Communications Technology Investments Ltd v Gandhi & Ors

There are three applications before the court, of which the most important is an application for relief from sanctions made on behalf of the First, Second and Third Defendants, the sanctions in question being those which were imposed by

The background to the action and the procedural steps which have been taken have been helpfully set out for me in writing by Mr. Beazley in his outline submissions on behalf of the claimants, and I propose in this judgment to incorporate a summary of what there appears.

The first claimant is a private equity investor and sole shareholder in two internet businesses in which it invested, the third claimant, Defcom, and the fifth to seventh defendants, the Peapod Companies. The third defendant,

The application by the claimants, in essence, is that

The upshot was that the first claimant, which had the benefit of a debenture over Defcom, appointed administrative receivers over its assets, and obtained interlocutory relief from the court in relation to the assets of the Peapod companies.

The orders obtained by the court in June 2003 also included worldwide freezing orders against Mr. Gandhi and Security First, with the usual provision for information and disclosure, and restrictions on spending money on legal advice without first informing the claimants where the money was to come from.

Although the relevant defendants indicated at an early stage that they proposed to apply to discharge the interim orders they did not in fact do so, and on the 16th October 2003 the claimants applied for an order for a speedy or expedited trial to take place in January 2004. The reason for desiring a speedy trial was that it was alleged that, as a result of the ongoing dispute as to the true ownership and control of the companies, they were unable to operate effectively, with substantial adverse effects on their respective businesses. That application was opposed by the defendants, who argued not against the principle of a speedy or expedited trial, but for a later date than the January date which was sought by the claimants.

After argument, Mr. Justice Park held that there should be an expedited trial, to take place as soon as listing permitted, after the 14th January 2004, with a time estimate of eight days, and he ordered:

The significance of that particular direction in parenthesis was that the second claimant had served a statutory demand on Mr. Gandhi in relation to sums allegedly lent by it to him, to which he had responded by, inter alia, exhibiting the documents referred to in that direction. The position of the claimants was that those documents were not authentic, and had never existed at the time. Although the matter was not, at the time the matter was before Mr. Justice Park, pleaded out, and indeed still has not been, it was quite clear, and the contrary has not been suggested in argument before me, that the issue to which that disclosure was to go was the issue of the authenticity of that documentation.

At that stage the claimants were represented by solicitors and counsel, the solicitor concerned being, at that time, Mishcon de Reya, who had taken over at an earlier date from the solicitors initially retained by the first three defendants, Charles Russell.

The claimants contend that they provided the disclosure by list as required by Mr. Justice Park's order within the time laid down by that order. There is a dispute about that, albeit one that has not been central to any of the matters that have been before me, since the disclosure given by the claimants was in terms given only on behalf of the first and second claimants, and the point has been therefore taken by the defendants that the third claimant cannot be conceded to have given the timeous disclosure as required by Mr. Justice Park's order.

What is, however, clear is that there was not timeous compliance with that order by the first to third defendants. They achieved an extension of time by agreement, to the 7th November, but that extended date was not complied with, and they were obliged to seek relief from the court, which they obtained from Mr. Justice Lewison on the 11th November, extending the time to the 14th November, and ordering them to pay the sum of £2,000 on account of costs within 14 days.

There was then purported compliance by the defendants, acting still by Mishcon de Reya, but the claimants took the view that the disclosure was patently inadequate, and not least because it was clear, on the face of it, that no documents predating the 28th June 2001, in the circumstances an arbitrary date, had been the subject of any searches or attempted disclosure, notwithstanding the issues raised in the proceedings which went to matters before that date.

No explanations were forthcoming from Mishcon de Reya as to the inadequacies of which the claimants complained, and the upshot was that the claimants decided to apply to the court for an order striking out the defences or, alternatively, for an unless order, and that application came before Mr. Justice Neuberger on the 2nd December 2003. By that time Mishcon de Reya had come off the record, and, accordingly, the first, second and third defendants were not represented at the hearing before Mr. Justice Neuberger. His order, so far as relevant, was in the following terms:

The amended particulars of claim raised the matters on behalf of the second claimant which, when pleaded out, which they have not yet been because the first to third defendants have not served any consequentially amended defence as provided by that order, will presumably raise the issues in relation to the disputed documentation, which had been foreshadowed in the statutory demand proceedings.

The position following the 2nd December was that the defendants did provide a further list to the claimants by 12 noon on the 5th December, and also delivered up a laptop computer and two desktop computers, which were said in the accompanying letter of Mr. Gandhi, which was written on behalf of all three defendants, to have been respectively the laptop which was used by him since 1998 and the desktop computers used by his principal assistants.

The claimants' response to the new lists was to maintain that the disclosure given continued to be seriously inadequate. The respects in which it was said to be deficient were set out in a long letter dated the 5th December 2003 from Peters & Peters to the three defendants, which appears at p.114 of volume 1, section 5, of the bundles before me today.

The defendants then retained another firm of solicitors to act for them, namely Ellis Taylor, who continue to act for them today, and at about the same time the claimants issued their application dated the 12th December 2003 for judgment on the footing that the debarring order of Mr. Justice Neuberger had taken effect in consequence of the allegedly inadequate disclosure. Directions were sought and obtained from

Following that hearing, the defendants served supplemental disclosure lists on the 17th, 19th and 22nd December 2003. On the 16th December the defendants issued their application for relief against sanctions under CPR 3.9. No separate directions for the filing of evidence were given in relation to the application for relief from sanctions, but witness statements have continued to be produced on behalf of the defendants even during the course of the application itself.

The principal question I have to decide is, as I say, whether there should be relief from sanctions. Of course putting the matter in that way assumes that there was a failure to comply by all three defendants with the order of Mr. Justice Neuberger dated the 2nd December. In the case of the first defendant, it seems to me quite clear that there was such a failure, the proof of that being, apart from anything else, the fact of the quite substantial further disclosure which the first defendant gave by the three additional lists which he served. It is suggested that in fact the additional disclosure represented by those lists was not materially substantial, given that Mr. Jones's has counted them out - some 22 new documents were in fact disclosed by those additional lists, and those 22 new documents not themselves having any very critical significance.

In my judgment, it is not possible to say that the failure of the first defendant to comply with Mr. Justice Neuberger's order, when judged against the yardstick of the further disclosure in fact made, was itself de minimis. It is not the sole function of disclosure to turn up documents of which the other side was previously ignorant. As Mr. Justice Neuberger had made clear in the course of the hearing before him, and as is apparent from the transcript of that hearing, what was required was proper disclosure of all documents relevant to the issues in the proceedings, and it is clear that the disclosure made by the first defendant on the 5th December, which was not of course his first attempt at standard disclosure, was inadequate, judged by what subsequently emerged. It is of course a different question whether the degree of inadequacy, and the extent to which it has been cured, is such as to disentitle the first defendant to relief from sanction imposed by Mr. Justice Neuberger's order.

The claimants, without abandoning any point that they may have on the inadequacy of the disclosure which took place on the 5th December, or subsequently, have focused their attack principally on the disclosure in relation to the disputed documentation, in relation to which what they were seeking was disclosure of all documentation, including documentation in electronic form relevant to the authenticity of that documentation, and the respects in which they say that the disclosure has been inadequate, and indeed continues to be inadequate in relation to that issue, is as follows.

The documentation consists, on the one hand, of an agreement dated the 29th July 2002, and the 9th August 2002 letter referred to in Mr. Justice Park's judgment and, on the other, of the two emails dating back to 2000, referred to in that order. So far as the former are concerned, what the claimants wish to see, as is perfectly apparent was obvious to the first defendant, is the computer hard drives or disks on which those documents were created, if they were created, or the disks or drives on which they would have been created had they in fact been created, the claimants, wishing to detect by inspection of that computer equipment either evidence of the absence of the disputed documentation in the place where it would otherwise be expected to be found, or other evidence supportive of their allegation that the documents have been subsequently fabricated.

The first defendant has given conflicting accounts of where and on what computer these documents were created. The initial account given by him in his letter dated the 5th December, which made the disclosure, or purported to make the disclosure ordered by Mr. Justice Neuberger, was that those documents had been created on a Defcom computer, now no longer available to him. He has sought, by a witness statement put in during the course of this application, to qualify that account in relation to the agreement itself, albeit not in relation to the letter, but I do not think, apart from the fact that the subsequent qualification indicated that the letter was not written with the care with which it should have been, that that disparity in the evidence significantly affects what I have to decide today.

The claimants' position is that, for a variety of reasons, the assertion by the first defendant that he does not have control over or access to the computer on which the documents were originally created, or any record thereof in the form of back-up tapes, cannot be correct.

So far as back-up tapes are concerned, the claimants rely on the evidence of former Defcom employees, Miss Belfoy and

The claimants' contention before me is that it has been clearly established on the evidence before the court that the back-ups were made and are in the defendants' control, and that there can be no excuse for the defendants' failure to disclose and deliver up those back-ups.

The answer given by the defendants to that point amounts to this: it is acknowledged by the third defendant that there was a project to do some backing up at or around the time alleged by the witnesses relied on by the claimants, but that the nature of that exercise has been exaggerated, it being limited to a process of backing up only a part of the system which, for various technical reasons, was not already the subject of a routine backing-up process, and that the result of the exercise was to subject that part of the system to the regular routine backing-up exercise.

The defendants have adduced evidence of Mr. Barry Smith that on an occasion on the 10th June 2003, when the administrative receivers appointed by the first claimant moved into the Defcom offices, the relevant back-up tapes were seen to be in their usual place at one point during the day, but had disappeared by the time Mr. Smith left the offices, had not been taken by him, and could not have been taken by either the third defendant or the first defendant, they not having been present at the office on that day. The curiosity of this allegation in relation to the back-up date is that the first defendant himself has been content to simply rely on that evidence from Mr. Smith and from Mr. Pratt without himself meeting head on the inferential allegation that he himself now controls, or can control, the back-up tape.

The belief of the claimants that the first defendant, and indeed the third defendant, have continued access to original

The first defendant's answer to that suggestion is that he does have electronic copies but not as a result of having the servers on which the emails were sent or received, but as a result of his practice on the sending or receipt of emails of significance, of cutting and pasting them to another folder on the system, and, it is to be inferred, subsequent copying of that folder onto a personal computer being used by him. That account is challenged by the claimants as being inherently implausible since they say, and they have adduced expert evidence to support them in the assertion, it is an unusual way of storing emails.

As to that, it does not seem to me to be a matter on which

That allegation is not dealt with in the first defendant's evidence, but what his counsel told me on the third day of the application is that the computer on which this material now exists is one in the possession of the first defendant, and that the material now exists on that computer as a result of it having been copied to that computer from one of the Defcom computers which was delivered up to the claimants on the 5th December, as, it is implied, the claimants will discover if and when they look at the contents of those computers, which they have apparently not yet done.

As I say, that is not a matter which I have in any formal sense in evidence before me, but is a possible explanation, and one which, given its nature, is capable of independent verification, both by looking at the computers which were delivered up and by looking at the computer on which the copies now exist. But that process of verification has not yet taken place, and nor, until the matter was aired before me in argument, has any offer been made by the first defendant to make available, as part of the disclosure process, the computer on which the documentation in question now resides, and that failure to make that offer until the hearing of the application itself, despite requests for it made in the witness statements of Miss Garbett, made in the course of the application, is itself relied on by the claimants as a further example of continuing failure to make proper disclosure by the first defendant.

More critical, in my judgment, is the question of whether the first or indeed the second defendant has continuing access to servers on which all or any of the relevant documentation, including the disputed documentation, may have been created or to which it may at some stage have been copied. The story here is an extremely opaque one so far as the first defendant's evidence is concerned. When addressing the matter in his letter of the 5th December, the first defendant, in relation to the emails referred to in Mr. Justice Park's judgment, made the unqualified assertion that the emails were made on computers belonging to a company called E. Exchange Ltd., which was a wholly owned subsidiary of an Irish company called E. Exchange Plc., the former of which went into administration in the autumn of 2000 and the latter of which shortly afterwards went either into administration or liquidation. The assertion made in the letter was that all computers which might have been relevant had been taken into possession of Mazars Neville Russell, the administrators of

As to that, the first defendant said in his paragraph 10 of his tenth witness statement dated 10th January this year:

However, what the first defendant's tenth witness statement did not deal with is its apparent incompatibility with a witness statement which he had made in July 2003 in connection with a dispute which had arisen between Security First and the administrators of Defcom, and a the company called Netsec UK Limited to whom those administrators had purported to sell Defcom's assets as to the ownership of certain machines at premises which had been shared, inter alia, by Defcom and the second defendant. The witness statement was made in the context of an application by Netsec within these proceedings against the first three defendants, but in relation to which, for reasons which I am unclear about, the claimants were not represented with the result, indeed, that until the course of the hearing of this application the fact of this earlier witness statement was not apparently known, or the contents of it at any rate, to the claimants.

What Mr. Gandhi there recounted was the circumstances in which he had come to assert that the computer and office equipment of Defcom had come into the ownership in the spring of 2003 of the second defendant and which had resulted in an episode in which following the appointment of administrative receivers by the first claimant he had caused all that equipment to have sticky labels put on it asserting its ownership by the second defendant, an episode which is, in part, the subject of an allegation by the claimants in its pleading of misappropriation by the first three defendants of Defcom's property.

As well as giving an explanation of how that occurred, Mr. Gandhi asserted in that witness statement that a number of the items claimed by Netsec to be part of the sale to it by the administrative receivers, were in fact owned not by Security First or by Defcom but by Mr. Gandhi personally, and included in a list of items said to be owned by him personally, Mr. Gandhi listed some four servers at paragraph 35.4, 35.6. 35.7 of that witness statement. He says in paragraph 36:

What emerges is that eventually Netsec by an order dated 9th July 2003 made by Lewison J. allowed Mr. Gandhi to retain certain items which included at least three of those servers as set out in schedule 3 to that order.

This is a matter which has been wholly unexplained by the first defendant by any of the evidence he has given, and it seems to me is a matter on which the claimants are entitled to place extremely strong reliance. As it seems to me, a veil has been drawn over this equipment which was retained by Mr. Gandhi pursuant to that order of 9th July. He had until that witness statement emerged in the proceedings been content first to say that everything belonging to E. Exchange had gone to Mazars Neville Russell and then, when faced with Mazars Neville Russell's evidence that four servers had not been taken by them, to allow the court to assume that those four servers had disappeared beyond his ken into the maw of the liquidation of E. Exchange Limited's parent. But what is tolerably clear, on the evidence before the court, and indeed his own evidence, is that if Mazars Neville Russell are right in saying that they took all except four servers, these must correspond to the four servers over which Mr. Gandhi was in July 2003 asserting personal ownership as against Netsec UK, and therefore his suggestion that he does not know what has happened to these servers is quite simply not a plausible one.

Nor has he said anywhere in relation to that schedule 3 equipment that it has been looked at by him with a view to making a proper disclosure in this case or that it is known by him not to contain anything relevant to his case, because indeed in the evidence filed in relation to the applications which are before me, there has been a complete silence about that equipment. The only inference that I feel able to draw from that is unfortunately that there has been some deliberate obfuscation on his part in relation to what must be known by him to be a critical concern of the claimants, namely their desire to have access to equipment on which the disputed documentation, or a part of it, either was or would have been if it had been genuinely created, have been created. In that respect there seems to me to be a continuing failure on the part of the first defendant to comply properly with the disclosure process.

The claimants say that as a result of that, I should not grant relief from sanctions. CPR 3.9 lists a number of matters to which I must have regard in approaching question. It is a non-exhaustive list. I have had my attention drawn to the principal authorities in which consideration has been given to the proper approach of the court in considering an application under 3.9, in particular Woodhouse v. Consignia [2002] 1 W.L.R. 2558, Arrow Nominees v. Blackledge [2000] BCLC 167., and Hanson v. Makin [2003] EW CA.siv.(?) 1801.

The factors which are expressly referred to in 3.9, and I will as advised by the Court of Appeal, take them in seriatim, are: "(a) The interests of the administration of justice". Here the principal consideration in so far as that is concerned, but not the only one, is whether the likely trial date can still be met if relief is granted, a matter which is itself the subject of an expresse reference in paragraph (g) of CPR 3.9. Here the failure to provide full and complete discovery by 5th December has undoubtedly caused delay. In practice the failure would inevitably have had the effect, in my judgment of rendering the 14th January trial date impossible to hold even if the claimants had not taken the stance which they did, that the inadequate disclosure entitled them to judgment, and therefore halted the inspection process. Inevitable delay was caused by the inadequate disclosure, it being emphatically the case that this was very much a last chance being given to defendants who were already in default in relation to time limits laid down by the court for disclosure and in relation to the giving of disclosure pursuant to directions of the court.

The second consideration is whether the application for relief has been made promptly. It is suggested that it had not been made promptly because they were in breach on 5th December but did not apply for relief until 16th December and could have applied more quickly. I would not attach a great weight to that particular factor myself in the light of the fact that the claimants' own application made on 12th December was inevitably going to require a full round of evidence which of its nature would be likely to have included or prompted the application for relief which was in fact by the time the defendants came to be legally represented again seen as inevitably necessary.

As to whether the failure to comply was intentional, it seems to me to follow from my analysis of the first defendant's position in relation to the equipment which was retained by him following the sale to Netsec in July 2003, that there has been a deliberate attempt by the first defendant to conceal the potential significance of that event and to fail to give any evidence at all in relation to the contents of the servers included in that equipment. That position still obtains. Next, the extent to which the party in default has complied with other rules, practice directions and court orders, and any other relevant pre-action protocol. As already indicated, there had been earlier failures to comply in so far as time and content were concerned with disclosure orders. In addition no inspection of the claimants documentation had taken place as provided by Park J.'s order.

In addition to that, there appears to have been on the evidence I have before me a failure to comply strictly with those paragraphs of the order made on 11th June which require information to be given by the first defendant as to what had become of the assets alleged by the claimants to have been stripped out of the company's concerned, albeit that those failures had not been made the subject of any separate application by the claimants for relief. Reliance is also placed on the failure timeously to comply with Lewison J.'s order in relation to costs and to their failure to comply with the direction that they serve an amended defence as provided for by Neuberger J.'s order and that they failed to pay the costs ordered to be paid by Neuberger J.'s order. None of those matters assist the defendants in their claim for relief from sanctions.

"(f) Whether the failure to comply was caused by the party or his legal representative". In this case none of the defendants are making the case that that was the cause of their failure to comply. I should interpose at this stage that I am considering at the moment the position of the first defendant alone. I will deal separately with the second and third defendants so far as separate considerations arise.

"(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". Obviously, so far as the latter is concerned, the effect if I do not grant relief is extremely serious for the first defendant since he will be deprived of the opportunity of advancing the defences on which he wishes to rely, which, I should add, I have not found easy to identify at present in the pleadings, although clearly there is a much more complex background to the relationship between the moving spirits of the claimant companies and the first defendant than appears simply from those pleadings.

The granting of relief will inevitably involve a delay. It would be a delay which the defendants themselves were indeed arguing should happen when the matter was argued out before Park J. in October of last year. I do not suggest that their failures to comply have been deliberately designed to obtain that delay since to do so, to have adopted such a tactic would indeed have been to risk cutting off their noses to spite their face. But nevertheless the fact of the matter is that it will give them the practical advantage which they were then seeking, and given my findings as to the continuing failure to comply, will involve the claimants in a trial in relation to which there were either not have been adequate or proper disclosure, or in relation to which there will exist substantial doubts as to whether there has been proper disclosure, doubts which would be probably explored in the course of that trial and which would be likely to occupy a disproportionate amount of time during the trial.

In all, the effect of the failure to make adequate disclosure and the continuing failure to address the issues in a plain and direct way, particularly in relation, as I have indicated to the equipment retained in 2003. The claimants, faced with a considerably more costly process if the trial goes ahead with a delayed date with continuing prejudice to the companies the ownership of which they assert, in circumstances where it is far from clear they could ever be or would ever be properly compensated in relation to that extra delay by costs, quite apart from the other consideration which as the CPR remind us in the overriding objective and was emphasised by Chadwick L.J. in Arrow Nominees v. Blackledge, the effect on other litigants' ability to come to the court whose time is being occupied by and having to deal with the deficiencies of the first defendant in complying with court's orders.

For all those reasons, it does not seem to me to be right to grant the first defendant relief from sanctions as sought. I take the same view in relation to the second defendant which, on which on all the evidence before me, is not only the creature company of the first defendant but which has, as it seems to me, at least as good a claim to be able to control the access to the equipment excluded by schedule 3 to the 9th July 2003 order as the first defendant himself. Indeed, their positions are not readily distinguishable.

So far as the third defendant is concerned, I do, however, take a different view. In the first place, I am not satisfied in relation to him that there was a material failure so far as documents under his possession, custody or control were concerned in complying with the order of 2nd December. It is true, as Mr. Beasley pointed out in his reply, that there is a substantial unanswered question in relation to his evidence, namely as to how in his late disclosure he was able to produce a printout of a digital copy of an email, albeit one that he said was irrelevant, when his evidence appeared to be that he had found it in a file. The printout is subsequent to 2nd December. That is a matter that does call for greater explanation than has been given, but is not a matter that

In any event, even if he was in breach of the order, I am not satisfied that the breach was so serious, or that he is still in such a continuing breach of it as to justify my denying him relief from sanctions. Although he has not hitherto, until this application, sought in any way to disassociate his position from that of the other defendants with whom he has been mounting a common defence and making common disclosure, he is on the claimant's own case in a potentially different position from the first defendant and there does not seem to be any justification for, as it were, making him vicariously liable for the defects in the first and second defendant's disclosure such as to debar him from defending the case on his own account altogether. I would therefore grant the application for relief from sanctions so far as he is concerned, and would not therefore grant the claimant's application for judgment against him.

So far as the third application before me is concerned, that is the application for further funding by the first and second defendants, it may be that this has become academic in the light of my judgment to date, but it may equally not be so because of further applications those defendants may wish to make. The reason that it is being made is because, it would seem, of a doubt as to whether the taking of an unsecured loan for the purposes of defraying expenditure on legal advice is permitted by the order.

Mr. Beasley has not sought to argue that the order does preclude entering into such a loan agreement, but invites me not to make any order in relation to it or certainly an order which might recognise or later be invoked as recognising that the source of the monies being lent is not one in relation to which the claimants have a proprietary claim. The source is the first defendant's wife, Mrs. Gandhi. It is fair to say that little, if any, disclosure has been given by her of her personal position. In circumstances in particular where there has been, as I see it, a failure to comply in material respects with the earlier provisions of the June order for disclosure and information by the first defendant, and in the circumstance where it is conceded by the claimants that the taking of a personal unsecured loan will not itself be a breach of the freezing order, it is unnecessary for me, and probably, as the claimants assert, undesirable for me to make any order at all on that application.