Daltel Europe Ltd & Ors v Makki & Ors

This is an application by the claimants for summary judgment under CPR Pt 24 against the first defendant, Hassan Ali Makki. The application relates to part of their claim in these proceedings. Orders are sought for the payment of two sums, of US $3,650,000 and US $1,413,929.35, previously received by Mr Makki. It is the claimants’ case that these sums belonged to Pacifica Limited (Pacifica) and Globenet (UK) Limited (Globenet). Pending such payment, an order is sought that Mr Makki holds on constructive trust for the benefit of Pacifica and Globenet, all assets held by him which were acquired directly or indirectly with the above sums.

Pacifica, Globenet and the first claimant, Daltel Europe Limited (Daltel) are all companies which traded as telecommunications service providers, in each case for short periods. They are all insolvent and in liquidation, owing substantial subs to British Telecommunications Plc. Each was owned and controlled by Mr Makki, who was in charge of their day to day operations. Mr Makki has always accepted that this was the case with Daltel and Pacifica, but he denied it as regards Globenet in his defence and in evidence on previous applications. In the judgment to which I refer below, I found that he had also owned and controlled Globenet.

In the proceedings, the three companies and their liquidators seek various remedies against Mr Makki in addition to payment of the dollar sums in issue on this application. They include claims for fraudulent and wrongful trading under section 213 and 214 of the Insolvency Act 1986 and compensation for breach of fiduciary duty as a director of each company.

On 3 May 2005 I gave judgment on two committal applications made by the claimants against Mr Makki. The applications related in part to alleged breaches of search and freezing orders which had been made against Mr Makki, most of which I found to be established. The part of the applications relevant to the present application for summary judgment was made under CPR Part 32.14. The claimants alleged that Mr Makki had signed defences for himself and Daltel USA LLC (DUSA) knowing them to be false in a number of important respects. I found those allegations to be established, to the criminal standard.

In order to give the background necessary for the present application, it is convenient to repeat (with some deletions) paragraphs 5-17 of my judgment of 3 May 2005 (the committal judgment):

“Background

5.

Each of the claimant companies is incorporated in England and Wales and carried on a telecommunications business. Each had obtained a licence from the regulatory authority under section 7 of the Telecommunications Act 1984 to offer telecommunication services. British Telecommunications plc (BT) was accordingly obliged to provide each company with interconnection facilities. This meant that their telecommunications switches were physically connected to the BT telephone network and were entitled to route incoming and outgoing calls via the BT network. This enabled the companies, in effect, to sell access to the BT network to end-users or to other telecommunications operators. Daltel Europe Limited (Daltel) did this by the sale of pre-paid telephone cards and by routing calls from the residential subscribers of an associated company, Apple Telecommunications Europe Limited (ATEL). Pacifica Limited (Pacifica) and Globenet (UK) Limited (Globenet) had no retail customers and routed calls to the BT network on a wholesale basis, directly or indirectly, from Arbinet-theexchange Limited (Arbinet). Arbinet is a New Jersey company which operates a global exchange to facilitate the sale and purchase of voice telephone minutes. It is in issue both in these applications and in the action (i) whether Pacifica and Globenet dealt directly with Arbinet or with companies which in turn dealt directly or indirectly with Arbinet and (ii) whether the intermediate companies (if any) were owned or controlled by Mr Makki or by a third party.

6.

There are many references in the evidence to the sale of airtime by BT to the claimant companies and to the onward sale of airtime by them to other entities. In turn this led to submissions on behalf of the claimants based on the notion that “airtime” was an asset to be bought and sold. Mr Page QC appearing for Mr Makki submitted, correctly in my judgment, that this was not an accurate legal analysis. The interconnect agreements between the claimant companies and BT give those companies access to the BT network for which they agree to pay on a time basis in accordance with contractually binding tariff tables. In that respect it is no different from any ordinary customer’s use of the BT or other networks. Essentially BT is providing a service for which it makes charges. The same was true of the companies which, by virtue of their interconnect agreements, were able to charge for access to the BT network. It is convenient to speak in terms of the sale and purchase of airtime, and I will do so in this judgment, but it is no more than convenient shorthand.

7.

The businesses of these companies were straightforward. Their principal costs were the amounts due to BT, which were charged on a time basis and payable on credit terms. The income of Daltel comprised the amounts received from the sale of pre-paid cards and the amounts due from ATEL, and the income of Pacifica and Globenet comprised the amounts payable by Arbinet or the intermediate company with which they dealt. The businesses could be run from small offices with a small number of employees. Apart from the telecommunications licences and interconnect agreements, the only essential assets were capacity on a telecommunications switch, which I will describe later in this judgment, and computer facilities.

8.

It is common ground that, at all material times, Mr Makki was the sole shareholder of Daltel and Pacifica and was in control of their day-to-day affairs.

9.

The position as regards Globenet is different. Although Mr Makki accepts that he incorporated Globenet, he says that he had sold it before it started trading on about 28 September 2003. …

10.

Mr Makki accepts that he incorporated, or purchased off the shelf, Hillside and two other Delaware companies, Weybridge Management LLC (Weybridge) and Community Technology LLC (Community). He says that he sold all three Delaware companies to Chlach Abdulazziz Al-Eid, a Syrian resident and citizen, in June 2003 under a written contract in Arabic. … Mr Makki says that Globenet, Hillside and Weybridge were after June 2003 controlled by Mr Al-Eid who directed their businesses. The truth of these claims regarding the change of control and ownership of Globenet, Hillside and Weybridge is the central issue in the committal application under CPR Part 32.14.

11.

It is not in dispute that Daltel traded with BT between December 2002 or January 2003 and August 2003, resulting in unpaid indebtedness of some £1.7 million. BT suspended Daltel’s interconnect services for non-payment of charges on 15 August 2004. Equally it is not in dispute that Pacifica traded with BT, resulting in substantial unpaid indebtedness. The precise amount is in dispute but it is accepted to be of the order of £3.9 million. As to the period of Pacifica’s trading, although there is a difference on the statements of case, it is, I think, agreed that it was from June to August 2003. Its interconnect services were suspended by BT on 27 August 2003. Globenet traded with BT from about 28 September to about 28 October 2003, resulting in unpaid indebtedness of nearly £3.69 million. The claimants’ evidence is that Pacifica and Globenet made no payments to BT and that Daltel paid approximately £280,300. There is no contrary evidence adduced by Mr Makki. The total unpaid debts from the three companies to BT are of the order of £9.3 million.

12.

Daltel and Pacifica were each ordered to be wound up on 19 November 2003 on petitions presented by BT and Globenet was wound up on 10 March 2004, also on a petition by BT. None of the petitions was opposed. There are no assets available to the companies or their creditors, other than claims in the action and/or, as Mr Makki says, the claims for unpaid debts against the companies with which they dealt.

Claims against Mr Makki

13.

It is the claimants’ case that between 15 July and 30 October 2003 Arbinet paid sums totalling $6,278,818, which were due to one or more of the claimant companies (all references in this judgment to $ are to US dollars). Instead of being paid to the companies and used to pay debts due to BT, at least $5 million was paid to or for the benefit of Mr Makki between 15 July and November 2003. It is common ground that neither Pacifica nor Globenet maintained a bank account and the claimants allege that sums due to them from Arbinet were paid into Daltel’s dollar account with Barclays Bank in London. Between 15 July and 30 October 2003 a total of $4,695,397 was paid by Arbinet into Daltel’s dollar account. Between July and September 2003 sums totalling $2,152,388 was transferred from this account to accounts at various banks in Beirut held in the joint names of Mr Makki and his father. On 3 November 2003, a further sum of $1.5 million was transferred from Daltel’s dollar account to an account with Barclays Bank in Geneva in the name of Daltel USA LLC (Daltel USA), a Delaware company which was at all times controlled by Mr Makki. A separate amount of $1.4 million was paid by Arbinet into Daltel USA’s account in Geneva. In November 2003 a sum of $2.8 million was transferred from the Geneva account to an account in Beirut in the joint names of Mr Makki and his father.

14.

Put shortly, the claimants’ case is that Mr Makki carried on the business of the companies fraudulently, obtaining connection services to the BT network on credit and diverting the income of the companies to himself, leaving the companies without funds to pay BT.

15.

This is denied by Mr Makki. He says that the relevant circumstances were different as regards each of the companies. He accepts that he controlled Daltel at all material times, but its business was unprofitable because he had intended that it should use Arbinet circuits for the onward transmission of calls but for technical reasons was unable to do so and so had to use the BT network at higher cost. He also accepts that he controlled Pacifica. His case is that it did not deal with Arbinet but sold airtime to Weybridge, which at all material times was owned and controlled by Mr Al-Eid. He says that Weybridge sold the airtime to Daltel USA, which remained under Mr Makki’s control, but did so at a loss apparently due to errors made by Mr Al-Eid in drawing up the rate sheet for the interconnect agreement between Weybridge and Daltel USA. He accepts that Daltel USA has not paid for the airtime. Weybridge failed to pay Pacifica which was therefore left without funds to pay BT.

16.

As regards Globenet, I have already mentioned Mr Makki’s case that he did not control it while it was trading, but had already sold it to Mr Al-Eid or to Hillside, which was by then controlled by Mr Al-Eid. He was not privy to Globenet’s arrangements with BT or with Weybridge. Again, airtime was acquired by Daltel USA from Weybridge and sold to Arbinet. Again, he accepts that Daltel USA has not paid for the airtime.

17.

Mr Makki does not dispute the payments summarised above but it is his case that all the dollar sums paid by Arbinet were for airtime sold by Daltel USA to Arbinet. Daltel USA had purchased the airtime from Weybridge, which in turn had acquired it from Pacifica and Globenet. The sums paid did not therefore represent the funds of Daltel, Pacifica or Globenet, but belonged to Daltel USA. Mr Makki alleges that all sums credited to Daltel’s dollar account were held for Daltel USA, as confirmed by a depository trust agreement.”

The application to commit Mr Makki under CPR Part 32.14 related to allegations in the defences that (i) Pacifica and Globenet sold their airtime to Weybridge, (ii) Weybridge and Hillside were sold by Mr Makki to Mr Al-Eid, and (iii) Globenet was sold by Mr Makki to Mr Al-Eid before it started to trade. I found that each of these allegations was untrue and that Mr Makki knew that they were untrue when he signed the statements of truth on his defence and on the defence of DUSA. I found that the interconnect agreement between Pacifica and Weybridge put forward by Mr Makki was fictitious and that he had prepared bogus invoices from Pacifica to Weybridge for the purposes of his defence. I found that various share sale agreements were also fictitious, as was the “depository trust agreement” relating to Daltel’s dollar account to which I referred in paragraph 17 of the committal judgment.

I was told that the committal orders against Mr Makki are under appeal, but on this application Mr Page accepts that he cannot challenge my findings in the committal judgment.

As appears from the extracts from the committal judgment, the rights of access to the BT network to which Pacifica and Globenet were entitled under their interconnect agreements with BT were in effect sold to or through Arbinet. Mr Makki’s case is that they were legitimately sold by DUSA on its own account, pursuant to the terms of a written agreement date 3 June 2003 between DUSA and Arbinet, and that DUSA was entitled to the sums totalling in excess of $6 million paid by Arbinet and that such sums became its property, to deal with as it decided.

The present application relates first, to sums totalling $3,650,000 paid by Arbinet to a dollar account in the name of Daltel with Barclays Bank in London (the Daltel dollar account) and then transferred, either directly or via an account in Geneva in DUSA’s name, to accounts in Beirut held by Mr Makki and his father. The other sum in issue is an amount of $1,419,929.35 paid by Arbinet to DUSA’s account in Geneva and then transferred to one of the Beirut accounts. These are referred to in more detail in paragraph 13 of the committal judgment.

In his defence and in his affidavit evidence on the committal application, Mr Makki alleged that the payments totalling $3,650,000 were made to the Daltel dollar account only because at that time DUSA did not have its own account. He alleged that only funds belonging to DUSA were credited to that account and he relied on the depository trust agreement dated 10 July 2004. As already mentioned, I found that the depository trust agreement was not a genuine agreement but was created in January 2004 and was back-dated by Mr Makki as part of his false defence.

The claimants submit that, in the light of my findings in the committal judgment, Mr Makki has no real prospect of a successful defence to the claim in respect of the above sums. The interconnect services provided to Arbinet were those to which Pacifica and Globenet were entitled under their agreements with BT. They submit that DUSA had no legal entitlement to make those interconnect services available to Arbinet. Mr Makki’s pleaded defence that DUSA was entitled to access to Pacifica’s interconnect services by reason of a chain involving an agreement between Pacifica and Weybridge has been rejected as deliberately false. Mr Makki has not pleaded or put forward any agreement by which DUSA could have access to Globenet’s interconnect services. His original defence was that Mr Al-Eid owned and controlled Globenet at the relevant times but I have found that defence also to be deliberately false and found that Mr Makki continued at all material times to own and control Globenet.

The claimants submit that in the absence of any legal entitlement to provide access to the interconnect services of Pacifica and Globenet, they and not DUSA are entitled to the sums paid by Arbinet. Accordingly, by transferring the relevant sums to himself, Mr Makki misappropriated those sums and acted in breach of his fiduciary duties to Pacifica and Globenet. They also submit that DUSA was simply used by Mr Makki as a front for his own dealings, made for his own benefit, with the interconnect rights of Pacifica and Globenet. Mr Sion Richards, a partner in the claimants’ solicitors, put it this way in paragraph 7 of his 10^th witness statement:

“…the only proper conclusion to be drawn is that DUSA’s involvement was a sham and that Mr Makki traded with Arbinet in his capacity as the owner / controller of Pacifica and Globenet and at all times dealt only with the assets of those companies.”

It was not part of the claimants’ case that the contract between Arbinet and DUSA was a sham in the sense described by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2QB 786 at 802. There is no suggestion that Arbinet had any reason to doubt DUSA’s apparent right to provide the interconnect services or intended to do anything other than deal with DUSA on the terms of their contract.

Mr Page on behalf of Mr Makki submitted that, while the entire case pleaded against Mr Makki raised allegations that he had perpetrated a dishonest scheme, the application for summary judgment was narrowly based. He submitted that the issues on this application were defined by paragraphs 16 and 21 of the amended particulars of claim. Paragraph 16 reads:

“Airtime purchased by Daltel and/or Pacifica and/or Globenet from BT was sold by those companies, at a discount to the price at which that airtime had been purchased from BT, directly or indirectly, to Arbinet Limited (“Arbinet”) which operated as a global exchange to facilitate the buying and selling of voice minutes.”

Paragraph 21 details the transfers to bank accounts in Switzerland and Lebanon of funds paid by Arbinet. The effect is to ignore DUSA and treat the money as if it had or should have been paid directly by Arbinet to Pacifica and Globenet.

Mr Page submitted that in answer to the case pleaded in paragraphs 16 and 21 it was sufficient on this application for Mr Makki to rely on the undoubted contract between Arbinet and DUSA. Under the terms of the contract, DUSA was entitled to receive the sums due and there was no pleaded case that it had entered into the contract or received sums under it as agent or trustee for Pacifica or Globenet. On this basis the sums paid to DUSA belonged to it, not Pacifica or Globenet, and this application must fail.

As regards the claimant’s argument based on the absence of any entitlement of DUSA to use Pacifica’s and Globenet’s interconnect services, Mr Page submitted that contracts could be implied between DUSA and each of Pacifica and Globenet that would entitle the latter to a reasonable rate of payment for the use of their interconnect services. He submitted that where party A (DUSA) agrees to provide a service to party B (Arbinet) and that agreement is performed by the provision to B of services to party C (Pacifica or Globenet), an agreement will be implied between A and C, entitling C to payment of a reasonable sum by A. Mr Page submits that it is at least reasonably arguable that such a contract should be implied on the facts of this case. In this way, DUSA could legitimately have access to the interconnect services of Pacifica and Globenet for the purpose of performing its contract with Arbinet. There is an additional complication. In a witness statement made shortly before the hearing, Mr Makki maintains that the airtime was passed from Pacifica or Globenet to DUSA through “Wholesale”, which he describes as “an entity separate from Pacifica or Globenet”. This appears to be a variation on the defence alleging Weybridge’s involvement which I have found to be untrue. On this basis, Mr Page’s submission requires a chain of implied contracts, but the applicable principle remains the same and I will deal with the submission on the basis that just one contract is to be implied between DUSA and each of Pacifica and Globenet.

Mr Page objected that the claimants’ submission that DUSA was no more than a front for Mr Makki’s activities was not open to them on this application. As I have mentioned, Mr Page submitted that the application was confined to paragraphs 16 and 21 of the amended particulars of claim. I do not, however, consider that this objection is well-founded. Mr Page stated in his skeleton argument that he was addressing the claimants’ case as set out in Mr Richards’ 10^th witness statement. In the passage already quoted, Mr Richards clearly contends that “DUSA’s involvement was a sham”. This echoes the case pleaded in the amended particulars of claim in relation to DUSA, which includes averments that DUSA “provided a corporate vehicle and/or veil behind which Mr Makki could attempt to conceal his breaches of trust” (paragraph 33F.5) and its “involvement was only to conceal the true position” (paragraph 33G.3). There is nothing in the claimants’ application notice, evidence or submissions which confined their case on this application to paragraphs 16 and 21 of the amended particulars of claim.

In my judgment it is not sufficient for Mr Makki to point to the existence of a contract between Arbinet and DUSA which was not a sham contract. If DUSA had no right to use the interconnect services of Pacific and Globenet to gain access to the BT network for the purpose of performing its contract with Arbinet, it equally had no right to retain sums paid to it by Arbinet for such access but held those sums for Pacifica and Globenet.

Unable to point to any express agreements entitling DUSA to use the interconnect services of Pacifica and Globenet, Mr Page relied on his submission that contracts should be implied. In my judgment Mr Makki has no reasonable prospect of establishing any such implied contracts. Such contracts may readily be inferred as between parties dealing in good faith. However, Mr Makki’s invention of an elaborate defence, involving a fictitious sale of Weybridge to Mr Al-Eid to make it appear as an independent third party and a bogus agreement between Weybridge with Pacific, demonstrates that there was no dealing in good faith between DUSA and Pacifica or Globenet. If there had been, Mr Makki would have had no need to rely on his concocted defence. I do not consider that at trial he has any prospect of establishing a basis on which any agreement would be implied.

Alternatively, Mr Page submitted that it could be inferred that Pacifica and Globenet had consented to DUSA using their interconnect services. For this purpose, he relied on the common control of Mr Makki, although as regards Globenet Mr Makki’s case had been that he did not control it. In different circumstances, common control could provide a proper basis for inferring consent. To be effective, such consent would have to be given in good faith and with a proper regard to the interests of the consenting company. There is no basis for inferring consent by Pacifica and Globenet in the circumstances of this case. Mr Makki’s defence, relying on the fictitious agreement between Pacifica and Weybridge and on the false claim that Globenet was owned and controlled by Mr Al-Eid, was wholly inconsistent with any such consent and demonstrates that Mr Makki did not in good faith consent on behalf of Pacifica and Globenet. Nor, in any event, could he have lawfully consented to a gratuitous use of the interconnect services, in view of the substantial sums which were due to BT and would become due to BT as a result of such use. Pacifica and Globenet would have had no means of paying those sums.

I conclude therefore that Mr Makki has no prospect of establishing that DUSA had, at any time, any entitlement to make use of the interconnect services of Pacifica and Globenet. DUSA had no right to retain the sums paid to it, or to its order, by Arbinet. Pacifica and Globenet were entitled to those sums and it was a breach of fiduciary duty by Mr Makki to divert them to the bank accounts in Beirut in the joint names of his father and himself.

I will note here an alternative submission by Mr Anderson for the claimants. If there had been an arguable basis for an implied agreement, DUSA would have owed sums to Pacifica and Globenet. Sums were paid by Arbinet to the credit of the Daltel dollar account. Mr Makki pleaded and gave affidavit evidence that the funds in that account were held for DUSA and relied on the depository trust agreement. I found that agreement to be a bogus agreement, created by Mr Makki for the purposes of his defence. In those circumstances, Mr Anderson submitted, the proper inference would be that the sums were paid to the Daltel dollar account for the benefit of Pacifica and Globenet in or towards discharge of amounts due to them. Neither of those companies had dollar accounts. If I had accepted Mr Page’s submission of an implied agreement, I would also have accepted this submission by Mr Anderson. Even on that basis, the claimants would be entitled to summary judgment in respect of $3,650,000.

In the absence of any arguable basis for the case that DUSA was entitled to use the interconnect services of Pacifica and Globenet, the claimants also succeed in their submission that DUSA was no more that a front for misappropriation by Mr Makki. All the evidence, read in the light of my findings on the committal application, indicates that DUSA had no bona fide role and Mr Makki has adduced no plausible evidence which has any reasonable prospect of establishing otherwise.

I am therefore satisfied that Mr Makki has no reasonable prospect of a successful defence to the claim for payment of the sums of $3,650,000 and $1,413,929.35, and that the claimants are entitled to summary judgment on the claim.

As to the further relief sought against Mr Makki in relation to those sums, it appeared from the skeleton arguments that substantial issues arose as to whether English or Lebanese law applied and whether the orders sought could be made. However, Mr Page accepted that, provided the orders were only against Mr Makki, they would operate in personam and would be governed by English law. Mr Anderson produced a revised draft order during the hearing and Mr Page confirmed that he had no objections to its form, except perhaps as to the precise wording of paragraph 4. I will invite counsel to agree the terms of the order and I will deal with any difficulties if they arise.