person has previous convictions, and that the process whereby they were discovered by the Administrators was not straightforward.

(3) I cannot bring myself to believe, despite Barclays failure to brief KPMG as to Judge Howarth’s findings, that with evidence of a previous criminal record, Barclays would have still failed to explain to KPMG the full reasons for its concern. It is one thing to treat findings made in Shaid’s absence as allegations rather than fact (however misguided their approach may have been). It is another thing to take the same approach where Judge Howarth’s findings of perjury and forgery, and HCW’s suspicions of fraud, related to a man who, according to his own family, had previous convictions leading to terms of imprisonment in connection with his business activities in the 1990s.

(4) With that information, it seems to me probable that KPMG would have advised Barclays in terms which placed greater emphasis on the risks of leaving Shaid in unsupervised control of Lexi, going forward. Nonetheless it would have still have been incumbent on KPMG to produce a balanced and dispassionate economic analysis of the pros and cons for the syndicate of the alternative strategies of enforcement and cooperation. KPMG would, (as Mr Green emphasised when asked about the impact which knowledge of Judge Howarth’s findings would have had on its advice), have been concerned to emphasise the information gaps about Lexi’s affairs, and the prospect that they might be remedied by a cooperative approach. Their advice as to the worst case scenario following hostile enforcement might, in the light of Shaid’s previous criminal record, have been even more pessimistic, due to having factored into it the risk that Shaid had already (as indeed he had) made off with a substantial proportion of Lexi’s assets. But by the same token, it is difficult to see how Barclays could have entertained a confident belief that a cooperative route would probably lead to a full recovery.

(5) Nonetheless, Barclays would still have had what Mr Gresham described as the real comfort of unqualified audited accounts for Lexi by KLSA for the year ended December 2003, and nothing concrete to show that Shaid had committed any frauds against Lexi, as opposed to an unsuccessful attempted fraud on Customs and Excise designed to benefit Lexi, followed by a dishonest attempt to cover it up.

(6) The hypothesis which assumes compliance with their duties by Monuza and Zaurian would also have led to the departure of Mr Davis and Mr Jewson, when (which I consider inevitable) they appreciated that it would be impossible to place Shaid under the level of supervision and control necessitated by their knowledge of his previous criminal record. But the banks appear to have placed no reliance upon Mr Davis or Mr Jewson’s continuing presence, as is evident from their failure to make any inquiries of either of them in relation to the matters revealed by HCW in November 2004.

(7) In the final analysis, the dilemma for Barclays would still have been whether to reject Shaid’s apparent offer to cooperate by charging property beneficially his own (the Ten Acre Property) as additional security for the whole of Lexi’s debt, in favour of hostile enforcement. In that context Barclays appear to have had no confidence in enforcing Lexi’s own security rights (if any) against the Ten Acre Property, and in any event those rights secured a much smaller lending by Lexi to Ten Acre (compared with the advised value of the property) such that, even if a proper security had been in place, enforcement by administrators of Lexi’s rights against Ten Acre would have been of very much less value than enforcement of a direct charge by Ten Acre itself to secure all Lexi’s liabilities.

(8) Although the decision would have been much more finely balanced, I am not persuaded that the addition of Shaid’s previous convictions to the balance between hostile enforcement and cooperation would have been sufficient to swing the decision in favour of the former, at the necessary cost of not obtaining Ten Acre’s direct charge of its property as security for the whole of Lexi’s debt, and in the light of KPMG’s advice as to the bleak prospects of a financial return by means of the enforcement route.

(9) Putting it as shortly as I can, I consider that Barclays would still have been minded to take the risk of increased leakage attributable to Shaid’s criminal record as a price worth paying for an immediate copper-bottomed security over Ten Acre’s property. A bird in the hand is worth two in the bush and, on KPMG’s advice, early rather than late enforcement offered the syndicate nothing like the perceived added value of the Ten Acre charge.

[147]I have thus far described my conclusion as to what Barclays’ probable choice would have been. In order to implement that choice it would of course still have been necessary to deal with Lloyds’ opposition, which would have been fortified by disclosure of Shaid’s criminal record. Furthermore, a more modest expectation as to the level of recovery from the cooperative route, attributable to the increased risk of leakage, might have made it less attractive to Barclays to buy out Lloyds’ interest in the syndicate at 72.5p in the pound. Nonetheless, my reading of the documents recently disclosed by Lloyds on the defendants’ application suggests that Lloyds would have been prepared to settle, even without knowing of Shaid’s criminal record, for a lesser amount. Knowledge that Shaid had a criminal record could hardly have led Lloyds to a more optimistic appreciation of the value of its investment. Furthermore, any route (including enforcement) which did not lead to a buy-out of Lloyds’ stake in the syndicate would have left Barclays exposed to litigation from Lloyds for having mismanaged the syndicate’s lending to Lexi. Mr Gresham acknowledged that there was such a risk, although he said that it did not play a decisive part in Barclays’ decision making. Accordingly, I am not persuaded that disclosure of Shaid’s criminal record would have made it impossible for Barclays to reach a commercial settlement with Lloyds, as in fact it did.

[148]My conclusions thus far bring me almost, but not quite, to the end of the possible chains of causation contended for by Lexi. It remains for me first to factor in the hypothetical consequences of a further report by either Zaurian or Monuza of unlawful loans or unlawful property transactions, as they occurred from time to time, in and after October 2005. Proper discharge of their duties as non executive directors would not necessarily have called for immediate disclosure of unlawful loans, since if (as was the case) Monuza and Zaurian took no part themselves in the making of the loans, they would only be likely to come to their attention on periodic reviews of Lexi’s Loan Book. Concern that those loans were unlawful would have been a matter to be raised at Lexi’s next board meeting.

[149]On 19th October 2005 PKF (who replaced KLSA as Lexi’s auditors) signed an unqualified report for the period ending December 2004, showing on balance sheet an improved solvency margin of £16.1 million ( as against £9.6 million in 2003). In consequence, breaches of section 320 would (so far as the board would have seen it) have been easy to cure by a shareholders’ resolution. As for unlawful loans, the aggregate of the loans to Imaan and Serton amount to only £1,725,500 (excluding the alleged loan of £425,000 to Serton, for which there is still no evidence). When it is borne in mind that the loan to Ten Acre of which Barclays knew was £6.7 million, I cannot think that these additional unlawful loans would have made any significant difference to Barclays’ attitude, even if reported. If the route by which they would have ultimately come to Barclays’ attention lay through a directors’ report to Lexi’s auditors (which I consider the most probable) this may not have arrived at Barclays until the next audit by PKF, well towards the end of 2006, and therefore only just before Barclays actually appointed administrators. It follows therefore that performance by Monuza and Zaurian of their duties in relation to those transactions would probably have made no difference to the outcome.

[150]There is also the further possibility that, with knowledge of the increased risks of leakage attendant upon a cooperative route, arising from Shaid’s previous convictions, Barclays would have adopted some compromise between cooperation and enforcement, such as requiring Shaid’s removal as a director, or permitting Shaid to continue to run Lexi under the close supervision of KPMG or some other firm of reporting accountants, or of directors nominated by the syndicate, such that his continuing depredations upon Lexi’s assets after February 2005 would have been hindered or prevented. On the facts which KPMG knew when advising the banks, they proposed no such compromise strategy. Although on the hypothesis that Shaid’s criminal record had been revealed, Mr Green said that KPMG would have advised differently, he did not suggest that KPMG would have recommended such a compromise route. Mr Gresham said in his witness statement that such knowledge might have led Barclays to demand Shaid’s removal, but attempted no explanation as to how Lexi’s affairs would have been capable of being conducted without him. It follows that the court has been presented with no worked-out causation analysis which would enable a conclusion to be reached on the balance of probabilities that some compromise strategy would have been instituted, or that it would have prevented or limited Shaid’s continuing depredations. In those circumstances, tempting though it is, it would be inappropriate for the court to embark upon any such necessarily highly speculative analysis of its own. Such a causation route has simply not been developed, still less proved.

[151]The final result therefore is that Lexi’s case that Monuza and Zaurian’s undoubted breaches of duty caused Lexi the loss primarily occasioned to it by Shaid’s fraud, together with his brother Waheed’s assistance, wholly fails. The detailed forensic analysis of Lexi’s case on causation which has occupied the bulk of the trial, and of this judgment, demonstrates the wisdom of the following passage in Palmer’s Company Law, at paragraph 8.2820:

“The problems of proof of breach are clear from the preceding paragraphs. There are also problems in proving a causative loss. Typically, the facts are similar to those of City Equitable, Re: a rogue, reasonably trusted by all, at the centre of the action, his frauds deceiving even the auditors; and the board of directors, many of them non-executive, meeting only at intervals and justifiably delegating many functions to committees or subordinate officers. On such facts, it is virtually impossible to hold that the acts or (more likely, the omissions) of those directors who were not directly involved in the wrongdoing were the cause of the company’s loss.”

[152]I make it clear that I have reached my negative conclusion on causation not by reason of any prima facie inclination to think that Palmer’s pessimistic analysis is correct. It has simply been demonstrated to be applicable to the very complicated analysis called for by the facts of the present case.

[153]There is always a risk that the complexity of a causation analysis may lead to an inability to see the wood for the trees. It is therefore necessary to stand back and check whether the outcome of the detailed analysis makes sense against the broader picture. In the present case I have recognised that a superficial view might lead to a conclusion that Shaid’s fraud would somehow have been stopped once those with the requisite power learned that Judge Howarth’s findings related to a man with an alleged criminal record. Looking at the matter in the round however, I consider that the principal feature in the landscape is the undoubted fact that, with the full benefit of those findings, revealing as they did a fraudulent concealment by Shaid of which the bank lenders were the intended victims, Barclays nonetheless concluded that its interests favoured the cooperative approach, even to the point of buying out its dissentient syndicate member. The administrators’ success in recoveries to date, together with the large benefit of the Ten Acre charge, by no means suggests that Barclays was wrong to conclude that its own best interests would not be served by early intervention. In that context, an allegation reaching Barclays via Lexi’s former auditors that Shaid had previous convictions would in my judgment probably not have been enough to change the course of history.

ISSUE 2 – MISAPPROPRIATION LOSSES

[154]On the view which I have formed of the causation issue, and leaving aside misappropriations by Shaid by way of payments to Monuza or Zaurian, or for their benefit, which are the subject of the next issue, the question whether Lexi has proved misappropriations by Shaid in respect of which I considered that there was a triable issue in my November judgment does not arise, because Monuza and Zaurian are not liable in damages in respect of them.

[155]In fact, Lexi made no attempt at the trial to prove misappropriations beyond those in respect of which I have already given summary judgment.

ISSUE 3 – IMPROPER RECEIPTS

[156]I shall take the claims against Monuza first. Lexi claims that Monuza is liable to account for two receipts of money, namely £75,800 paid by Lexi to her in January 2005, and £49,993.00 paid to her on 15th November 2006 by Shaid, using monies which he had previously misappropriated from Lexi. The second of those claims was introduced by a very late amendment, during the trial. I shall deal with them separately.

[157]As to the £75,800, Monuza has always admitted the receipt, but given various explanations by way of attempted justification for it: see paragraphs 238 to 241 inclusive of my November judgment. At that stage, I concluded that Monuza had an arguable defence, upon the basis that she had previously made payments of £45,436.42 and £27,990.59 to Shaid on the express basis that he would lend them to Lexi, and that the £75,800 was Lexi’s repayment of those loans, together with accrued interest.

[158]Rather to my surprise, Monuza’s evidence at trial (in particular in cross-examination) was simply that she had lent the monies to Shaid, and not that she had somehow entrusted the monies to Shaid for the purpose of his lending them to Lexi on her behalf.

[159]While I appreciate that, assuming but without deciding that her evidence linking these payments is true, Monuza may regard the £75,800 as simply the repayment by Shaid of loans made by her to him, that affords no defence to a claim by Lexi to recover the money which was, in fact, paid directly from a Lexi bank account to a bank account of hers. It is, shortly, no answer to a claim by the owner of the money that it was stolen and used to pay a debt owed by the thief. Monuza is therefore liable to account in respect of the £75,800 together with interest from 24th January 2005.

[160]The second payment of just under £50,000 is also shown to have come from monies belonging to Lexi which Shaid previously transferred to a bank account of his in Spain. It was paid by him from that account to Monuza, without any mixing with monies not belonging to Lexi, on the very day when the Administrators obtained freezing orders against both Shaid and Monuza. In earlier written evidence, Monuza described the sum as having been received from a cousin of hers.

[161]The documents show beyond doubt that the sum was paid by Shaid from monies that he had misappropriated from Lexi, and Monuza does not, in relation to this amount, even advance any argument that it was by way of repayment of a debt. She is, accordingly, plainly accountable in respect of it, together with interest from the date of receipt.

[162]Lexi relies upon two further groups of payments made to Monuza in 2003, which I can deal with collectively, because of their similarities. The first group consisted of three payments amounting in aggregate to £261,600, made in January and March 2003, and used by Monuza in connection with the purchase of a property at 3 Stanhope Road, Bowdon, Altrincham. The second group consisted of three payments of an aggregate of £191,656.75 made in April and July 2003, which were used by Monuza in connection with her purchase of another property at 79 High Elm Road, Hale Barns, Altrincham. It is not seriously in dispute that all these payments were made from monies belonging to Lexi, although Monuza denies knowing that at the time. Her defence is that she had, on Shaid’s recommendation, previously sold other properties owned by her, and paid the net proceeds to Shaid, for him to hold pending her purchase of alternative (and better) investment properties. She said that as far as she was aware, all those receipts came from, or on account of, her previous payments to Shaid of proceeds of sale belonging to her.

[163]Again, as with the £75,800 I consider that Monuza’s explanation (the truth or otherwise of which it is unnecessary for me to determine) affords her no defence to liability to account to Lexi in respect of these receipts. No case was advanced by Mr Chaisty on Monuza’s behalf that Shaid had received the proceeds of sale of Monuza’s properties as a trustee, in such a way as to impose any trust obligation upon Lexi, if and when those monies were received by Lexi. Furthermore, Monuza advanced no evidence to show that the proceeds of sale that she paid to Shaid were in fact passed on by Shaid to Lexi at all.

[164]While, again, I appreciate that Monuza may have regarded the receipts as repayment of money that she had given Shaid, she took the risk as to his source of repayment. He used Lexi’s money for that purpose and Monuza can therefore have no better defence to liability to account for it than she has in relation to the £75,800.

[165]I turn to the improper receipts alleged against Zaurian. These fall into a single category, namely two payments made in March and April 2003 amounting in aggregate to £320,232.15, which were used by Zaurian in connection with a property at 58 Eyebrook Road, Bowdon. Again, there is no serious challenge to Lexi’s claim that these sums came from its assets. Zaurian advances exactly the same defence in relation to these payments as Monuza did, in relation to the two groups of payments used by her to purchase real property. The difference is that Zaurian has not given evidence to make her case good. In any event, it would afford her no better defence to liability to account in relation to those two payments than did Monuza’s evidence. Zaurian is therefore liable to account in respect of those receipts, together with interest.

ISSUE 4 – SECTION 330/320

(a) Did Lexi make a loan of £425,000 to Serton?

[166]Lexi advanced no better evidence in relation to this item than it did at the summary judgment stage, when, in paragraph 197 of my November judgment I noted that there was no proof of the making of that loan in the evidence before me. Accordingly, that additional claim fails. (b). Were any of Lexus, Halfway, KNJ or Beauchamp companies connected with a director of Lexi?

[167]It is convenient to take Lexus and Halfway together. At paragraphs 141 to 148 of my November judgment I concluded that similar fact evidence constituted a powerful case for the drawing by the court of an inference that there was the necessary connection between these two companies and Shaid, notwithstanding Shaid’s denial, but that there remained an outstanding issue involving a Mr Bhatti, who claimed to be the owner of both companies, and who in a witness statement had denied that Shaid either owned or controlled them. Mr Bhatti was not called to give evidence at this trial, and Monuza and Zaurian denied any relevant knowledge of the affairs of these two companies. Accordingly, I am left with the similar fact evidence to which I have referred which, in the absence of any evidence deployed to the contrary, is sufficient to lead me to conclude on the balance of probabilities that both Lexus and Halfway were sufficiently connected with Shaid.

[168]I turn to KNJ and Beauchamp. At paragraphs 149 to 156 of my November judgment I concluded that, again, while there was evidence justifying an inference that both companies were connected with Shaid, at least from the date when declarations of trust of the shares in favour of Shaid were made, there remained a triable issue whether there was a sufficient connection at the earlier dates when the relevant loans to those two companies were made by Lexi.

[169]In this instance, the question is whether clear evidence that these two companies were beneficially owned by Shaid on dates after the making of the relevant loans is sufficient to found an inference, in the absence of any evidence to the contrary, that he beneficially owned them on the earlier dates when the loans were made. In my judgment such an inference is justified on the balance of probabilities, not least because the declarations of trust do not purport to record that Shaid acquired beneficial ownership pursuant to some transfer or transaction by way of purchase. The natural inference is that the relevant declarations of trust merely recorded, for the satisfaction of some third party, what had always been the position in relation to those two companies.

[170]It follows that on this issue, there being no evidence at all to the contrary, Lexi succeeds. (c). Did either Monuza or Zaurian incur a direct liability as an authoriser under section 341(2) and 322(3) in respect of any of the impugned loans or transfers?

[171]Those two sections impose statutory liability to account for gains and to indemnify the company for any losses resulting from infringing transactions, upon any director of the company who authorised the transactions, unless she can show that at the time of the transaction she did not know the relevant circumstances constituting the contravention. The plain meaning of the statutory language (which is substantially the same in relation to both sections) is that it is for the company to prove authorisation, but for the authorising director to prove the absence of knowledge which founds the statutory defence.

(d) Sections 330/341

[172]I have already concluded that had they done their duty as directors Monuza and Zaurian ought to have made a study of Lexi’s Loan Book sufficient to give them a basic understanding of the nature of its lending business, and the identity of its customers. But Lexi has adduced no evidence to show that either Monuza or Zaurian in fact knew about or authorised any of the unlawful loans, sufficient to found statutory liability. In those circumstances, the question whether, had they authorised any of the loans, Monuza and Zaurian would have had a statutory defence under section 341(5) does not arise.

(e) Section 320/322(3)

[173]Here, it is necessary to deal with Monuza and Zaurian separately, since each of them signed a number of the relevant infringing property transfers on behalf of Lexi, in circumstances which Lexi claim to have amounted to authorisation.

[174]Taking Monuza first, she signed transfer documentation on behalf of Lexi for the transfer of the following properties to Serton: i) 47 Heaton Road, Heaton Norris, Stockport, on 7th April 2006; ii) 32 Devoke Road, Wythenshawe, Greater Manchester, on 23rd May 2006; iii) 6 Gower Road, Heaton Chapel, Stockport (for which no precise date was supplied, but which is alleged to have occurred in February 2006).

[175]It is not in issue that Serton was a company connected with Lexi, that the transactions were not approved by shareholders in general meeting, and that Monuza did indeed sign those documents on behalf of Lexi. I have already concluded that each of those transfers infringed section 320: see paragraphs 157 to 193 inclusive of my November judgment.

[176]Monuza’s defence was that she signed documents at the request of her brother or other employees of Lexi without considering their content or implications, relying on those persons as to the propriety of the transactions. By parity of reasoning with the analysis of the Court of Appeal in Bishopsgate Investment Management Ltd v. Maxwell (No 2)

[1993] BCLC 1282

at 1285f to 1287a, I consider that it is no answer to a case of authorisation under section 322(3) that the director concerned did not trouble to ask herself what the transaction was that she was authorising. The whole purpose of her signature was to authorise the transaction on Lexi’s behalf, whether she knew what it was or not.

[177]Nonetheless Monuza advanced a defence of lack of knowledge under section 322(6), alleging both that she did not know that the transactions constituted sales of property by Lexi to Serton, or that Serton had a relevant connection with Shaid. I have already rejected the second of those assertions. As to the first, Monuza’s evidence as to the time which she took to sign transactional documents placed in front of her leads me to conclude that she spent sufficient time on the process to have understood the basic nature of the transaction in question, namely that it was a property sale, that the vendor was Lexi and that the purchaser was Serton. That conclusion is sufficient to dispose of any statutory defence under section 322(6).

[178]It follows that Monuza is liable to account for any gains and to compensate in respect of any losses suffered by Lexi in respect of those three transactions. But Mr Marshall goes further, relying on Neville v. Krikorian

[2006] EWCA Civ 943

and in particular upon the passage in the judgment of Chadwick LJ which I quoted (in relation to the claim against Waheed) at paragraph 204 of my November judgment. He submits that the three sales to Serton constitute a sufficient practice allowed by Monuza to continue to render her liable for all transactions in breach of section 320, as having authorised them by implication.

[179]I would have been impressed by that submission, were it not for the fact that the three transactions in breach of section 320 actually authorised by Monuza were the last three in the whole of the series complained of by Lexi, particulars of which are in Schedule A to the RAPOC. They occurred in February, April and May 2006, whereas all the others occurred in or before 2005. It would in my judgment be wrong to attribute implied authority on Neville v. Krikorian principles in relation to transactions preceding those actually authorised by the director concerned, in the absence of some evidence about her conduct in relation to those transactions which she actually authorised which suggests authority ab initio. There being no such evidence in the present case so far as concerns Monuza, I consider that her liability under section 322 is limited to the three transactions which she specifically authorised.

[180]I turn to the claim against Zaurian under section 322. The full list of transactional documents which she signed on behalf of Lexi are as follows: i) Agreement for the sale of 6 Gower Road, Heaton Chapel, Stockport to Serton (undated); ii) Transfer of 6 Gower Road, Heaton Chapel, Stockport to Serton (undated). iii) Agreement for the sale of No Man’s Fort in the Solent to Charyn dated 1st February 2006; iv) Transfer of No Man’s Fort to Charyn on the same date; v) Transfer of 3 Gardens Road, Lilliput, Poole to Minaro dated 15th December 2005; vi) Transfer of 12 Rimsdale Walk, Bolton, Greater Manchester to Serton dated 24th November 2005; vii) Transfer of 76 Ullswater Road, Wythenshawe, Manchester to Serton dated 16th November 2005; and

[181]I have already held by way of summary judgment that each of those transactions infringed section 320. Again, I consider that Zaurian incurred liability under section 322 by authorising each of them. She has not given any evidence to prove a statutory defence under section 322(6).

[182]Again, Lexi advances a wider case against Zaurian based upon Neville v. Krikorian, extending to all transactions in breach of section 320. In that respect, it seems to me that while authorisation of a transaction in favour of a company without showing that the director knows of the relevant connection is sufficient to establish prima facie statutory liability in relation to that transaction (subject to proof of the statutory defence), it by no means follows that proof of authorisation in the absence of any evidence that the director concerned knew that the counter-party was a connected company is sufficient to establish a general authorisation of an infringement within the Neville v. Krikorian principle. It simply cannot be shown that the director in question was indifferent to breaches of section 320 in the absence of proof of any knowledge of facts sufficient to invoke the prohibition there set out. That outcome may at first sight look surprising, until it is borne in mind that section 322 places the burden of proof of lack of knowledge on the director, and imposes no burden of proof of knowledge on the company.

[183]The only one of the recipient companies in relation to which Zaurian authorised a transfer where it is shown by inference that she knew of the relevant connection is Monaro. No wider knowledge of relevant connections is supported by any evidence, so that her failure to give evidence in her defence does not justify an inference of any wider knowledge. It follows in my judgment that there is an insufficient basis for the establishment of Neville v. Krikorian liability against Zaurian, even though she incurred a statutory liability in respect of all seven transactions where she signed or executed the relevant documentation.

[184]For convenience I summarise the outcome of the trial as against each of Monuza and Zaurian.(1) Both Monuza and Zaurian are liable to account in respect of the receipts from Lexi with which they funded their property purchases.

(2) Both Monuza and Zaurian are liable under section 322 in respect of all the infringing property transactions where they personally signed or executed transactional documents on behalf of Lexi.

(3) Monuza is liable to account in respect of the two cash receipts of £75,800 and £49,993.

(4) Otherwise, neither Monuza or Zaurian are liable as claimed.

(5) The extent of Monuza and Zaurian’s liabilities in relation to the transactions infringing section 320 remains to be ascertained, if it cannot be agreed, at a further hearing.

Cited in 11 later judgments

and 2 more of the most senior