Case No: IHC 190/02
Neutral Citation Number: [2003] EWHC 13 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 3 rd February 2003
Before:
THE HONOURABLE MR JUSTICE ETHERTON
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Between:
CIBC Mellon Trust Company & Ors Claimant
- and -
Stolzenberg & Ors Defendant
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Mr Christopher Carr QC, Mr Philip Marshall and Ms Hannah Brown (instructed by Shook, Hardy & Bacon ) for the Claimants
Mr John Wardell QC (instructed by Withers LLP) forthe 10th and 38th Defendants
Hearing dates: 9th – 16th December 2002
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Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
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The Honourable Mr Justice ETHERTON
Mr Justice Etherton:
Index
Introduction 1 - 3
The procedural background 4 - 32
The basis of the Applications 33 -41
Principles to be applied 42 -45
The merits 46 - 95
The interests of the administration of justice 96 - 107
Have the Applications been made properly? 108 - 137
Was the failure to comply intentional? 138 - 152
Is there a good explanation for the failure to comply with the
“unless” orders? 153
Were Mora and Chascona in default with the other court orders? 154 - 158
Was the failure to comply with the “unless” orders caused by Mora and
Chascona or the legal representatives? 159
What will be the likely date of trial if relief is granted? 160
What effect did the failure to comply have on the Claimants, on the one
hand, and Mora and Chascona, on the other hand? 161 -162
What effect would the granting of relief have on the Claimants, on the
one part, and Mora and Chascona, on the other part? 163
Weighing up the factors 164 -167
Decision 168
Mr Justice Etherton:
Introduction
1. This is my judgment on applications dated 5th December 2001 and 27th November 2002 by the Tenth Defendant in these proceedings, Mora Hotel Corporation NV (“Mora”), and the Thirty Eighth Defendant, Chascona NV (“Chascona”), and an application dated 30th April 2002 by Mora. These applications (“the Applications”) are, in substance, to set aside a judgment entered against Mora on 4th February 1999 for CAN$357,738.21 and US$386,687.95, and judgments entered on 21st October 1999 and 7th December 1999, pursuant to which Mora was ordered to pay damages of CAN$245,701,477.70 and US$134,325,511.10 and Chascona was ordered to pay damages of CAN$246,082,660 and US$134,727,540.30.
2. Those judgments were entered in consequence of the failure of Mora to comply with an “unless” order made on 13th October 1998 by Mr Justice Rattee, and the failure of both Mora and Chascona to comply with an “unless” order made on 4th October 1999 by Mr Justice Rattee. By the Applications, Mora and Chascona also seek relief from the sanction imposed by those orders (“the “unless” orders”) that, if they did not comply, they would be debarred from defending the proceedings.
3. The factual background to the claims against Mora and Chascona in the proceedings, and the procedural background to the Applications, are complex.
The procedural background
4. These proceedings (“the Proceedings”) are brought by the Claimants as trustees of certain pension and other benefit funds established by Daimler Chrysler Canada Inc. for its employees. Between 1984 and 1992 the Claimants made substantial loans to, and investments in, an international group of finance and investment companies known as the Castor Group (“Castor”). The loans and investments made by the Claimants totalled approximately CAN$240 million. Castor collapsed in early 1992 with debts of CAN$1 .8 billion. The Claimants’ loans have proved to be irrecoverable, and their investments virtually worthless.
5. The Claimants allege that their loans and investments were made in reliance upon fraudulent misrepresentations by the First Defendant, Wolfgang Stolzenberg, of which the Second Defendant, Marco Gambazzi, and others of the Defendants, including Mora and Chascona, were aware and to which they were party.
6. Mr Gambazzi is an attorney in the firm Gambazzi & Berra based in Lugano, Switzerland. He specialises in acting as a fiduciary, using off-shore companies and entities. Mr Gambazzi was a shareholder in and director of the leading Castor company, Castor Holdings Ltd, (“Castor Holdings”) until its insolvency in February 1992. He was also a director of a number of other Castor companies, some of which were key operating subsidiaries of Castor Holdings, including C. H. International Finance NV, C. H. International (Netherlands) By, Castor Finance A. G., CH (Ireland) Limited and Castor Investment AG.
7. Mora and Chascona own and operate the Gorham Hotel in New York (“the Hotel”). From 1979 Mr Gambazzi was the managing director of Chascona. He was also a director of Mora from 1995.The Claimants allege that he was actively involved in the affairs of Mora even before 1995. Until relatively recently, Mr Gambazzi held all the bearer shares in Mora and Chascona. He claims, however, that at all times prior to the collapse of Castor he held them as nominee for the true beneficial owners.
8. In May 1996 the Claimants issued the Proceedings against the main conspirators. The first four Defendants are individuals. The other Defendants are corporations. At that time, the only claim against Mora was a tracing claim for US$380,687 and CAN$357,738.
9. On 26th February 1997 Mr Justice Rimer granted a worldwide freezing order against the individual Defendants and many of the corporate Defendants, including Mora. The order required Mora, in relation to the tracing claim, to provide information and documents regarding what had become of the money which it had allegedly obtained by fraud. In order to enable the freezing injunctions to be policed, Mora, in common with other of the Defendants, was required to produce information and documents regarding its assets. Mora was also required to provide copies of any documents which it held which were relevant to the proceedings.
10. On 10th April 1997 Mora acknowledged service of the writ. Mora was thereafter represented by the same solicitors and counsel who appeared on behalf of Mr Gambazzi. The solicitors acting for Mora at that time were Richards Butler.
11. On 11th April 1997 Mora, Mr Gambazzi and other Defendants applied to set aside service of the writ on the grounds of lack of jurisdiction.
12. On 23rd May 1997 Mr Justice Rattee dismissed the applications to set aside service of the writ on grounds of lack of jurisdiction. An appeal to the Court of Appeal was dismissed on 29th October 1997. In due course permission was granted to appeal to the House of Lords.
13. By this time Colman Coyle had replaced Richards Butler as Mora’s solicitors for the Proceedings.
14. On 10th July 1998 Mr Justice Rattee made several orders against Mora to secure compliance with the freezing order of Mr Justice Rimer, some of which were “unless” orders.
15. On 13th October 1998, Mr Justice Rattee made an order that, unless Mora served on the Claimants’ solicitors by 10th November 1998 “all documents within its possession, custody or power relating to the security granted by [Mora] to C H International Overseas which either remained in existence, or was created, after 20th May 1992” Mora be debarred from defending the Proceedings further, and the Claimants be at liberty to proceed with an account of what was due to the Claimants from Mora in respect of the tracing claim against Mora.
16. Mora did not supply any such documents. Nor did it serve any affidavit or witness statement explaining why it had failed to do so.
17. On 4th February 1999, following the taking of an account against Mora by Master Winegarten, pursuant to the order of 13th October 1998, judgment was entered against Mora, as I have said, for CAN$357,738.21 and US$386,687.95.
18. In the meantime, on 11th January 1999 Chascona had been joined to the Proceedings. A claim in conspiracy was made against Chascona. Furthermore a claim in conspiracy was now made against Mora. The amended writ and statement of claim were served on Mora and also on Chascona.
19. On 25th February 1999 Chascona entered an acknowledgement of service. On 12th March 1999 Chascona issued an application challenging the jurisdiction of the English court. That application was adjourned pending the determination by the House of Lords of the jurisdiction issue.
20. On 23rd July 1999 Mr Justice Lightman made an order extending the existing freezing relief against Mora, and also granting freezing relief against Chascona, up to a value of CAN$420 million in respect of the conspiracy claim. Mora was also required, by Mr Justice Lightman’s order, to take certain steps to ensure that any proceeds of certain litigation it had brought in Canada against Castor’s auditors (“the C & L Litigation”), and any proceeds of a proof of debt which it had submitted in Castor’s bankruptcy, were preserved. Those steps included opening an account at a branch of a bank in England & Wales, for the purpose of receiving any such proceeds, and giving certain notices.
21. Mora and Chascona took no steps to comply with the order of Mr Justice Lightman.
22. On 4th October 1999 Mr Justice Rattee ordered that, unless Mora and Chascona complied with the outstanding terms of the order of Mr Justice Lightman within fourteen days, they would be debarred from defending the Proceedings further, and the Claimants would be entitled to enter judgment for damages to be assessed in respect of their claims in conspiracy. Mora and Chascona took no steps to comply with that order.
23. Accordingly, on 21st October 1999 it was ordered that Mora and Chascona pay the Claimants damages to be assessed, together with the costs of the Proceedings, such costs to be taxed on an indemnity basis. Damages were assessed at a hearing before Master Bowles on 7th December 1999, when the Claimants were, as I have said, awarded damages of CAN$245,701,477.70 and US$134,315,511.10 against Mora, and CAN$246,082,660 and US$134,727,540.30 against Chascona.
24. In May 2000 the Claimants applied to the Supreme Court of the State of New York for recognition and enforcement in the United States of their judgments against Mora and Chascona.
25. On 12th October 2000 the House of Lords dismissed the appeal from the decision of the Court of Appeal upholding the decision of Mr Justice Rattee not to set aside service of the writ on grounds of lack of jurisdiction.
26. On 21st December 2000 the Honourable Justice Ira Gammerman gave judgment in New York in favour of the Claimants, and appointed a receiver over the Hotel.
27. Mora and Chascona appealed the decision of the Honourable Justice Ira Gammerman. On 28th May 2002 the Appellate Division of the New York State Court dismissed the appeal of Mora and Chascona.
28. On 5th December 2001 Mora and Chascona applied to set aside the order of 21st October 1999 for damages to be assessed on the conspiracy claim, and the order of Master Bowles of 7th December 1999 assessing those damages.
29. On 30th April 2002 Mora applied to set aside the order of Master Winegarten of 4th February 1999, on taking the account in respect of the tracing claim against Mora.
30. On 27th November 2002 Mora and Chascona applied for relief from the “unless” orders of 13th October 1998 and 4th October 1999 of Mr Justice Rattee, and also for the discharge of freezing orders against Mora and Chascona, including the freezing order against Mora of Mr Justice Rimer of 26th February 1997 and the freezing order against Mora and Chascona of Mr Justice Lightman of 23rd July 1999.
31. There is currently pending in the United States an appeal from the decision of the Appellate Division of the New York State Court of 28th May 2002 to the New York Court of Appeals.
32. The Claimants have also taken proceedings in Ontario and the Netherlands Antilles for recognition and enforcement of the judgments obtained by them against Mora and Chascona in the English Proceedings.
The basis of the Applications
33. In his 1st affidavit sworn on 29th November 2001 Mr Paolo Cavazza claimed that he is the owner of 75%of the shares in Mora and Chascona, having acquired 50%in 1994 and a further 25%in 1995. He explained that Mr Gambazzi, who was his Swiss lawyer and friend, introduced him to Mora and Chascona and the opportunity of purchasing, through those companies, the Hotel. He described the manner in which he acquired his shareholdings in Mora and Chascona. This was the first time that Mr Cavazza’s beneficial interest in the shares of Mora and Chascona had been disclosed in the Proceedings.
34. Mr Cavazza’s affidavit was sworn in support of an application (“the Chinablue Application”) to challenge the Claimants’ joinder of Chinablue Investment SA (“Chinablue”) to the Proceedings and an order made by Mr Justice Jacob on 16th May 2001 that Chinablue’s assets be frozen Underlying the order of Mr Justice Jacob, and the joinder of Chinablue to the Proceedings, was the belief of the Claimants that Mr Gambazzi owned and controlled Chinablue and used Chinablue in connection with the acquisition of shares in Mora and Chascona. Mr Cavazza’s evidence, which was, in the event, accepted by Mr Justice Jacob, was that Chinablue was owned by Mr Cavazza
35. What emerges from that and other evidence on behalf of Mora and Chascona is the following explanation for non-compliance with the “unless” orders, for permitting judgment in default to be entered against Mora and Chascona, and for the subsequent delay in making the Applications.
36. The Hotel was purchased, according to that evidence, by an Italian, Mr Enzo Cori, in about 1981. Mr Cori was another client of Mr Gambazzi. Mr Gambazzi at all material times was the holder of the bearer shares in both companies. By 1994,25% of Mora and Chascona were owned beneficially by Mr Gambazzi. In that year Mr Gambazzi recommended to Mr Cavazza that he should invest in the Hotel, and Mr Cavazza acquired from Mr Cori 50% of the beneficial interest in the shares in Mora and Chascona. In 1995 Mr Cavazza acquired Mr Cori’s remaining 25% interest in those companies.
37. Mr Cavazza’s interest in Mora and Chascona was acquired in breach of Italian exchange control regulations, and without disclosing the acquisition to the Italian authorities. In view of those matters, Mr Cavazza did not wish his beneficial ownership of the shares in Mora and Chascona to become known to the wider world. Like Mr Cori, Mr Cavazza was not a director of either Mora or Chascona. In Mora and Chascona’s tax returns from 1987 onwards Mr Gambazzi was held out as owning 100% of the shares in those companies. Mr Cavazza left it to Mr Gambazzi to conduct the case of Mora and Chascona in the Proceedings. It was only in August 2001 that Mr Cavazza consulted the solicitors Withers, after Mr Cavazza lost confidence in Mr Gambazzi. Mr Cavazza’s evidence is that, until Withers advised, he did not know it was open to him to apply to set aside the judgments against Mora and Chascona. It was, as I have said, at that stage that the interest of Mr Cavazza in Mora and Chascona first came to light in the Proceedings.
38. The evidence, on behalf of Mora and Chascona, is that Mr Gambazzi took the view, from the outset, that the proper tactics to adopt, on behalf of Mora and Chascona, as well as himself and other Defendants, were to contest the jurisdiction of the English courts, and not to fight the Proceedings on their merits here, but to do so only in the courts in New York. Mora initially took steps to comply with the freezing order of Mr Justice Rimer of 26th February 1997, and some subsequent orders in that year. From the end of 1998, however, Mr Gambazzi took the view that Mora and Chascona should not comply with any orders of the English court, save in connection with the challenge to jurisdiction. For that reason, notwithstanding that the English solicitors for Mora and Chascona, Colman Coyle, advised that the “unless” orders should be complied with, no steps were taken to comply with those orders, and Mora and Chascona permitted the judgments in default to be entered against them. According to the evidence for Mora and Chascona, the stance taken by Mr Gambazzi, on behalf of Mora and Chascona, resulted from the firm advice which Mr Gambazzi received that the English courts would ultimately accept that they did not have jurisdiction and, moreover, the United States courts would not, against the background of the jurisdiction challenge, enforce a judgment of the English courts which did not result from a trial on the merits. According to that evidence, those tactics of Mr Gambazzi were formed after consultation with, and upon the advice of, an old friend of his, Mr Dario Ceppi. Mr Ceppi was a New York litigator, who was, at the relevant time, a sole practitioner carrying on practice from premises on Park Avenue in New York.
39. Following the unanimous rejection by the House of Lords of the jurisdiction challenge, and the willingness of the New York courts to enforce the default judgments against Mora and Chascona, it became apparent that Mr Gambazzi’s strategy, on behalf of Mora and Chascona, was completely misconceived.
40. Although the decision of the Honourable Justice Ira Gammerman was given in the Supreme Court of the State of New York on 21st December 2000, Mr Cavazza did not become involved in the Proceedings, as I have said, until August 2001. His involvement was prompted by the injunction granted in respect of Chinablue, as a result of which he instructed Withers at the end of August 2001. Mr Cavazza has explained that the reason for the delay in his involvement, even after it had become apparent that the strategy of Mr Gambazzi had proved so disastrously wrong, was that he wished to await the passing of legislation in Italy granting an amnesty to persons who had invested outside Italy, in breach of Italian exchange control regulations. That legislation was only passed in April 2001.
41. In the skeleton argument on behalf of Mora and Chascona, their case on these Applications is summarised as follows:
“7.1 In brief, Mora and Chascona’s response is that:
7.1.1 they have an unanswerable (alternatively a very strong) defence to the claims;
7.1.2 there is no doubt that a fair trial can still be held (alternatively the delay complained of has only had a marginal impact on the ability to hold a fair trial);
7.1.3 the breaches in respect of which the debarring orders were made are, when put in context of the Claimants’ concern about not submitting to the jurisdiction of this Court, not very serious and have in any event been substantially remedied;
7.1.4 the sanction imposed by Mr Justice Rattee in both October 1998 and October 1999 was disproportionate;
7.1.5 any prejudice caused to the Claimants by reason of their having pursued enforcement proceedings can be remedied by appropriate costs orders and/or orders for security;
7.1.6 a refusal of these applications would deprive Mora and Chascona of a very valuable asset and give the Claimants a wholly undeserved windfall;
7.1.7 the overriding objective points strongly to the conclusion that Mora and Chascona should be given the opportunity of fighting the case on the merits.”
The principles to be applied
42. In order to succeed on the Applications, Mora and Chascona must satisfy the Court, not merely that they have a real prospect of successfully defending the claim (comp CPR r.13.3(1) in relation to setting aside default judgments), but that this is an appropriate case, pursuant to CPR r.3.9, for the grant of relief from the sanction imposed by the “unless” orders, pursuant to which the judgments against Mora and Chascona were entered.
43. CPR r.3.9 provides, so far as relevant, as follows:
“3.9 (1) On an application for relief from any sanction imposed for failure to comply with any rule, practice direction or court order the court will consider all the circumstances including -
(a) the interests of the administration of justice;
(b) whether the application for relief has been made promptly;
(c) whether the failure to comply was intentional;
(d) whether there is a good explanation for the failure;
(e) the extent to which the party in default has complied with other rules, practice directions and court orders and any relevant pre-action protocols;
(f) whether the failure to comply was caused by the party or his legal representative;
(g) whether the trial or the likely date can still be met if relief is granted;
(h) the effect which the failure to comply had on each party; and
(i) the effect which the granting of relief would have on each party.”
44. The Court of Appeal has laid down guidance as to the approach of the Court when considering an application for relief from sanctions within CPR r.3.9. The Court, in such a case, must consider each of the nine items listed in r.3.9(1) which are relevant to the case, carrying out the necessary balancing exercise methodically, and explaining how the ultimate decision has been reached: Woodhouse v Consignia [2002] EWCA Civ 275, [2002] 1 WLR 2558. The Court must bear in mind that, where the effect of the sanction is to preclude a trial on the merits, the effect is to deprive the applicant of access to the Court, a concept which now has a particular resonance under article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms, as scheduled to the Human Rights Act 1998 (“Article 6”): ibid at para. [42]. The Court, in carrying out the balancing exercise, is not, however, limited to the nine items specified in r.3.9. That rule expressly requires the Court to consider all the circumstances. In an appropriate case, for example, the Court can and should consider the merits, as part of the circumstances: Chapple v Emmett (unreptd) (CA) 8th December 1999. The exercise of the discretion of the Court under CPR r.3.9 must be carried out against the background, and in the light of, the overriding objective to deal with cases justly, as set out in CPR r.1.1: ibid.; Arrow Nominees Inc. v Blackledge[2002] 2 BCLC 167, esp. at paras.54-55 (Chadwick LJ and 70 and 72 (Ward LJ).
45. I propose to consider, first, the submissions of the parties as to the legal merits of the claims against Mora and Chascona, and then, in turn, the nine items specified in CPR r.3,9.
The merits
46. Considerable time was spent, on the hearing of the Applications, on the issue of the legal merits of the claims against Mora and Chascona. Mr John Wardell Q.C., counsel for Mora and Chascona, submitted that, at a trial on the merits, the Claimants would have no real prospect of succeeding on the conspiracy or tracing claims against Mora or Chascona and that, were the proceedings continuing, I would be in a position to give summary judgment against the Claimants. Mr Wardell submitted that, if he made good this submission, it would be a powerful, albeit not conclusive, factor in deciding how to exercise my discretion as to whether to set aside the judgments and relevant orders.
47. For the Claimants, Mr Christopher Carr, submitted that, on the available material, Mora and Chascona have no real prospect of succeeding in their defence, should I set aside the judgments and relevant orders. He submitted, plainly correctly, that, if he made good that submission, the Applications would necessarily fail.
48. Although nothing turns on the point, I should mention, for completeness, that no draft Defence has been tendered on behalf of Mora or Chascona.
49. In order to examine the submissions on the legal merits in further detail, it is necessary to set out the background to the allegations of conspiracy.
50. As I have said, the Claimants allege that they made loans to, and investments in, Castor and its subsidiary and associated companies in reliance upon fraudulent misrepresentations made by Mr Stolzenberg, of which Mr Gambazzi and other Defendants, including Mora and Chascona, were aware and to which they were party. It is alleged that such participation and assistance often took the form of involvement in artificial transactions designed to give a misleading impression as to the financial position and business of Castor or, in other cases, transactions designed to cover up fraudulent activity or to extract funds obtained by fraud. In particular, Mr Stolzenberg, acting with the assistance of Mr Gambazzi and others, made representations that Castor’s business was to lend money secured by mortgages over high quality real estate developments in North America on a short to medium term basis. Further, Mr Stolzenberg, acting in conjunction with Mr Gambazzi and others, ensured that the Claimants were provided with copies of consolidated financial statements of Castor, as well as other documentation, which indicated that Castor was financially sound, profitable and growing, and invited the Claimants to lend money orinvest on this basis.
51. The Claimants allege that, in fact, Castor did not conduct business of the character represented. Its business was, in reality, to lend money to companies which were also owned, controlled or managed by Mr Stolzenberg, Mr Gambazzi and the Third or Fourth Defendants (“the Individual Defendants”). Such companies were linked to Castor or to the Individual Defendants by common shareholdings, directorships and management. Among those companies were Mora and Chascona. The companies in which those Defendants were interested either consistently made losses or were insolvent or able to secure lending from Castor on more favourable terms than they would otherwise have been able to obtain. No arms’ length lender or investor, knowing the truth, would have lent monies to those companies or would have invested in their projects either at all or on the terms on which Castor did so.
52. In many instances the companies to which Castor made loans were unable to repay those loans, or even to pay a small percentage of the interest which was due on them. Nevertheless, over a period of years, Castor’s financial statements made it appear that there was consistent growth on its loan portfolio, income and earnings. The Claimants allege that this was only achieved by a series of artificial and deceptive arrangements by Mr Stolzenberg, Mr Gambazzi and others of the Defendants. One essential feature of each of these deceptions was that, rather than making substantial provisions in Castor’s accounts on the basis that the loans were irrecoverable, itwas represented that unpaid interest due to Castor upon its loans had in fact been paid, and unpaid interest was treated as a new debt. This created the appearance that income and earnings were increasing, that net assets were increasing, and that the loan portfolio was expanding. The truth, according to the Claimants, was that Castor was simply recycling bad debt.
53. The Claimants contend that from 1986 onwards the financial position of Castor was such that it was no longer carrying on any legitimate business. Its sole function was to act as a vehicle for the purpose of obtaining money by deception for the benefit of the Individual Defendants or the corporate Defendants or other entities associated with them.
54. From 1981 onwards both Mora and Chascona obtained substantial loans from Castor, rising from US$3.5 million to US$21.5 million by the time of Castor’s collapse in 1992. The Claimants claim that Castor’s lending to Mora and Chascona was not on commercial terms, including rates of interest. Further, Castor did not always collect interest in cash. It frequently permitted Mora and Chascona to capitalise interest (that is to say, add it to the existing loan balance) when they requested it. There are a range of other matters which, the Claimants say, illustrate the uncommercial or improper financial arrangements between Mora and Chascona, on the one hand, and Castor, on the other hand.
55. The evidence is that Mr Gambazzi obtained commissions or fees when companies introduced by him lent money to, or invested in, Castor.
56. Furthermore, there is evidence that Mr Gambazzi received a share of the fees paid to Castor by Mora and Chascona.
57. In addition, Mr Gambazzi received dividends, as a shareholder of Castor Holdings, on the basis of fictitious profits or earnings of Castor. As I have said, such profits or earnings were fictitious since they resulted from the incorrect representation of Castor’s actual financial position in its accounts; in particular, treating interest payments as having been paid, and the loan book as continually expanding, and failing to make proper provision for bad debt.
58. It is in the context of these factual allegations that the Claimants assert the two causes of action which have resulted in the default judgments against Mora and Chascona, namely a tracing claim against Mora, based upon knowing receipt of sums derived from the Claimants, and common law conspiracy to injure.
59. I can deal, relatively briefly, with the merits of the tracing claim against Mora.
60. The tracing claim relates to three payments made to Mora in 1991. Mr Wardell submitted that the evidence establishes that those payments were part of the advances made to Castor for works of renovation and refurbishment to the Hotel, and that they were re-paid to Castor as part of re-financing arrangements with Banque Paribas in 1992. He submitted that, in those circumstances, the tracing claim must fail.
61. I do not agree. In the first place, if, as the Claimants allege, a tracing claim lay against Mora when the sums in question were paid to it, Mora thereupon became subject to a constructive trust to account for the money to the Claimants, the defrauded parties. That trust obligation cannot have been satisfied by re-payment to the alleged fraudster, Castor. Further, on the evidence, it is not at all clear that the sums in question were, in fact, re-paid to Castor in 1992. Under the arrangements with Banque Paribas in 1992, Castor was, in effect, not re-paid some US$2.25million of the loans previously made by Castor to Mora and Chascona, and, moreover, part of the Castor loans was apparently released.
62. Mr Wardell conceded, for the purposes of the Applications, that there is powerful evidence that Mr Gambazzi was a party to the alleged conspiracy to defraud the Claimants. On the other hand, for the reasons which I shall elaborate in due course in relation to the conspiracy claim, Mr Wardell submitted that the overwhelming weight of the evidence before me is that Mr Gambazzi never had a real management role in relation to the affairs of Mora or Chascona. Accordingly, Mr Wardell submitted, Mr Gambazzi ought not to be regarded as the “directing mind and will” of Mora or Chascona either generally or specifically in relation to the successive loans to those companies from Castor. Mr Gambazzi’s knowledge of the frauds of Castor is, therefore, not to be imputed to Mora or Chascona: cf. El Ajou v Dollar Land Holdings Plc [1994] 2 All ER 685.
63. Mr Wardell further submitted that, although there is evidence of the personal involvement of Mr Stolzenberg in the affairs of Mora and Chascona, it is clear that Mr Stolzenberg’s role was limited to supervision and assistance in connection with the carrying out of renovation works to the Hotel, in which capacity he was acting on behalf of Castor, as lender. Accordingly, Mr Wardell submitted, the tracing claim against Mora must fail because Mora lacked any knowledge of Castor’s frauds.
64. There is, however, before the Court documentation which is capable of supporting a case that Mr Gambazzi’s role in Mora and Chascona was not limited simply to acting in a nominee, and purely administrative, capacity. There is evidence, for example, that Mr Gambazzi played an important role in procuring for Mora and Chascona both the initial finance in 1981 and subsequent finance up to, and including, 1992. Mr Wardell realistically recognised that it is impossible for the Court, in the light of all the evidence, and bearing in mind the absence of cross-examination or even full disclosure, to reach the conclusion, at this stage, that the guilty knowledge of Mr Gambazzi, at least, is not to be imputed to Mora and Chascona.
65. I conclude, that, on the evidence before me, Mora would have an arguable defence to the tracing claim, but the Claimants would also have a real prospect of succeeding on that claim at a trial on the merits.
66. I turn now to the legal merits of the conspiracy claim, which took up much of the hearing before me. It was not in dispute between the parties that the relevant law is set out in the following statements in Clerk & Lindsell on Torts (18th ed.):
“24-118 The combination The tort requires an agreement, combination, understanding, or concert to injure, involving two or more persons…”
“24-119 Of the various words used to describe a conspiracy, ‘combination’ has been preferred on the ground that ‘agreement’ might be thought to require some agreement of a contractual kind, whereas all that is needed is a combination and common intention.... A party to a conspiracy need not understand the legal effect of it; but he must know the facts on which the combination is unlawful. But there must be a combination; lack of overt acts or an uncommunicated intention to join a conspiracy may show there has not been an effective combination…”
“24-120 The conspirators need not all join in at the same time, nor need they have exactly the same aim in mind; but the possession of a separate aim may be evidence that the party concerned has not participated in the combination at all, at any rate if he acted throughout in ignorance of the true facts. The question is how far the defendant was aware of the plan and then ‘joined in the execution’ .... The question is whether a particular defendant, having regard to his knowledge, utterances and actions; was sufficiently a party to the combination and the common design..
67. Mr Wardell submitted that, if the judgments against Mora and Chascona were set aside, the claim in conspiracy against them would have no real prospect of success since there were no overt acts showing an effective combination, to which either Mora or Chascona was a party, to defraud the Claimants. He submitted that the evidence clearly shows that the 1981 lending was for the perfectly legitimate purpose of the acquisition of the Hotel by Mr Cori, and that subsequent loans to Mora and Chascona from Castor prior to Castor’s collapse in 1992 were for the legitimate commercial purpose of renovation and refurbishment of the Hotel, and all the loans were on proper commercial terms. Accordingly, he submitted, there is no material from which the inference can be drawn that Mora or Chascona became parties to an unlawful combination. Even if, which Mora and Chascona deny, Mr Gambazzi’s knowledge of Castor’s frauds on the Claimants could be attributed to them, there would still be missing an essential component of a cause of action for conspiracy, namely overt acts showing an effective combination to which Mora and Chascona were parties.
68. Reduced to its legal essence, the general principle asserted by Mr Wardell is that there can be no conspiracy to injure if a person receives money from a fraudster, knowing the money to be the product of fraud, if the terms on which the recipient obtains the money, and the purposes for which he intends to use it and does use it, are legitimate and commercial. It makes no difference, Mr Wardell submitted, whether the money is received on one occasion only, or the recipient, with his knowledge of the fraud and of the circumstances in which the money has been procured by the fraudster, repeatedly applies to the fraudster for money and receives it over a period of time.
69. Mr Wardell, in support of his analysis, cited the judgment of the Court of Appeal in Grupo Torras SA v Al-Sabah (unreptd) (2 November 2000) and, in particular, the following paragraphs:
“79. The judge held that Mr Folchi had rendered dishonest assistance to the conspirators in each of the Oakthorn 1, Oakthorn 2, Pincinco and Wardbase transactions, and that he was liable to account as a constructive trustee for the large sums mentioned earlier in this judgment. The judge stated that conclusion very shortly at the end of section V.3(a) of his judgment, but it was based on his lengthy analysis and findings of fact in section IV.3(g) as to Mr Folchi’s part in the matter, and on his analysis of the law earlier in section V.3(a).
“94. …The Judge acquitted Mr Folchi of involvement in the conspiracy on the basis that he had not knowingly become party to the scheme to defraud GT although, particularly in relation to Wardbase, it is clear that Mr Folchi got perilously close to having such a finding made against him. As to the other Defendants the Judge made positive findings that Mr Soler, Mr Coll and Mr Moukarzel believed that they were acting in the interests of GT and in the case of Mrs Parker that she simply acted on the instructions of Mr Folchi whom she had no reason to distrust. No such positive findings were made in Mr Folchi’s case and it is possible therefore that the Judge did not intend to include Mr Folchi in the passages in question. However, that is clearly what he has done and we must take his conclusions as we find them. It would not be right for us to substitute our own view on this aspect of the case.
“117. Mr Davies submits that having declined to hold that Mr Folchi was a conspirator, the judge could not consistently hold him liable for dishonest assistance to successive conspiracies. This submission is based on the further submission that, on the facts of this case, the liabilities would be co-extensive (the Respondent’s Notice to the effect that the judge should have found that Mr Folchi was indeed a conspirator is in a sense the mirror-image of the Appellant’s submission). We reject this submission. On the facts of this case many of Mr Folchi’s acts might have been viewed as the acts of a conspirator, but the judge abstained from that conclusion because he was not satisfied that Mr Folchi was engaged on any concerted action aimed or directed at GT or THL. The reference to concerted action is important because that is an essential of the tort of conspiracy. It is not however an essential of accessory liability. We do not therefore think that this point assists the appeal; nor (if it were necessary to consider it) would we accede to the mirror-image point in the Respondent’s notice.”
70. I do not accept Mr Wardell’s proposition of law that the receipt of money on commercial terms, and for a legitimate commercial purpose, and which is in fact applied for that purpose, renders it impossible to establish liability in conspiracy against the recipient, notwithstanding that the recipient is fully aware that the money is the product of a fraud on the claimant, and even where the recipient repeatedly applies to the fraudster for funds, with that knowledge.
71. On the other hand, I do not accept the rival proposition of law advanced by Mr Carr that anyone who receives money, knowing it to be stolen, is a conspirator. Mr Carr relied upon the statement of Templeman J in Re Gerald Cooper Chemicals Ltd1978 2 All ER 49, at p54, that “a creditor is party to the carrying on of a business with intent to defraud creditors if he accepts money which he knows full well has in fact been procured by carrying on business with intent to defraud creditors for the very purpose of making the payment”. That case, as Mr Wardell observed, was a case concerning fraudulent trading under the Companies Act 1948 s.332. Liability turned on the particular wording of the statutory provision: “any persons who were knowingly parties to the carrying on of the business in manner aforesaid [viz. “with intent to defraud creditors of the company ... or for any fraudulent purpose”] shall be personally responsible ... for all or any of the debts or other liabilities of the company.”. In that case, the respondents applied to have the points of claim struck out as disclosing no cause of action on the ground that a single transaction could not amount to “carrying on a business with intent to defraud creditors” within the meaning of the subsection. The actual decision was, therefore, on a narrow point, specifically related to the wording of the statute. Templeman J rejected the respondent’s submission. Moreover, and critically, the statement of Templeman J, which I have quoted, does not seek to draw any distinction between a cause of action for knowing receipt and a cause of action for common law conspiracy, and it is impossible to say, were he intending to refer to a non-statutory cause of action, whether he was referring to one or the other or both.
72. I agree with Mr Wardell that the passages in Grupo Torras, which I have quoted, underline the fallacy of Mr Carr’s submission of law. As was stated in paragraph 117 of that judgment, “concerted” action is an essential element of the tort of conspiracy, but is not an essential feature of accessory liability. Nor, for that matter, it is an essential feature of liability for knowing receipt: BCCI (Overseas) Ltd v Akindele [2001] Ch 437.
73. On the other hand, the facts and findings of the Court of Appeal in Grupo Torras do not enable Mr Wardell to rely on that Court’s case as authority in support of his proposition of law. Mr Folchi was held not liable for conspiracy because he was found to have believed that the transactions in question were in the interests of the defrauded company Grupo Torras. The manner in which the Court of Appeal reconciled the findings of the Judge that Mr Folchi was not liable in conspiracy, but was liable on the ground of accessory liability, appear from the following passage in the judgment of the Court:
“114 The Judge’s finding that Mr Folchi was deceived into believing that the transactions were in the interests of GT is not inconsistent with his finding that Mr Folchi was guilty of “blind eye” dishonesty. These two apparently diverse findings can be reconciled since it can have been only by turning a blind eye and refraining from asking the obvious questions that Mr Folchi was able to sustain that belief whilst knowingly conniving at a breach of what the Judge called the most fundamental breach of fiduciary duties. That would be in line with the view expressed by Sir Christopher Slade in Walker v Stones… Mr Folchi’s belief may also have been induced or sustained by what Mr Popplewell described as “suppression of the moral antennae” caused by the desire for personal gain and the influence of Mr de la Rosa. This may also explain, but does not excuse, the dishonesty itself. The blunting of moral antennae is not, as Mr Popplewell suggested, a separate head of objective dishonesty, rather it explains why a defendant may have a lower standard of honesty or, in this case, may have turned a blind eye. It explains the Defendant’s reckless regard for the rights of others.”
74. Whether or not Mora and Chascona were parties to an effective combination to defraud the Claimants (and indeed other lenders to or investors in Castor) must depend upon an analysis of all the facts, of which the purposes and terms of the loans from Castor to Mora and Chascona are only part. I have set out earlier in this judgment the nature of the frauds carried out by Castor to induce the Claimants and others to lend to Castor, or to invest in Castor, substantial sums of money. As I have said, the Claimants’ contention is that from 1986 onwards Castor was no longer carrying on any legitimate business and its sole function was to act as a vehicle for the purpose of obtaining money by deception for the benefit of the individual Defendants and companies or other entities associated with them.
75. An important element of the way in which Castor carried on its business was the extraction of money, for the personal benefit of Mr Gambazzi, when he procured the payment of loans to, or investments in, Castor. In proceedings in Canada, Mr Stolzenberg gave evidence that:
“Mr Gambazzi had an arrangement, as far as I am concerned, with clients because we would pay a certain interest rate and he would deduct from this interest rate his fee and would give his clients less.”
In an affidavit sworn for the purposes of the Applications, Mr Gambazzi confirmed that he did, on some occasions, receive commissions when one of his clients made an investment in Castor. He said that “was usually an annual commission of 1% of the amount invested and agreed with the client”.
76. Further, as I have already said earlier in this judgment, there is evidence that Mr Gambazzi procured payments to himself when loans were made by Castor. This is denied by Mr Gambazzi in his sworn evidence. The evidence on behalf of the Claimants, however, in particular paragraph 35 of the Appendix to the 33rd witness statement of Charles Andrew Pugh, refers to substantial fees paid to Castor by lenders, which fees were transferred into an account from which they were extracted for the benefit of Mr Gambazzi and others. Mr Pugh concludes, in paragraph 36 of that Appendix, that Mr Gambazzi appears to have received fees and commissions for acting on Mora and Chascona’s behalf. For the purposes of the Applications, on this state of evidence, I am bound to assume that the Claimants have a real prospect of establishing that conclusion at any trial on the merits.
77. Further, as I have said, Mr Gambazzi, as a shareholder in Castor Holdings, extracted dividends from that company from funds which had been acquired through Castor’s fraudulent trading, and on the basis of financial records that he knew were deliberately misleading.
78. Putting together these various elements, and assuming Mr Gambazzi’s knowledge is to be imputed to Mora and Chascona, Mora and Chascona knowingly provided a mechanism by which loans and investments were fraudulently procured by Castor from the Claimants and others, on the basis of fraudulently drawn accounts and financial statements, which misrepresented, at least from 1987, that Mora and Chascona were fully performing their loan obligations, including the payment of all interest due, even though they were not. Mora and Chascona knew that those fraudulently obtained funds enabled Castor to continue in existence. Mora and Chascona knew that, indirectly, by keeping Castor in existence, and also directly, the fraudulently obtained funds were used to generate dividends for Mr Gambazzi out of fictitious profits, and to generate personal payments for Mr Gambazzi’s benefit when clients introduced by Mr Gambazzi made loans to, or investments in, Castor, and also when loans were made by Castor to, among others, Mora and Chascona. In short, Mora and Chascona were knowingly parties to a scheme, under which loans to them by Castor were an element in the process by which Castor, by fraudulently procuring the drawing up of its financial information and accounts, dishonestly procured funds from, among others, the Claimants, and thereby enabled Mr Gambazzi and others to extract funds for their personal benefit through commissions and dividends. If those are the facts established at trial, then I see no legal impediment to the Claimants establishing liability, on the part of Mora and Chascona, for common law conspiracy, even if the loans paid to Mora and Chascona were for the purpose of the acquisition of the Hotel by Mr Cori, and the renovation and refurbishment of the Hotel, and were on commercial terms.
79. In any event, however, even if I am wrong on that conclusion of law, I would not regard this as a suitable case for forming a view, at this stage of the proceedings, that, if the judgments against Mora and Chascona were set aside, the Claimants’ case in conspiracy would have no real prospect of success. The frauds, of which the Claimants complain, are immensely complex. They concern matters which took place from at least 1984 until 1992, require investigation and analysis of complex relationships between individuals and many corporations, and close scrutiny of a vast number of documents. The re-re-re-re-re-amended statement of claim runs to one hundred and six pages. There were more than sixty lever-arch files placed before me, for the purposes of the Applications. The hearing before me lasted six days, and undoubtedly would have lasted considerably longer had the rigours of efficiency and discipline not been imposed on the hearing by the need of Mr Wardell to appear in another case on the eighth day and had I not prevented Mr Carr from seeking to establish, by reference to a very wide selection of documents, that the Claimants would be bound to win on any trial on the merits. In a fraud case of this complexity, it is obvious that the Court must be very wary indeed of reaching conclusions on the facts, where there has been no oral evidence, and no cross-examination, and disclosure of documents has not been completed.
80. As I have said, Mr Wardell’s submissions on conspiracy were based on the assertion, which Mr Wardell submitted was conclusively established on the evidence, that all the loans from Castor to Mora and Chascona from 1981 onwards were for legitimate commercial purposes, and on proper commercial terms, and were utilised for those commercial purposes. In this connection, he relied particularly on the following. He emphasised that, at least until 1987, those loans were properly serviced, and over US$6million was paid in respect of interest on them over the years. He submitted that the evidence conclusively establishes that Mr Cori acquired Mora and Chascona in 1981, and sold 50% of his interest to Mr Cavazza in August 1994, and a further 25%in October 1995, the remaining 25%being acquired by Mr Gambazzi in 1993. He submitted there is no evidence at all that either Mr Cori or Mr Cavazza were ever in any way involved in the frauds of Castor or of the individual Defendants, including Mr Gambazzi and Mr Stolzenberg. He submitted that the evidence shows clearly that the loans were for the purpose of the acquisition of Mora and Chascona by Mr Cori in 1981 and, thereafter, for the renovation and refurbishment of the Hotel.
81. So far as concerns the terms of the loans, Mr Wardell emphasised that the loans were made at 2% above base, which was a commercial rate. He said that the fact that perfectly reputable lenders, including, in particular, Banque Paribas, were prepared to advance Castor 85%of the value of the loans, on the security of the Hotel, showed that the loans were on proper commercial terms. Mr Wardell submitted that there is no evidence before the court that an independent lender would not have been prepared to enter into the loans to Mora and Chascona on the terms on which those loans were in fact made by Castor.
82. Mr Carr did not, for the purposes of the Applications, dispute that Mr Cavazza is the beneficial owner of 75% of the shares in Mora and Chascona. Nor did he seek to challenge, on the hearing of the Applications, that Mr Cori acquired Mora and Chascona in 1981 and subsequently dealt with the shares in the manner stated by Mr Wardell. Mr Carr did not, however, accept that the loans by Castor to Mora and Chascona were on commercial terms or that independent lenders would have made similar loans, that is to say loans on those terms and at those times.
83. It appears that Castor’s approach was to secure, back-to-back lending to itself, in respect of 85% of the amounts it lent to Mora and Chascona. The Claimants point out that the interest rate charged by Castor on its lending to Mora and Chascona was, at least in relation to the early lending, often less that that charged to it by such third party lenders to Castor. In the case of the loans in 1981, this is because the loans by Castor to Mora and Chascona, on the one hand, and by the third party lender to Castor, on the other hand, provided for interest to be fixed by reference to different base rates. Mr Carr submitted that an arrangement which exposed Castor to the possibility of the rates of interest being paid to and by it becoming out of kilter was unusual and not commercial. Mr Wardell riposted by emphasising that there is no evidence at all, nor is it alleged in the statement of claim, that there was any conspiracy in 1981. Furthermore, Mr Wardell stated that it is necessary to take into account a substantial deposit made by Mr Cori with Castor which, Mr Wardell alleged, was security for the loans to Mora and Chascona. He also observed that there is no evidence as to whether Castor hedged against the possibility of the different rates of interest getting out of kilter.
84. Again, it seems to me that it is important to bear in mind at all times that the evidence before the Court, on these Applications, is limited. On the face of it, arrangements which permitted interest rates to get out of kilter, so that Castor might be paying more interest than it was receiving from Mora and Chascona, raises a query. Further, from about 1987 Mora and Chascona increasingly failed to make interest payments and Castor permitted such unpaid interest to be capitalised. The fact that Castor was increasingly prepared to permit this over a substantial period, whilst at the same time agreeing to provide fresh funds, also raises a legitimate query as to whether Castor was adopting the same attitude as would have been taken by a wholly independent lender. Mr Wardell emphasised, as I have said, that Banque Paribas was prepared to lend Castor substantial amounts in 1988 and 1990, secured by collateral assignments of the mortgage in favour of Castor, and would only have been prepared to do so if satisfied as to the legitimacy of the business carried on by Mora and Chascona and as to the appropriateness of the loan to value ratio. As Mr Carr observed, however, Banque Paribas must be assumed to have decided to lend Castor on the terms, and at the times, it did lend, on the basis of its belief as to Castor’s financial standing. That belief as to Castor’s financial standing will have been based on the fraudulent accounts and financial records of Castor.
85. Mr Wardell also submitted that the evidence shows that the terms of the loans were not negotiated by Mr Gambazzi, on behalf of Mora and Chascona, but rather by a New York attorney, Mr Emanuel Demos, acting on the direct instructions of Mr Cori. On the other hand, Mr Demos’ own evidence indicates that Mr Gambazzi played an important role in procuring the loans from Castor to Mora and Chascona.
86. In my judgment, itis impossible to conclude at this stage, in the absence of oral evidence and the opportunity for cross-examination, and in the absence of full disclosure and also the absence of expert evidence as to the appropriateness of the lending from time to time by Castor to Mora and Chascona, that such lending would have been entered into by a fully independent commercial lender
87. The Claimants’ skeleton argument refers to other respects in which Castor’s loans to Mora and Chascona were not such as would have been agreed by a normal commercial lender. It is there alleged, for example, that, unlike any normal commercial lender with back-to-back lending arrangements, Castor was prepared to lend money to Mora and Chascona for purposes outwith those provided for in the loan arrangements and where no back-to-back facility was available So, itis said, in December 1989 Castor provided funding for “professional fees and interest” when there was no provision for such funding in its loan arrangements with Mora and Chascona and when no request was made for an equivalent draw down from the back-to-back third party lender, then Banque Paribas. Further, itis also alleged that, unlike any normal commercial lender, Castor was willing to advance funds to Mora and Chascona using facilities made avai1able to other parties arid for other purposes. So, itis alleged, loan facilities made available by Castor to Immenhausen NV and Aliakmon Corporation NV (both of which were also allegedly controlled by Mr Gambazzi and Mr Stolzenberg) were used to advance further funds to Mora and Chascona when they had reached the limit of their agreed borrowing limit with Castor of US$l5million. These points were not expanded upon in the oral submissions to me, and I do not find it necessary to rely upon them to reach my conclusion that, on the available material, it is not appropriate or possible, on these Applications, to reach any firm conclusion as to whether the loans by Castor to Mora and Chascona were such as would have been made by independent commercial lenders.
88. An important part of the factual matrix, against which the allegation of conspiracy by Mora and Chascona has to be examined, is the role of Mr Gambazzi and of Mr Stolzenberg in the affairs of those two companies. I have addressed this, to some extent, earlier in this judgment in connection with the tracing claim against Mora, and the question whether the knowledge of Mr Gambazzi, in particular, and Mr Stolzenberg is to be imputed to Mora and Chascona. Mr Wardell submitted that the evidence shows that, at least until Mr Cori became ill in 1992 and returned to Italy, Mora and Chascona were managed and controlled by Mr Cori, with the day to day assistance of a Mr Jack Davis (the previous owner of the Hotel), and, subsequently, Mr Paul Spitzberg, who was vice-president of the Hotel from 1984 until 1993. Mr Wardell pointed out that it was Mr Spitzberg who signed the documentation for the loan arrangements, other than the first in 1981, on behalf of Mora and Chascona.
89. In relation to Mr Gambazzi, Mr Wardell relied heavily upon Mr Demos’ evidence (in the form of an unsigned witness statement) that Mr Gambazzi’s role in Mora and Chascona was merely as a nominee of Mr Cori, and that, until late 1992, Mr Gambazzi was only ever involved to the extent that it was necessary for members of his office to sign documents as the company officers for Mora and Chascona. Mr Demos states that he never received any directions from Mr Gambazzi; rather Mr Demos would telephone Mr Gambazzi or his colleagues and tell them what he needed so as to carry out Mr Cori’s wishes with regard to the running of the Hotel. Mr Demos says he always viewed Mr Gambazzi’s office as an unincorporated trust company, acting on Mr Cori’s behalf. In so far as Mr Demos needed authority to act on behalf of Mora or to make any decisions, he spoke with Mr Cori.
90. Mr Demos’ unsigned witness statement was, apparently, drawn up less than one week before the hearing of the Applications. It appears that its contents have been approved by Mr Demos, even though he has not signed it. More importantly, Mr Demos’ evidence has not been subject to cross-examination. There are, undoubtedly, other documents and material indicating that Mr Gambazzi did not play a merely administrative, or nominee, role in relation to Mora and Chascona. As I have already said, Mr Demos’ own evidence refers to Mr Gambazzi playing a role in the actual procuring of finance for the purchase of Mora and Chascona in 1981 and its subsequent renovation and refurbishment. Further, Mr Carr referred me, briefly, to some of the documents on which Mora and Chascona would wish to rely, at any trial on the merits, to show that Mr Gambazzi had a real role in relation to the management of Mora and Chascona and, in particular, the financing arrangements. Amongst those documents are some which refer to Mr Gambazzi, even before he was formally recorded as a director of Mora, as Mora’s managing director and also as its chairman. As I have said, Mr Gambazzi was at all relevant times a director of Chascona. Taking the evidence as a whole, I consider that it would be unsafe and unwise, in the absence of oral evidence, cross-examination and full disclosure, to form any firm view that Mr Gambazzi’s role in Mora and Chascona was as limited and circumscribed as submitted by Mr Wardell.
91. So far as concerns Mr Stolzenberg, Mr Wardell submitted, as I have already said, that his involvement in the affairs of Mora and Chascona was limited to considering the running of those companies, and in particular the carrying out of the works of renovation and refurbishment, in his capacity as agent for, and on behalf of, Castor, as lender. Again, in my judgment, it would be unwise and unsafe of the Court, at this stage, to reach any firm view in favour of that assertion. The evidence is that, although Mr Stolzenberg was principally involved with the works of renovation and refurbishment, his role was not limited to that aspect. There is evidence, for example, that Mr Stolzenberg acted on behalf of Mora in negotiations over rent payable by the Castellano restaurant in the Hotel. Moreover, there is evidence that Mr Gambazzi, as managing director, formally resolved, in a written minute, that Mora retain “the consulting assistance of Wolfgang Stolzenberg ... with respect to the making of final decisions as to design, the awarding of contracts to contractors, the purchase of furniture, fixtures, equipment, and all other actions necessary to implement and conclude the renovation”. It appears that Mr Stolzenberg demanded and received, presumably pursuant to that resolution and appointment, a substantial consultancy fee from Mora. On the face of it, it is difficult to reconcile that payment, and the resolution to which I have referred, as consistent with Mr Stolzenberg acting exclusively on behalf of, and in the interests of, Castor, as lender.
92. Part of the skeleton argument of the Claimants, and of Mr Carr’s oral submissions, concentrated on a “set off” of certain deposits with CR International Finance NV against money due from Mora and Chascona to Castor. It appears to be the Claimants’ case that this arrangement was improper, and a fraud on other creditors of Castor. I do not consider that this issue assists the resolution of the matters before me, and I do not propose to analyse the submissions made in relation to it.
93. It is clear, in my judgment, that the evidence as to the involvement of Mr Gambazzi in the affairs and management of Mora and Chascona, and, in particular, the procuring of loans by Castor to Mora and Chascona, provides the Claimants with a real prospect of succeeding, at any trial on the merits, in a claim that Mr Gambazzi’s knowledge of Castor’s frauds on the Claimants should be imputed to Mora and Chascona. The Claimants have a well arguable case that, in relation to those loans, Mr Gambazzi was the directing mind and will of Mora and Chascona, and, accordingly, his knowledge in relation to the dishonest acquisition of those funds and use of them by Castor is to be imputed to Mora and Chascona: El Ajou. Whether or not Mr Con and Mr Cavazza are wholly innocent and unrelated to any of the frauds of Castor, the imputation of Mr Gambazzi’s knowledge of dishonesty to Mora and Chascona, and any consequent liability of those companies for conspiracy, would not be surprising. As Hoffman LJ observed in El Ajou at p.707:
“If the persons beneficially interested in a company prefer for tax or other reasons to allow that company to be for all legal purposes run by off-shore fiduciaries, they must accept that it may incur liabilities by reason of the act or knowledge of those fiduciaries”.
94. For all these reasons, I conclude that, if the judgments against Mora and Chascona were set aside, they would have an arguable defence to the tracing and conspiracy claims of the Claimants; but, on the other hand, the Claimants would have a real prospect of succeeding on both those heads of liability at any trial on the merits.
95. I now turn to consider each of the matters specified in CPRr.3.9(i)(a) to (i).
The interests pf the administration of justice
96. As I have already said earlier in this judgment, Mora and Chascona explain their non-compliance with the “unless” orders on the ground that a policy decision was taken by Mr Gambazzi that, save in connection with steps challenging the jurisdiction of English courts, he and the other Defendants on whose behalf he was conducting the proceedings would cease to comply with any orders made by the English court. In his affidavit sworn for the purpose of the Applications, Mr Gambazzi said:
“86. The challenge to jurisdiction is highly relevant to Mora and Chascona’s approach to this litigation. I shall explain why Mora and Chascona failed to comply with the orders of the court in the context of this challenge to jurisdiction and why Mora and Chascona focused on the jurisdiction challenge …
87. …
88. I turned to a very old friend, Mr Dario Ceppi, whom I have known since my school days. Mr Ceppi was, and is, a litigator in New York. At the time, he was a sole practitioner on Park Avenue in New York. In addition to being a litigator, Mr Ceppi was an expert in the conflicts of law-s and cross-border litigation. Indeed, Mr Ceppi has written textbooks on the conflicts of laws between different states.
89. …
90. …
91. …
92. Richards Butler and Mr Ceppi agreed, from the outset, that Mora, together with a number of the other Defendants, were best advised to challenge the English proceedings on the basis of jurisdiction. This was my inclination and I was pleased to see that everyone agreed.
93. Richards Butler said that Mora, together with the other Defendants I represented, had such an excellent jurisdiction challenge that it was pointless to spend time and money in exploring the case on its merits, other than a cursory inspection of the claim and the defence that Mora could submit, if necessary. Richards Butler told me that if I wanted them to investigate the case on its merits, I would need to pay £lmillion on account of their costs. I understood that by this request, Richards Butler was encouraging me not to defend the allegations against my clients and me on the merits.
94. …
95. Initially, I gave instructions for Mora and Chascona to comply with various orders made by the court under the various freezing orders against the Defendants I represented. I understand that Mora and Chascona’s solicitors have set out in more detail the extent to which such orders were complied with. I note that Mr Pugh also refers to documents that were disclosed to him by Richards Butler. Mr Sabo swore a number of affidavits on behalf of Mora and I understand that Richards Butler sent a number of documents to the Claimants’ solicitors. At that time, I thought that Mora had complied with the freezing order made by Mr Justice Rimer. I do not recall Richards Butler asking me to provide any further documentation to disclose to the Claimants.
96. …
97. As I have said, I was funding the litigation on behalf of a number of the Defendants and after the proceedings had progressed some way, I took the decision to focus entirely on the jurisdiction challenge.
98. …
99. I instructed Messrs Colman Coyle, assisted and guided by Mr Ceppi. Like Richards Butler, Colman Coyle advised me that I should be successful in my jurisdiction challenge and that I was right to focus on this aspect of the case. Colman Coyle did advise me that I should comply with the Pre-emptory Orders of the court. However, I discussed this matter in some detail with Mr Ceppi and we shared a concern that to continue to comply with such orders might be prejudicial to Mora’s (and subsequently Chascona’s position) as we might submit to the jurisdiction.
100. The question of jurisdiction appeared to be unique and Mr Ceppi and I never received a consistent analysis of the legal position from the various advisers that were instructed. In addition to Richards Butler, Colman Coyle and the various counsel instructed by them, Mr Ceppi sought advice from a number of academic lawyers and we received a variety of analyses of the position. The only consistent advice was that the English court would, eventually, be persuaded that it did not have jurisdiction, even if we had to take this matter to the House of Lords.
101. …
102 I was extremely concerned about submitting to the jurisdiction as I had focused on the jurisdiction challenge and I believe this was the most efficient way to deal with the case against my various clients. I did not want to risk wasting my time and money in the jurisdiction challenge by submitting to jurisdiction unwittingly. It was Mr Ceppi’s firm advice that I should cease to comply with the various orders made by the English court and concentrate exclusively on the jurisdiction challenge. I agreed with this advice, though I now understand that this was not the right advice. In fact, Mora and Chascona could have complied with the orders against them relatively easily, though it should not be forgotten that Mora and Chascona were one of the numerous clients I represented that were the subject of various orders made by the court.”
97. In his third affidavit, sworn for the purpose of the Applications, Mr Andrew Ford, the solicitor having the conduct of the Proceedings on behalf of Mora and Chascona, says:
“9. If it were not for this challenge to jurisdiction, it might be that Mora and Chascona could be criticised for failing to defend the case on its merits ... and for failing to comply with the orders of the English court. However, when one realises the extent and duration of this challenge to jurisdiction, it alters completely the context in which the court must consider Mora and Chascona’s conduct of the proceedings against them.”
98. It is clear, as I have said earlier in this judgment, that the impetus for the Applications has come from Mr Cavazza. In his third affidavit, sworn on 4th July 2002, Mr Cavazza explains that until “relatively recently” he took a “hands-off” approach to the conduct of the Proceedings, as he did to the management of the Hotel. He explains in that affidavit that he is a very busy businessman, and the majority of his time has been spent and is spent running a substantial pharmaceutical company. He says that he received limited updates from Mr Gambazzi on the conduct of the Proceedings. In paragraph 26 of that affidavit, he states that he had no contact at all with the English lawyers instructed by Mr Gambazzi, and thinks that they probably did not know of his identity “as before the taxing amnesty I was keen for my identity as the beneficial owner of 75%of Mora and Chascona not to be revealed for the reasons set out at paragraph 45 of my 1st affidavit and paragraphs 12 - 16 of my 2nd affidavit; namely, I had not reported my investment in the hotel to the Italian tax authorities.”
99. In his second affidavit, sworn on 24th April 2002 for the purposes of the Chinablue Application, Mr Cavazza referred to recent transfers of his bearer shares in Chinablue, Chascona and Mora, and said the following in that connection:
“13. I have done this in order to take advantage of the amnesty that has been granted by Italian Law Decree 350 of September 2001 (which was approved by the Senate on 13 November 2001). By this Decree an amnesty has been offered to Italian nationals who have made investments abroad not previously declared to the Italian authorities. The effect of this amnesty is that, provided that the appropriate application is lodged by the stated deadline (15 May 2002), the only amount payable on such investments is 2.5%. Because my ownership of Chinablue, Mora and Chascona had not been reported to the Italian authorities, I decided on advice to make the appropriate application under Law Decree 350 before I launched this application to set aside the orders made on 16th May 2001. I understand from the press that this Decree has been very successful so far and the government forecasts that many more will take advantage. Indeed, the original deadline was 15 February 2002 and one of the reasons for the extension of the deadline was because of the number of people who wanted to take advantage of the Decree.
14. Under the scheme set up by Law Decree 350 anyone wanting to benefit under the amnesty can transfer the assets in question to a ‘Fiduciaro’ (fiduciary) who then becomes responsible for settling the amount payable on those assets.
15. I transferred my shares in Chinablue and in Mora and Chascona to Cititrust acting as my Fiduciaro about one month ago. Cititrust is now responsible for settling the tax payable on my behalf I have also just completed the process of transferring my shareholding in Crocus to Cititrust, for the same reason”
100. There is no doubt that there were duly and properly served on Mora and Chascona the applications for the various orders that were made against Mora and Chascona in 1997, 1998 and 1999 in the Proceedings, and the evidence in relation to them, and the orders made by the court pursuant to those applications.
101. Further, as appears from paragraph 99 of the affidavit sworn by Mr Gambazzi for the purpose of the Applications, which I have quoted earlier, Colman Coyle, who were the solicitors acting for Mr Gambazzi, Mora and Chascona, as well as some of the other Defendants, advised that the “unless” orders should be complied with
102. Mr Wardell accepted that compliance with the freezing orders against Mora and Chascona and the orders supplementary to them, including the “unless” orders, could not possibly have prejudiced the challenge to the jurisdiction of the English court by Mora and Chascona, and that a reasonably competent solicitor would have so advised. In the absence of evidence to the contrary, I infer that this was the advice given to Mr Gambazzi, and, accordingly, Mora and Chascona, by Colman Coyle when they advised that the “unless” orders should be complied with.
103. The matters to which I have referred in this section of my judgment weigh against the setting aside of the judgments entered in default of compliance with the “unless” orders. Mora and Chascona, acting by Mr Gambazzi, a duly authorised director, consciously decided not to comply with the “unless” orders, despite the advice of their Engnsh solicitors to do so in R C Residuals Ltd v Linton Fuel Oils Ltd[2002] EWCA Civ 911[2002] 1 WLR 2782 both Sir Swinton Thomas (at para [28]) and Brooke LJ (at para [30]) emphasised the importance of strict compliance with court orders, particularly “unless” orders. In the present case, the “unless” orders were supplementary to, and in enforcement of, freezing orders. Freezing orders are critical weapons in the court’s armoury against fraud, securing the preservation of assets which might otherwise be wrongly dissipated pending judgment, and, in appropriate cases, the preservation of evidence, including documentation, and the provision of information to trace the proceeds of fraud. In the present case, the freezing orders were designed to deal with all those aspects.
104. Willful and conscious disobedience to freezing orders, against the express advice of a defendant’s English lawyers, is a matter of the gravest concern. While each case must turn upon its own facts, the setting aside of a judgment properly entered against a defendant for willful and conscious failure, against legal advice, to comply with such orders sends, generally speaking, entirely the wrong message to those who face allegations of fraud. Relief in such a case is likely to provide a broad base from which determined and well resourced defendants, with the benefit of the most skilful lawyers, will attempt to mitigate the court’s sanction for non-compliance in other cases. It is not in the least surprising that R C Residuals, in which the Court of Appeal emphasised the importance of complying with “unless” orders, but in which the Court of Appeal found there was no intentional default and granted relief from sanction (debarring the Claimant from relying upon experts’ evidence at trial, by reason of failure to serve those reports by a specified date), now forms part of a body of jurisprudence relied upon by Mora and Chascona for setting aside the default judgments (resulting from intentional default) in the present case.
105. Mr Wardell drew my attention to the following observation by Peter Gibson LJ in a judgment given on 8th October 2002 on an appeal from the decision of Mr Justice Jacob by which he ordered that, as a condition of Mora and Chascona being allowed to pursue the Applications, they should pay £1,600,000 into court by 10th June 2002 (see [2002] EWCA Civ 1688):
“39. In the present case I accept that the Appellants can be criticised for their tactical decision which led to failures to comply with “unless” orders and to the default judgments Nevertheless I doubt if in the circumstances there was an absence of good faith in the sense given by Simon Brown LJ [in Olatawura v Abiloye[2002] EWCA Civ 998]”
Lord Justice Peter Gibson, like Simon Brown LJ in Olatawura, was there considering the court’s jurisdiction to make orders tantamount to orders for security for costs outside the provisions of CPR Part 25. I understand that the hearing before the Court of Appeal lasted one day. Important parts of the evidence before me, including Mr Gambazzi’s affidavit, in which he explains in detail the reasons why he did not comply with the “unless” orders, and the fact that he acted contrary to the advice of his English lawyers, were not before the Court of Appeal. Further, in paragraph [40] of his judgment, Lord Justice Peter Gibson expressly acknowledged that the Court of Appeal had not been addressed by either counsel on the merits of the Applications before me. He noted the difficulties facing Mora and Chascona in seeking relief from sanction under CPR r.3.8, by reason of r.3.9, and stated that “it will be for the judge at the hearing in December of the applications to set aside to determine whether on the merits [Mora and Chascona] have a good case and if so whether the factors referred to in r.3.9 on which Mr Marshall [junior counsel for the Claimants] relies would nevertheless prevail.”
106. The evidence indicates, as I have said, that the Applications have been made at the instigation of Mr Cavazza. Both the evidence and, in part, the submissions of Mr Wardell have been skilfully crafted to distance Mr Cavazza, as the majority shareholder in Mora and Chascona, from the tactical decisions taken in the proceedings by Mr Gambazzi on behalf of Mora and Chaseona. One of the underlying themes of the Applications is that Mr Cavazza stands to lose the entire value of his investment in Mora and Chascona (the only asset of which is the Hotel, said by Mora and Chascona to be worth between US$30m and US$35m) by virtue of incorrect tactical decisions made by Mr Gambazzi and without any proper hearing on the merits of the claims against Mora and Chascona.
107. It seems to me, however, that a more realistic appraisal, on the evidence, is that Mr Cavazza, took the deliberate decision not to become a director of, or closely involved with management of, Mora or Chascona, but rather to have Mr Gambazzi as a director of those companies and to leave the conduct of the Proceedings to Mr Gambazzi, on behalf of Mora and Chascona, in order to keep hidden from the Italian tax authorities Mr Cavazza’s acquisition of the shares in Mora and Chascona in breach of Italian exchange control. In those circumstances, it is difficult to see why any significant weight should be attached to Mr Cavazza’s personal ignorance of tactical decisions made by Mora and Chascona, through Mr Gambazzi, and the grounds for those decisions. Further, Mr Cavazza is not the same as Mora and Chascona, each of which has an independent legal personality. His personal circumstances are no more relevant than those of any other shareholder in, or creditor of, Mora and Chascona.
Have the Applications been made promptly?
108. The earliest of the Applications was made on 5th December 2001, some three years and two years respectively from the dates of the default judgments. CPR r.3.9 does not contain any express time limit for the making of an application under that rule. In the analogous situation of an application to set aside a judgment entered after striking out, CPR r.3,6 provides that the application must be made not more than 14 days after the judgment has been served on the party making the application. Judged by that standard, the delay in making the Applications in the present case is considerable.
109. Mr Wardell submitted that the period which elapsed before the making of the Applications can be both explained and excused on the following grounds. He submitted that, once judgment had been entered against Mora and Chascona, there would have been a real danger of submitting to the jurisdiction if an application had been made to set aside the judgments prior to the final disposal of the jurisdiction challenge by the House of Lords in October 2000. Further, until Withers were retained by Mr Cavazza in about August 2001, he was unaware of the possibility of making an application to set aside the judgments.
110. In my judgment, neither of those explanations fully excuses the delay in making the Applications. Mr Cavazza’s personal ignorance of the jurisdiction of the court to set aside the judgments and give relief from the sanction imposed by the “unless” orders seems to me of doubtful relevance. The control of the litigation was, as I have said, entrusted to Mr Gambazzi, as a director of both Mora and Chascona. Mr Gambazzi and, through him, Mora and Chascona took the conscious decision not to comply with the “unless” orders. As Mr Carr neatly put it, the preference of Mora and Chascona was for judgment rather than compliance. All that has happened is that Mora and Chascona have changed their preference.
111. So far as concerns the proposition that Mora and Chascona might have submitted to the jurisdiction by seeking to set aside the default judgments prior to the disposal of the jurisdiction challenge by the House of Lords, Mr Wardell cited me no authority to support that proposition. Even assuming it to be correct, however, applications to set aside the default judgments should have been made immediately the House of Lords disposed of the jurisdiction point in October 2000.
112. The delay in making the Applications weighs against the grant of relief for a number of reasons. Firstly, as Mr Carr observed, there is a public interest in the conclusion of litigation. The longer the period of delay between the conclusion of litigation and the taking of steps to revive it,the greater the weight to be attached to this policy consideration. In the present case, itis to be noted that the Proceedings have already come to a conclusion, since the Claimants have either secured final judgment against, or concluded compromises with, all the defendants.
113. Second, the inevitable consequence of the delay in making the Applications in the present case is that, if the default judgments are set aside, the trial will be held at a later date than it would have been held if there had been no failure to comply with the “unless” orders or the applications for relief had been made promptly. By way of analogy, in a case which is continuing to proceed to trial, the question of whether the trial date would be likely to be adversely affected by the granting of relief under CPR r.3.9 will be an important factor: comp. R C Residuals. Irrespective of the question whether delay will have an impact on the ability to have a fair trial, there is a public interest in the prompt and efficient disposal of litigation.
114. Assuming, in favour of Mora and Chascona, that the Applications could not be expected to have been made until after the decision of the House of Lords in October 2000, it is likely, in my judgment, that, if the Applications had been made promptly (and been successful), the trial would have taken place towards the end of 2002. It would, in my judgment, have required in the region of two years to bring the Proceedings to trial in view of the need for pleadings to be served, full disclosure to be given, witnesses to be proofed, and experts’ reports to be exchanged, and bearing in mind the usual interlocutory applications and skirmishes in substantial and complex cases of this kind, and the need to find an appropriate slot in the lists for a substantial hearing.
115. If I set aside the default judgments now, the trial is, in my judgment, likely to take place towards the end of 2004. For reasons which have not been explained to me, the application dated 5th December 2001 has taken more than a year to come on for hearing.
116. I recognise, however, that matters of timing of this kind cannot be determined with precision. Allowing some latitude, I conclude that it is likely that, by virtue of the delay in making the Applications, following the House of Lords’ decision, any trial on the merits will have been delayed by one and a half to two years.
117. Not surprisingly, there is considerable disagreement between Mr Carr and Mr Wardell as to the impact of delay on the ability to have a fair trial. The Claimants maintain that a fair trial has been endangered in, at least, the following respects. There may be difficulty in locating witnesses. The delay will or may have had an impact on the ability of witnesses to recollect relevant events. There is a real possibility of the destruction or loss of relevant documents. A new legal team will have to be assembled by the Claimants I shall consider these points in turn.
118. There is no convincing evidence before me that the one and a half to two years’ delay in making the Applications will have made itimpossible or substantially more difficult to contact relevant witnesses.
119. Mr Wardell submitted that there is no proper basis for concluding that the delay in the commencement of a trial, should I set aside the default judgments, will or is likely to have any adverse impact on the ability of witnesses to recollect relevant events. Mr Wardell emphasised that the matters of which the Claimants complain in the Statement of Claim date back to 1984 Accordingly, a significant period of delay had already elapsed between the occurrence of those events and the House of Lords’ decision in October 2000. He submitted that there is no reason whatever to believe that a further delay of one and a half to two years in the commencement of the trial date will have had any impact on the memory of the available witnesses. Mr Wardell also emphasised that these are proceedings in which there is a vast amount of available documentation. Such documentation is likely to be critical, and will, in any event, provide material from which witnesses can refresh their memories.
120. In my judgment, the Claimants are entitled to express concern at the impact of a delay of one and a half to two years on the memory of available witnesses. The period of relevant events stretches from 1984 to 1992. Whether the evidence of a witness is directed to events at the beginning of that period or the middle or end of it, it is likely, in my judgment, that the period of one and a half to two years delay in the trial will have some damaging impact on the accuracy of the witnesses’ recollection. It is impossible to express a firm view on the issue of loss of memory since the Claimants have not, so I am informed, taken steps to proof all relevant witnesses, bearing in mind the initial challenge to jurisdiction and, subsequently, the fact that the Claimants obtained the default judgments. The possibility of loss of memory is, nevertheless, a real possibility. In my judgment, this concern is not overcome by the existence of a large amount of documentation. From my limited exposure to the documentary material, and my understanding of the issues between the parties, it is likely that there will be extensive oral evidence and cross-examination relating to the matters referred to in the documents. It seems to me that the accuracy of such oral evidence is just as likely, as oral evidence of other matters, to be at risk of impairment by virtue of delay in the trial of the proceedings.
121. Mr Carr made extensive and detailed submissions on Mr Gambazzi’s failure, both on his own behalf, and on behalf of Mora and Chascona, to give proper disclosure of documents in accordance with the freezing order of Mr Justice Rimer of 26th February 1997. Those documents included “all documents recording or evidencing or relating to any transaction or dealing of any manner whatsoever” between any defendant and Castor and between any defendant any other defendant (see para 2.2.5 of the order).
122. The evidence is that on 11th March 1997 Swiss police attended Mr Gambazzi’s offices in Lugano and removed a substantial number of documents. The Swiss police were acting on a complaint made by the Claimants concerning the Castor frauds. A number of those documents were returned by the Swiss Public Prosecutor to Mr Gambazzi in May 1997 and October 1997 Mr Carr submitted that the documents originally seized by the Swiss Public Prosecutor will have contained many relevant documents of Mora and Chascona.
123. Mr Carr submitted that, on the evidence, Mr Gambazzi acted deceitfully in failing to disclose to the Claimants the return of documents by the Swiss Public Prosecutor in 1997, and wrongfully failed to give disclosure of documents which were returned to him and fell within the ambit of the disclosure part of the freezing order of Mr Justice Rimer. He submitted that these matters show a willful lack of regard for the cooperation expected of parties to litigation in complying with their disclosure obligations and with orders of the court in order to ensure a fair trial. Further, Mr Carr submitted, the time which has elapsed between the entering of the default judgments and the very recent disclosure of the return of documents to Mr Gambazzi in 1997 has precluded the Claimants from taking steps to ensure that any relevant documents returned by the Swiss Public Prosecutor are preserved in order to ensure a fair trial.
124. Mr Carr made the same point in connection with the decision of the Swiss Public Prosecutor in about 2000 not to prosecute Mr Gambazzi. The evidence is that, at that stage, the Swiss Public Prosecutor returned a further file to Mr Gambazzi, and retained the rest. Mr Carr submitted that the delay between the entering of the default judgments and the hearing of the Applications has provided Mr Gambazzi with a further opportunity to destroy or conceal relevant documents following the decision of the Swiss Public Prosecutor not to prosecute Mr Gambazzi.
125. Mr Wardell, on the other hand, submitted that there is nothing to indicate that the documents returned to Mr Gambazzi in 1997 contained any relevant documents, let alone relevant documents of Mora and Chascona. He accepted that one of the files returned in 1997 had one of Mora’s documents which was relevant to the Proceedings, but it was of no relevance to the only claim then made against Mora, namely the tracing claim. Further, Mr Wardell submitted that it was made clear by Mora’s then solicitors that Mora had not given full disclosure, since those solicitors, Richards Butler, wrote to the Claimants’ solicitors on 18th August 1997 stating:
“One area of documentation which has not been produced by Mora is the detailed information on the allocation of funds from such of the building loan draws as do not relate to the three payments set out in Schedule 7 to the Mareva Order ... The detailed documents relating to the other draws are voluminous and cannot be of conceivable relevance to your clients or these proceedings, as we believe you will see from a review of those for the three draws which are disclosed in file 35.”
126. Mr Wardell submitted that there is no evidence to indicate the destruction of any documents by Mr Gambazzi. Further, Mr Wardell submitted that there is no evidence that Mr Gambazzi or anyone else has interfered with the documents retained by the Swiss Public Prosecutor following the decision not to prosecute Mr Gambazzi. The evidence is that Mora and Chascona’s present solicitors, Withers, have procured directly from the Swiss Public Prosecutor two general files relating to Mora and Chascona, those appearing to them to be the files likely to be of most relevance, and there is no indication of any kind that those files have been tampered with.
127. Strictly, the matters of concern raised by Mr Carr in relation to non-compliance with the disclosure part of Mr Justice Rimer’s freezing order and the possibility of tampering with, or destruction of, relevant documents by Mr Gambazzi or others are not related to the delay in the making of the Applications. They relate to the more general issue as to whether it would be possible to have a fair trial of the proceedings, if the default judgments are set aside, in view of the perceived failure of Mr Gambazzi to comply with earlier disclosure orders, his perceived deceitful conduct in relation to the return of relevant documentation by the Swiss Public Prosecutor, and the opportunity for tampering with or destruction of documents in the long period between the entering of the default judgments and the hearing of the Applications. It is convenient, nonetheless, to consider these issues at this point in my judgment.
128. I agree with Mr Wardell that, on the evidence currently before the court, it is a matter of speculation whether there were any, and if so what, relevant and important documents which were originally taken by the Swiss Public Prosecutor from Mr Gambazzi and were subsequently returned to him. Although it is impossible to be certain about the point, it seems to me possible, at the least, that there were such documents. Whatever view may be taken about the general involvement of Mr Gambazzi in the management of Mora and Chascona between 1981 and 1992, there is, as I have already said, a reasonable evidential basis for concluding that he played a significant role in relation to the procuring of loans from Castor to Mora and Chascona. It is certainly possible that matters relevant to the procuring of such loans were recorded in documents, other than purely formal documents, contained in files in Mr Gambazzi’s offices in Lugano. It is also quite possible that those files contained sensitive material relating to dispositions of the shares or the beneficial ownership of shares in Mora and Chascona, which dispositions, it would appear, Mr Cori and Mr Cavazza wished to keep hidden from the Italian authorities.
129. Further, it seems to me that the evidence supports Mr Carr’s submission that Mr Gambazzi did act deceitfully in failing to make clear to the Claimants’ solicitors in 1997 what had been returned to him by the Swiss Public Prosecutor. In a letter dated 21st July 1997 from Richards Butler, who were then acting for Mr Gambazzi and Mora, to the Claimants’ solicitors, it was stated that documents returned by the Swiss Public Prosecutor “did not relate in any way to Castor” and that “The clear impression of Mr Gambazzi and his lawyer is and has been that Mr Gambazzi will not get any of his Castor related documents back until the Public Prosecutor has considered the matter fully.” Those statements were patently untrue since, on any footing, the documents returned to Mr Gambazzi in both May and October 1997 included “Castor related documents”.
130. I have also to bear in mind that, on the available evidence, there is a strong basis for regarding Mr Gambazzi as having been implicated in, and a party to, the frauds of Castor specified in the statement of claim. Indeed, Mr Wardell accepted that the Applications should proceed on that basis. Accordingly, the court must be alive to the possibility that it may have been in the interests of Mr Gambazzi to secrete or destroy relevant and important documentation. I do not regard it as surprising that there is no direct evidence before the court of any such secretion or destruction, since it is hardly likely that evidence of such conduct would be easily available. On the other hand, what is clear, is that the long period of delay between the default judgments and the hearing of these Applications will have furnished Mr Gambazzi, or others, with the opportunity of tampering with the documentary evidence, which it was the very purpose of the freezing order of Mr Justice Rimer to preserve. That opportunity will have arisen, not only when documents were returned to Mr Gambazzi in 1997 and 2000, but, it would appear, at all times after the Swiss Public Prosecutor decided against prosecution in 2000, since the ease with which Withers obtained files directly from the Swiss Public Prosecutor gives rise, at the least, to the possibility that Mr Gambazzi would have had access to the retained files with the same ease. Nor, in my judgment, is this conclusion, or its implications in relation to the exercise of the court’s discretion under CPR r.3.9, in any significant respect mitigated by the fact that Mr Gambazzi personally, rather than Mona and Chascona, was or may have been guilty of culpable conduct in relation to disclosure obligations.
131. In summary, there is a possibility that a fair trial may not be possible because a substantial period of time has elapsed since the “unless” orders and the default judgments during which Mr Gambazzi - a director, or former director of Mora and Chascona who had control of the Proceedings on behalf of those companies, and who appears to have been involved in and a party to substantial frauds on the Claimants - has had the opportunity to retain, secrete or destroy documentary evidence which may have been in his possession or control.
132. Mr Carr informed me that, if the default judgments are set aside and the matter proceeds to a trial, it will be necessary for the Claimants to assemble a new legal team. The loss of the knowledge and expertise of the original team will result in greater costs, he submitted, than would have been the case if the litigation had proceeded continuously to trial in the usual way. Bearing in mind that, if the Claimants are successful at a trial on the merits, the liability of Mora and Chascona will be far in excess of the value of the assets of those companies, such increase in costs will, Mr Carr submitted, effectively be borne by the Claimants themselves.
133. I have been informed that a team of some forty fee earners were involved in the Proceedings, on behalf of the Claimants, prior to the entering of the default judgments. Many of those are no longer available. I am not surprised at the number of legal personnel originally retained on behalf of the Claimants, in the light of the scale of the Proceedings, and the complex issues which they raise. Some idea of the scale and cost is reflected in the fact that, so I have been informed, the Claimants have incurred something in the region of £10million in costs in connection with the claims alleged in the statement of claim.
134. Mr Wardell submitted, in answer, that is likely that the Claimants’ team would have had to be reconstituted in any event, in view of the delay in the proceedings prior to the House of Lords’ decision.
135. It is impossible to be certain whether or not, as Mr Wardell submitted, there would inevitably have been some reconstitution of the Claimants’ legal team during the course of the Proceedings, had there been no such interruption as has in fact occurred by virtue of the judgments against Mora and Chascona. On the other hand, the Claimants are entitled to say that, at the least, there is a risk of an increase in costs, which might not otherwise have occurred, which would have to be borne, in effect, by the Claimants themselves, should they be successful in any trial.
136. As I have mentioned earlier in this judgment, the Claimants have taken proceedings in the US, Canada and the Netherlands Antilles to enforce the judgments against Mora and Chascona. If the judgments are set aside, and the Claimants succeed at trial, the costs of those enforcement proceedings will have been wasted. Payment of those costs by Mora and Chascona could be made a condition of setting aside the judgments. However, for the reasons I have already indicated in connection with the assembly of a new legal team for the Claimants, this will not sufficiently compensate the Claimants, should they be successful at trial and incur the cost of fresh enforcement proceedings. As I have said, the effect of the liability of Mora and Chascona far exceeding the value of their assets is that the increase in or duplication of costs already incurred would, in effect, be borne by the Claimants themselves.
137. In an attempt to meet this point, Mr Wardell, on the instructions of Mr Cavazza, indicated, at the very end of his speech in reply, that Mr Cavazza was willing to hold his bearer shares in Mora and Chascona to the order of the Claimants pending the outcome of a trial on the merits, with power of the Claimants to resort to them if they won on conspiracy. This does not seem to me to be a satisfactory solution to the problem. Enforcement of a judgment in favour of the Claimants entitles them to proceed against all the assets of Mora and Chascona. Mr Cavazza only has a 75% interest in the shares of those companies. There is no evidence before me that, by virtue of a 75% shareholding, the Claimants would be entitled to procure the distribution to themselves of all the assets of Mora and Chascona. Nor is there any evidence before me as to whether, as holders of bearer shares in Mora and Chascona, the Claimants would be or might be exposed to any personal liabilities attaching to those shares. So far as concerns the shares themselves, as a saleable commodity, there is no evidence before me as to whether there is any market in the shares or as to the value of the shares. In my judgment, the offer of Mr Cavazza is too little and too late.
Was the failure to comply intentional?
138. For the reasons I have set out earlier in this judgment, it is clear that a conscious decision was taken by Mora and Chascona, against the advice of their English solicitors, not to comply with the “unless” orders.
139. Mr Wardell submitted that, although there was intentional non-compliance with the “unless” orders, or at least the orders made in 1999, the court should weigh in the balance that, upon close analysis, the “unless” order of 13th October 1998 proceeded on a false basis, and there was, in fact, no breach of it; and further, the breaches of the “unless” order of 4th October 1999 were of no practical significance, and the order was disproportionate.
140. The order of 13th October 1998 required Mora to serve on the Claimants’ solicitors by 4pm on 10th November 1998 “all documents within its possession, custody or power relating to the security granted by [Mora] to C H International Overseas which either remained in existence, or was created, after 20th May 1992”, and provided that, in default, Mora would “be debarred from defending the proceedings further”. The evidence before me is that, after 20th May 1992, there was no security granted by Mora to C H International Overseas (“CHIO”). After that date, in practical terms, there remained due to Castor some US$2.25million in respect of loans to Mora and Chascona, but, by virtue of the arrangements with Banque Paribas in 1992, Castor’s right to repayment and to security for that outstanding indebtedness was as a junior participant in the loan and security arrangements between Mora and Chascona, on the one hand, and Banque Paribas, on the other hand. In short, after 20th May 1992 CHIO’s security was as a participant in, and derived from, the security granted by Mora to Banque Paribas. I agree with Mr Wardell that, on this evidence, there strictly were no documents within the category specified in the order of 13th October 1998.
141. Mora was represented by counsel and solicitors at the hearing on 13th October 1998. It is quite clear that Mora’s legal advisers believed that there were such documents as were specified in the order made on that date and that, in breach of the original freezing order of Mr Justice Rimer and orders supplemental to it, Mora had wrongfully failed to disclose those documents. It remains a mystery, which Mr Wardell has not been able to unravel, why the Claimants’ legal advisers were of that view, and why Mr Justice Rattee was not informed at the hearing on 13th October 1998 that no such documents existed. The only explanation that springs to mind is that the Claimants’ legal advisers believed that the documentation which conferred on Mora after 20th May 1992 a junior participating security interest, behind Banque Paribas, fell within the terms of the order. Certainly, the disclosure of such documentation would have been in accordance with the spirit of the “unless” order, and it undoubtedly did fall within the wide terms of the disclosure part of the original freezing order of Mr Justice Rimer.
142. In conclusion, I agree with Mr Wardell that, as it now appears, the fact that the “unless” order of 13th October 1998 proceeded on a mistaken basis, and there was not, strictly speaking, a breach of that order, is a factor to be weighed in the balance in support of the application to set aside the default judgment in relation to the tracing claim against Mora.
143. By the order of 4th October 1999 Mora and Chascona were required, within fourteen days of service of the order, to serve on the Claimants’ solicitors an affidavit of their respective assets. Mora was also required, within fourteen days of service of the order, to open a bank account for the purpose of receiving any payment to it arising out of the C&L Litigation, and any payment by the Trustee in Bankruptcy of Castor Holdings by way of dividend, and to serve certain notices in relation to those accounts and payments. In default of compliance with their respective obligations in the order, it was ordered that Mora and Chascona be debarred from defending the Proceedings further. As I have said, those requirements were not met by Mora or Chascona.
144. Mr Wardell submitted that the sanction of debarring Mora and Chascona from continuing to defend the Proceedings, should they fail to serve a statement of assets, was disproportionate and unjustified.
145. So far as concerns Mora’s failure to comply, Mr Wardell emphasised that Mora had already provided a statement of assets pursuant to the freezing order of Mr Justice Rimer of 26th February 1997. That statement was served on 17th April 1997, and was verified by Mr David Sabo, the President of the Hotel, on 2nd May 1997. There was never any complaint that the statement of assets made by Mora was deficient. In my judgment, this is no excuse at all for Mora’s conscious and willful default. As Mr Carr pointed out, the requirement for a new statement of assets arose under the freezing order of Lightman J 23rd July 1999, following the addition of a claim in conspiracy against Mora until that time, Mora had only been facing a tracing claim. The freezing order of Mr Justice Rimer prohibited a disposal of assets by Mora up to £250,000. Following the addition of the conspiracy claim, the freezing order of Mr Justice Lightman increased that limit to CAN$420million. It is clear that, between the date of Mr Justice Rimer’s order and Mr Justice Lightman’s order, there had been substantial dealings by Mora with its assets, including dispositions in favour of Mr Gambazzi himself. It was entirely appropriate for the court to require a fresh statement of assets by Mora in the light of the alteration to the restrictions on dealings by Mora with its assets introduced by Mr Justice Lightman’s order.
146. Mr Wardell submitted that the seriousness of the failure of Chascona to comply with the freezing order of Mr Justice Lightman and the subsequent “unless” order of Mr Justice Rattee should be viewed realistically, in the light of the fact that the only asset of Chascona was the Hotel. Mr Carr observed, however, that Chascona has not complied, to this day, with the requirement that it set out in an affidavit all its assets, wherever they may be, “and whether in its own name or not and whether solely or jointly owned, giving the value, location and details of all such assets and exhibiting all such documents within [Chascona’s] possession or control evidencing the same” as required by Mr Justice Lightman’s order of 23rd July 1999 and Mr Justice Rattee’s order of 4th October 1999.
147. In my judgment, the sanction imposed by the order of 4th October 1999 was not disproportionate in relation to the failure of Mora and Chascona to provide statements of their assets. It is a standard feature of freezing orders to require the defendant to give details of the defendant’s assets. Such information is critical to the very purpose of the freezing order, which is designed to prevent the wrongful dissipation of assets with a view to frustrating any judgment that might be awarded. Freezing orders are, as I have said, a crucial weapon in the court’s armoury against fraud, although, of course, they are not restricted to cases in which allegations of fraud are made.
148. In Motorola Credit Corporation v Uzan[2002] EWCA Civ 989, the Court of Appeal emphasised the importance of the disclosure requirements of a freezing order Waller LJ, with whose judgment Lord Woolf CJ agreed, cited, in that connection, the following passage in the judgment of Steyn LJ in Grupo Torras SA v Al-Sabah (CA, 16. 2.94):
“Mr Andrew Smith QC who appeared for Sheik Fahad, submits that Waller J misdirected himself [in refusing to suspend the disclosure part of a Mareva injunction pending the resolution of a challenge to the jurisdiction] in two respects. First, he submits that the judge misdirected himself as to the nature of his discretion. He says in fact that the discretion is a narrow one. He put itthis way. Where the court, as in this case, can see that there is, or is likely to be, a serious challenge to its jurisdiction it should, in normal circumstances, refuse any sort of relief which cannot be undone if the court has no jurisdiction. It should only grant such relief if there are exceptional circumstances justifying it. He says the basic error made by Waller J was to require disclosure in the absence of such circumstances. I am not sure what the phrase ‘exceptional circumstances’ in this submission means. After all, it is already the law that a worldwide Mareva to which a disclosure Order is ancillary should only rarely be made and only if there are exceptional circumstances. Presumably, the submission means that something more is required to obtain a disclosure order if there is a challenge to jurisdiction.
The consequences of accepting Mr Smith’s submission must be considered. If the direction to make a disclosure order is as narrow as Mr Smith says the worldwide Mareva injunction will be [a] relatively toothless procedure in the fight against rampant transnational fraud. In many such cases, despite a cogent case of fraud, the connections of transactions with different countries will enable a Defendant to raise jurisdictional challenges which may take months to resolve at first instance, many months to determine in the Court of Appeal and even longer to decide in the House of Lords. And there may be a reference to the European Court. During such a lengthy delay it would be impossible to ‘police’ the Mareva injunction, and that is the purpose of the disclosure order.
…
Despite Mr Smith’s attractive and careful arguments, I consider that the power to order a disclosure order is not limited in the way he submits. When rarely and in exceptional cases a worldwide Mareva is granted, a disclosure order will usually follow.”
149. It seems to me that Mr Justice Rattee had no realistic alternative to making the “unless” order on 4th October 1999 (with its debarring sanction) in the face of the persistent defiance of Mora and Chascona to the freezing order of Mr Justice Lightman in relation to the disclosure of assets.
150. So far as concerns the failure of Mora to open the bank account required by the “unless” order of 4th October 1999, reflecting the requirements of the earlier freezing order of Mr Justice Lightman of 23rd July 1999, Mr Wardell submitted that the order proceeded on a mistaken basis. The order was plainly made on the assumption that the C & L litigation was still on foot, so that there remained a possibility of a payment being made to Mora arising out of those proceedings. It appears, however, that the C & L litigation had been discontinued in October 1996.
151. Further, Mr Wardell submitted that there was no possibility of any payment being made by the Trustee in Bankruptcy of Castor Holdings to Mora by way of dividend. The evidence is that a proof had been lodged by Mora in Castor’s bankruptcy in case the Trustee failed to recognise a set-off in 1992 by which Mora sought to apply certain deposits with Castor against outstanding indebtedness to Castor. In fact, the Trustee did not challenge the validity or effectiveness of the set-off, and so, Mr Wardell submitted, the proof was not required. Further, Mr Wardell pointed out that, in any event, Castor Holdings had insufficient assets for a distribution to Mora.
152. On the evidence which I have seen, it is reasonable to conclude that, had Mr Justice Lightman been informed of all relevant facts, he would not have directed the opening of a bank account by Mora, and that requirement would not have been contained in the “unless” order of 4th October 1999. I agree with Mr Wardell that this is a factor to weighed in the balance in favour of the Applications.
Is there a good explanation for the failure to comply with the “unless” orders?
153. I have already considered earlier in this judgment the explanations of Mora and Chascona for their failure to comply with the “unless” orders. Those explanations are manifestly not “good” explanations in the sense of providing a justifiable excuse for non-compliance.
Were Mora and Chascona in default with other court orders ?
154. I have already referred to Mr Carr’s submissions that Mora was in serious breach of the disclosure part of the freezing order of Mr Justice Rimer. I have also set out the explanation, given on behalf of Mora, for providing limited disclosure, and Mr Wardell’s submissions for rejecting the Claimants’ assertion that relevant and significant documents were returned by the Swiss Public Prosecutor to Mr Gambazzi in 1997, which ought to have been disclosed on behalf of Mora pursuant to Mr Justice Rimer’s freezing order. As I have said, on the state of the evidence before me, itis not possible to reach any firm conclusion as to whether there were significant and relevant documents returned by the Swiss Public Prosecutor to Mr Gambazzi in 1997, which he or Mora ought to have disclosed.
155. On the other hand, itis clear that there were other documents which ought to have been disclosed, pursuant to the wide terms of the disclosure requirements of Mr Justice Rimer’s freezing order, but which were not Evidence is given, for example, in the 33rd witness statement of Charles Pugh, on behalf of the Claimants, of documents in the possession or custody or power of Mora in New York, which fell within the terms of the disclosure requirements of Mr Justice Rimer’s freezing order, but which were not disclosed Mora, as I have said, relies upon the terms of the letter of 18th August 1997 from Richards Butler to the Claimants’ solicitors, and the fact that the Claimants did not thereafter object to the limitation of disclosure specified in the letter.
156. In all the circumstances, itdoes not seem to me that the disagreement between the parties as to the adequacy of Mora’s disclosure assists the exercise of my discretion under CPR r.3.9 further than I have already indicated elsewhere in this judgment.
157. There are outstanding costs orders against Mora and Chascona in favour of the Claimants. These do not, in my judgment, weigh significantly in the balance, since it would be possible and, as Mr Wardell acknowledged, entirely appropriate to make the payment of outstanding costs a condition of setting aside the default judgments.
158. It appears that a payment of US$54,276 was made by Mora to Mr Gambazzi in December 1999 in breach of Mr Justice Lightman’s freezing order of 23rd July 1999. The evidence is that this was not a willful breach. I do not consider that it plays any significant role in deciding how to exercise my discretion in relation to the Applications.
Was the failure to comply with the “unless” orders caused by Mora and Chascona or their legal representatives?
159. As I have said, the English solicitors of Mora and Chascona advised them to comply with the “unless” orders. I infer, in the absence of any evidence to the contrary, that the English solicitors will have advised Mora and Chascona of the consequences of the failure to comply with those orders. Indeed the orders, which were served on Mora and Chascona, specify on their face the sanction for non-compliance. Mora and Chascona took a conscious decision not to comply with the orders.
What will be the likely date of trial if relief is granted?
160. As I have said, if the default judgments are set aside, it is likely that the trial will take place in the second half of 2004. Assuming, in favour of Mora and Chascona, that, if default judgments had not been entered, preparations towards the trial would not have begun until after the House of Lords’ decision on jurisdiction in October 2000, the trial date, should the default judgments be set aside, is likely to take place between one and a half and two years later than it otherwise would.
What effect did the failure to comply have on the Claimants, on the one hand and Mora and Chascona, on the other hand?
161. In relation to the Claimants, I have already considered, in the context of whether the failure to comply with the “unless” orders was intentional, the significance of the directions in those orders, in default of which Mora and Chascona were to be debarred from defending the proceedings.
162. So far as concerns Mora and Chascona, the effect of non-compliance was that judgments were entered against them for very substantial sums, well in excess of the value of their assets. Such judgments were entered without any trial on the merits, and so depriving them of the opportunity of presenting defences which, on the material before me, are arguable. This is plainly a most important factor to be taken into account in the exercise of my discretion under CPR r.3.9.
What effect would the granting of relief have on the Claimants, on the one part, and Mora and Chascona, on the other part?
163. The effect on each of the relevant parties is apparent from all my earlier observations in this judgment.
Weighing up the factors
164. In exercising my discretion, I bear in mind that the overriding objective is to deal with the Proceedings and the Applications justly.
165. I fully recognise the importance to Mora and Chascona of being permitted to defend the serious claims against them, and to resist a huge liability in damages, at a full and proper trial on the merits, in circumstances in which it appears that they have arguable defences. In this regard, I am conscious of the resonance of Article 6. I take full note of the fact that they initially complied with the orders of the English court in 1997 and 1998, and that subsequent non-compliance was the result of the disastrous and misguided tactic of non-compliance adopted by Mr Gambazzi, apparently following discussions with Mr Ceppi. I take into account that the “unless” order of 13th October 1998 proceeded on a mistaken basis, and there was, strictly, no breach of it by Mora. I also take into account that the part of the “unless” order of 4th October 1999 requiring Mora to open a bank account also proceeded on a mistaken basis
166. Nevertheless, taking account of all the circumstances and in particular all the matters specified in CPR r.3.9, I am firmly of the view that the judgments should not be set aside in the present case.
167. I do not propose to rehearse in detail all those matters which I have identified earlier in this judgment as tending to the rejection of the Applications. They include the following important considerations as to the administration of justice, in particular deliberate non-compliance, against the advice of English lawyers, with the freezing order of Mr Justice Lightman of 23rd July 1999 in relation to the provision of statements of assets and the “unless” order of 4th October 1999, and also the public interest in the finality of litigation, in circumstances in which setting aside the judgments would revive complex and expensive litigation, which has been entirely resolved against the defendants; the prejudice or risk of prejudice to as fair and speedy a trial as there could have been if there had been compliance with the “unless” orders or the Applications had been made promptly; the prejudice or risk of prejudice to the Claimants in the preparation and presentation of their case at a trial on the merits caused by delay since the judgments were entered against Mora and Chascona and the delay in making Applications; the additional costs (that is to say, over and above those that would have been incurred had the litigation proceeded continuously to trial in the usual way) that would, in effect, be borne by the Claimants themselves, if the judgments were to be set aside and the Claimants were to succeed in their claims. Finally, bearing in mind what I have said as to the apparently erroneous basis of the “unless” order of 13th October 1998, I also take account that, in view of the much greater liability of Mora under the default judgment of 21st October 1999 (on the conspiracy claim) than under the earlier judgment of 4th February 1999 (on the tracing claim), there is no practical point in setting aside the earlier judgment unless the later judgment is also set aside.
Decision
168. For these reasons, I dismiss the Applications.