Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE HON. MR JUSTICE COULSON
Between:
AAH PHARMACEUTICALS LIMITED | Claimant |
- and - | |
(1) DALJIT BIRDI (2) IAN EDGE (3) GREYWOOD INVESTMENT S.A. (4) GREYWOOD OVERSEAS S.A. (5) AAH MARKETING S.A. | Defendants |
Mr H Matovu QC & Ms S Abram (instructed by Addleshaw Goddard) for the Claimant
The First Defendant in Person
Hearing Date: 20th June 2011
Judgment
Mr Justice Coulson:
Introduction
This is an application for summary judgment for just over £2,072,280.26 against the 1st defendant (Mr Birdi) and against the 4th and 5th defendants, two Panamanian companies of which Mr Birdi is the sole beneficial owner. It is an all-too-familiar story of offshore companies, fraud and the absence of proper financial controls.
Originally, this case was listed for a 5 day trial, starting today. However the claimant concluded that, in the light of:
the various admissions made by Mr Birdi; and
his deliberate decision not to serve any witness statements for the trial;
the case was suitable for disposal by way of CPR Part 24. In addition, although Mr Birdi complains that the continuation of these proceedings is unnecessary in the light of his admissions, and the payment of much of the claim by way of interim payment, aspects of the claimant’s entitlement to the sums claimed remains in dispute, and it therefore seems to me inevitable that the merits of the those claims must now be determined.
Mr Birdi was the commercial development manager of the claimant company between 2007 and 2010, the period with which I am concerned. The nature of the claimants’ business is the distribution of pharmaceutical and healthcare products and services. One of their suppliers was Quantum Specials Ltd, who supplied particular pharmaceutical products, known as ‘specials’, to pharmacies, hospitals and doctors. It was Mr Birdi who was responsible for the contractual arrangements between the claimant and Quantum.
It appears that, at some point in 2007, Mr Birdi procured and entered into an arrangement with Quantum whereby 10% of Quantum’s net profit on sales of ‘specials’ was paid to the claimant, whilst a further 5% of those profits was paid to the 5th defendant, AAH Marketing S.A., a Panamanian company of which Mr Birdi was and remains the sole beneficial owner.
It seems that this agreement was oral, and not the subject of any written record or note at all. Its existence was not known to, and certainly not approved by, the claimant. On the face of it, it was a patently fraudulent arrangement. How it came to be agreed and operated by Quantum in such obviously suspicious circumstances, and how its existence was not noted by the claimant before February 2010, is not explained in the papers. In total, the sum of £370,848.05 was paid into the Swiss bank account of the 5th defendant as a result of this oral agreement.
Response 24 of the response by the 1st, 4th and 5th defendants to the claimant’s request for information deals with how Quantum were persuaded to make payments to the Panamanian companies. Although it is expressly addressing the position in respect of the 4th defendant, Response 25 makes clear that the same considerations applied to the payments that were made to the 5th defendant. It read:
“The basis upon which the 1st defendant persuaded the 2nd defendant to agree to pay a percentage of profits to the 4th defendant was by telling the 2nd defendant that the 4th defendant was a Celesio Offshore Business, to which the claimant required payment to be made so as to reduce its overall tax liability. The 1st defendant added credibility to this request by informing the 2nd defendant how in 2002 Project Banana was undertaken in conjunction with Cahill May Roberts in Ireland, to reduce the level of tax the claimant paid on its grey market purchasing for that year. The 1st defendant further likened this situation to payments which Lloyds Pharmacy had requested Quantum to make to a third party called Pharmagen.”
It seems to me that this response makes plain how the payments to the 4th and 5th defendants were dishonestly engineered by the Mr Birdi. Quantum’s false belief, that the 4th and 5th defendants were somehow linked to the claimant and therefore entitled to this money, was the result of Mr Birdi’s lies, and the essence of the fraud.
In January 2009, the arrangements between the claimant and Quantum were formalised in writing. The main contract was between the claimant and Quantum and stipulated that Quantum would pay 4% of its turnover derived from the supply of ‘specials’ on behalf of the claimant, in exchange for which Quantum became the claimant’s principal supplier. It appears that this agreement, dated 30th January, was signed by Mr Birdi, although it also bears the signature of the claimant’s head of marketing, Mr Malhi. There is a dispute as to whether he had even seen the agreement at the time that it was signed, or at any time thereafter.
Of much more importance for present circumstances is the existence of a second agreement dated the following day, 31st January 2009, pursuant to which Quantum agreed to pay the 4th defendant, the other Panamanian company of which Mr Birdi was the sole beneficial owner, 2% of its turnover derived from the supply of ‘specials’ on behalf of the claimant. In addition, the agreement provided that Quantum would pay £1.2 million to the 4th defendant by way of a commitment or commencement fee. Again, that agreement was not known to, and certainly not approved by, the claimant. Again, so it seems to me, it was patently fraudulent. As Mr Birdi accepts, the payments were dishonestly engineered in the same way as before. Again, how it was missed by the claimant is not explained in the papers. This time, the much larger sum of £1,701,432.21 was paid into the Swiss bank account of the 4th defendant.
It appears that Mr Birdi’s dishonesty was not discovered until February 2010. He was dismissed, although there is a dispute (which is not relevant for present purposes) as to which party repudiated the contract of employment. These proceedings were commenced at the same time. The payments made at the behest of Mr Birdi, and received by the 4th and 5th defendants, are all admitted in some detail in the defence. In addition, paragraph 29 of the defence is in these terms:
“The 1st defendant does admit, however, that he was in breach of his duty of faithful service to the claimant, while he remained an employee of the claimant, and admits that the sum of £2,072,280.26 is due and owing as damages to the claimant, together with interest as applicable thereon. The sum represents the total of all sums paid by Quantum to the 4th and 5th defendants from 2007, as set out in paragraph 21 above.”
Mr Birdi has subsequently made a number of other admissions in his witness statements. It is perhaps necessary to set out only one other, which comes from his second witness statement, dated 15th November 2010:
“There is no excuse for what I did and I know what I did was wrong. I regret taking the actions I took and this will impact me and my family for the rest of my life…During the negotiations with Quantum I saw an opportunity to take what I felt I deserved. But I know now this was wrong.”
In keeping with this admission, and the other admissions to which I have referred, Mr Birdi has made interim payments to the claimant in the total sum of about £1.8 million odd. However, save as noted in paragraph 9 above, no unqualified admissions of liability have been forthcoming and no admissions of any sort have been made on behalf of the Panamanian companies. As I have already indicated, Mr Birdi has made clear that he disputes the claimant’s entitlement to summary judgment today.
The claims against Mr Birdi are put in four ways: breach of contract, breach of fiduciary duty, unjust enrichment and conspiracy to injure the claimant by unlawful means. The claim for breach of contract is admitted and judgment has been entered on that basis, with damages to be assessed. But the claims in respect of fiduciary duty, unjust enrichment and conspiracy are all denied.
The claims against the Panamanian companies are for dishonest assistance in the fraud of their beneficial owner; knowing receipt of assets disposed of in breach of fiduciary duty; unjust enrichment by their receipt; and conspiracy. These claims are all denied on the principal ground that Mr Birdi owed no fiduciary duty, and the non-admission that Mr Birdi was the directing mind and will of the Panamanian companies.
Accordingly, although there are a number of other matters for me to decide on this application, the principal issues are whether the defendants have a realistic prospect of successfully demonstrating that there was no fiduciary duty, and that Mr Birdi was not the directing mind and will of the Panamanian companies.
The Suitability of this Case for Summary Judgment
Principles
As is well known, the principle at the heart of any application for summary judgment is whether or not the defendant has a real prospect of success: see Lord Woolf MR in Swain v Hillman [2001] 1 All ER 91 at 92. As Potter LJ made plain in ED & F Man Liquid Products Ltd v Patel and Another [2003] EWCA Civ 472, the distinction between a realistic and a fanciful prospect of success was whether any defence that a defendant sought to argue carried “some degree of conviction”. It meant that a defendant had to have a case which was “better than merely arguable”.
A certain amount of difficultly has stemmed from the fact that, in Swain v Hillman, Lord Woolf MR said that, on an application for summary judgment, the court should avoid entering into what he called ‘a mini trial’. However, as Potter LJ explained in ED & F at paragraph 10, “that does not mean that the court has to accept, without analysis, everything said by a party in his statements before the court. In some cases, it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporary documents. If so, issues which are dependant on those factual assertions may be susceptible of disposal at an early stage, so as to save cost and delay of trying an issue, the outcome of which is inevitable”. In commercial cases, where there can often be a lot of paper, even in an application under Part 24, it is thought that that observation has particular force: see paragraphs 8 and 9 of the judgment in Jacobs UK Limited v Skidmore Owings & Merrill [2008] EWHC 2847 (TCC).
The real point that arises here is whether a case which turns so significantly on allegations of dishonesty and fraud can be suitable for summary judgment. The leading case on that is the decision of HHJ Norris QC, as he then was, upheld in the Court of Appeal, in Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237 and [2007] BCC 139. Judge Norris was keenly aware of the potential dangers of reaching conclusions on a summary judgment application, which involved such serious allegations against an individual defendant. However, he said:
“34…But notwithstanding the seriousness of the allegation, the quality of the evidence (derived as it is from matters that are either common ground or have been adduced by Mr Hamilton [the relevant director]) and the clarity of the principle has lead me to the judgment that it is a plain and obvious case and that it would not be a just disposal to compel the Club to prove it at trial…
35 I will give summary judgment in favour of the Club. I regard this as a straightforward case, in which a fiduciary duty in the Club has been misused for the benefit of those interested in the exploitation of its property assets and they must account for [to?] the Club for the benefit they have obtained.”
That approach was expressly approved by the Court of Appeal. Sir Peter Gibson observed:
“51 The judge was well aware that the conclusion that a party has not acted in good faith ought generally to be reached at trial (paragraph 34 of the judgment). However, it has not been suggested that that conclusion can never be reached on a summary judgment application and it must depend on the circumstances of the particular case whether the point can be decided without a trial. The seriousness of the allegation against Mr Hamilton, which was acknowledged by the judge, does not oblige the court to dismiss the allegation for summary judgment. In this case the judge has been led to his conclusion by the quality of the evidence derived from matters which were common ground or had been adduced by Mr Hamilton and the clarity of the principle involved.”
The Relevant Facts
In the same way as the material before Judge Norris in Wrexham Association Football Club was either admitted, or was capable of being derived directly from the other material before the judge, so in this case the relevant facts are either admitted or follow inexorably from those admissions.
In summary, I consider those relevant facts to be these:
Mr Birdi dishonestly diverted over £2 million, which was due and payable to the claimant, into the Swiss bank accounts of two Panamanian companies, of which he is the sole beneficial owner and to whose accounts he alone has access;
The money was paid by Quantum to the Panamanian companies because they had been led to believe by Mr Birdi that those companies were related to the claimant company. That was untrue and, as I have said, it was the essential element of Mr Birdi’s dishonesty.
In fact, the Panamanian companies had no connection with the claimant or their business. That is admitted at paragraphs 14 and 25 of the defence. In other words, as Mr Birdi put it in his skeleton argument today, the arrangements between Quantum and the two Panamanian companies, and the payments that were made pursuant to those arrangements, were all made “purely for my own benefit”;
The claimant did not know about, and certainly did not consent to, these arrangements. If they had known about them they would have objected to them, because they were arrangements which deprived the claimant of money to which it was plainly entitled, and provided the money instead to Mr Birdi, who had no entitlement to that money;
In so acting, Mr Birdi received a secret profit, in breach of the obligations owed under his contract of employment.
It is important to stress that no other findings could arise at a trial. That is partly because no other findings are possible on the face of the material before me, but also because, as I have noted, Mr Birdi has not adduced any evidence for a trial. Therefore there is no prospect of those findings being challenged or changed. To that extent, therefore, the claimant’s case is even stronger than the claimant’s case in Wrexham, where there was, at least at the outset of the hearing, the possibility that the dishonest defendants might have been able to put in further evidence at a trial.
Accordingly, it seems to me that, on the authority of Wrexham, this claim is patently suitable for a summary judgment application. I leave over, because it is not relevant to the application for substantive judgment, whether such an application should have been made earlier.
The Claims Against Mr Birdi
Breach of Contract
The claim against Mr Birdi for breach of contract is admitted and judgment has been entered for damages to be assessed. I need say therefore, no more about it as a matter of liability. There is no reason why the relevant damages should not be assessed in the full sum of £2,072,280.26. Mr Birdi did not ultimately dissent from that.
Breach of Fiduciary Duty
It is, I think, trite law that the mere fact that somebody is an employee does not mean that they owe to their employer a fiduciary duty. Authority for that proposition, if it were needed, can be found in the judgment of Elias J, as he then was, in University of Nottingham v Fishel [2000] ICR 1462. The particular paragraphs in support of that proposition can be found at pages 1490F and 1491E of the report.
However, a specific fiduciary duty will apply in any case where an employee retains a profit, or otherwise keeps money, in circumstances which put him in breach of his contract of employment. There are a number of authorities that demonstrate this proposition, and it is unnecessary for me to set them all out here. However I have particularly in mind:
Neary v The Dean of Westminster [1999] IRLR 288, where Lord Jauncey considered that the employee organist had taken advantage of his position for his own benefit and he had a duty to inform the Abbey authorities because he had used his position to earn secret profits.
University of Nottingham, where Elias J dealt with this aspect of an employee’s liability in the following passage at pages 1490-1491:
“Thus every employee is subject to the principle that he should not accept a bribe and he will have to account for it, and possibly any profits derived from it, to his employer. Again as Fletcher-Moulton LJ observed in Re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 728, even an errand boy is obliged to bring back my change and “is in fiduciary relations with me”. But his fiduciary obligations are limited and arise out of the particular circumstances, namely that he is put in a position where he is obliged to account to me for the change he has received. In that case, the obligation arises out of the employment relationship, but it is not inherent in the nature of the relationship itself.”
Tesco Stores Ltd v Simon Pook and Others [2003] EWHC 823 (Ch), where Peter Smith J said at paragraph 63:
“I accept that there is no duty to an employee to disclose breaches of contract which do not involve a fiduciary element. However, if an employee receives a profit in breach of his duty, he is liable to account. If he receives a bribe, he is liable to account for that bribe. It seems to me that this fiduciary obligation to account is different from the authorities in relation to breaches of contract of employment with no such fiduciary element.”
Other than circumstances involving profit or bribes, an employee can owe a fiduciary duty in particular circumstances. This will always depend on the nature of the obligations owed. Thus, in Bristol and West Building Society v Mothew [1998] 1 Ch 1, at page 18, Lord Millett said that the fiduciary obligation depended on the particular circumstances which gave rise to a relationship of trust and confidence. He said that the distinguishing obligation of a fiduciary was the obligation of loyalty: the principal was entitled to the single-minded loyalty of his fiduciary. In reaching a conclusion as to the general nature of this obligation, Elias J said in University of Nottingham at page 1493E:
“Accordingly, in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify, with care, the particular duties undertaken by the employee and to ask whether, in all the circumstances, he has placed himself in a position where he must act solely in the interests of his employer.”
On an analysis of the facts, I am in no doubt that Mr Birdi owed the claimant company a fiduciary duty and was in breach of that duty as a result of the secret payments. The principal reason for that view concerns Mr Birdi’s diversion of £2 million odd by way of profit that would otherwise have been paid to the claimant. This was money which was paid by Quantum to the 4th and 5th defendants, because they mistakenly believed that those companies were connected to the claimant. That false belief had been induced by Mr Birdi. The money belonged, in law, to the claimant and, accordingly, Mr Birdi owed the claimant a clear fiduciary duty to account for it. It seems to me that such a conclusion is entirely in accordance with the principles I have identified in Neary, Nottingham and Tesco.
In many ways, the complete answer to any defence on this part of the claim was provided by Fletcher-Moulton LJ in Re Coomber. An errand boy has to account for change in the same way as Mr Birdi has to account for the much larger sums which belonged to the claimant, but which had instead been paid to the 4th and 5th defendants. It seems to me that, on the law, and on the admitted facts, no other conclusion is possible. For that reason alone, the claim for breach of a fiduciary duty is made out.
Accordingly, it is unnecessary for me to consider in any detail the more general basis on which the fiduciary duty is alleged against Mr Birdi, which depends on the precise nature of his obligations to the claimant. But, on the material before me, I would conclude that the more general fiduciary duty has also been established. That is a result of a number of factual matters which are not disputed:
First, I note that Mr Birdi was part of the organisational management group of the claimant company. He was therefore a senior employee, with a directing role in the claimant company. He may have felt that he was not properly appreciated - that is certainly a point that arises in a number of his witness statements - but the fact that he had that important role seems to me to be beyond doubt.
Secondly, in that role, it is plain that Mr Birdi was privy to confidential information. That is regarded in the authorities as a very important factor in indicating whether or not a fiduciary duty was owed by an employee. The greater the amount of confidential information that an employee may be party to, the more likely it will be that he owed a fiduciary duty to his employer.
Thirdly, I note that Mr Birdi was, in the period with which I am dealing, solely responsible for the arrangements with Quantum. That is another indication that a fiduciary duty was owed, at least in respect of those arrangements.
Accordingly, for these three reasons, it seems to me that, when considering the particular duties undertaken by Mr Birdi in this case, it is appropriate to conclude that he did indeed place himself in a position where he was obliged to act solely in the interests of his employer, at least in connection with Quantum and the payment arrangements as between Quantum and the claimant. The fiduciary duty is again made out.
Unjust Enrichment
The next way in which the claim is put is by way of a claim for unjust enrichment. It seems to me that, regardless of my conclusions as to the fiduciary duty, the unjust enrichment claim is unanswerable. When one considers the admissions in the pleadings and in the evidence, it is clear that the payments were only made by Quantum because they mistakenly believed that the Panamanian companies were connected to the claimant company and that mistake of fact, which is also admitted by Quantum’s director who dealt directly with Mr Birdi, meant that Mr Birdi’s consequent enrichment was unjust. He, after all, was the person who was solely responsible for Quantum’s mistaken belief. In those circumstances, the unjust enrichment claim is also made out.
Conspiracy
The final claim against Mr Birdi, and it is also a claim against the Panamanian companies, is put by way of an alleged conspiracy. For the reasons outlined below I could not allow that claim on this application for summary judgment.
The criminal law is clear: one man cannot conspire with companies of which he is the sole beneficiary (a so-called one man company): see R v McDonnell [1966] 1 QB 233. The civil law is less clear. Whilst a contract can be made between one man and his company (see Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC)), and a combination of two or three wholly connected companies has been thought to be sufficient (see Taylor v Smith [1991] IR 142), it seems to me that a result that distinguishes between the criminal and civil jurisdictions in such a radical way is, in principle, unattractive. I would need to hear further argument on it before reaching a final view.
Since, in view of my other conclusions, I do not need to make any finding on this aspect of the case, and given that this is an application for summary judgment, I therefore decline to do so.
The Claims Against the Panamanian Companies
Conspiracy
For the reasons given above, I reach no conclusion on this way in which the claim is put against the Panamanian companies. For the reasons noted below, that is immaterial to the substance of the application against these defendants.
Knowing Receipt/Dishonest Assistance
Dishonesty was dealt with at some length in the well-known case of R v Ghosh [1982] QB 1053. It is an objective standard so that, even though it may have a connotation of subjectivity, it is to be decided by way of an objective assessment. The Privy Council made plain in Royal Brunei Airlines v Tan [1995] 2 AC 378, that “the standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”
The leading case on knowing receipt is BCCI v Akindele [2001] Ch 437. In that case, Nourse LJ defined the test in these terms:
“For these reasons, I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led.”
On the facts here, there can be no doubt that, if the claimant was the directing mind and will of the Panamanian companies, their state of knowledge, being his state of knowledge, would make it unconscionable for Mr Birdi to retain the benefit of the receipt. He knew that the money was not his to divert. He knew that the money was only being paid because Quantum thought that the Panamanian companies were connected to the claimant company. He had no entitlement to the money and dishonestly received it. Thus, subject to the issue as to the directing mind and will of the Panamanian companies, the claims for knowing receipt and dishonest assistance will have been made out.
There are five reasons why I am in no doubt that Mr Birdi was and remains the single determining mind and will of the Panamanian companies. They are:
He is their sole beneficial owner, as admitted in paragraphs 5 and 6 of the defence;
He controls the Swiss bank accounts of both companies (see his second statement at page 2/281 of the bundle);
He gave all the relevant instructions as to the presentation of the cheques (which he had dishonestly procured) to the Swiss bank (Responses 27 and 28 to the claimant’s request for further information);
He has acted for, and represented them, in these proceedings and at this hearing. His home address is given as the relevant address for service upon them;
There is no one else in the same position. The legal owners of the company, CAMS are said expressly by Mr Birdi to have played, and to continue to play, no role in the management or control of the Panamanian companies (see Response 2). Similarly, Response 22 makes plain that the director, Mr Gil, also has not played, and does not now play, any role in the management and control of the Panamanian companies.
Accordingly, it seems to me clear that Mr Birdi was and is the sole determining mind and will of the Panamanian companies. That means that the claims for knowing receipt and dishonest assistance have been made out. So too are the claims for unjust enrichment, given that those claims have been made out against Mr Birdi personally and that he is the sole controlling mind and will of the Panamanian companies.
Conclusions
As against Mr Birdi personally, for the reasons I have given, he is liable in full for the sum of £2,072,280.26, not only by way of damages for breach of contract, but also for breach of fiduciary duty and unjust enrichment. There is, and can be, no defence to those claims. I make no finding on the conspiracy claim.
As against the Panamanian companies, for the reasons I have given, they are liable in full for the same amount. That is on the basis of knowing receipt, dishonest assistance and unjust enrichment. It is clear beyond doubt that Mr Birdi was their sole determining mind and will. There is, and can be, no defence to those claims. I again make no finding on the conspiracy claim.
I therefore give judgment for the full sum claimed. I will deal separately with interest and costs.