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	England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> RBS Invoice Finance Ltd v Karia & Ors [2008] EWHC 1238 (QB) (12 May 2008) URL: http://www.bailii.org/ew/cases/EWHC/QB/2008/1238.html Cite as: [2008] EWHC 1238 (QB)

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IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		12th May 2008

THE DEPUTY JUDGE:

1. On 18^th April 2008 the Honourable Mr Justice Penry-Davey made a Freezing Order against the three defendants in this case, prohibiting them from disclosing, dealing with or diminishing the value of any of their assets in the United Kingdom up to a value of £467,000. The order was made without notice to the defendants on the application of the claimant, RBS Invoice Finance Limited.
2. The order required the defendants to identify any of their assets exceeding £1,000 in value, and to confirm that information by affidavit within seven working days of service upon them of the order. The order was to continue in effect until a return date which was specified as 25^th April 2008, that is seven days after it was made.
3. The order excepted from its effect living expenses of the first defendant up to £500 a week, and for all the defendants reasonable expenditure on legal expenses, and the use of their assets in the ordinary and proper course of their business, subject to the defendants keeping RBS Solicitors informed in relation to any proposed expenditure.
4. The first defendant, Mr Karia, is a qualified solicitor, who it is accepted is the sole shareholder and the controlling mind of the second and third defendants, who are companies forming part of a group under his control.
5. The second defendant, RAM Recycling Limited operates a waste-disposal and recycling centre in Southampton.
6. The third defendant, GRITTCO Limited's business is the salting and gritting of roads in the southern part of Hampshire.
7. On 25^th April 2008, the return date specified in the order, the matter came back to court before the Honourable Mr Justice Davis. The parties were not then in a position to proceed, it being clear from Mr Karia's first affidavit that the defendants intended to oppose continuation of the order, and a Consent Order was made, varying the terms of the order to increase the weekly living expenses permitted to the first defendant, identifying specific permitted expenditure by the defendants in relation to legal expenses, work on the second defendant's site, insurance premium payments relating to the second defendant's leasing of the site and other operational expenditure by the second and third defendants. The return date for a Substantive Hearing was fixed for 2^nd May 2008.
8. On 2^nd May 2008 the matter came before me. RBS, who appeared by Mr Pelling, sought a continuation of the order until trial or further order on the grounds that it would be in the interests of justice and fairness to extend the order, that the claimant had a good arguable case in its claim for which proceedings had been issued and served on 18^th April, and that there was a real risk that the defendants would dissipate their assets if the order was not continued.
9. The defendants, who were represented by Mr Quiney, opposed that application and sought the discharge of the order. On behalf of the defendants there were submitted five affidavits, sworn by Mr Karia, the second, third and fourth of which were affidavits identifying his and the second and third defendant's assets; an affidavit from Mr Lad, the Financial and Accounting Consultant retained by Mr Karia's companies in January 2008 to replace a Finance Director who had resigned in December 2007; from Mr White, a Director of another company known to have been controlled by Mr Karia, called RAM Tippers Limited, which although not a defendant takes a central part of the story; and from a Mr Rakesh Mehta, another director of RAM Tippers.
10. RBS relied upon the original affidavit of Ms Webster, its Head of Client Relations Business South, a second affidavit of hers, responding to matters raised by the defendants' evidence, and two affidavits from Ms McCallion, the person in RBS appointed as "Relationship Manager" for their dealings with Mr Karia and RAM Tippers.
11. The hearing of the application occupied a full court day and the matter was adjourned for judgment. Pending judgment, the order was continued on the same terms, save for two variations. In the light of developments and of the evidence about the defendants' assets that has been provided since the date of the making of the original order, the value of the assets frozen by the order was reduced to £325,000 and the first defendant, Mr Karia, was released from its provisions. The order remained in full force in effect against the second and third defendants in that reduced amount.
12. At least since 2005 the first defendant and his companies have banked with National Westminster Bank PLC, a sister company of RBS. NatWest holds a charge over the first defendant's house in Bassett Avenue in Southampton to secure its loan to him of £250,000 and the first defendant has given his bank a personal guarantee in the sum of £15,000.
13. Following an approach by the first defendant for funding support for RAM Tippers business, on 18^th February 2008 RBS entered into a factoring agreement with RAM Tippers. By the terms of the agreement, which provided to RAM Tippers what was called a 'debt purchase facility' to provide RAM Tippers with working capital, that company called 'the client' was to notify debts to RBS who would advance to it by way of prepayment 85% of the value of notified debts up to a maximum of £500,000 (subsequently increased to £750,000)
14. RBS made a charge, called 'the discount margin,' of 2.25% over the base rate of NatWest, applicable to the balance on its client's account with RAM Tippers. RAM Tippers' customers debts were assigned to RBS. By the provisions of Clause 13 of the agreement, RBS was to collect payment of the debts from RAM Tippers' debtors, and RAM Tippers was obliged to notify its customers of the assignment of debts to RBS and to ensure that customers made payment, called the "Remittances" to RBS, or to a designated account under its control.
15. By Clause 14 the Remittances were to be the property of RBS, and any Remittance paid to RAM Tippers by its customer was to be delivered by RAM Tippers to RBS or paid into the designated account. Remittances held by RAM Tippers before delivery to RBS were, it was agreed, held by RAM Tippers on trust for RBS and separate from RAM Tippers' own monies.
16. In February and March 2008 RBS made prepayments to RAM Tippers in four stages amounting in all to £693,800. It came to RBS's attention in February and March that RAM Tippers were failing to transfer Remittances received from its customers to RBS. In the first affidavit of Ms Webster, at paragraphs 24-26, she describes a situation which developed from a small sum of £7,000 in late February, to £52,000 by 27^th March and to about £130,000 at the beginning of April.
17. On 2^nd April RBS sent RAM Tippers a notice of breach and reduced the cap on prepayments to zero. On 4^th April, according to Ms Webster, at a meeting with Mr Lad, in the absence abroad of the first defendant, Mr Lad said that RAM Tippers did not have the money to pay the Remittances over to RBS, and tendered a cheque for the sum of £131,020.73 as part-payment, pending his review of the ledger, but stated that without prepayments the cheque would be dishonoured.
18. On the same day, but then unknown to RBS, a trade creditor of RAM Tippers called Veolia Environmental Services UK Limited presented a petition against RAM Tippers in respect of its unpaid debt of £348,364.03. RAM Tippers is in administration. It appears that notwithstanding the substantial prepayments made RBS and its retention of Remittances which, it is not disputed, had emerged by 18^th April to have amounted to £345,000 odd, and which present information reveals to have been somewhat more, at about £367,000 or £369,000, by 18^th April RAM Tippers had a balance of only £6,809.16 in its bank account.
19. RBS allege a fraudulent conspiracy against the defendants and claim damages against the first defendant for his involvement in RAM Tippers' conversion of RBS property in the Remittances, and equitable compensation against all the defendants for their knowing and dishonest assistance to RAM Tippers in its breach of trust in relation to the Remittances received and used by RAM Tippers, which were impressed with the trust in favour of RBS by virtue of the terms of the factoring agreement.
20. The claim is that from the outset, the first defendant intended to make off with the prepayments and the Remittances, to leave the bank, and I quote from RBS's Skeleton paragraph 6: 'high and dry.'
21. RBS relied, before Mr Justice Penry-Davey on 18^th April, on a number of matters from which it alleged an inference of fraud could be drawn. They identified the substantial payments made by RAM Tippers to the second and third defendants, apparently connected to the receipt by RAM Tippers of prepayment monies, for no discernable commercial reason.' These amounted, at that time, to a net amount of £353,739 paid to the second defendant, and £66,395.99 to the third defendant. The up-to-date figures at the time of the hearing before me were £377,239 and £66,395.99 for the second and third defendants respectively, and the pattern of payment and contra-entries is conveniently set out in coloured schedules submitted by Mr Pelling in the course of the hearing. In the particulars of claim it is pleaded that the true reason for these payments was to make their recovery more difficult for RBS. See paragraph 14.3.
22. RBS also relied on payments by the bank drafts of £300,000 by the second defendant and £51,000 by the third defendant made on 20^th March from their bank accounts with NatWest to new bank accounts, opened for the purpose of receiving those payments, with HSBC. This, it is said, was an attempt to put funds removed from RAM Tippers beyond the immediate reach of RBS. It is the second of the third defendant's participation in these transactions that implicates them 'so it is alleged' in the fraudulent scheme.
23. RBS relied on the fact that substantial sums, by way of Remittances, had been received by RAM Tippers and not accounted for to RBS. The affidavit of Ms Webster described, in paragraphs 24-26, the difficulties in contacting the first defendant and the lack of satisfactory answers from Mr Lad as to why the company was unable to pay over the remittances it had received.
24. RBS also identified further substantial sums paid away by RAM Tippers, which had the effect of depleting its bank account further. They gave, as examples, details of a payment of £70,000 to the first defendant's brother, of £28,224 to a Mr Mehta, a Director of the company, and of four cheques drawn for cash between 14^th March and 4^th April, in a total sum of £79,000.
25. In argument before me, while acknowledging the explanations which the defendants have now given about these payments, Mr Pelling pointed to the fact that they were all payments to parties more or less closely connected to the defendants, and were to be contrasted with the defendants' failure to pay any sums to trade creditors such as Veolia.
26. RBS also pointed to the fact that in the Aged Creditors Analysis produced to Ms McCallion on 18^th February and forming part of the material on which RBS relied in entering into the agreement, Veolia was shown as a creditor to the tune of £37,000 odd. RBS contrasted this with the fact that at the time of its petition Veolia claimed to be a creditor to the sum of £348,000 odd. The difference was said to be evidence that the figure given to it by Mr Karia and relied upon by RBS was materially misrepresented and cast doubt on all the accounting information provided to RBS. See Ms Webster's first affidavit, paragraph 31 and 32. In the particulars of claim, the allegation is made that this was a false statement founding an inference of fraud, see paragraph 14.11. Its significance, of course, lies in the fact that it was a false statement at the outset of the relationship between the parties.
27. In addition, before the Judge on 18^th April, RBS also relied upon evidence that the first defendant's house was in the process of being sold, and on his refusal to give personal or cross-company guarantees by the second and the third defendants in respect of RAM Tippers facility as supporting the inference that: 'It was always the defendant's intention to make off with the prepayments of remittances and leave the bank high and dry.' See the first skeleton argument, paragraph 7.5 and 7.3.
28. Only the former, and not the latter of these aspects of the case is relied upon as supporting the inference of fraud in the particulars of claim. See Particulars of Claim, paragraph 14.4 and 10.
29. In the evidence before me the defendants, without accepting that the facts necessarily gave rise to any inference of fraud sufficient to require from them any explanation, offered explanations for the various matters on which RBS relies.
30. The payments made to the second and third defendants are not disputed. But they are explained as having been made to satisfy RAM Tippers' liabilities to these companies, in substance for the licensed use by RAM Tippers of the second defendant's waste-disposal and re-cycling centre, and for the repayment of loans made by those companies to RAM Tippers. Some documentary evidence is produced to support this account, but it is not by any means complete.
31. The transfers away by the second and third defendants of sums from their NatWest bank account to the new account with HSBC are admitted, but are said by Mr Quiney on instructions, to have been made with a view to exploring alternative factoring arrangements with HSBC. It is the fact, however, that no such arrangements were in the event pursued or made. The first defendant has agreed to swear to the truth of that account on affidavit. It is not an explanation which currently appears in his evidence, indeed the allegation is not dealt with there.
32. The defendant's explanation in relation to the Remittances is that Ms McCallion agreed at the outset that providing the total of prepayments and Remittances did not exceed 85% in value of the notified debts from time to time, RAM Tippers would be permitted to retain the Remittances to assist its cash flow. This agreement, which would of course run counter to the express terms of the factoring agreement is not documented and is not referred to in any contemporaneous document.
33. The payments of £70,000 to the first defendant's brother was the repayment of a loan he made to RAM Tippers it is said, which is evidenced by entries in bank statements; the payment of £28,224 was not made to Mr Mehta, the Director of RAM Tippers, but to another Mr Mehta, who is a Solicitor, for 'Legal and professional services.' There is no invoice for these services produced, no description of them and no support from the relevant Mr Mehta. The cash payments of £79,000 were, as to £60,000, for staff wages. The balance was for employee disbursements. The former are not documented; the latter are.
34. As far as Veolia's debt is concerned, the defendants say that the Aged Creditors Analysis was shown to RBS on 2^nd February, when it was accurate, and not on 18^th February when, as the ledger shows, at Volume Two, Tab One, page 37, the debt was already of the order of £160,000. The liability to Veolia increased rapidly and substantially during February and March because of difficulties the second defendant was experiencing at its re-cycling centre which required RAM Tippers to incur large expenditure using Veolia for land-fill services elsewhere.
35. So far as the first defendant's house is concerned, the first defendant had placed it on the market by December 2007, when his family had increased in size by the arrival of triplets born to his wife about November 2007, and taking account of the housing market, they planned to rent a house until the market had stabilised. The sale had not proceeded as fast as it might have done because the first defendant had got cold feet about making the move.
36. The first defendant does not deal with his refusal to give personal and cross-company guarantees in his affidavits. Mr Quiney points out that it is RBS's own evidence that they were sufficiently eager to do business with the first defendant and RAM Tippers to be prepared to proceed without that security and there is no reason to draw the inference that the first defendant had formed a dishonest plan from a reluctance to encumber himself or his other businesses with guarantees for which there was no commercial justification.
37. RBS point out that the evidence which might be expected to exist were these explanations true, is incomplete. The loans made by the second defendant, the third defendant and the first defendant's brother are not documented. The sums allegedly used from RAM Tippers and the second defendant in respect of the licence are in part supported by an invoice which charges three months in one, which departs from the previous pattern of monthly invoicing, and which is quite inconsistent with another document given to RBS at the outset, namely the Aged Debtors Analysis, also dated 2^nd February 2008.
38. The explanation given in relation to the Remittances is flatly contradicted by Ms McCallion and is not only not supported by any contemporaneous document but is positively inconsistent with documents in RBS's file.
39. The first question for me on this application to continue the injunction is whether RBS has a good arguable claim. Mr Pelling does not quibble with the test set out in Mr Quiney's skeleton at paragraphs 28 and 29 based on the judgment of Mr Justice Mustill in The Niedersachsen [1983] 2 Lloyds Reports 600 at 604 and 605.
40. Is the claimant's case capable of serious argument? It is of course impossible for me to resolve the contested issues of fact and their proper interpretation or to decide upon the proper inference to be drawn from those facts, at this stage of the case, and it is important that nothing I say should be understood as expressing my opinion about the merits of the case.
41. But in order to form a view about the question whether the claimant's case is capable of serious argument, it is necessary for me to take account of the apparent strengths and weaknesses of the claimant's case.
42. At this stage it is fair to say that the material now before the court does apparently undermine the strength of the claimant's case and provide explanations where previously the claimant relied on a lack of any apparent justification for the defendants' action to found an inference of dishonesty.
43. But despite that, in my judgment the claimant's case meets the required threshold for injunctive relief. Thus it does appear that substantial sums of money have passed from the claimant through RAM Tippers to the second and third defendants, where substantial sums can still be found. It seems that RAM Tippers has been reduced to a shell by the transfer of monies out of it. It seems that RAM Tippers used very substantial Remittances as its own in apparent breach of the express terms of the factoring agreement, and that the defendants rely on an oral, undocumented, and hotly-disputed agreement to justify its use of those funds.
44. These features of the case lie at the core of the claimant's claim, and in my judgment are capable of founding an inference of fraudulent conduct.
45. Is there a real risk that by reason of a dissipation by the defendants of their assets any judgment or award in favour of the claimants would remain unsatisfied?
46. There must be good evidence of a real risk that the defendants will deal with their assets in a manner distinct from their ordinary course of business, or for the first defendant different from his ordinary course of living, with the effect of defeating a judgment in favour of the claimant, to draw the inference of dissipation. The purpose of this jurisdiction is not to create the claimant a secured creditor for his claim, but to prevent frustration of any ultimate judgment the claimant obtains by such dissipation of assets.
47. RBS relied, before Mr Justice Penry-Davey, on the sale of the first defendant's house, and the first defendant's links with Dubai (Ms Webster's first affidavit paragraph 41). She had referred to the fact that the first defendant had gone to Dubai at the time RBS became seriously concerned about the state of the account and thereby avoided meeting RBS's representatives.
48. Before me RBS relied on their case of fraud, consisting, as it did, of an attempt to put substantial cash beyond the reach of RBS by directing it away from RAM Tippers with whom RBS had a contract to the second and third defendants and, to the extent that it was not spent already, through them to their bank accounts with HSBC.
49. RBS also relied on what they said was dishonesty in the defendants' attempts to answer the claim - the evidence about the oral agreement about Remittances from Mr Lad and from Mr White being a prime example - and in other evidence such as that of Mr Mehta, who alleged that Ms Webster and Mr McCallion has made a harassing visit to Mr Mehta's home, or that Ms Webster threatened to ruin the first defendant and ensure that no other factor would take on the first defendant's account, despite the fact that RBS would not thereby be paid the sums due to them.
50. I bear in mind the cautionary words of Lord Justice Peter Gibson in Thane Investments Limited and others v. Tomlinson and Others (2003) in EWCA Civ 1272, that it is necessary to scrutinise an allegation of dishonesty with care to see whether, in itself, it really justifies the inference that the person is likely to dissipate his assets unless restricted by a court order.
51. In my judgment the alleged dishonesty of the defendants in attempting to put the fruits of their fraud out of reach of RBS is capable of amounting to a factor suggesting a risk of dissipation of assets, although the inference is weakened, at this stage, by the explanation given by the defendants for their actions, and by the fact that, on any view, a transfer from an account in one UK bank to another UK bank, details of which could be and were easily traced by RBS, does not bear the strongest hallmarks of dissipation.
52. But I am not persuaded that the same inference arises from the allegations of dishonesty on the part of the defendants' witnesses in their attempts to defeat the injunction by their explanation of the transactions, or the other allegations of threats and the like, which they make, and which Mr Pelling with some justification describes as inherently incredible.
53. Nor do I feel justified in inferring from the proposed, if not completed, sale of the first defendant's house, that there is a serious risk of dissipation of assets. The evidence suggests that the first defendant placed the house on the market some months before he had any involvement with RBS. The reasons he gives for having done so make sense and the fact that he has stalled the progress of the sale is more consistent with the innocence of the transaction rather than the reverse. As it happens, removal of the value of the equity of his house, which amounts to about £50,000, is unlikely to make a useful contribution to any new life he is contemplating in Dubai.
54. What else is there? The first defendant has lived all his life in England. He was educated here and has always worked here. His business interests are based in the Southampton area. Their businesses are local and not international. The principal asset of the second defendant, indeed of all three defendants taken as a whole, is its lease hold interest in the re-cycling centre. That lease is terminable on six months notice, and it appears that Network Rail, the freeholder, who proposes to give six months notice, has not yet done so.
55. The first defendant and his businesses have banked with NatWest for some years. No question has been raised over the conduct of his accounts as far as appears from the evidence before me. There is no suggestion, for example, that the first defendant has been transferring money abroad, or has investment in properties overseas.
56. In my judgment, these factors persuade me that despite the arguable case of fraud, and the features of that fraud, it has not been established that there is real evidence which can found an inference of a real risk of dissipation of assets. In those circumstances the order must be discharged.
57. Had it been otherwise in relation to the risk of dissipation, I should have had to consider whether in all the circumstances it was just and convenient to continue the order. Had I been satisfied that there was evidence of a real risk of dissipation of the defendant's assets, I would have found that it was just and convenient to make the order and would not have been dissuaded from doing so by the considerations advanced in paragraph 35 of Mr Quiney's skeleton argument.
58. I would not have continued the order in the same figure however and I would not have continued it against the first or the third defendant, because in a reduced sum the assets of the second defendant alone would have been sufficient for the claimant's protection.
59. It is perhaps an unusual feature of this case that alongside the protection of the Freezing Order RBS has enjoyed the continuing right to collect sums on RAM Tipper's debtors book. This fact does not seem to have been adverted to by RBS when it applied for the Freezing Order on 18^th April. It has not been suggested that this was a material non-disclosure justifying the discharge of the order. The matter has therefore not been explored in detail, and I would not be justified in expressing any concluded view about it, but at first sight it is difficult to see why this aspect of the matter was not explained to the court.
60. In her first affidavit, Ms Webster said that it was expected that misappropriated Remittances would eventually amount to some £600,000. She now says, two weeks later, that the likely figure is only two-thirds of that amount. The Freezing Order was made in the sum of £467,000 on the basis I assume, that that, rather than the total value of prepayments and costs, estimated at £720,000, which was sought in the claimant's first skeleton, was a true estimate of the claimant's losses for which the defendants were potentially liable.
61. Since 17^th April, further recoveries amounting to £77,000 have been made from the defendants' book, according Ms Webster in her second affidavit. Ms Webster also deposes to a revised estimate of losses. These she places at £400,000, but on the footing as it was explained to me by Mr Pelling, that that is the value of the claimant's contractual claim against RAM Tippers, rather than their damages claim against the defendants.
62. Mr Pelling puts forward a figure for recoverable losses of £363,512.28 (skeleton paragraph 10) before taking into account likely recoveries from RAM Tippers' debtors.
63. As to that, in Ms Webster's second affidavit it is shown that the debts identified in the debtors book amount to £863,000 odd. Of that figure £369,000 odd is identified as remittances already paid to RAM Tippers, and therefore lost to RBS.
64. Of the balance of £494,000 odd it is said that £342,000 odd are 'Disputed debts.' Some will be disputed on account of having been paid to RAM Tippers already, but, taking account of Ms Webster's overall estimate of misapplied remittances of £400,000 and the sums already traced to date, presumably those untraced misapplied remittances amount to only about £41,000 of the balance of disputed debt, leaving £300,000 odd disputed on other grounds.
65. The book, according to RBS accounts therefore, has undisputed debts of £152,000 and disputed debts of £300,000 remaining for potential collection. To these parts of the book, Ms Webster is inclined to give a value for future recoveries of only £50,000 in all. She does not explain her analysis.
66. Taking the sum of £50,000 from Mr Pelling's estimate of losses and adding something for costs is the explanation, with rounding, for the figure of £325,000 Mr Pelling told me the claimants sought in any continued order. That is the explanation also for the reduced sum in which I have continued the order pending this judgment. Since that sum can easily be found in the bank accounts of the second and third defendants it was not necessary to continue the order against the first defendant personally, and I accordingly released him from the order as explained above.
67. Had I continued the order until trial or further order, I would have had to decide in what amount, and against which defendants it should have been continued.
68. I am told by Mr Pelling that recovery of debts is hampered by lack of paperwork, but I observe that in April alone £175,000 has been recovered. Taking account of the fact that the disputed debt schedule, exhibited to Ms Webster's second affidavit, suggests that even some of the disputes may be capable of easy resolution, and also bearing in mind the need to avoid requiring the parties having to return to the court for further variations of the order as recoveries pending trial further diminish the claimant's losses, I would have assessed the sum it was in all the circumstances just and convenient to make the subject of a continuing Freezing Order at £150,000. That was an order which could have been confined to the second defendants alone.
69. In the result however, for lack of evidence justifying the inference of a real risk of dissipation of assets, I discharge the order in its entirety.