Claim No: CFI 019/2013
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
In the name of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Ruler of Dubai
IN THE COURT OF FIRST INSTANCE
BEFORE THE DEPUTY CHIEF JUSTICE SIR JOHN CHADWICK
|(1) ROBERTO’S CLUB
(2) EMAIN KADRIE
|PAOLO ROBERTO RELLA
||5 February 2014
||Zeeshan Dhar assisted by Tarek Shrayh (Al Tamimi & Co.) for the Defendant/Applicant.
Yacine Francis assisted by Rumaana Habeeb (Allen & Overy LLP) for the Claimants/Respondents.
||5 February 2014
JUDGMENT OF THE DEPUTY CHIEF JUSTICE SIR JOHN CHADWICK
Transcribed from the oral judgment delivered on 5 February 2014, revised and approved by the Judge.
Deputy Chief Justice Sir John Chadwick:
1. The circumstances which led to the proceedings which are before me are described in a judgment which I gave on 18 December 2013, of which a transcript appears in the bundle before me. Without seeking to rehearse in detail what I said on that occasion, I summarise as follows.
2. The proceedings arise out of a joint venture between the second-named claimant, Mr Emain Kadrie, and the defendant and present applicant, Mr Paolo Roberto Rella. The joint venture was for the establishment of a restaurant or club business in the DIFC, which subsequently became known as Roberto’s Club LLC. That company is the first-named claimant. As the name suggests, the venture was founded on the basis that the reputation and skill of Mr Roberto Rella could be exploited for the mutual benefit of the joint ventures. The joint venture was constituted by a shareholders’ agreement dated 21 November 2011 and the articles of association of the company. There is a dispute whether Mr Rella signed the shareholders’ agreement in the form in which it now appears. That issue, amongst many others, will need to be determined in due course at a trial.
3. The parties fell out in the early part of 2013. Thereafter, Mr Rella was effectively excluded from participation in the management of the joint venture company. He was not formally dismissed as its executive manager until 3 April 2013, and a further issue in the trial will be whether the grounds of dismissal relied upon were indeed substantial. Whether or not he was dismissed for proper cause is potentially important in relation to his continued standing as a member of the company; given the terms of a forfeiture clause in the shareholders’ agreement. It may also be important in relation to whether he ceased to be a director or, as it is termed in the articles, “Manager” of the company; but as things stand, for the reasons which I set out in my earlier judgment, no material has been put forward to show that he did in fact ever cease to be a de jure director.
4. The proceedings include a counterclaim by Mr Rella, alleging what may be described as unfair prejudice. It is probable that, at a trial, the Court will be asked to consider whether to grant relief arising from that allegation; including relief in the form of a buyout order of Mr Rella’s shares.
5. The proceedings were commenced in July 2013. Mr Rella issued an application (CFI 19/2013/2) on 7 November 2013, in which he sought an order that the claimants – that is to say, the joint venture company and Mr Kadrie – disclose financial information relating to the company, including provisions of its audited accounts. That application came before the Court on 18 December 2013. It was following the hearing of that application that I delivered the judgment to which I have just referred. For the reasons set out in that judgment, I made an order on 18 December 2013 which, so far as material, was in these terms:
“1. Until the determination of the counterclaim or further order in the meantime, the affairs of the first claimant, Roberto’s Club LLC (‘the company’), are to be conducted on the footing that the defendant [that is Mr Rella] remains a Manager (director) and member of the company; in particular: (i) the defendant is to be given proper notice of all matters which (pursuant to the articles of association of the company) are to be put before meetings of the board of directors or the members, and is to be permitted to attend and vote at such meetings; and (ii) the defendant and his advisors are to be provided with such financial information as the defendant reasonably requires in order for him to properly carry out his duties as a manager (director) of the company, including but not limited to the provision of the audited accounts.”
The order went on to make it clear that the information to which the defendant was to be given access was for the purpose of him being able to perform his duties as a manager or director and was to be kept confidential. It also included a paragraph which required that the funds of the company should not be used by Mr Kadrie for the purpose of defending the counterclaim, which alleged unfair prejudice as between the shareholders.
6. Following that order, by letter dated 22 December 2013, Messrs Al Tamimi and Co, the attorneys acting for Mr Rella, wrote requesting information and documents which, it was said, were required in accordance with my order of 18 December 2013 and in order that Mr Rella could carry out his duties as manager (director) of the company. The information and documents requested were these:
“(1) company accounts, whether auditable or otherwise, and any auditors’ reports thus far compiled, whether complete or incomplete;
(2) information and documentation evidencing the date on which the audited accounts were filed with the Companies Registrar of the DIFC;
(3) daily revenue reports from the date of incorporation to date;
(4) copies of all financial books and records, any information and documents evidencing all transactions, whether daily, weekly, monthly, or yearly, relating to the financial dealings of or arising out of the business of the company, including, but not limited to, all bank account opening forms, bank statements, books, ledgers, invoices, receipts, loans, repayment of shareholders’ loans, finance agreements since incorporation, and disbursements to shareholders;
(5) all management accounts created prior to and since incorporation relating to the company’s business, including, and in particular, details of all or any repayments made in respect of any debt or equity finance to date, and the company’s profit and loss statements; and
(6) documents recording or evidencing details of all capital invested and debt incurred on or before the commencement of trading of the company and thereafter to date.”
The information was required to be provided forthwith, and at the latest by close of business on 29 December 2013; and it was said that, if the claimants failed to provide the information sought in breach of the order, the matter would be brought back to the Court.
7. The response to that request from the attorneys formerly instructed on behalf of the claimants was less than helpful: in that they asserted that the request was premature and would not be responded to, pending the issue by the Court of a sealed version of the order. Given that the order had been made in the presence of those attorneys and was recorded, that could properly be regarded as obstructive.
8. The order was issued by the Court and sent to the claimants’ former attorneys on 31 December 2013. On 2 January 2014, Al Tamimi & Co were sent the financial statements for the year ended 31 December 2012. On 13 January 2014, Al Tamimi & Co were sent financial reports relating to the business of the restaurant company during the calendar year 2013. It was stated in the covering email that that information showed all key elements of the business review streams and their analyses as compared with budget; and was equivalent to the information shared with the other director and shareholders in the company on a periodic basis during the year. The document sent was headed, “Operation and Financial Reports 2012 against 2013” and extends to some 15 pages. The covering email of 13 January went on in these terms:
“By way of information, instructions have been given to the auditors of the company to prepare on an expedited basis the audited accounts for 2013, and it is anticipated that such accounts will be available for submission to the directors and shareholders within 60 days. When so available, meetings of the board and shareholders will be convened and all the board members and shareholders (client) will be invited to attend.
Our clients consider that with the provisions of the audited accounts of 2012 previously supplied, this information and the audited accounts of 2013, when available, the terms of the interim order have been fully complied with. The additional matters that you request in your letter of 22 December go well beyond what a director and your client in particular would require to enable him adequately to perform his duties to the company and for the benefit of the company.”
9. I interpose to mention that the financial statements or audited accounts for the year ending 31 December 2012 had indeed been audited by Messrs Ernst & Young; but they had been signed off by the directors at a meeting on 22 April 2013, which Mr Rella had not been invited to attend and did not attend. The accounts do not include his signature; so that he is entitled to say that those audited accounts for 2012 are not accounts which he ever had the opportunity formally to approve.
10. The information sent on 13 January 2014 was described at paragraph 24 of an affidavit sworn by Miss Hedeel Mahdi King, an associate lawyer at Al Tamimi, acting for Mr Rella, in these terms:
“A basic report relating to the business of Roberto’s Restaurant during the calendar year 2013. The short report comprised a summary of the daily revenue, employee head count, number of covers and customer satisfaction data for the years 2013 and 2012. The information provided did not contain any of the underlying records of the business to which the defendant is entitled.”
11. Given that that appeared to be all the information that would be forthcoming in response to the request made in the letter of 22 December 2013, Al Tamimi & Co issued a further application (CFI-019-2013/3) on 19 January 2014, in which they sought an order, to be made on the papers, requiring that, unless the claimants provided the information and documents set out in the defendant’s request letter dated 22 December 2013 – as reproduced in the attached draft order – within seven days from the date of the order, the claimants’ claim and defence be struck out without further notice. The grounds for that application was said to be that the claimants had failed to comply with the order of 18 December 2013 requiring them to provide the defendant with such information as the defendant reasonably required in order for him to properly carry out his duties as a director of the company.
12. The Court did not accede to the suggestion that an unless order of that nature should be made on the papers and without giving the claimants an opportunity to be heard. On 27 January 2014 it notified the parties that a hearing would be listed for today, 5 February 2014; and gave directions for the filing of evidence and bundles, and the exchange of skeleton arguments.
13. At or about that time, the claimants changed their attorneys. Following that change, their new attorneys, Allen & Overy, wrote on 29 January 2014 to indicate what documents the claimants were then prepared to disclose. Paragraph 4 of the letter was in these terms:
“We note that the claimants have already provided the defendant with the following documents pursuant to the order dated 18 December 2013:
(a) a copy of the first claimant’s audited accounts for the financial year ending 31 December 2012;
(b) evidence that the first claimant’s audited accounts were submitted to the DIFC Companies Registry on 30 June 2013; and
(c) the first claimant’s operational and financial reports for 2013.”
The letter went on:
“The claimants have also already confirmed to the defendant that the audit of the first claimant’s 2013 accounts is being completed on an expedited basis, and that the 2013 audited accounts will be provided to the defendant once they are ready. At present the claimants understand that the 2013 audited accounts should be finalised by the end of February 2014.
In addition to the above, the claimants confirm that they can provide the defendant with the following financial documents and information (pending further order or judgment of the DIFC Court in this matter):
(a) preliminary financial results for 2013 by Sunday, 2 February 2014. This will include the preliminary 2013 profit and loss account and balance sheet;
(b) a copy of the fixed asset register by Sunday, 2 February 2014;
(c) profit and loss accounts for 2014 on a monthly basis, which should be available within 15 days of the end of each month; and
(d) operational and financial reports for 2014 on a monthly basis, which should be available within 15 days of the end of each month. This will include the following information:
(1) monthly net revenues,
(2) monthly covers,
(3) monthly average spend per cover,
(4) employee turnover,
(5) guest comment card scoring, and
(6) cover and average spend per cover by area.
(7) the financial documents and information described above should be sufficient to enable the defendant to satisfy himself that the first claimant’s business is being conducted in a manner that does not prejudice the interest, the company and its shareholders; and
(8) the claimants will also consider any reasonable request for further financial information which does not risk causing disproportionate cost or disruption to the claimants. In this regard, the defendant should bear in mind that the first claimant’s finance team is currently engaged in assisting the auditors to complete tasks relating to the preparation of the audited accounts for 2013.”
The letter concluded with an invitation to the defendant to withdraw the application and to refrain from making further demands of the company’s employees and/or third parties in reported reliance on the order of 18 December 2013.
14. In opposition to the application for an unless order, Justin Mosstad, who was employed by Skelmore Consulting Group as Chief Finance and Investment Officer — and who, in that capacity, performed the role of Chief Financial Officer to the Claimant company — said this, at paragraph 14 of the affidavit sworn on 2 February 2014:
“The information and documents requested by the defendant in the 22 December letter amounts to effectively all of the first claimant’s financial information and documents to the greatest level of detail and dating back to its incorporation (i.e. 26 May 2011). The requests are more extensive than an auditor would make for the purposes of any ordinary annual audit of the first claimant’s accounts. The volume of documents that will have to be provided to meet all of the defendant’s requests would extend to tens of thousands of documents.
For example, the request in paragraph 4 of the 22 December letter extends to copies of every supplier invoice and customer receipt, which constitutes hundreds of separate documents on a daily basis. I estimate that it would have taken at least a month of my dedicated time, and that of my three-member finance team, to compile all of the documents requested in the 22 December letter. This would have caused significant disruption to the day-to-day financial management of the first claimant and to the other businesses for which I and my team are responsible.”
15. As I have said, that affidavit was sworn on 2 February, the day after a letter dated 1 February 2014 from Al Tamimi & Co to Allen & Overy. Al Tamimi & Co, in their letter, refuted any suggestion that the defendant’s request for books and records in the letter of 22 December 2013 was disproportionate or unreasonable. It was said that the request was entirely consistent with the defendant’s right to inspect the books, records and corporate information as a manager of the first claimant, and it was pointed out that the claimants had had over three months to comply with the request since first made on 13 October 2013. After stating that the information provides to date was wholly inadequate and omitted to include any of the underlying source documentation that had been requested, Al Tamimi & Co went on to say this:
“However, in order to avoid the incurrence of any further costs, and in the spirit of co-operation, we propose that the parties agree by way of a consent order the following terms.
The claimants shall provide within three business days of the date of the consent order:
(1) the items listed in paragraph 6 of the claimant’s representatives’ letter dated 29 January 2014;
(2) management accounts, weekly or monthly, from incorporation to date;
(3) historic and current profit and loss accounts monthly from incorporation to date;
(4) cash payment ledger spanning the period from incorporation to date;
(5) cash receive ledger spanning the period from incorporation to date;
(6) bank reconciliation records from incorporation to date;
(7) bank statements for all accounts held by the first claimant from incorporation to date;
(8) schedule of liabilities and payments in respect of: the second claimant or any entity in which he holds equity directly or indirectly, and the Skelmore Consulting Group and any of its subsidiaries;
(9) list of all payments made to creditors and suppliers from incorporation to date;
(10) invoices and receipts from Allen & Overy and Cotty Vivant Marchisio & Laurenzal to the claimants in respect of work undertaken or arising out of claim CFI 019/213;
(11) details of any projects, plans or proposals to expand or restructure RS Roberto’s Restaurant and/or the first claimant since incorporation, including but not limited to the details of any proposed sale, leasing or franchise agreements; and
(12) business forecasts, reports since incorporation; and within three business days of the date of the consent order, claimant shall
(a) take all necessary steps to rectify internal records and those held by the DIFC Registrar of Companies to reflect the defendant’s directorship of the first claimant;
(b) notify, by written announcement sent to all the first claimants, employees, agents and officers, that the defendant remains a manager (director) and shareholder of the first claimant;
(c) instruct the first claimant’s employees, officers and agents to respond, assist and co-operate with the defendant to ensure that his queries regarding the day-to-day operations of the first claimant are met;
(d) direct their employees, agents and officers to copy the defendant into emails dispatching daily revenue and sales reports to the first claimant’s managers, and to ensure that the practice is maintained thereafter.”
The letter went on to express the view that, for the avoidance of doubt, the steps to which the claimants were required to agree constituted what they were already obliged to carry out under the terms of the existing order of 18 December 2013.
16. That offer or proposal was rejected by Allen & Overy in a letter of 2 February 20104; but, in that letter, Allen & Overy pointed out that, although it had not been possible to reach agreement to avoid the hearing fixed for today, they enclosed copies of further financial information and documents that the claimants had offered to provide: being the claimant company’s preliminary 2013 profit and loss account and balance sheet, and a copy of the claimant company’s fixed asset register.
17. On 3 February 2014 Al Tamimi & Co sent to Allen & Overy an amended draft order which they would invite the Court to make at the hearing today, in the alternative to the draft order, which had been filed with the application notice, and it was said that the alternative draft order consolidated the items listed in your letter, that is Allen & Overy’s letter of 29 January 2014, and Al Tamimi & Co’s letter of 1 February 2014. In the course of the hearing today, Mr Dhar – as counsel for the applicant, Mr Rella – applied for leave to amend his application of 19 January 2014, by substituting for the reference to the letter of 22 December 2013 and the draft order attached to that application, the amended draft order which had been sent on 3 February. That application to amend was not opposed;, and leave to make the amendment was granted.
18. Also on 3 February 2014, Mr Rella made a third witness statement, in which he said, at paragraphs 13 and 14, that the reports with which he had been provided were merely a summary of the financial statement for 2013 and provided no transparency or information relating to payments, receipts and cost attribution, and that without any source documents it was not possible to determine what each of the subtotals under the various headings relate to, or assess whether they had been accrued or incurred in the most commercially advantageous circumstances for the claimant company. He gave, as an example, the fact that, as he stated, there was no information from which he would be able to assess the exact costs of various supplies or whether the business was opting for the most cost-efficient and productive choice of supplier. Further, he was not able to determine individual staff costs. There was no visibility regarding the consultancy fees or professional fees paid by the first respondent to third parties. So, as he pointed out at paragraph 20, he would be unable to satisfy his obligations towards the claimant company if he was not provided with the financial data which he had requested, and he had been prevented from gaining access to information regarding the current operations and plans of the claimant company.
19. The application before the Court is, as I have said, an application for an unless order, striking out the claim and defence to counterclaim filed on behalf of the claimants in these proceedings. The jurisdiction to strike out in circumstances where there has been failure to comply with a rule, practice, direction or court order, is conferred by RDC 4.16
. It is, of course, a draconian sanction to strike out the claim or the defence for failure to comply with an order. Such an order has the effect of driving the party from the court; and of exposing him to a default judgment on the other party’s case. It is not a power to be exercised lightly; and it is for that reason that it is usual to seek an unless order before seeking an order for strike out under rule 4.16
. But the unless order, itself, of course is draconian. As the application requires, the claim and defence would be struck out without further notice if the claimants do not provide the information sought within seven days. If the information is not provided, it is not envisaged that there will be a further hearing.
20. In those circumstances it is necessary for the Court, before making an unless order, to be satisfied that there has been a contumacious failure to comply with an order which
it has made; sufficient to justify the sanction of striking out the pleadings of the patty in default.
21. On the present application, the issue for decision is whether the circumstances are such that an order in those terms should be made: on the basis that there has, at least prima facie, been a contumacious failure to comply with the order of 18 December 2013 by failing to provide the information sought in the letter of 22 December 2013. It would not be appropriate to make an unless order for failure to provide information which was not sought in the letter of 22 December 2013, but which was first sought in the draft amended order provided on 3 February 2014. I need to ask myself, therefore, whether, in the light of the information which has been provided since 18 December 2013, I should now make an unless order in the terms sought in the draft amended order provided on 3 February 2014.
22. In my view, I should not do so. The draft order contains 13 paragraphs, in addition to a paragraph requiring the respondents to pay the applicants’ costs. Those paragraphs follow, although with different numeration, the paragraphs in Al Tamimi & Co’s letter of 1 February 2014.
23. The first six paragraphs of the draft order seek:
(1) management accounts, weekly or monthly, from incorporation to date;
(2) profit and loss accounts, monthly, from incorporation to date;
(3) cash payment ledger spanning the period from incorporation to date;
(4) cash receipt ledger spanning the period from incorporation to date;
(5) bank reconciliation records from incorporation to date; and
(6) monthly bank statements for all accounts held by the first claimant from incorporation to date.
I find it impossible to understand why, in order to perform the duties of a director in the relatively short period between the beginning of February and the anticipated trial of these proceedings in May, it should be necessary or reasonable for the applicant to want those documents or that information for a period from incorporation to date. It is important to note that he is not seeking those documents or that information from here on until May, which is the period during which he needs to perform his duties. If he did need management accounts or profit and loss accounts in relation to 2011, 2012 or up to January 2013, he could have got them while he was an executive director of the company. If he had needed them between January 2013 to December 2013, he could have asked for them much earlier than he did. I am not persuaded that the request for those documents, at this stage, is born out of a reasonable requirement to have them in order to perform his functions as a director over the next three or four months. To require documents of that nature suggests a desire to engage in a degree of micro-management of the affairs of the company which is inconsistent with the usual role and duties of a non-executive director, as the applicant must now be assumed to be.
24. Paragraph 7 of the draft order seeks a monthly schedule of liabilities and payments in respect of the second claimant and any entity in which he, the second claimant, holds equity. There is no evidence that a monthly schedule of liabilities and payments in respect of the second claimant actually exists. Whether that is a schedule held by the company or by the second claimant and whether, on a proper interpretation, what is sought refers to liabilities and payments of and by the claimant company or liabilities and payments of the second claimant is unclear. If the allegation is that the second claimant is using the funds of the first claimant for his own improper purposes — or that loans are being made contrary to the articles of association of the company or the general law — then the correct approach is for the applicant to make that allegation, and raise a request for a list of payments that have been made over a specified period in order that he can bring the alleged conduct to the attention of a meeting of the board of directors which he has convened. He has not sought to take any of those steps. The application for an unless order in respect of paragraph 7 is premature.
25. Paragraph 8 of the draft order seeks a list of all payments made to creditors and suppliers from incorporation to date. I am not persuaded that it is reasonable, in the context of the ongoing duties of the applicant pending resolution of this dispute at a trial, to require all payments made since incorporation — or perhaps since the commencement of trading in 2012 — now to be compiled or provided. The audited accounts and both the 2012 and/or 2013 financial statements that will be provided will indicate what the amount of such payments has been. If it is necessary to seek a breakdown of payments in respect of a particular period relevant to the continuing management of the company, then an application for that purpose can be made.
26. Paragraph 9 of the draft order seeks invoices and receipts from two firms of lawyers in respect of work undertaken or rising out of these proceedings. That must be seen in the context of the prohibition, in the order of 18 December, against using the company’s funds to fight the counterclaim; which is essentially a dispute between the shareholders. Having regard to the prohibition in the order, it seems to me most unlikely that lawyers acting for the company would bill the company for costs relating to that counterclaim. Insofar as they may have done so before the order was made, it is difficult to see what purpose there is at this stage – that is to say, prior to the resolution of the dispute between the shareholders – in requiring the information sought to be provided. It would of course simply raise an argument as to whether payments were properly made prior to 18 December 2013; and that is a matter which can be resolved, if necessary, in due course. It does not need to be resolved at this stage.
27. Paragraph 10 of the draft order seeks details of any projects, plans or proposals to expand or restructure the company. It has not been explained how there could be such plans or proposals which were not to be put to the board of the company for approval at a meeting of the board. If they are put to the board of the company for consideration at a meeting of the members of the board, they will of course have to be provided to Mr Rella as a member of that board entitled to attend the meeting; at least so long as the order of 18 December remains in its present form. His interest and the interests of the company are sufficiently protected by the requirement that matters which need to go to the board will be disclosed to him and he will have the opportunity to make his representations upon them. The request under paragraph 10 seems to me another attempt to micro-manage the company in circumstances where Mr Rella is a non-executive director in a company with a management structure which delegates the day-to-day management to executives.
28. Paragraph 11 of the draft order seeks business forecast reports since incorporation. I am unable to understand why that information should be necessary to perform a director’s duties from here on until May. If what is sought are business forecast reports in the next three or four months, then a request for that may be made and the company will have an opportunity to respond to it. But what was being forecasted back in 2011 or 2012 seems to me to have little, if any, relevance to the duties which Mr Rella now needs to perform.
29. Paragraph 12 of the draft order is not in issue. There has been an offer to provide that information. The offer is contained in the letter from Allen & Overy of 29 January 2014; and there is no reason to think that the information will not be provided. It is unnecessary to make an unless order in relation to that information.
30. Paragraph 13 of the draft order seeks to require that items 1 to 10 and 12 be provided on a monthly basis and to be made available within 15 days after the end of each month from 5 February 2014 until further order. The claimants are content to provide the information under items 2 and 12 in relation to the year 2014, and as I have said, are proposing to provide the 2013 audited accounts when they are ready. It is necessary to bear in mind that they have indicated that the audited accounts are expected to be ready by the end of February and that they will then be put before a board meeting for approval, so Mr Rella can expect to receive them as soon as they are available
31. For those reasons I decline to make the unless order which is sought in the application, either in its original or amended form. Accordingly, the application CFI 019/2013/3 is dismissed.
Date of Issue: 3 March 2014