June 13, 2021 Technology and construction division - Judgments
Claim No. TCD 003/2020
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 JUSTICE SIR RICHARD FIELD
(1) NEST INVESTMENTS HOLDING LEBANON S.A.L.
(2) JORDANIAN EXPATRIATES INVESTMENT HOLDING COMPANY
(4) GHAZI KAMEL ABDUL RAHMAN ABU NAHL
(5) JAMAL KAMEL ABDUL RAHMAN ABU NAHL
(6) TRUST COMPASS INSURANCE S.A.L.
(7) TRUST INTERNATIONAL INSURANCE COMPANY (CYPRUS) LIMITED
(8) HIS EXCELLENCY SHEIKH NASSER BIN ALI BIN SAUD AL THANI
(9) FADI GHAZI ABU NAHL
(10) HAMAD GHAZI ABU NAHL
(11) KAMEL GHAZI ABU NAHL
(1) DELOITTE & TOUCHE (M.E.)
(2) JOSEPH EL FADL
JUDGMENT OF JUSTICE SIR RICHARD FIELD ON PRELIMINARY ISSUES
1. This is the judgment following the trial of three preliminary issues ordered to be determined by Justice Sir Jeremy Cooke on 23 April 2020.
2. The Claimants are shareholders in Lebanese Canadian Bank SAL (“LCB”) a company incorporated in Lebanon.
3. The First Defendant (“DTME”) is a firm of accountants registered in accordance with the laws of Cyprus. It operates through “practice offices” in numerous Middle East countries including Dubai and, where necessary because of local requirements, through a separate legal entity which, in the case of Lebanon, is an entity called Deloitte & Touche (“DTL”).
4. The Second Defendant is a partner of DTME and a Managing Partner of DTL.
5. Under contracts contained in letters of engagement made between DTL and LCB, DTL audited LCB’s financial statements for the financial years ending 31 December of 2006, 2007, 2008 and 2009 and the financial statements for the financial years ending 31 December of 2008 and 2009 of LCB’s wholly owned subsidiary, LCB Investments (Holding) SAL (“LCBIH”).
6. On 11 February 2011, the US Financial Crimes Enforcement Network (“FinCEN”) issued a notice (“the FinCEN Notice”) identifying LCB as “a financial institution of primary money laundering concern” together with a proposed rule to prohibit US financial institutions from opening or maintaining correspondent or payable-through accounts for LCB. The Claimants aver that as a result of the FinCEN Notice, LCB was effectively put out of business because it was now unable to handle international banking transactions due to it being unable to operate in the USA and the immediate termination of its relationships with its clearing institutions. Faced with these consequences, LCB sold its assets and liabilities to Société Générale de Banque au Liban (“SGBL”) for US$580 million and subsequently went into liquidation.
7. In their Re-Re-Amended Points of Claim (“RRAPOC”), the Claimants claim that, in conducting the aforesaid audits DTL were in serious breach of duty, including failures: (i) to comply with a range of applicable international rules, accounting standards and reporting requirements imposed by Lebanon’s anti-money laundering laws; (ii) properly to report on losses caused to LCB by certain related-party transactions; and (iii) properly to report on the effect on LCBIH of the suspension by Emirates Securities & Commodities Authority (“ESCA”) of the brokerage licence of Tabadul Company for Shares and Bonds LLC (“Tabadul”). In consequence of these failures, DTL neglected to report the true financial position of both companies and the various illicit activities in which LCB had been involved, including “systematic money-laundering” and “flawed loss making related-party transactions”.
8. The Claimants aver that: (i) DTME is primarily liable for DTL’s alleged defaults and breaches of duty as principal or is vicariously liable for the same on the basis that every step taken by DTL in the performance of the audits in question was overseen by and carried out through DTME; and (ii) the Second Defendant is personally liable for DTL’s defaults and breaches of duty on the basis that he was responsible as lead client service partner for the LCB audits.
9. The Claimants plead that in respect of LCB’s compliance with the statutory obligations under Lebanese law aimed at money laundering and terrorist financing, DTL and the Second Defendant committed intentional defaults in that each knew and understood a range of different matters including, inter alia, activities and behaviour which, taken together, formed the basis for suspecting money laundering and terrorist financing and the Claimants’ concerns regarding management and regulatory control.
10. Further and in the alternative, the Claimants plead that DTL and the Second Defendant committed unintentional defaults under Lebanese law in that they failed to act as competent professional auditors in performing their obligations under the Lebanese Code of Commerce (the “LCC”), the Lebanese Code of Obligations and Contracts (the “LCOC”) and the Lebanese anti-money-laundering provisions (the “AML Provisions”).
11. The Claimants further plead that: (i) had DTL properly fulfilled its duties, LCB‘s involvement in money laundering and the deficiencies in its accounts caused by the aforesaid related-party transactions would have been discovered and reported upon, thus enabling the Claimants to obtain minority shareholder relief including the removal of LCB‘s management; (ii) if this had happened, LCB‘s business would not have been sold to SGBL, LCB would not have gone into liquidation, and the Claimants would still be shareholders in a profitable bank.
12. Paragraphs 315 and 316 of the Re-Re-Amended Particulars of Claim plead:
315. But for the Defendants’ misconduct … the Claimants would as at the date of these Re-Re-Amended Particulars of Claim have:
315.1 Retained a valuable shareholding in LCB as an operational bank; and
315.2 Continued to receive dividends after the date of liquidation.
316. The Claimants’ loss and damage is thus the difference between (a) the sums that the Claimants did in fact receive, and stand to receive, following the liquidation of LCB and (b) the value of their shareholding in LCB and the sums that they would have received but for the Defendants' misconduct.
The Preliminary Issues
13. These are as follows:
Issue 1. Is the Claimants’ claim for loss recoverable under Lebanese law?
Are the Claimants entitled to recover the losses claimed as a matter of principle under Lebanese law, namely the alleged difference between (a) the sums that the Claimants had in fact received (and will receive) in their capacity as shareholders in LCB (including sums that they stand to receive following the liquidation of LCB) and (b) the sum that the Claimants assert their shareholding would have been worth but for the Defendants’ alleged breaches?
Issue 2. Limitation
(a) Which system of law governs the issue of whether the Claimants’ claims under Lebanese law set out in the RRAPOC are time-barred?
(b) If the Court finds that Lebanese law governs the issue of whether the Claimants’ claims are time-barred, in respect of each of the claims advanced in the RRAPOC:
(i) What is the applicable limitation period(s) under the Lebanese law?
(ii) When did the applicable limitation period(s) start to run?
(iii) Having regard to the answers to the questions set out above, are the Claimants’ claims time-barred under Lebanese law?
(c) If the Court finds that DIFC law governs the issue of whether the Claimants’ claims are time-barred:
(i) When did the limitation period(s) under Article 38 of DIFC Court Law (No 10 of 2004) (relied on by the Claimants at paragraph 325.2 of the RRAPOC in respect of their non-deceit claims) start to run?
(ii) Having regard to (i) above, are the Claimants’ non-deceit claims summarised at paragraphs 300 to 301 of the RRAPOC time-barred such that only the Claimants’ claims in deceit (summarised at paragraphs 293 to 299 RRAPOC) should proceed to trial?
Issue 3. Admissibility
(a) Which system of law governs the admissibility of evidence in these proceedings?
(b) Under that system of law, are the following documents admissible as evidence of the findings and/or matter stated in them?
(i) The notice of finding issued on 10 February 2011 by the United States Financial Crimes Enforcement Network (referred to in the RRAPOC at paragraphs 53 and 54).
(ii) The violation notice issued by ESCA to Tababul on 21 January 2008 and referred to at paragraph 190 of the RRAPOC.
(iii) The findings allegedly made by ESCA on 16 March 2008 and referred to in paragraph 194 of the RRAPOC.
(iv) The findings allegedly made by ESCA on 1 December 2008 and referred to in paragraph 202 of the RRAPOC.
(v) The ESCA’s suspension of Tababul’s licence on 12 January 2009, 11 February 2009, 12 April 2009, 12 May 2009, 19 May 2009 and 26 May 2009 as referred to at paragraphs 208, 211, 217, 219, 220, 222 of the RRAPOC.
14. It was ordered that these issues were to be determined on the basis of a series of agreed facts set out in a Schedule to the Order and the facts as stated in the RRAPOC. The agreed facts included:
(A) In respect of Issue 1:
(a) the Claimants’ claims are based only on Lebanese law (Lebanon being a Civil Law country); (b) the audits of LCB and LCBIH in question were carried out pursuant to letters of engagement between DTL and LCB/LCBIH; and (c) there was no contractual relationship between the Claimants and DTL or the Claimants and the Second Defendant.
(B) In respect of Issue 2:
(a) the Claimants’ substantive claims are based only on Lebanese law; (b) the only provisions of DIFC law relating to limitation that the Claimants seek to rely on in respect of the Lebanese law claims are Article 38 of DIFC Court Law (number 10 of 1994) in respect of their non-deceit claims and Article 9 (1) of the DIFC Law of Obligations (No. 5 of 2005) in respect of their deceit claims (see paragraph 3 to 5 of the RRAPOC).
The principal provisions in the LCC, the LCOC and the Lebanese Code of Civil Procedure (“LCCP”) referred to in the evidence of the experts on Lebanese law.
Title 1 – General Provisions
In the absence of any applicable legal provision, the judge can draw upon the previous test cases for guidance as much as he may let himself [be] inspired by the strictures of commercial equity and loyalty.
Chapter 2 – Securities issued by joint-stock companies and the legal status of the holders of such securities
The share confers on its holder a certain number of specific rights: right to dividend, right to option to subscription in the event of capital increase, right to refund of the nominal amount of the share and to the apportionment of the company’s assets, right of vote at general meetings, right of conveyance of his title.
In principle, all the shareholders of the same company must enjoy the same rights and participate in the same advantages.
However it is permitted to create, by a resolution of an extraordinary meeting deliberating as shall be indicated hereinafter, preference shares whenever the articles are not formally against them …
Chapter 3 Operation of joint-stock companies
Section 1 – Directors
Directors are responsible, even towards Third-Parties, for all fraudulent acts and all infringements to the law and the Articles.
Proceedings are open to the injured party or individual; they may not be checked, even in relation to shareholders, by a vote of the general meeting granting final discharge to the Directors.
Directors are, on the other hand, responsible to shareholders for their mismanagement.
As a general rule, the Directors liability for mismanagement is not involved in relation to Third-Parties.
The case to be brought against the Directors by virtue of the first paragraph of the preceding article, lies with the company. But in the event of the latter’s inertia any shareholder may take proceedings in its place within the limit of his interest in the company.
Final discharge, if it is to be used as defence, must always be preceded by a statement of the company’s account and the commissioners (auditors) report; it only covers facts of management with which the general meeting may have been acquainted.
Proceedings for liability are limited to 5 years dating from the meeting during which the directors were required to account for their management.
Section 2 – Supervisory commissioners
The supervisory commissioners exercise a permanent control over the company’s operations. They may require to be acquainted with all deeds, all documentary evidence in support of accounts, demand all information from the Directors.
Stocktaking, of the balance sheet and the profit and loss account shall be put at their disposal 50 days, at the latest, prior to the general meeting.
The commissioners report to the general meeting on the situation of the company, the balance sheet, the accounts tabled before them by the Directors and the proposed dividend distribution. Failure (to produce) this report would nullify the deliberation of the general meeting approving the accounts.
Commissioners are required to convene the general meeting whenever the Directors omit so doing, in cases specified by law or by the Articles.
Likewise they are empowered to convene the meeting in all cases they deem it needful.
They are even bound to do it …
They are not to take any interest in a group whose object would be to influence Stock Exchange dealings involving any of the company’s securities.
They commit their responsibility, either individually or jointly, even towards third parties, whenever they commit a supervision offence (default) subject to the five-year time limit.
The proof of commercial matters is not in principle restricted to the restrictive rules governing civil transactions. Subject to the exceptions resulting from the specific legal provisions, they may be established by all means of proof that, due to practices or circumstances, the judge believes must be admitted.
In trading matters, action is lost by time limitation after the lapse of ten years, whenever no shorter term has been set. (para 1)
Book I DIFFERENT CATEGORIES OF OBLIGATIONS
TITLE 1 – CIVIL OBLIGATIONS AND NATURAL OBLIGATIONS
Civil obligation is an obligation the execution of which may be imposed by the creditor upon the debtor.
Natural obligation is a judicial duty the performance of which may not be demanded, but whose voluntary execution has the same value and produces the same effects as the performance of civil obligation.
Book II, TITLE II – ILLICIT ACTS (Offences and quasi-offences)
An offence is an act by which one causes unjust and intentional prejudice to the interests of another.
The quasi-offence is an act by which one causes unjust but not intentional prejudice to the interests of another.
Any fact due to man’s action which causes unjust prejudice to another man compels its author to offer reparation, at least if he is gifted with understanding.…
A person is liable for the damage caused by his negligence or by his improvements as well as for what may result from a positive act.
Must equally offer reparation he who has caused prejudice to another exceeding, in the exercise of his right, the limits set by bona fides or by the goal towards which such right has been vested in him.
Reparation due for an aggrieved party of an offence (delict) or a quasi-offence (quasi-delict) must correspond, in principle, to the entire damage the aggrieved party has sustained.
Moral as well as sentimental damage is taken into account.
Incidental damages are to be taken into consideration, but provided they are obviously linked up with the delictual or quasi-delictual fact.
Chapter 3 – Extinguishing or discharging time limitation
Section 1 – General provisions
Obligations are extinguished by the inertia of the creditor who has refrained from claiming his rights for a certain period of time.
Section 2 – Starting point and periods of time limitation
Time limitation is computed only as from the day when the claim has become due.
The time-limit is calculated by days and not by hours; the initial day is not counted; time limitation is completed when the last day of the time-limit has expired.
In principle, no action shall be brought after the expiration of ten years.
The time limitation is also suspended, in general, in favour of the creditor for whom it is impossible, for reasons beyond his control, to interrupt it.
Section 4 -Effects of time limitation
Time limitation operates as a mode of proof of the debtor’s discharge; presumption of discharge resulting therefrom is indisputable and allows no proof to the contrary.
Time limitation extinguishes not only the creditor’s action, but the obligation itself which may not henceforth be used under any form, either through actions or through exception.
However, the debtor who has been civilly discharged through time limitation, remains held for a natural obligation which may be used for cause for payment.
The judge shall not under the penalty of being considered as carrying out a denial of justice:
1. Refrain from issuing a judgment on the ground of the vagueness or the inexistence of a text.
2. Delay without reason the issuing of a judgment.
In case of vagueness of the provision, the judge shall interpret it in a way that gives it an effect that is consistent with its purpose and ensure harmony between it and the other provisions.
In case of absence of a provision, the judge shall rely on general principles, custom and fairness.
The [bringing of a] lawsuit is open to anyone who has a legal and actual interest, or who seeks through it [the lawsuit] to establish a right whose existence is denied or to take a preventative measure to avert an imminent future damage or to keep a record about a right who evidence could cease to exist at the time it comes under dispute, with the exception of situations where the law restricts to certain persons, that it [the law] indicates the capacity, the right to bring a claim or to report it or to defend a specific interest.
Article 62 (para 1)
A motion for inadmissibility is any reason through which a party seeks a declaration that its opponent’s claim is not admissible, without addressing its merits, because he/she/it (the opponent) lacks the right to bring a claim. Are considered as motions of inadmissibility the motion for lack of capacity, the motion for lack of interest (on the part of the claimant), the motion for statute of limitation, the motion for res judicata and the motion for expiry or procedural time limits. The motion for time limitation is considered as a motion for inadmissibility without prejudice to the special provisions of article 361 LCOC.
Evidence is the bringing of proof before courts on a “fait” or an “acte juridique” that is taken as the basis of a claim, a motion or a defence.
Every person must support courts for the purpose of eliciting the truth.
A brief summary of the parties’ cases on each of the three issues.
The Claimants’ case
15. The Claimants submit that they have suffered recoverable personal loss caused by DTL’s breaches of duty for which the Defendants are liable under Articles 121 – 124 of the LCOC which they say is the basis of liability on which Article 178 of the LCC is predicated (liability of auditors for “supervision fault”). They contend that their personal loss is separate and distinct from any loss to LCB caused by DTL’s breaches of duty and there is no legal justification for the Defendants’ contention that there is a set of principles which apply to claims brought against auditors under which: (i) no individual personal claim for damages can be brought by a shareholder for loss consequent on a loss suffered by the company because it is the company alone that can sue since it is the company that suffered the loss (“Principle 1”); and (ii) where all the shareholders across the board have suffered loss caused by a breach of duty, the claim has to be brought by all the shareholders in the name of the company so that the fruits of the recovery are shared equally by all the shareholders in proportion to their shareholding (“Principle 2”).
16. The Claimants’ primary contention is that if these principles are applicable at all, they only apply to claims against directors for mismanagement under Article 168 LCC and have no application where, as in the instant case, it can be demonstrated that shareholders have suffered a loss separate and distinct from any loss suffered by the company consequent on a breach of duty by an auditor and there is no risk of double indemnification for the same damage. It is also argued that to the extent that the breaches of duty alleged against DTL are not “supervision faults” within Article 178 LCC, such as the alleged failure to comply with the obligation to report suspicions of money laundering to the Central Bank of Lebanon under Lebanese Law No. 318 of 20 April 2001, the Claimants’ claim will not be brought under LCC Article 178 but under Articles 121 – 124 LCOC, and for this reason, to the extent that the postulated principles are founded on an interpretation of Article 178 that derives from the meaning and effect of Articles 171, 167 (para 1) and 168, the principles will have no application to such a claim.
The Defendants’ case
17. The Defendants refute the claim that Article 178 does not apply to breaches of the duty to report to the Central Bank of Lebanon under Lebanese Law No. 318 of 20 April 2001 because such breaches are not supervisory faults within the Article. They contend that the expression “supervisory fault” in Article 178 means all breaches of duty committed in the course of carrying out the role of a commissaire de surveillance (an auditor).
18. The Defendants contend that there are two overarching free-standing principles (Principle 1 and Principle 2) that lead inexorably to the result that the Claimants have no entitlement to claim for the loss in value of their shares in LCB caused by the pleaded breaches of duty owed to them by DTL. Notwithstanding that much of the evidence of their expert witness going to Issue 1 is founded on the proposition that the meaning and effect of Article 178 LCC is to be derived in large part by construing this Article in the context of Articles 166, 167 (para 1), 168 and 171 LCC (all of which are concerned with directors, not auditors), in their Closing Submissions the Defendants contend that the existence of these two overarching principles does not depend on construing Article 178 in the context of the aforesaid Articles.
19. The Defendants argue that under Principle 1, where a defendant commits a fault which causes loss to the company, the claim seeking redress from the defendant for that loss belongs to the company. This rule, contend the Defendants, is derived from: (i) the company being a legal entity in its own right separate from its shareholders; (ii) the specific rights conferred on shareholders by Article 105 LCC, such as the rights to vote at general meetings and to participate in distributions out of profits; and (iii) the principle of equality among shareholders derived from Article 110 LCC under which all holders of the same class of shares enjoy the same rights and advantages so that each shareholder’s investment follows the fortune of the company. Principle 2 is the principle of shareholder equality and provides that where, due to a breach of duty a loss is suffered by the company which affects all the shareholders such as a diminution in the value of their shares, the claim for that loss must be brought by or on behalf of the company, so that the fruits of the claim are shared equally by all the shareholders in proportion to their shareholding.
20. It will be readily seen from the foregoing that the rival contentions of the parties are very similar to those that feature in the judgments in Marex Financial Ltd v Sevilleja  UKSC 31 of Lord Reed and Lord Hodge who held that a shareholder cannot sue for the diminution in value of his shares consequent on damage done by a wrongdoer to the company1 and the judgment of Lord Sales who held that in such a case the damage to the shareholder is separate from that done to the company and can be sued for by the shareholder with any problem of potential double recovery being resolved by the use of procedural rules available to the court2 .
The Claimants’ case
21. The Claimants contend that under Lebanese law, once the relevant limitation provisions in the LCC, LCOC and LCCP are construed in the context of the pre-existing Ottoman Code, the correct conclusion is that limitation is a matter of procedure and not substantive law. It therefore follows that the question whether the Claimants’ claim is statute-barred is to be decided by reference to the common law of the DIFC which directs that the applicable limitation periods are those provided for in DIFC law. The Claimants further contend that the start date of the applicable DIFC six-year limitation period is 28 July 2011 when the sale of LCB’s business to SGBL was approved by the shareholders and the end date of the period is 28 July 2017. Since the Claimants’ Claim Form was issued on 19 July 2016, it follows, say the Claimants, that their claims are not statute barred.
22. Against the possibility that the limitation period is that provided for in Lebanese law, the Claimants contend:
1. The 5-year period specified in Article 178 LCC is inapplicable so far as concerns DTL’s failures that stand to be characterised as “non-supervisory” such as a failure to report to the Central Bank of Lebanon suspicions of money laundering under both Lebanese Law No. 318 of 20 April 2001 and the Regulations concerning money laundering and terrorist financing made under Basic Circular No. 83 dated 18 May 2001. Article 178 is inapplicable because the aforesaid faults are not “supervisory faults” since they are premised on a breach of duty to report to the Central Bank of Lebanon, this duty being one that is imposed in the public interest as well as in the private interest of LCB. It follows that the claim in respect of the failures to report suspicions of money laundering and the financing of terrorism is subject to the 10-year limitation period specified in Article 349 LCOC starting from the date when the damage occurs or when its occurrence was known to the Claimants.
2. The claims for breaches of supervisory faults (properly so called) are subject to the 5-year limitation period specified in Article 178, the start date being when the damage occurred or it was known by the Claimants as found at trial.
3. Alternatively to (2),
(A) In respect of claims relating to supervisory issues that were addressed in the annual report presented by DTL, the Article 178 five-year limitation period would apply with a start date of when the annual report was presented to the general assembly.
(B) In respect of claims for supervisory faults going to issues not identified in the annual report, the limitation period would not be the period of five years specified in Article 178, but would be the 10-year period referred to in Article 349 LCC, starting from the date the damage occurred or when its occurrence was known to the Claimants.
The Defendants’ case
23. The Defendants contend that the relevant limitation provisions in the LCC, LCOC and LCCP are of a substantive, not a procedural nature and that pursuant to Article 8 (2) (d) of the Law on the Application of Civil and Commercial Laws in the DIFC (DIFC Law No. 3 of 2004), it is the laws of Lebanon on the limitation of actions that apply in these proceedings since these are the laws of the jurisdiction that is mostly closely related to the facts of and the persons concerned in the matter before the Court.
24. The Defendants submit that under Lebanese law, the relevant limitation period is the five-year period referred to in Article 178 LCC and in accordance with the views of such scholars as Fabia and Safa, Tyan and Nassif, the period starts on the date the auditor’s report was presented to the shareholders.
25. As noted in paragraph 17 above, the Defendants strongly refute the Claimants’ contention that the expression “supervisory fault” does not embrace non-supervisory faults committed by an auditor where, for instance, the auditor of a bank fails to report suspicions of money laundering and/or the financing of terrorism contrary to Law No. 318 of 20 April 2001. In the submission of the Defendants, the fact that the role of an auditor of a bank has expanded considerably since the LCC was enacted in 1942 is nothing to the point.
The Claimants’ case
26. The Claimants contend that the issue of admissibility should be determined by the application of Lebanese law which essentially allows a party to adduce such evidence as he or she chooses to advance, it being in the discretion of the court to give the evidence such weight that it thinks is appropriate in all the circumstances of the case.
27. In the event that the Court decides that admissibility is governed by the law of England and Wales, the Claimants, citing Hoyle v Rogers  EWCA Civ 257, contend that the facts and opinions stated in the FinCEN Notice are all admissible save for the ultimate finding that LCB had been involved in money laundering. In respect of the ESCA notices and findings, the Claimants submit that these are admissible as evidence that the notices were issued and the findings made.
28. The Claimants also submit that both the FinCEN Notice and the ESCA notices and ESCA findings are admissible on the ground that they are the product of expertise and/or are admissible under the “public documents” exception.
The Defendants’ case
29. The Defendants submit that admissibility should be determined by reference to the law of evidence applied in England and Wales, with the consequence that the FinCEN Notice (the “Notice”) will be evidence that the Notice was issued on the date in question but the ultimate conclusion expressed in the document that LCB had been involved in money laundering would not be admissible pursuant to the rule in Hollington v Hewthorn  KB 587 as restated in Hoyle v Rogers. Further, statements of facts in the Notice will only be admissible as hearsay, subject to weight, if they are statements of facts witnessed by someone in respect of matters perceived by him. The Defendants refute the contention of the Claimants that the findings in the Notice are admissible given on the basis these are the product of expertise.
30. As to the ESCA Notices and findings, the Defendants contend that to the extent that the ESCA findings amount to an allegation that unlawful activity noted by ESCA had occurred, these findings are inadmissible. Further, findings of fact in the notices and findings are not admissible, although factual statements concerning matters actually observed by a witness will be admissible as hearsay, subject to weight.
31. The Defendants also refute the Claimants’ case that the ESCA notices are admissible on the ground that they are the product of expertise and that the notices are admissible under the “public documents exception”.
The expert witnesses on Lebanese law
32. The expert witness called by the Claimants was Professor Hadi Slim who is a Professor of Law specialising in Private International Law and the laws of the Middle-Eastern Countries and is Head of the Master’s Program in International Business Law at François-Rabelais University (Tours-France) and Co-Director of the LLM program of Business Law-Middle-East and Arab Countries at Panthéon Sorbonne University (Paris 1). Professor Slim is also a member of the Paris and Beirut Bar Associations and has appeared as an advocate in the Courts of France and Lebanon.
33. Professor Slim was an impressive witness of high intellectual distinction and erudition who gave his evidence in a balanced, measured way.
34. The expert witness called by the Defendants was Maître Mohammed Farid Mattar who has been in practice as a lawyer in Lebanon since 1980 specialising in International Criminal Law, Extradition, Money Laundering, Cross-Border White Collar litigation, arbitration and Constitutional Law. He is a founding partner in the Lebanese law firm Levant Law Practice. He also practised as Legal Counsel for Jacques & Lewis in London in the years 1977 to 80 and has assisted in drafting and reviewing many pieces of draft legislation. Between 1999 and 2006 he taught the Concept of Law at St Joseph University and has written on Constitutional and Electoral Law, Corruption, Human Rights and Jurisprudence. He also served on the Governmental Ad Hoc Legal Commission investigating the legal responsibility for the 2006 Lebanon War.
35. Maître Mattar was a careful witness whose reports were very clearly expressed. He demonstrated a close familiarity with the areas of Lebanese law in issue and, like Professor Slim, he expressed his views fairly and with the manifest intention of assisting the court.
36. Both witnesses gave their evidence in English.
Professor Slim’s two reports
37. In his first report Professor Slim makes some introductory remarks on the Lebanese Civilian legal system. He says that the LCOC came into force in 1934 when Lebanon was subject to the French mandate and it has not been substantially modified since. This Code is the body of law intended to apply to contracts and torts in the absence of specific rules or regulations and/or to complement other specific rules or regulations.
38. The LCC was enacted in 1942 and also reflects some old French legal principles in this field. Some of its provisions were amended in 2019.The LCCP came into force in 1983, replacing the former Code of Procedure of 1933.
39. Professor Slim explains there is a hierarchy of courts in Lebanon that deal with civil as opposed to criminal cases. At the bottom of the hierarchy are the Courts of First Instance. Above them are the Courts of Appeal and at the top is the Cour de Cassation whose rulings do not have a stare decisis effect so that it is possible for Courts of Appeal or Courts of First Instance to disregard the opinion of the Cour de Cassation which can happen where new social conditions require a change. That said, in practice judicial precedents do influence the determination of future cases and the Cour de Cassation’s rulings have, if not de jure authority, at least weight and ascendency over lower courts.
40. In paragraph 29 of his first report, Professor Slim states that where, due to vagueness of a law or statutory text or there is no existing law or statute that provides for determination of the issue in question, the judge is enjoined pursuant to paragraph 3 of the LCCP to interpret the available text in a way that gives it an effect that is consistent with its purpose and ensures harmony between it and other provisions; and in the absence of a provision he must rely on general principles and fairness. To ensure harmony between an equivocal provision and other provisions, there are two fundamental rules of interpretation: (i) where a clear specific provision exists, it must be preferred over a general provision; and (ii) a specific provision must be strictly interpreted. In support of these propositions, Professor Slim cites a judgment of the Lebanese Cour de Cassation, No. 103, 27 October 1970 and a judgment issued by the Lebanese Council of State, No. 79, 15 March 1979, p.323 .
41. Professor Slim maintains that analogical reasoning of the sort advocated by Maître Mattar in interpreting Article 178 in the light of Articles 167 (para 1), 168 and 171 is impermissible in this case. He states that before such reasoning can be adopted, there must be established not only a relevant similarity between the case to be determined and the scope of the rule whose implementation is sought but also pertinent reasons that the purpose of the existing rule encompasses the case. Professor Slim cites: (i) the view of former Lebanese Judge Albert Farhat4 that to resort to analogy, it is required that the provision intended to be applied be a general provision and not a specific provision; (ii) the judgment of the Plenary Assembly of the Lebanese Cour de Cassation No. 9, 16 November 2015, where it is said that analogical reasoning is not carried out between inconsistent situations or between situations that that legislature addressed in specific and particular provisions, because analogy in the latter case leads to contradicting the legislature’s will and to make a legal provision applicable to a factual situation it does not govern; and (iii) the judgment issued by the Lebanese Cour de Cassation, No. 3 of 13 January 1998 where it was said: “ Whereas the provision of the mentioned Article 24 [of the rental law] is clear and that the rental law is an exceptional law. In presence [of the law] of a clear provision it is not allowed to interpret widely or to apply analogy or induction. Its provisions [of the law] must be interpreted strictly without any extension. Expressions and words contained in it must be taken into account and not disregarded.”
42. Professor Slim goes on to opine that Article 178 LCC is a specific provision that does not indicate who can bring a claim against a company’s auditors and accordingly the general rule contained in Article 9 LCCP applies which provides that “the bringing of a lawsuit is open to anyone who has a legal and actual interest … with the exception of situations, where the law restricts to certain persons … the right to bring a claim or to rebut a specific interest”.
43. Professor Slim is of the opinion that the loss for which the Claimants seek compensation is loss that is personal to them and is not to be equiparated with the loss suffered by LCB by reason of DTL’s breaches of duty and since LCB has not and cannot now sue the Defendants for its loss, the Claimants are entitled, pursuant to the general provisions contained in Articles 122 and 123 of LCOC, to recover the damages claimed by bringing the individual, personal claims they have pleaded. To establish a liability in tort under these Articles the Claimant needs to establish the existence of a fault, damage and a causal connection between the fault and the damage. Fault is defined under Lebanese law as abnormal conduct that a reasonable person or entity would not follow if he, she or it was in the same circumstances as the defendant.
44. As already stated, Professor Slim disagrees with Maître Mattar’s view that Article 178 LCC stands to be interpreted (and thereby supplemented) in the light of Articles 167 (para 1), 168 and 171 (hereinafter referred to as the “Directors Articles”). In Professor Slim’s view, Article 178 is a specific provision with a scope quite separate from that of the Directors Articles since there is a fundamental difference between the role of directors and the role of an auditor reflected in the fact that the Directors Articles appear in the Section head “Directors”, whilst Article 178 appears in the Section headed “Supervisory Commissioners”. Professor Slim states that the Directors Articles contain specific rules applicable to the liability of directors of a Lebanese société anonyme for management faults (fautes de gestion) and it is obvious that since such faults can only be committed by directors these Articles have no bearing in the present case. A further important difference between Articles 168 and 178 is that the reference in the former to an ut singuli claim is explained by the possibility of conflicts of interests between directors that might get in the way of an ut universi claim whereas there is no such risk of a conflict of interest on the part of auditors who have no standing to determine whether a claim should be brought by the company.
45. Professor Slim is of the firm view that, notwithstanding the absence of any reference to the possibility of an individual claim in Article 168, a shareholder who has suffered personal loss by reason of a faute de gestion can sue to recover such loss. He cites in support of this conclusion: (a) the views of Fabia and Safa5 ; (b) former judge Elias Nassif;6 and (c) the following extract from the judgment issued on 30 April 2014 by the Beirut Court of First Instance:
“Whereas the law allows the shareholder… to bring an individual claim in his/her/its own name against the board of directors of the société anonyme whether the behaviour of the board of directors causes a personal damage to him/her/it or to a certain number of shareholders, such as if the board of directors refrains from giving a shareholder his/her/its shares in the profits or if it (the board) does not pay back his/her/its contribution at the expiration of the company or if the board of directors misleads the person by representing incorrectly the company’s situation, so as such shareholder purchases the company’s shares and the value of such shares drops afterwards. In these cases, the shareholder suffers alone from the damage to the exclusion of the company. And, even if the company suffers from a given damage, it would be different from the damage suffered by the shareholder and the board of directors is in this case liable toward the shareholder must indemnify him/her/it for his/her/its damage”.7
46. Professor Slim states that this judgment is consistent with many judgments issued by the French Cour de Cassation including a judgment issued on 8 November 2005 which held that a French company’s directors were liable to minority shareholders for having failed properly to inform the latter of the real situation of the company with the aim of excluding such minority shareholders from the company8 , and another judgment of the same court issued on 9 March 2010 (No. 03-19679) that held that a French company’s directors were liable towards shareholders who were encouraged to invest in the shares issued by such company and not to sell them on the basis of false information and of incorrect accounts presented to the shareholders9 .
47. In the opinion of Professor Slim, the entitlement of a shareholder to bring an individual claim for personal loss caused by a faute de gestion is founded on the general provisions contained in Articles 122 and 123 of LCOC and the same reasoning supports the conclusion that an individual claim can be brought by a shareholder against an auditor for breach of duty for personal loss which is separate from the loss that might be suffered by the company by reason of the breach of duty. Professor Slim also prays in aid Article 134 LCOC which he says provides clearly for the full compensation principle.
48. In support of his opinion that in Lebanese law an individual claim can be brought against auditors Professor Slim cites the views of: (a) Fabia and Safa (“The liability claim against the auditors, is either brought individually or by the company. The company’s claim is brought in the name of the company or individually in accordance with the admissibility and capacity requirements and with the consequences examined [above] in respect of the liability of the directors under Article 166 LCC, No. 18 to 34 and [Articles] 168 and 168 LCC, No. 48 to 67.”10 ); and (b) former judge Eid11 (“The liability claim against auditors, alike the claim against the member of the board of directors, is brought either by the company or the shareholder or the third party”).
49. Professor Slim accepts that the damage suffered by a shareholder in consequence of a breach of duty by an auditor or a director may have a connection with damage suffered by the company in consequence of the breach of duty, but the damage suffered by the former is distinct from the damage suffered by the latter. In particular, the damage suffered by shareholders caused by false information provided to them in breach of a duty is not the same damage suffered by the company in reliance on the false information and, in such a case, the shareholders should not be prevented from exercising their private rights under Articles 122 and 123 LCOC. It is only where these different occurrences of damage stem from the same wrongful conduct and to distinguish between them could lead to a double indemnification for the same damage that the company alone can sue for the breach of duty. In the instant case, LCB is no longer in a position that allows it to bring a claim against DTL for damages and thus there is no risk of double indemnification. The Claimants are therefore entitled to bring their claim against the Defendants and to prevent them from doing so would amount to a denial of justice and the infringement of the basic right of access to courts that is accepted under Lebanese law and international instruments such as the UN Covenant on Civil and Political rights.
50. In paragraphs 90 and 91 of his first report, Professor Slim opines:
90. …[An] auditor can be held liable under article 178 LCC where it is established that he/she/it has not behaved as a diligent professional auditor, i.e. where he/she/it has not abided by duties prescribed by statutory or regulatory provisions, has avoided complying with the requirements imposed by professional regulations, has not behaved in good faith loyalty and honestly or has not acted prudently and diligently.
91. According to former judge Elias Nassif;
“Auditors are liable for not carrying out the normal diligence in scrutinising the exactness of the companies accounts and the items of its balance sheet […]. They are also liable for infringing the law or the articles of association and for fraudulent acts and for non-informing the board of these breaches, and for failing to call for a general assembly in cases where they must call for the general assembly’s meeting. They are liable, in particular, for untruthful statements they include in their reports to conceal defects or breaches in the management activities and in the items of the company’s books and accounts. They are liable if they do not control the management carried out by the members of the board or if they remain silent about the breaches of the law or the articles of association carried out by the members of the board of directors. Where it is established that the auditors have not carried out a sufficient diligence in controlling the correctness of the company’s accounts and its balance sheet items, in ensuring that its financial position allows to distribute the suggested dividends, in disclosing fraudulent activities of breaches to the law and the articles of association and where it is established that they have not drawn to the attention of the board of directors to these breaches and have not called for a general assembly meeting in cases where the law imposes on the calling of such meeting and that the company, the shareholders or third parties have suffered damages as a result therefrom, and where it is established that they have included in the report untruthful statements to conceal defects or breaches whether in the company’s accounts or books or in its management activities, their [the auditors’] civil liability is incurred in respect of these behaviours and they must compensate the aggrieved parties.”
51. Professor Slim goes on to express the opinion that Article 178 LCC applies only in respect of “supervisory fault” and does not apply to “non-supervisory faults”, liability for which is governed by Articles 122-123 of the LCOC. In Professor Slim’s view, the expression “supervisory fault” refers to the tasks that were generally entrusted to auditors at the time the LCC was enacted in 1942 in regard to checking the company’s accounts, the company’s financial situation, the directors’ reports and the company’s internal functioning. These supervisory tasks are concerned solely with the interest of the company as a private body.
52. Professor Slim explains that since the end of the 19th Century, an auditor was designated in France as “commissaire aux comptes”. However, a French decree issued on 8 August 1935 referred to auditors by using another appellation, that of “commissaire de surveillance”, although in fact these words were not utilised in practice in France where auditors continued to be designated as “commissaire aux comptes”. However, the Lebanese legislature chose in 1942 the appellation used in the French decree of 8 August 1935 and this remains the appellation in the LCC to the present day.
53. Professor Slim observes that the word surveillance derives from the verb surveiller which means to observe, to watch over or to supervise and he notes that in the leading book of Professor Gérard Cornu on French legal vocabulary, the word surveillance is defined as “the action to watch over a personal thing in the interest of the latter or to watch over a person or an operation to safeguard other interests, a preventative action that is founded on the vigilance of the one who supervises (characterised by acts of verification and control)”. It is with this meaning that the word is used in other Lebanese provisions that were also initially drafted in French such as the LCOC. In Professor Slim’s view, the expression “supervisory fault” cannot be construed to embrace all faults of an auditor but must be construed having regard to the specific duties entrusted to the auditors in question which have changed significantly since 1942, particularly in the case of bank auditors. Further, the expression supervisory fault can only refer to a fault based on a lack of supervision or a failure to supervise correctly. The word “supervisory” aims to specify the type of misconduct and does not describe all the tasks entrusted to an auditor. Where the default comprises a failure to take the initiative, as where there is failure to report suspicions of money laundering and/or the financing of terrorism, the default is non-supervisory in nature.
54. Professor Slim gives the following examples of faults in respect of tasks and duties that fall outside the concept of supervisory faults, noting that they involve a failure to take a required initiative including: (i) the breach of the duty to call for a general assembly in accordance with Article 176 LCC; (ii) the breach of the duty to abide by the instructions issued by the Central Bank of Lebanon and the Bank Control Commission, including the instructions12 relating to a bank’s compliance with anti-money-laundering and counter terrorist financing procedures (“AML/CTF procedures”); (iii) breach of the duty to report to the relevant authorities any irregularities and/or infringement the auditors may notice, including infringements of the instruction relating to the bank’s compliance with AML/CTF procedures;xxxxx">13 (iv) breach of the duty to inform shareholders of all relevant and important information relating to the company’s management and situation.
55. Professor Slim addresses the question whether the limitation periods provided for in Lebanese law are of a substantial or a procedural nature.
56. He states in paragraphs 340 and 343 of his first report that, on the basis of Articles 360 and 361 (para 1), the majority of Lebanese scholars opine that a limitation period is of a substantive nature but in his view an in-depth analysis reveals that the LCOC provides, in harmony with the French view that was generally accepted at the beginning of the 20th Century, that time limitation extinguishes the obligation as such, but it also provides, in harmony with the Shari’a principles embodied in the former Ottoman Civil Code (the Medjelle), that the obligation in its “natural” component outlives the passing of time.
57. Professor Slim notes that the limitation period in Article 360 LCC is based on the presumption of the debtor’s release and opinion between scholars is divided on whether the presumption can be reversed on the basis of an admission by the debtor which would signify that the limitation period is not truly substantive. He states that of the three types of proceedings that could lead to the dismissal of a claim under the LCCP – procedural motions, motions for inadmissibility and substantive defences - the defence based on a time limitation is advanced by a motion of inadmissibility and not by way of a substantive defence, which suggests that limitation periods may be procedural rather than substantive. In June 1960, the following sentence was added to the definition of a motion of inadmissibility in Article 62 (para 1) LCCP: “The motion for time limitation is considered as a motion for inadmissibility without prejudice to the special provisions of Article 361 LCC.” In the opinion of Professor Slim, this sentence confirms that the time limitation defence requires a motion of inadmissibility but nonetheless preserves that approach taken of time limitation in Article 361 LCOC and thereby evidences the fundamental inconsistency between Article 361 and the three-fold classification of defences provided for under the LCCP.
58. On the question of whether the 5-year limitation period specified in Article 178 LCC applies to all claims of breach of duty against auditors, it is Professor Slim’s opinion for the reasons summarised in paragraphs 51 – 54 above under Issue 1, that Article 178 LCC does not apply to non-supervisory faults, such as the failure to report suspicions of money laundering and the financing of terrorism under Lebanese Law No. 318 of 20 April 2001. Claims for non-supervisory faults are therefore not covered at all by Article 178 and this means that, not only do shareholders have an individual claim for personal loss where the value of their shares is affected by a breach a non-supervisory fault, but also that such a claim is subject to the 10-year limitation period specified in Article 349 LCC and not the 5-year limitation period referred to in Article 178 LCC.
59. On the question of when the limitation period begins to run for claims in delict under the general provisions of the LCOC (Articles 348 and 356), Professor Slim says, citing two scholarly works14 , that the start date is when all the elements of the delict, including damage, have occurred. Where the damage does not occur when the wrongful conduct occurs, Professor Slim says on the basis of Article 356 LCOC and certain jurisprudence15 that time begins to run when the damage occurs but where the aggrieved party is unaware of the occurrence of damage, time begins when he becomes aware of it.
60. Professor Slim then deals with when the limitation period in Article 178 LCC begins to run. In his view, Article 178 is a specific provision and as such must be construed strictly and can only be complimented, in respect of the details as to the computation of the limitation period, by the general rules contained in the LCOC. Thus, for claims against auditors based on Article 178, the general rule provided for in Article 348 and Article 356 LCOC must apply.
61. Professor Slim disagrees with the view taken by Maître Mattar that the limitation period in Article 178 is to be understood as having the equivalent start date as that provided for in Article 171 LCC, a provision concerned with directors, not auditors. In Professor Slim’s opinion, the Lebanese scholars relied on by Maître Mattar have probably been misled by the fact that the limitation period is the same in both Article 178 and Article 171.
62. Professor Slim goes on to consider what the start date is for the 5-year limitation period in Article 178, assuming that Article 171 is taken into account in interpreting Article 178. He says that Article 171 has to be understood in the light of Article 169 LCC and it follows that the event that triggers the running of time under Article 171 is not the mere holding of a general meeting of the shareholders but any final discharge (quietus) which might be granted to the directors during such a meeting. Further, the Lebanese Cour de Cassation decided in a judgment of 17 December 1969 that Article 171 LCC does not apply to claims against directors under Article 166 because Article 171 only applies to management faults.
63. Professor Slim disagrees with the statement made in Fabia and Safa’s work Code de Commerce Annoté, relied on by the Defendants, that a final discharge (quietus) granted to directors extends to the company’s auditors. In Professor Slim’s opinion, this statement wrongly assumes that a discharge can be implied and he cites the view of Edouard Eid that, whilst a discharge issued by the general assembly extinguishes the right to bring a claim in respect of actions brought to the assembly’s notice, the personal claim brought by a shareholder or creditor for personal damage remains open16 . Professor Slim also cites the view of Elias Nassif that a discharge granted to members of the board of directors does not have any connection with the auditor’s liability. Article 169 LLC provides clearly that the limitation period in Article 171 only covers management information that was brought to the attention of the shareholders during the general meeting that grants a final discharge. Where information has been concealed from the general meeting or has not been addressed in the reports submitted to the meeting, Professor Slim states that the general principles articulated in Articles 349 et seq LCOC must apply so that the limitation period for tortious liability begins to run on the date all the elements of the delict or quasi-delict occur, or where the damage only emerges after the wrongful conduct, on the date of the occurrence of the damage.
64. Professor Slim is also of the opinion that since Article 171 LCC is clearly related to the reports that are supposed to be submitted to the company’s general assembly, it cannot affect the interpretation of Article 178 so that it covers specific duties owed by auditors of banks to the Central Bank or the bank Control Commission.
65. Professor Slim states that:
(1) Lebanese law distinguishes between faits juridiques (agreements and/or undertakings and/or promises) and faits materiéls (every event, behaviour/conduct that is not a fait juridique). Where a fait materiél is likely to give to give rise to a claim before a court, it is characterised as a legal fact.
(2) To prove a commercial transaction or any fact in connection with commercial litigation, no specific type of evidence is required. There are therefore no restrictions in connection with the nature of the documents, the number of witnesses, the number of experts the type of presumption etc. Further, no evidence has conclusive effect that automatically overrides other evidence.
(3) The free admissibility of evidence applies in this case because: (a) the case does not require the establishment of civil transactions or the challenge of the existence of civil transactions; (b) the Claimants’ case is based primarily on tortious liability and torts by their nature are based on facts that cannot have given rise to agreement; (c) the case is considered in Lebanese law as a commercial matter.
(4) The documents set out in paragraph 3.1 (b) of Justice Sir Jeremy Cooke’s order aim to establish material facts and such facts can under Lebanese law be freely proved.
Maître Mattar’s two reports
66. Maître Mattar’s description of the Lebanese legal system does not appear to differ markedly from that provided by Professor Slim. He states that whilst court rulings have no stare decisis effect, courts should give ample weight to an accepted rule of law that is applied over a long line of cases, especially so that courts do not overrule or modify their own decisions except in cases of clear error and injustice. Lebanese courts recognise the doctrine of jurisprudence constante (which is similar to stare decisis) albeit that the former does not require strict adherence to a legal principle. There are times when a Lebanese judge has to find the appropriate legal basis to solve the issue before him, either by extracting from the existing texts or from general principles and rules prevailing in the existing legal system, whenever the text before him appears to be ambiguous, contradictory or absent. In accordance with Article 3 LCC, if there is no legislative text that can be applied, the judge may be guided by jurisprudence precedents and the requirements of fairness and commercial integrity.
67. Maître Mattar agrees with Professor Slim’s statement that if a clear and specific provision of Lebanese law exists, it must be preferred to a general provision and that a specific provision must be strictly interpreted. Referring to Article 2 LCC, he says that commercial law is often referred to as a “law of exception” and suggests that Professor Slim appears to consider commercial law as an exceptional law when comparing commercial law with civil law, a view with which Maître Mattar disagrees because it leads to the conclusion that there is no scope for the interpretation of commercial law provisions even where such a provision does not address or specifically regulate a particular scenario. For this reason, Maître Mattar disagrees with Professor Slim’s view that, where a specific provision is at stake, there is “no room” for analogy and asserts that the judgment issued by the Lebanese Cour de Cassation, No. 3 of 13 January 1998 cited by Professor Slim in paragraph 4317 of his first report makes it clear that analogy is possible where it is not carried out between inconsistent provisions or between inconsistent situations or between situations that the legislature has addressed.
68. In paragraph 1.2 of his first report Maître Mattar states that Articles 166, 167 (para1) and 168 of LCC assist in the interpretation of Article 178 “given the close connection, if not the indivisibility, between the supervision (auditors’ mission) and the acts to be supervised (management acts of managers/directors)”. He also says that his approach to the interpretation of Article 178 is based on Articles 1 and 2 LCC which provide broadly that where the LCC is silent on a matter, general civil law rules apply only in the absence of any commercial laws or customary trade laws which aid in the interpretation of the relevant issue.
69. Maître Mattar goes on to say that Articles 166, 167 (para 1), 168 (the Directors Articles) and Article 178, when compared and read concurrently, distinguish between two categories of liability claims that can be brought against auditors, namely: (a) an “individual” claim which can be brought by any shareholder who has suffered damage separate and distinct from the damage of the company and all other shareholders in the company; and (b) a “company/corporate” claim where the fault is to the detriment of the company or to all of the shareholders, which claim can be brought primarily by the company and, incidentally, by any shareholder in the name of the company in the event where the latter has failed to do so.
70. In support of proposition (a), Maître Mattar cites, inter alia, the views of Fabia and Safa in their Note No. 79 on Articles 167 and 168 [1831 of the trial bundle “TB”]; and Cozian and Viandier [1861 TB].
71. In support of proposition (b), Maître Mattar cites, inter alia, Fabia and Safa, Note 68 on Articles 167 and 168 [1829 -1832 TB]; Tyan (p 723-724, No 635) [1807-1808 TB]; and Merle (p.409) [1871-1873 TB].
72. Maître Mattar gives the following examples of where a shareholder’s personal/individual interest is affected as opposed to the company’s interest: (i) the violation of the preferential right to subscribe when the share capital is increased; (ii) the wrongful retention of dividends due to one or several shareholders; (iii) the diversion of funds paid for a release of a shareholder’s shares; and (iv) the provision of false information misrepresenting the company’s financial position relied on by a shareholder to buy shares that in the light of the true financial position were not worth what was paid for them.
73. In Maître Mattar’s opinion, the prevailing position is that an individual shareholder who has suffered injury in the form of a depreciation in the value of his shares as a result of mismanagement by directors does not suffer an individual loss separate from the company/corporate loss; see Cozian and Viandier, p. 186, no. 186 [1860 TB].
74. Maître Mattar cites a decision of the Beirut First Instance Court rendered on 23 February 2017 [1914-1923 TB] which he maintains supports the above-stated propositions. He states that in this case the plaintiff, a shareholder and board member in the “Lebanese Company for Restaurant marketing SAL” (“the Company”) brought a claim against another shareholder and board member seeking compensation for loss resulting from the defendants’ failure properly to manage the Company by failing to prepare corporate accounts, file tax declarations, settle suppliers’ invoices and pay salaries. The plaintiff alleged that these failures led to the Company’s financial collapse which in turn resulted in the shutdown of the Company’s business (a restaurant which it owned) and the filing of bankruptcy claims against it, all of which caused a decrease in the Company’s value. The Lebanese Court of First Instance ruled that the criteria for determining whether a liability lawsuit against the Company’s board members based on article 168 LCC is a “company/corporate” lawsuit or an “individual” one depends on the nature of the damage sustained. The Court held that when damage is general, affecting the whole company and sustained by all the shareholders, the lawsuit is considered a “company/corporate” lawsuit within article 168 LCC and has to be brought by the company or by the shareholders in the name of the company in the event of the company’s failure to bring the claim. However, when damage is individually sustained by a shareholder, affecting only his/her own shares in the company, and is not sustained by the company as a whole, the lawsuit is “individual” and can be brought by the affected shareholder/s within article 166 LCC.
75. Having concluded that the related claim was a corporate claim, the Court dismissed the lawsuit because the plaintiff had failed to bring evidence that the company had failed to take any action to bring a claim, and accordingly he was not entitled to bring the “company/corporate” lawsuit.
76. Maître Mattar accepts that this decision did not constitute “jurisprudence” and would not do so until upheld by a Higher Court, but he is of the view that nonetheless it is indicative as to the courts’ interpretation of Articles 167 (para 1) and 168.
77. Maître Mattar’s conclusion is that if the loss in the value of their shares claimed by the Claimants were established, all of LCB’s shareholders would have suffered the same loss and accordingly the loss can only be claimed by LCB in a “company/corporate” claim and cannot be claimed by the individual Claimant shareholders.
78. Maître Mattar is firmly of the view that the limitation period applicable to the Claimants’ claim is the 5-year period referred to Article 178 on the basis that Article 178 is a specific provision and therefore displaces the 10-year period prescribed in Article 262 LCC, this latter provision being subject to a shorter term being provided for in the LCC.
79. Citing the views of two scholars18 , Maître Mattar states that whilst Article 178 LCC does not expressly indicate the point that the specified limitation period of 5 years begins, considering both the terms of Article 171 and the interpretation of doctrine, that point is when the general assembly of shareholders, to which the auditors have submitted their report, is held.
80. Maître Mattar is also firmly of the view that Article 178 is the sole basis for the Claimants’ claim because “the claims are grounded on alleged faults/breaches committed by LCB’s auditors while conducting their audit functions/supervisory missions for LCB” and thus it follows that all of the claims are subject to the 5 year limitation period specified in the Article, which period began to run when the audit reports in respect of each of the audits relied on were presented to LCB’s shareholders.
81. Maître Mattar is at pains to point out that in his view Article 178 applies to all of the Claimants’ claims including those claims relating to AML/CTF reports, although in respect of the latter claims he acknowledges that since AML/CTF reports are not required to be submitted to the general assembly of shareholders there is an alternative view that the limitation period begins from the date of the relevant AML/CTF report. However, Maître Mattar opines that this alternative approach is less likely to be the correct position because Article 178 LCC is specific and does not provide for exclusions/exceptions. All that said, he concludes that neither of the competing views assists the Claimants in the instant case.
82. Maître Mattar goes on to state that in his opinion, the “supervisory” nature of the fault in Article 178 must be interpreted as referring to the auditors’ overall “mission”, which, in essence, is supervisory. All faults committed by auditors under Lebanese law amount to supervisory faults for the following reasons: (1) The expression “supervisory fault” (faute de surveillance) stems from the fact that the word “supervision” (surveillance) is embedded in the designation of the auditors as “supervisory commissioners” (commissaires de surveillance). (2) The auditor’s mission is in essence a supervisory mission and his liability is triggered by a fault committed in the exercise of his audit function/mission. (3) “Fault” within the ambit of Article 178 is very broadly construed by prevailing doctrine and jurisprudence so that it includes any fault committed by auditors in the course of conducting their audit.
83. Summarising, Maître Mattar’s view is that, on the assumption that the Claimants’ claim was being heard by a Lebanese court, each party would have the right to submit all necessary evidence in its possession and the judge would have a broad discretionary power to assess the probative value of the evidence so submitted having regard to its specificity, its pertinence to the proceedings and whether it is inadmissible because its object violates public policy or morals, or it violates professional secrecy.
The principal views of scholars, judicial decisions and legal provisions put by the Defendants to Professor Slim in cross-examination and re-examination.
[A] Nassif p. 1054 Treatise on Commercial Companies vol 10, 2008 [1307 TB]
“[P. 312] What would be the rule where the behaviour attributed to the members of the board causes a damage at the same time to the company and to the shareholders? Should the company, in such a case, be considered as the only possible claimant, or should it be accepted that the company and the shareholders be equally allowed to bring a claim?
The answer to this question depends on the nature of the damage suffered by the shareholder. Where the damage is separate and independent of the damage suffered by the company, both the shareholder and the company have the right to bring his/hers/its proper claim because each seeks to get a compensation for the damage he/she/it suffered from. The compensation of the damage that affected one of them does not lead to compensate the damage suffered by the other one.
Therefore it must be accepted that each of the shareholder and the company has a proper claim. Each of the two claims is brought independently. The shareholder brings his/her individual claim and the company brings the company’s claim.
However, the damage could affect the company, such as where the mismanagement leads to a decrease in its monies, and the shareholder suffers therefrom indirectly, because the decrease in the companies monies affects its (the company’s) investments and subsequently the amount of the dividends that he/she/it expects to receive annually, and affects his/her/his share in the company’s assets at the time of its liquidation.
In such a case, the shareholder has no individual claim in addition to the company’s claim because the compensation of the company’s damage and the restoration of its capital to its initial situation lead to the exclusion of the shareholders’ complaint.
84. It was put to Professor Slim that the effect of the italicised words was that where the company had suffered damage in the form of a decrease in its investments under Lebanese law, the shareholder has no individual claim.
85. Professor Slim replied that by using the word “compensation”, former Judge Nassif was referring to the principle of full compensation. Where the shareholder is compensated through the company, he cannot claim for the same damage. But where he is not compensated through the company, he can claim in respect of his own damage.
86. Professor Slim was then asked from the bench whether the shareholder could sue where the company did not recover compensation, for example where it did not sue, to which he replied that pursuant to the principle of full compensation, the shareholder could sue for his own individual indirect loss consequential on the fault of the defendant.
87. Professor Slim also pointed out that former Judge Nassif was referring to claims against directors and not auditors. He said the issue is whether the shareholder’s claim can succeed or not. If the company achieves compensation which compensates the shareholder he cannot ask for extra compensation.
[B] Maurice Cozian, Alain Viandier, Florence Duboissey Droits des sociétés, 32nd ed [1860 TB]
In contrast, according to the constant jurisprudence of the Commercial Chamber of the Court of Cassation, the partner who invokes a depreciation of the value of his shares due to the bad management of the managers does not characterise some individual damage that is different from the company’s damage; the first is only the corollary of the second; hence, the demand for compensation must take the path of the derivative lawsuit. (Com. Cass., 1st April 1997). The Criminal Chamber adopts the same approach when the lawsuit for compensation takes the path of the civil lawsuit (see infra, No 1001). Similarly, the partner who indicates that the management faults of the manager of a civil company have led to a reduction in the amount of the distributed profits does not invoke the compensation of some damage that is personal to him. (Cass.,Civil, 22 Sept. No 08-18.789.)
88. When asked if he agreed that this passage stated clearly that, if the shareholder suffers a depreciation of value of his shares, he must bring a derivative claim and not an individual claim, Professor Slim accepted that this was the view of Cozian and Deboissy but said it relates to the French law of directors not auditors, and if French law has to be taken into account, the French law relating to auditors’ liability, which does not make such distinctions, must be taken into account. Professor Slim’s second point was that he was not sure what was meant by the word “corollary” given that in another part of the book the authors used the word “consequence”19 . His third point was that this view of Professor Cozian is not shared by other French scholars, such as Ripert et Roblot whose book20 is referred to by Maître Mattar.
[C] Sociétés Commerciales, 2017, 48th ed Editions Lefebre, (translated from the original text [p.943 TB])
However, the action engaged by a partner or shareholder against the company’s managers is inadmissible as he claims for the loss of value of his securities, a damage that is simply the corollary caused to the company and that does not have any personal aspect [case citations]. Therefore, the reduction of the company’s patrimony could not constitute a damage for which the partner or shareholder may claim for compensation from the manager.
A partner may not claim compensation for the loss of the value of his securities regardless of the reason for such damage: for example, downfall of the company voluntarily caused by the manager [case citation] or deliberate reduction of the company’s activity for the benefit of a third-party company [case citation].
A partner may not claim compensation for the loss of the value of his securities regardless of the reason for such damage: for example, downfall of the company voluntarily caused by the manager [case citation] or deliberate reduction of the company’s activity for the benefit of a third-party company [case citation].
89. Professor Slim was dismissive of this statement because the identity of its author was unknown. It was not written by Lefebvre who was simply the editor of the book.
[D] Maître Chakib Cortbaoui’s report for earlier interlocutory proceedings, citing Lefebvre [867 TB]
The Lebanese Courts do not consider that the shareholders have an individual claim in the event of loss of value of their shares, if the assets of the company are diminished if the company is damaged intentionally by the director or its activities have been intentionally reduced in favour of another company.
90. Professor Slim remarked that he did not know how Maître Cortbaoui could cite Lefebvre when talking about the Lebanese position because the author of the passage in the Lefebvre book is unknown and Maître Cortbaoui is referring to the French law of directors, and one needs to know what the French law as to auditors is. French judgments relating auditors’ liability do not make the same distinctions as are made in respect of directors’ liability.
[E] Fabia and Safa, Annotated Code of Commerce [1831 TB]
79-See lawsuit for individual damage.-This lawsuit differs from that which was the subject of the comments above… in that it seeks to compensate the damage that is caused by the acts of one or more directors, not to the company or to all the shareholders, but to one or more shareholders individually, for specific interests that are distinct from the corporate interest. E.g.in case of an improper retention of the securities or the dividends accruing to one or more shareholders, or in case of violation of the preferential subscription right to the capital increase, or of false advertising having determined subscriptions or purchases.
91. Professor Slim agreed that it followed from this paragraph that the individual claim does not lie where you have something that causes damage to all the shareholders, but only where you have fault or an event that causes damage to a specific interest. Professor Slim also agreed that the examples given in the paragraph did not correspond to the pleaded facts of the instant case but he noted one of the examples referred to was false advertising having determined purchase or subscription purchases from which one can easily make a parallel between false advertising and false information. He also accepted that the fall in the value of the shares in LCB would have affected all the shareholders.
[F] Mustapha Kamal Taha, Principles of Commercial Law [p. 1846 TB]
552 (B) liability towards the shareholder-Individual lawsuit:
The actions of the board of directors may cause personal harm to one of the shareholders or to a number of them, such as when the board of directors refrain from giving a shareholder his share in the profits, or if the board does not return to the shareholder his share upon the expiry of the company, or if the board of directors issued a statement in which it gives the wrong representation of the company’s position, thus enticing such shareholder to buy shares and then decreasing [in] value. In such or similar cases, the damage occurs to the shareholder alone and not to the company, and even if the company suffers damage, it would be distinct from the damage that the shareholder has suffered, and in these cases, the board of directors is responsible towards the shareholder for compensating him for the damage that he sustained.
92. Professor Slim agreed that there had to be individual damage, not collective damage to bring an individual claim.
[G] Cozian, Viandier and Deboissy op. cit. p. 405 [1861TB]
b) Individual Damage
Damage is individual when it is personally suffered by a shareholder without being the consequence of some damage suffered by the company; the hypothesis is relatively rare…
93. Professor Slim said he did not think that “consequence” meant the same things as “corollary” and he declined to agree that the damage suffered by the shareholders in this case is a consequence of the damage suffered by the company. The damage suffered by the claimant shareholders is distinct from the damage suffered by the company because it is damage that is the consequence of the failure of the auditor to inform them, to alert them; the duty of information is due to the shareholders personally and not to the company. In this case the damage suffered by the company was reputational damage, damage to its assets and a fall in the value of the company. The damage to the shareholders was not consequential to the damage suffered by the company because the damage to the shareholders is that they lost the opportunity to sell their shares before the breakdown of the company.
94. Professor Slim was asked by the Court how you value, in money terms, the loss where there has been a loss of an opportunity to take action, if it isn’t by reference to the ultimate resulting value of the shares compared with what they would have been if there had not had not been any fault, to which Professor Slim responded that this is for the assessment of damage, but not the existence of the damage, as such. The damage pleaded by the Claimants is the difference between the price of the shares – between the price they could have sold the shares for and the actual price of the shares which Professor Slim accepted was a claim based on the differential value of the shares. But he went on to say that in French legal literature there was a difference between the damage as it is suffered and damage from the stand point of the aggrieved party.
[H] Phillippe Merle, Droit Commercial, Sociétés Commerciales, 5th ed [1872 TB]
409 Individual lawsuit.
The individual lawsuit supposes on the one hand that the damage suffered by the third-party or by the shareholder was caused by a director and not by the company itself. It is based on article 1382 of the Code of Civil Procedure. On the other hand, the damage must be personal and independent of the damage that the company might have suffered. So much that in practice, the individual lawsuit is quite rare.
The example that is usually cited is that of the director who had embezzled the dividends that were destined to a shareholder.
On the other hand, in the absence of a proof of personal damage, the individual lawful suit brought by a shareholder against the chairman of the board of directors of the company, who had to proceed to a “capital reduction” cannot be accepted…; the damage suffered by the plaintiff being only the corollary of the damage incurred by the company, as a result of the mismanagement by the chairman.
95. Professor Slim said that it is impossible to find independent or completely separated damages between shareholders and the company because the company can suffer and the shareholders can suffer at the same time.
[I] The judgment of the Beirut Court of First Instance, Decision no. 89/150/2017 Bechara Touma v Pragma Group Holding [1914-1923 TB]
96. The Claimant, Mr Touma, was a shareholder in the Defendant company (the “Defendant”) which established a company called The Lebanese Restaurants Marketing Company SAL (the “Company”), 25% of whose share capital was held by the Defendant and 15% held by the Claimant. The Claimant alleged that since the beginning of 2015, the Defendant, in its capacity as Manager of the Company and the supervisor of its accounts and financial management, had failed in the duties of management and failed to reply to notices all of which had led to the loss of the restaurant owned by the Company and large losses in respect of which the Claimant claimed large damages.
97. The Court dismissed the Claimant’s claim holding that: (i) the action was a liability action against a Board Member of a Joint Stock Company; (ii) the Claimant did not bring the action in his capacity as a representative of the Company but rather in his personal capacity; (iii) (referring to Taha’s Principles of Commercial Law), the distinction between the corporate action and the individual action lies in the nature of the claimed damage, whereby if the damage is general and occurs to the whole of the company and all of the shareholders, then the action brought by the shareholder would be a corporate action; but if the damage is individual and occurs to only one or some of the shareholders, in their assets, which are represented by the shares of the company, then the action would be individual; (iv) it was clear from Article 168 LCC that a shareholder may not bring a corporate action except in the case of the failure and neglect of the company to do the same; and (v) the Claimant did not bring any proof of the fact that the Company had failed to bring a corporate action.
98. Referring to his second report, Professor Slim said that this judgment is a very poor judgment because it confuses many issues including the individual claim with a derivative claim. Thus, the Beirut Court distorted the wording of Article 166 LCC to introduce in its scope “the management acts”, and hence management faults. The judgment misrepresents the Lebanese rules applicable to directors’ liability. It brought together Article 168 LCC and Article 166 LCC while Article 168 LCC clearly provides that the rule it expresses applies to the first paragraph of Article 167 LCC (and cannot therefore be combined as Article 166 LCC). All Lebanese scholars stress that there is no room for any distinction between a company claim and a personal/individual claim under Article 166 LCC. Further, the idea that the Plaintiff had not brought evidence that the Lebanese Company for Restaurants Marketing remain passive and has not itself brought the claim is extremely unconvincing. Proof of a negative is seldom insisted on in civil law countries and the Claimant was in fact the Chairman of the Board/General Manager of the Lebanese Company for Restaurants Marketing. Further, Article 168 LCC relied on in the judgment does not distinguish between the company claim and “individual claim”: company claims can be brought ut singuli or ut universi but in both cases the claim is that of the company. Finally, by basing its conclusion on Article 168 LCC i.e. on the distinction between the ut singuli claim and the ut universi claim, the Court has evidently not based it on the distinction between a company claim and a personal/individual claim.
[J] Fabia and Safa, op. cit. Comment No. 13 on Articles 178 LCC [1280 TB]
The liability claim against auditors is either brought individually or brought by the company. The company’s claim is brought in the name of the company or individually in accordance with the admissibility and capacity requirements and with the consequences examined [above] in respect of the liability of the directors under Article 166 LCC, No. 18 to 34 and [Articles] 168 and 168 LCC No. 48 to 67.
99. Responding to the suggestion that what is being said in this comment is that the same principles that apply in relation to claims against directors apply in relation to claims against auditors, Professor Slim said that what Fabia and Safa are saying here is that the distinction between an ut singuli claim and an ut universi claim applies to liability claims against auditors. Further, this opinion of Fabia and Safa is not shared by modern scholars in Lebanon, and in any case, is not consistent with the distinction between ut singuli and ut universi claims because the rationale of the distinction is the avoidance of conflict of interest which is relevant to directors but not relevant to auditors.
[K] Elias Nassif, Treatise on Commercial Companies, vol 11, 2009 [1238 TB]21
Pages 314-315: Auditors are liable for not carrying out the normal diligence in scrutinising the exactness of the company’s accounts and the items of its balance sheet (…) They are also liable for infringing the law or the articles of association and for fraudulent acts for non-informing the board of these breaches, and for failing to call for the general assembly in cases where they must call for a general assembly meeting. They are liable, in particular, for untruthful statements they include in their reports to conceal defects or breaches in the management activities and in the items of the company’s books and accounts. They are liable if they do not control the management carried out by the members of the board or if they remain silent about the breaches of the law or the articles of association carried out by the members of the board of directors.
Page 317 The liability claim against auditors, unlike the claim brought against the member of the board of directors, is brought either by the company or the shareholder or the third-party.
Page 318 The shareholder is entitled to bring a personal claim against the auditors in order to be compensated for the personal damage he/she/it suffered as a result of their [the auditors’] fault. That is the case, for instance, where he/she/it has purchased shares of the company’s shares on the basis of the auditors’ report that confirmed, incorrectly, the company strengths, if the shares value decrease shortly afterwards.
Page 318 (bis) No analogy is possible in this situation on the basis that the legal provision [article 168 LCC] gave the shareholder the right to bring the company’s claim on its behalf. If [the legislature] wanted the same with regard to the claim against auditors, it [the legislature] would have provided for it. It is not acceptable to carry out an analogical reasoning broadly because the rule applicable to the company’s claim is an exceptional rule that cannot be interpreted broadly or serve as a basis for an analogical reasoning.
100. Professor Slim was asked whether the same distinction drawn by Nassif between damage which is personal in that it is suffered only by a particular shareholder and damage which is suffered generally applies in relation to claims against auditors. He replied that claims against auditors can be brought by the company and also by shareholders. He also agreed that Nassif was saying that in order to suffer personal damage, you have to suffer loss that is separate and distinct from the loss suffered by the company which is part of general principles of tortious liability. Professor Slim also noted Nassif’s observation in 318 (bis) that no analogy is possible for the purpose of an ut singuli claim and an ut universi claim and therefore no derivative claim is possible in the case of auditors.
[L] Mustapha Kamal Taha, Principles of Commercial Law [p. 1847 TB]
553-The distinction factor between the derivative lawsuit filed by the shareholder and the individual lawsuit:
If the shareholder files a lawsuit on the liability of the members of the Board of Directors, how is it possible to distinguish between whether he is initiating a derivative lawsuit and whether he is filing his individual lawsuit?
We think that the distinction factor between the derivative lawsuit and the individual lawsuit is the place of the lawsuit or its subject matter, which is the damage subject to compensation. If the damage for which compensation is sought is a general damage to afflicts the whole company, that is, affects all of the shareholders, then the lawsuit brought by the shareholder is a derivative lawsuit. However, if the damage was individual, it affects only one of the shareholders, or some of them in his wealth represented in his company shares, then the lawsuit is individual.
101. Professor Slim agreed that the distinction drawn in this passage was the distinction made in Lebanese law between a derivative action and an individual action and stated that if the damage affects all the shareholders, there can be a derivative claim or a corporate claim but this does not mean that the shareholders cannot also suffer damage.
[M] Article 9 of the Lebanese Code of Procedure
The [bringing of a] lawsuit is open to anyone who has a legal and actual interest, or who seeks through it [the lawsuit] to establish a right whose existence is denied or to take a preventative measure to avert and imminent future damage or to keep a record about a right who evidence could cease to exist at the time it comes under dispute, with the exception of situations where the law restricts to certain persons, that it [the law] indicates the capacity, the right to bring a claim or to report it or to defend a specific interest.
102. Professor Slim accepted that the LCOP does not create substantive rights and obligations and went on to say that the “interest” referred to was an interest in the meaning of the law of procedure and one could not rely solely on Article 9 LCOC in bringing a claim but needed also to rely on another body of law or on the case law.
[N] Judgment of the Beirut Court of First Instance issued on 30 April 2014, no. 99. [01-1310.1 to 01-1310.11 TB]
103. Professor Slim referred to this judgment in paragraphs 154 to 160 of his first report. In paragraphs 154 and 155 he stated that the judgment evidences that the Lebanese courts take the view that a shareholder is entitled to bring an “individual claim” against the company’s directors in the case of management faults and he cited a passage in the judgment which passage he had translated from Arabic into English and which is set out in paragraph 45 above. It is convenient to set the passage out again here:
[O] “Whereas the law allows the shareholder… to bring an individual claim in his/her/its own name against the board of directors of the société anonyme whether the behaviour of the board of directors causes a personal damage to him/her/it or to a certain number of shareholders, such as if the board of directors refrains from giving a shareholder his/her/its shares in the profits or if it (the board) does not pay back his/her/its contribution at the expiration of the company or if the board of directors misleads the person by representing incorrectly the company’s situation, so as such shareholder purchases the company’s shares and the value of such shares drops afterwards. In these cases, the shareholder suffers alone from the damage to the exclusion of the company. And, even if the company suffers from a given damage, it would be different from the damage suffered by the shareholder and the board of directors is in this case liable toward the shareholder must indemnify him/her/it for his/her/its damage”.
104. The Defendants obtained an English version of the whole judgment that had been published in a set of case reports.
105. Professor Slim agreed that in this case the Claimant on behalf of a group of shareholders sought to have the minutes of meetings held by the directors and the general assembly and a contract for the sale of real estate annulled on the ground that in respect of all these matters the Chairman had exceeded his powers. He also agreed that the claim had been dismissed in its entirety on the ground that there was no evidence of any personal harm caused to the claimant in isolation from the damage caused to the company.
106. His attention was drawn to the following passage in the judgment that he had not included in his first report:
[P] The law permits the shareholder to file an individual claim in his name against the board of directors of the joint stock company when the actions of the board of directors cause personal harm to him or to a number of shareholders provided that this damage is individual and independent of that which affects the company as a whole.
107. Professor Slim responded that these were general principles of tortious liability in Lebanon under which, when a person claims compensation, he has to bring evidence that he has suffered individual personal damage.
108. He also agreed that none of the examples given in the passage from the judgment quoted in paragraph 156 of his first report of personal loss suffered by a shareholder that could found an individual claim was the equivalent to the loss claimed in the instant case which had been suffered by all the shareholders.
109. The following two passages in the judgment were also referred to in the course of Professor Slim’s cross-examination and re-examination.
[Q] This is true [that the law permits a shareholder to file an individual case] when the actions of the board of directors cause personal harm to him [ a shareholder] or to a number of shareholders, such as if the board of directors refuses to give a shareholder his share of the profits, or if he does not return his share at the expiration of the company, or if the board of directors delivers a person who [photographed] the position for a company unlike the reality, this shareholder bought shares and then the value of these shares decreased after that. In these cases the damage falls on the shareholder alone without the company and even if the company suffered some damage, this damage is distinct from the harm to the shareholder, and the board of directors in this case is responsible towards the shareholder and is obligated to compensate him for the damage he has suffered.
[R] It is noticeable that the damage is invoked by the claimant, in addition to being potential future damages that may or may not occur, these damages and assuming their occurrence will harm the interest of the claimant company. Accordingly, especially since the claimant did not provide any perceptual evidence of distinct personal and special harm that he suffered independently of the damage that may be caused to the company, and based on the foregoing, it is one of the conditions required to accept the individual claim and is not included in the present claim in terms of demanding responsibility for the members of the board of directors.
110. In re-examination, Professor Slim said the word “photograph” in the first of the two passages set out immediately above should be replaced by “represented” and in the second passage the words “potential future damages” should read “hypothetical damages”. He further stated that the court dismissed the case basically because it considered that the damage resulting from the execution of the real estate contract was hypothetical and incidentally because the claimant did not bring sufficient evidence that the damage was individual or personal damage.
[S] Nassif, op cit [2498 TB]
The task of the auditors goes beyond the accounting and administrative work, to the legal work, whereby he can check whether there are legal violations, such as the distribution of fictitious dividends to the shareholders or the distribution of dividends before the deduction of the legal and statutory reserves, if any, the taking of the decision to increase the capital prior to the payment of the full value of the subscribed shares, the unlawful appointment of members of the board of directors, or the existence of violations of the legal provisions related to the incorporation and the publication. However, the auditors may not effectively interfere in the management of the company, nor may they issue orders and instructions to the members or the chairman of the board of directors.
Their liability is released with the discharge of liability issued by the general assembly of shareholders. It is also released if it is proved that the actions do not fall within their mission of control. The liability lawsuit lapses after the expiry of five years as of the date of the general assembly to which they submitted their report.
111. Professor Slim said that here Judge Nassif was describing the classical auditor duties. In another book, he refers specifically to bank auditors. Asked about the last sentence of the citation, Professor Slim accepted that this was the view of several scholars but he thought they had been misled by the fact that Articles 178 and 171 refer to the same limitation period of five years. He denied that in taking the view that the starting point of the limitation period in Article 178 was not when the auditors submitted their report to the general assembly, he was a complete “outlier’.
[T] Edouard and Christiane Eid, Treatise on Commercial Law, Sade red 2007 [2419 TB]
The liability claim brought against the auditors prescribes after five years (Article 178) as of its entry into effect since the meeting of the General Assembly that approved their report. As for the case brought by third parties, it is subject to the ordinary time limitation i.e a ten-year limitation period.
[U] Fabia and Safa, Code de Commerce Libanais Annoté, 1998 [2412 TB]
The liability action against the auditors will lapse by the period of five years as of the assembly during which they will have presented their report.
[V] Emile Tyan, La Prescription, 1977 [2573 TB]
Liability lawsuit against the auditors
180- Article 178 Code of Commerce provides that “the auditors are liable… subject to the five-year statute of limitations”. Thus, since the text does not contain a provision on the regime of the statute of limitations, it is normal to think that the provisions enacted in this matter with regard to the lawsuit against the directors are applicable to them. It follows that for the faults committed by the auditors in the exercise of their powers, the starting point of the statute of limitations will be, as with regard to the administrators, the day of the meeting of the assembly where they were to submit their report.
112. Asked to agree that there was no support in the scholarly writings for his view that non-supervisory faults fell outside Article 178 and that Article 171 was not to be read into Article 178, Professor Slim said that he relied on the wording of Article 178 that was clear in that it referred only to supervisory faults. He also said that in his view, the limitation period for breach of Article 176 was not five years but 10 years because this was concerned with a management duty and not a supervisory duty. In Professor Slim’s opinion, the fact that several Lebanese scholars have given weight to the point that Articles 171 and 178 refer to the same period of limitation (five years) does not mean that one has to transplant Article 171 into Article 178 as these scholars do.
[W] Decision 108 of the Beirut Court of First Instance, dated 25 November 2009 [2597-2643, at p.2626 TB]
Whereas the liability lawsuit against the auditors is subject to the five-year statute of limitations, and this statute of limitations is subject to the same rules of the statute of limitations of the lawsuit against the members of the Board, and its time limit applies to the company and to the shareholders since the meeting of the general assembly that approved the report; as for the others -- including the Plaintiff bankruptcy -- the statute of limitation applies as of the occurrence of the harmful act or as of its discovery if it had been concealed, given that the time limit is a period of prescription and not a period of extinction, as it is subject to the causes of suspension and interruption to which the prescription is subject according to the general principles (Article 354 to 359 Code of Obligations and Contracts).
See: Edouard Eid, Commercial Companies, Part 2 (Joint-Stock Companies), No. 353, p. 633, and No. 344, p.572, and seq., especially p.579
113. As Maître Mattar says in paragraph 143 (h), p. 65 of his second report, this was a decision rendered in relation to a liability claim against the directors and auditors in the context of a company’s bankruptcy.
114. Responding to this passage from the judgment, Professor Slim observed that this was a bankruptcy case, the company involved was not a bank and the distinction between supervisory and non-supervisory fault had not been raised.
115. In re-examination, Professor Slim said that: (i) in bankruptcy cases it is very common that directors and auditors are sued together and it is quite normal that the limitation period is the same in the judge’s mind; (ii) in bankruptcy cases the issue is not a liability issue under Article 178 LCC or Article 122 LCOC but an issue that relates to the fact that the company failed in bankruptcy; and (iii) the words, “as for the others, including the Plaintiff bankruptcy – the statute of limitations applies as of the occurrence of the harmful act or as of its discovery if had been concealed given that the time limit is a period of prescription …” reflects his view that the limitation period cannot start to run where the aggrieved party was not informed of its rights or where information was concealed or not provided as in the instant case.
116. In further re-examination, Professor Slim was referred to the following passage in:
[X] Judgment issued by the Lebanese Cour de Cassation No. 133 dated 17 December 1969 “The Abid Khair decision” [1625 TB]:
As it provides that the liability claim is subject to a five-year limitation period from the date of the general assembly where the members gave [were given] an account on their management, Article 171 LCC limits this time limitation period to the management faults, to the exclusion of the faults provided for in Article 166 LCC that stem from breaches of the law or to the articles of association.
117. Professor Slim said that this passage clearly shows that Article 171 LCC does not apply to liability under Article 166 because Article 171 applies only to management faults and therefore Article 171 cannot be transplanted into Article 178.
The principal views of scholars and the judicial decisions relied on by the Defendants in the cross-examination and re-examination of Maître Mattar
[Y] Elias Nassif, Treatise on Commercial Companies, vol 11, 2009 [1239 TB]
The shareholder is entitled to bring a personal claim against the auditors in order to be compensated for the personal damage he/she/it suffered as a result of the [the auditors’] fault. That is the case, for instance, where he/she/it has purchased shares of the company’s shares on the basis of the auditors’ report that confirmed incorrectly the company strength, if the shares’ value decreased shortly afterwards.
118. Maître Mattar accepted that this contemplates a claim for the loss of value of shares bought on reliance of auditors’ statement, which is not this case.
[Z] Judgment issued by the French Cour de Cassation, 11 February 2003, No. 99-20139 [2048-2049 TB]
119. In this case, Editions Albin Michel, Infomedia and Maxi livres pro France (“the three investors”) sued the auditors of the company SPI, the holding company of the Group Y, for having understated the negative net equity of SPI in SPI’s certified accounts. On the strength of that certification the three investors purchased Group Y through their company Florengeoise de participation, claiming the loss that that company and each of the three claimants had incurred in consequence of their reliance on the certified accounts. This claim was declared admissible by the Court of Appeal.
120. On a re-appeal, the first ground of appeal was that the Court of Appeal should have held that the claim brought by the three investors was inadmissible in that it aimed to obtain compensation for the damage suffered by the holding company, Florengeoise de participation, in which the three investors were partners.
121. The passage put to Maître Mattar was as follows:
[AA] That whereas the judgment [under re-appeal] found that the three companies Editions Albin Michel, Infomedia and Maxi livres pro France which have invested in the purchase of the “Group Y” through the company Florengeoise de participation, which has been transformed into a partnership, have a lawful and direct interest to bring a claim against the auditors, who/which are liable, according to these companies, for the damage they incurred in that operation, whether through their holding company or on their own account and that the causal connection between the investment that was carried out through the company Florengeoise de participation according to Article 2.1 of the agreement dated 10 January 1995 and the possible fault committed by the auditors cannot be seriously contested by the auditors. By finding that the three companies are requesting the compensation of the damage consisting in the financial additional cost and the losses that the company Florengeoise de participation and through the latter the three other companies have incurred as a result of the purchase operation that was not in conformity with what [these companies] have envisaged, the Court of Appeal has not infringed Articles 31 and 32 of the Code of Civil Procedure. The ground of the re-appeal is unfounded in its first branch.
122. Maître Mattar agreed that in this judgment, the French Cour de Cassation held that the three investors were able to establish a direct interest in their claim against the auditors even though the claim was not brought in the name of the holding company. He went on to emphasise that this was a French decision and that, under Lebanese law, if a shareholder sustains damage which is not collective damage that basically affected the whole company, all the shareholders can sue. If there is separate and independent and distinct damage suffered by a shareholder, he can bring an individual claim.
[BB] Judgment issued by the Lebanese Cour de Cassation No. 133 dated 17 December 1969 “The Abid Khair Decision” [1625 TB]
123. The passage in this judgment to which Maître Mattar was referred is set out in paragraph 119 above.
124. Maître Mattar said that this decision was not binding and he disagreed with it. To assess the decision you have to know the facts and see the extract in the context of the whole judgment.
[CC] Judgment issued by the Beirut Court of Appeal, No.549, 25 March 1965 [2176-2177 TB]
Whereas the auditors have the power to control the company’s activities [Article 174 LCC] and the existence of the words “vested with control” in Article 167 leads at first sight to consider that they are also subject to the rules of presumed liability provided for in Article 167 alike the members of the board of directors and the other persons empowered to manage the company’s affairs.
Whereas the court considers that such position does not fit with the appropriate interpretation of Article 167 and that an in-depth examination of its terms and its location leads to consider that it does not apply to auditors.
First, Article 167 LCC is included in a section of the Code of Commerce [first section of the third chapter] that is dedicated to the members of the board of directors. It is an article that addresses in its terms and spirit the liability of the board members, while the auditors’ liability is addressed in Article 178 LCC which is included in another independent section. There is no reason to submit auditors’ liability to a twofold liability.
Second, the auditors’ task is limited to the control and does not extend to the management. If they were to be considered as being part of the persons that are liable under Article 167 LCC, they would remain submitted to a liability that they cannot free themselves from, because they cannot establish, according to Article 167, they have correctly carried out the management (of the company) that they have not been entrusted with (…)
Whereas it must be said, finally, that the auditors’ liability cannot be examined in light of Article 167 LCC, but in light of article 178 LCC that provides that they are liable either individually or jointly/severally, even towards third parties whenever they commit supervisory fault (…)
125. Maître Mattar accepted that: (i) in this judgment the court is making it clear that Section 1 of the relevant part of the LCC, which deals with directors, and Section 2 which deals with auditors, are independent sections; and (ii) the decision makes it clear that the liability under Article 167 is a specific liability and it should be determined and applied in light of the principles of strict construction.
Discussion and decision
126. The question is whether the Claimants’ pleaded loss, namely the difference between (a) the sums that the Claimants did in fact receive, and stand to receive, following the liquidation of LCB and (b) the value of their shareholding in LCB and the sums that they would have received but for the Defendants’ misconduct, is recoverable in Lebanese law.
127. To answer this question I think one has to begin with an assessment of the Claimants’ case ignoring: (a) Maître Mattar’s opinion that the effect of Article 178 has to be determined in the light Articles 166, 167 (para 1), 171 and 168 LCC and the jurisprudence and scholarly writing thereon concerning the circumstances in which a shareholder can bring an individual claim for personal loss resulting from management fault under Article 168; and (b) the Defendants’ contention that there exist two free-standing principles (Principle 1 and Principle 2) under which the loss claimed by the Claimants is irrecoverable in Lebanese law22 .
128. I take this approach because, if the Claimant does not have a case irrespective of the aforementioned issues raised by the Defendants, cadit questio.
129. It is common ground that on its face, Article 178 LCC does not limit the entitlement to sue an auditor for supervisory fault to a claim brought by the company ut universi or a derivative claim brought by shareholders ut singuli on behalf of the company. As Mr Mattar accepted in cross-examination, the phrase “third party” in Article 178 includes a shareholder23 . It is also common ground that to establish the necessary supervisory fault, a shareholder must establish a breach of duty owed to him or her that has caused him or her individual personal loss. I accept Professor Slim’s evidence that Article 178 is based on the concept of liability articulated in Articles 121, 122 and 123 LCOC.
130. In my judgment, it is manifest that, in the absence of some special rule, the loss suffered by a shareholder when the value of his or her shareholding in a company is diminished in consequence of damage sustained by the company, is very different in nature from the loss sustained by the company, even though there may be a causal connection between the two losses. This is because, in the ordinary way, the value of a shareholder’s shares depends on what a willing purchaser would have paid for them pre and post the occurrence of the damage, either through a bargain on a stock exchange where the shares are listed or by private treaty. The damage suffered by the company will be the adverse impact on its assets and its opportunity to trade profitably, which are interests of a quite different nature from the shares held by the shareholder. Further, as accepted in cross-examination by Maître Mattar (as recorded in the transcript set out below) any problem with double recovery caused by the shareholder and the company each recovering in respect of their pleaded losses could be dealt with by the Lebanese courts under the procedures available to them. It follows, in my judgment, putting on one side the analogical reasoning of Maître Mattar based on Articles 166, 167 (para 1), 168 and 171 and the alternative proposed free-standing principles championed by the Defendants, a shareholder’s loss in the value of his shareholding indirectly connected to damage suffered by the company would be recoverable pursuant to the Lebanese principle of full compensation expressed in Article 134 paras 1 and 4.
Mr Mattar, I’m not putting to you anything about the priority. I simply wanted to establish two things really, which I think we are agreed upon. That the nature of the loss suffered by the company and the nature of a loss of by a shareholder, whilst they are related are different. That’s the first thing.
The second thing which I think we’ve agreed upon is that in both instances those losses could be recoverable in principle in Lebanese law provided the losses are causally connected with the wrongdoing that’s caused them?
Q Thank you.
I would suggest that there’s no risk of double recovery that cannot be dealt with in the courts. For example, the courts in Lebanon would have a residual power to decline to make an award in an appropriate circumstance if they thought there was double recovery, and there are procedural rules, certainly we have procedural rules in the common law for joining parties, so parties could be joined to an action.
There are various mechanisms that could be used and are recognised in Lebanese law to prevent any concern about double recovery?
A Yes there are.
Q Thank you.24
131. I turn to examine the principal scholarly writings and judgments relied on by the Defendants for their case that, where the company suffers loss which is causally linked to loss suffered by shareholders in the form of a diminution in the value of their shares, only the company or the shareholders representing the company can sue the party at fault. In doing so I am concerned not only to identify the conditions therein laid down as to the claims that can be made but also the underlying reasons for the conditions.
132. I begin with the extract from Elias Nassif’s Treatise on Commercial Companies at p. 1054 (document [A]) where it is stated that both the shareholder and the company can sue if the damage suffered by the shareholder is separate and independent of the damage suffered by the company because the compensation for the damage that affected one of them does not lead to compensate the damage suffered by the other one. In other words, as is clear from the italicised words in the document, whilst the principle is expressed in terms of the nature of the damage for which the shareholder can sue, its purpose is to avoid the shareholder achieving double recovery for his loss by, on the one hand, receiving damages from the defendant, and on the other hand, receiving the beneficial effect on the value of his shares when the company recovers damages for its loss. This is also the view of Professor Slim, see paragraph 160 of his first report.
133. This principle that the shareholder can only sue for loss that is separate and independent of the damage suffered by the company is sometimes expressed in the scholarly writings and judgments in terms of “individual damage”25 or as the “corollary” of the damage to the company26 , but in substance it is the same principle with the same raison d’être as that articulated in document [A].
134. It is clear that the aforesaid principle is part of the Defendants’ Principle 1. Another strand to Principle 1 advanced by the Defendants in reliance on Maître Mattar’s evidence27 is the view expressed in some of the scholarly writings and jurisprudence28 that, if all the shareholders suffer damage across the board caused by a management breach of duty, the claim must be brought by the company ut universi or by the shareholders in a derivative ut singuli claim and not by an individual claim. It is to be noted at the outset that none of the scholarly writings or judgments relied on for this strand to Principle 1 makes any reference to a principle of shareholder equality founded on Article 110 LCC or to the nature of a share in a company as provided for by Article 105 LCC.
135. I accept Professor Slim’s view expressed in paragraph 9.5 and paragraph 134 of his second report that the purpose of any distinction between a company claim and an individual personal claim is the avoidance of double compensation. In other words, just as the purpose of the rule that a shareholder cannot sue for the diminution of the value of his or her shareholding caused by damage to the company for which the company has a claim is to avoid double compensation, so too is this the purpose of the rule that where damage is done to all the shareholders the claim has to be a corporate claim ut singuli or a derivative claim ut universi. I also accept Professor Slim’s evidence, fortified as it is by the last paragraph of the extract from Elias Nassif (document [K]), that there is no scope for a claim ut universi where a claim is made against auditors where all the shareholders across the board have suffered the same damage.
136. Turning to the Defendants’ Principle 2, I can find no reference to Article 110 LCC and/or the claimed principle of shareholder equality in the Defendants’ Written Opening Submissions or in the writings and judgments that were put to Professor Slim in cross-examination. Further, Principle 2 is not relied on by Maître Mattar when giving his reasons for his opinion that shareholders who suffer a diminution in the value of their shares in consequence of a loss connected to a loss suffered by the company cannot sue the wrongdoer who has caused these separate losses. Instead, the only reference Maître Mattar makes to Article 110 LCC is in his second report where he says, in paragraph 57, that the prohibition against recognising a reduction in value of a shareholding alleged to have been suffered as a result of the company suffering a loss “adheres to the default position of equality among shareholders in their participation in the company as confirmed in Article 110 C. Com. and Article 844 COC., Article 894 COC and Article 895 COC”, an observation he repeats in paragraph 76.
137. In the cross-examination of Professor Slim, Ms Day QC for the Defendants took the witness to Article 110 LCC. Professor Slim agreed that the provision meant what it said concerning shareholders of the same class enjoying the same rights and advantages, which meant that shareholders follow the fortunes of the company29 . The questioning then went off on a tangent when Professor Slim was asked to agree that the equality of shareholders requires that the claims of the company’s creditors will have priority over the claims of the shareholders if the company is wound up, to which he replied that he did not see the link between the equality of shareholders and the fact that the creditors came before the shareholders in a liquidation. The rest of the cross-examination in which there was mention of shareholder equality continued as herein set out:
Q. Similarly, if the company spends a large amount of money to buy a building which was negligently overvalued by its surveyor, this may affect the value of the shares or
cause a reduction in the size of dividends.
Q. We could go through many other examples, but in each of these cases, the claim against the defendant belongs to the company because it's the company that suffered the loss, isn't it?
A. It belongs to the company at the first place, but this does not mean that the shareholders cannot also bring a claim if the company fails to do -- fails to bring the claim.
Q. Well, obviously we disagree on that because, as you are aware, we say that the principle of shareholder equality requires such claims to be brought by or on behalf of the company.
A. I don't see the connection between the principle of equality of shareholders and the claim you are talking about.
Q. Well, the connection is this: the fruits of the claim are to be shared equally by all the shareholders in proportion to their shareholding, aren't they?
A. If the claim is brought by the company, yes, of course, in this case, the fruits of the claim will go to the company, and therefore there will be -- they will profit to all shareholders.
Q. Yes, but it would be unfair if one shareholder could
bring a claim and recover it for itself and not share it with the shareholders in the company (audio distorted).
A. No (audio distorted).
Q. Sorry, I could not hear your answer.
A. No, I don't see that as being unfair.
Q. So your position is that one shareholder can bring a claim and recover the entire loss caused to the company; is that correct?
A. No, my answer is we have under Lebanese law a very important principle which is the principle of full compensation, and this means that the injured -- the aggrieved party must be compensated in full. It has not to – no impoverishment, no enrichment. And if the shareholders has suffered a damage which is personal to the shareholder and the company has suffered a damage which is personal to the company, the (audio indistinct) to avoid the compensation. And if the company is compensated, then the shareholders will not have the right to be compensated, but if the company is not compensated, then the shareholder has the right to be compensated on the ground of the principle of full compensation.
Q. But the shareholder cannot recover for the company's entire loss, can it?
138. Given that the Defendants’ claimed Principle 2 was not advanced in the Defendants’ written opening submissions, was not advanced by Maître Mattar, was not accepted by Professor Slim, is not canvassed in any of the scholarly writings or judgments put before the court and is therefore no more than an unsupported submission advanced by counsel, I conclude that the Defendants have not established that Principle 2 is part of Lebanese law.
139. At this stage in this judgment, what in my view the Defendants have established by: (i) reference to the scholarly writings designated [A], [B], [C], [D], [E], [G] & [P]; (ii) the judgments in Bechara Touma v Pragma Group Holding (document [I]) and that of the Beirut Court of First Instance no. 99 (document [P]); and (iii) the evidence of Mr Mattar is that in the context of liability claims for management fault under Article 168 LCC there exist two rules whose raison d’être is to avoid double compensation: (i) a shareholder cannot bring an individual claim for the diminution in the value of his or her shareholding where this is causally connected to loss suffered by the company due to management default;30 and (ii) where all the shareholders are damaged across the board by a management default, the claim for management fault against directors must be brought as a corporate claim ut universi or by a derivative claim ut singuli.
140. Three further issues fall for consideration: (a) in Lebanese law, do each of the two rules (i) and (ii) referred to in paragraph 142 apply where the company has not brought and for whatever reason will not in the future bring a claim against the wrongdoer who has caused loss to a shareholder; (b) if the answer to (a) is yes as to rule (i) but no as to rule (ii), does rule (ii) apply in liability claims against auditors; (c) if the answer to (a) is yes as to both rules, or yes as to rule (i) and the answer to (b) is yes as to rule (ii), does rule (i) apply in claims against auditors?
141. The Defendants contend in paragraphs 70 and 71 of their Closing Submissions that Lebanese law has adopted a position that, as a matter of principle, a fall in the value of shares is not regarded as a recoverable head of loss at all. In support of this contention reliance is placed on: (i) the shareholder having to accept that he or she follows the fortunes of the company; (ii) it is normal for the articles of association to provide that ultimate control of the company’s affairs is by a majority of the shareholders voting in general meeting; (iii) if the company’s decision organs decide not to pursue a claim in the name of the company for whatever reason, the shareholder must ordinarily accept that state of affairs; (iv) it would be a subversion of the fundamental principal expressed in (iii) if the shareholder were able to bypass the majority and bring proceedings in his own name; (v) the shareholder’s only recourse is to the remedies provided by company law to minority shareholders who claim that they are being treated unfairly.
142. These contentions are essentially the reasons given by the majority in Marex for upholding the rule against reflective loss. The problem for the Defendants is that the principle they contend for and the reasons they marshal in support thereof are not to be found in the evidence of either expert witness or in the scholarly writings and judgments that are before the Court which, together, constitutes the only relevant evidence of Lebanese law on which Issue 1 stands to be decided.
143. I turn then to the expert evidence and the scholarly writings and judgments put before the Court.
144. As already recorded, it is Professor Slim’s opinion that the two rules under discussion do not apply where there is no possibility of the company suing the wrongdoer. In paragraph 205 of his first report he observes that the reasoning on which the Defendants rely is based on the assumption that, in parallel to the shareholders personal claim, the company/bank is in a position that allows it to bring a claim and seek compensation for the damages it suffered. He goes on to state that in the present case, LCB is no more in a position that allows it to claim for any damages or, at least, it does not want to claim for any damages and thus duplication of compensation is not possible and so the distinction between damage personal to the shareholder and damage suffered by the shareholder is irrelevant. In his view, in these circumstances, not to allow the Claimants to bring their claim would be a denial of justice.
145. As already recorded, Professor Slim is also of the view that there is no scope for an ut singuli claim where the complaint is against auditors because an ut singuli claim is applicable only where the claim is against directors for management fault because directors have a potential conflict of interest when the board is asked to bring a corporate claim. This position is supported in the last paragraph of the extract in the judgment that is document [K].
146. In reply to this part of Professor Slim’s report, Maître Mattar says in paragraphs 101 and 102 of his second report that the rationale behind the ut singuli claim is to allow the shareholder to follow suit on a liability claim to compensate the company where the company’s representatives have failed to do so (due essentially to their involvement in the alleged reprehensible acts). This is not equivalent to where the company is no longer in a position to bring the claim itself due to other reasons, including the assumption that the company simply “does not want to”. In any event, the fact that LCB may “not want to” claim damages should not, as a matter of principle, be relevant. Whether or not a shareholder can bring a claim must be determined at the time the claim arose and should not depend on the mere chance of whether the company intends to sue at a later date. Taking this to its logical conclusion, one must consider what would be the outcome if the company subsequently changed its mind.
147. Maître Mattar’s contention that whether or not a shareholder can bring a claim must be determined at the time the claim arose and should not depend on the mere chance of whether the company intends to sue at a later date was put to Professor Slim by Ms Day. She suggested that if Professor Slim’s view that shareholders could sue where the company had not sued the wrongdoer was correct, there would be uncertainty as to what limitation period would apply. In reply, Professor Slim said that a claim by a shareholder and a later claim by the company would be separate claims and the same limitation period would apply to each. And if the company changed its mind and decided to sue, the judge would take into account the principle of full compensation and he would subtract or add compensation depending on the situation.
148. As Professor Slim accepted, there has been no decision on whether a shareholder or group of shareholders can sue a wrongdoer who has caused damage to them and to the company where the company has declined to sue or is incapable of suing. The DIFC Courts must therefore decide this question on the basis of the jurisprudence and scholarly writing put before it, together with the views of the expert witnesses. In my judgment, such a claim is possible given that: (i) in my opinion the two rules are predicated on a risk of double compensation and it is to be inevitably inferred there is no such risk in this case; (ii) the shareholders have a claim for a breach of duty owed to them and not just owed to LCB; (iii) there exists in Lebanese law a principle of full reparation for loss suffered due to the fault of another as provided for in Article 134 of LCOC; (iv) it was open to the other shareholders to bring claims for their own personal losses but they have chosen not to sue; (v) the limitation period for the Claimants’ claim is unaffected by the Claimants bringing their claim in light of LCB not bringing its own claim against DTL; (vi) justice does not require that the viability of a shareholder’s claim for the diminution in the value of his or her shares must be established once and for all at the time the limitation period begins to run in respect of his or her putative claim; and (vii) it would be a grave denial of justice not to allow the Claimants to bring their claims in circumstances where there is no risk to the Defendants of double indemnification.
149. I would add that, even if rule (ii) is not predicated on a risk of double recovery, I accept Professor Slim’s evidence that rule (ii) has no application in claims by shareholders for personal, individual loss brought against auditors.
150. Given the conclusions expressed in paragraphs 151 and 152, it is strictly unnecessary to determine whether rule (i) applies in actions against auditors since, if rule (i) has no application in a claim against directors for management fault on the ground that there exists no risk of double recovery, rule (i) will have no application in this case where there is no risk of double recovery, even if it applies in claims against auditors where there is such a risk as well as in claims against directors.
151. Even though it is not necessary to do so, since the point was extensively argued I propose to say that in my judgment rule (i) does apply in claims against auditors for the following reasons: (i) Maître Mattar’s opinion that Articles 166, 167 (para 1) and 168 of LCC assist in the interpretation of Article 178 LCC given the close connection, if not the indivisibility, between the supervision (auditors’ mission) and the acts to be supervised (management acts of managers/directors); and (ii) the view expressed by Fabia and Safa in their comment no. 13 on Article 178 LCC (document no. [J]).
152. The first question to be decided is what conflicts of rule is applicable in deciding which law, the lex fori or the lex causa, determines the limitation period to which the Claimants’ claims are subject. On balance, I think that the conflicts of rule is subsumed in Article 8 of the Law on the Application of Civil and Commercial Laws in the DIFC (DIFC Law No. 3 of 2004) and on applying that Article, I find that the law that determines the applicable limitation period is Lebanese law, this being the law that is most closely related to the facts and the persons in the matter.
153. In case I might be erroneous to apply Article 8 of DIFC Law No. 3, in the alternative I find that that old English choice of law rule is applicable which depended on whether the postulated foreign limitation rule was substantive or procedural in nature. If substantive, the foreign limitation law applied; if procedural, English law as the lex fori applied. In my judgment, the Lebanese law of limitation is substantive in nature. Professor Slim accepts in paragraphs 340 and 343 of his first report that, on the basis of Articles 360 and 361 (para 1) LCOC, the majority of Lebanese scholars opine that a limitation period is of a substantive nature. He goes on to observe that there has been a current of thought that flows the other way based, inter alia, on the fact that of the three types of proceedings that could lead to the dismissal of a claim under the LCCP – procedural motions, motions for inadmissibility and substantive defences – the defence based on a time limitation is advanced by a motion of inadmissibility and not by way of a substantive defence, which suggests that limitation periods may be procedural rather than substantive. He notes that in June 1960, the following sentence was added to the definition of a motion of inadmissibility in Article 62 (para 1) LCCP: “The motion for time limitation is considered as a motion for inadmissibility without prejudice to the special provisions of Article 361 LCC”, and observes that whilst this preserves the approach taken of time limitation in Article 361 LCOC it nonetheless evidences the fundamental inconsistency between Article 361 and the three-fold classification of defences provided for under the LCCP.
154. At the end of the day, I am persuaded by the reasons given by Maître Mattar in paragraphs 134 and 135 in his second report that the Lebanese limitation defence has an implication not only on the underlying right to file a legal action but also on the underlying right of that legal action, and accordingly its substantive nature prevails over its procedural characteristics in Lebanese law.
155. Article 178 LLC prescribes a limitation period of 5 years. I turn to consider the Claimants’ case that this Article does not apply to those breaches of duty alleged against DTL which stand to be characterised as “non-supervisory”, rather than “supervisory”. I have summarised in paragraphs 51 to 54 above the contentions that Professor Slim eloquently advances in support of this case, but I am not persuaded by the reasoning he deploys in his two reports or in cross-examination.
156. I prefer Maître Mattar’s expert evidence that “supervisory fault” (“faute de surveillance”) in Article 178 encompasses any fault committed by auditors in the course of carrying out their audit function. As Maître Mattar observes, the word “supervision” (“surveillance”) is embedded in the very designation of auditors (“Commissaires de Surveillance”) in the LCC and the scope of supervisory faults is very wide, as is clear from paragraphs 90 and 91 of Professor Slim’s first report. I also find that the distinction between what Professor Slim regards in paragraphs 90 and 91 of his first report as supervisory faults and the examples he gives of non-supervisory faults is unconvincingly artificial. In addition, I think I must give weight to the fact that there is no support for Professor Slim’s view in any of the scholarly writings or jurisprudence put before the court. Nor am I persuaded by what is submitted in paragraphs 79 to 123 of the Claimants’ Closing Submissions.
157. Article 178 does not specify when the 5-year limitation period it prescribes begins and the experts disagree on when this is. Maître Mattar opines in paragraph 2.8 (b) of his first report that considering both the provisions of Article 171 --
“Proceedings for liability are limited to five years dating from the meeting during which the Directors were required to account for their management” – and the interpretation of doctrine, the starting point is the date of the general assembly of shareholders to which the auditors submitted their report. The doctrine referred to is the statement in Fabia and Safa, La Code de Commeriale Annoté, “The liability action against auditors will lapse after a period of five years as of the assembly during which they had presented their report” (see document [J]). In his second report, Maître Mattar prays in aid the statement in Emile Tyan’s, work La Prescription, that “in general this regulation  is not different from that of directors’ liability”, and the statement in Eid, op.cit., “A liability lawsuit is filed against the auditors, such as a lawsuit that is filed against the members of the board of directors …”.
158. The following doctrinal statements are also to the effect that the limitation period in Article 178 starts on the date of the general assembly at which the Auditors presented their report:
Tyan op. cit.: “The five-year statute of limitation period is declared applicable to the liability action against the auditors (Art. 178, in fine), whether it is a liability towards the company and the shareholders or towards third parties as expressly stated in Article 178. Therefore we do not face here the above-mentioned interpretation difficulty with respect to the statute of limitation of the directors’ liability towards third parties. But as with the directors, the starting point of the statute of limitation will not be, in the case of third parties, the date of the meeting of the assembly”.
159. In Nassif, op.cit. it is stated: “Their [Auditors] liability is released with the discharge of liability issued by the general assembly of shareholders. It is also released if it is proved that the actions do not fall within their mission of control. The liability lawsuit lapses after the expiry of five years as of the date of the general assembly.”
160. In Between Legislation and Jurisprudence published by Sader Legal Publications [2492 TB] is] it is stated:
Statute of limitations of the liability suit against auditors: The liability suit against the auditors shall lapse after the expiry of five years as of the date of the general assembly to which the auditors submitted their report, except in the case of a criminal offence.
161. Finally, the following passage appears in Decision 108 of the Beirut Court of First Instance, dated 15 November 2009 (Document [W]):
Whereas the liability lawsuit against the auditors is subject to the five-year statute of limitations, and this statute of limitations is subject to the same rules of the statute of limitations of the lawsuit against the members of the Board, and its time limit applies to the company and to the shareholders since the meeting of the general assembly that approved the report; as for the others …
162. Professor Slim was firmly of the view that the scholars whose views I have set out above had been misled by the fact Articles 178 and 171 both referred to a limitation period of five years. In Professor Slim’s opinion, since Article 178 is a specific provision it can only be complemented in reference to the details relating to the computation of the five-year limitation period by the general rules provided for in the LCOC. It follows that the general rule provided for in Article 348 and Article 356 in respect of tort claims must apply, with the result that: (i) where the tortious conduct and the ensuing damage occur at the same time, the limitation period runs from the date when the wrongful conduct and the damage occur; (ii) where there is a period of time between the tortious conduct and the manifestation of the damage or consolidation of the damage, the limitation period runs from when the damage occurs; and (iii) where the aggrieved person was not aware of the damage that affected him/her/it, the limitation period begins to run from when the aggrieved person was aware of the damage.
163. According to Professor Slim, the equivalence in the duration of two time limitation periods does not mean that the two limitation periods must be governed by the same rules relating to the computation of the periods. Further, no analogical reasoning can be adopted by reference to Article 171 LCC because that provision is a specific rule and the rules applicable to auditors cannot have the same rationale or the same purpose as the rules governing directors’ liability.
164. Professor Slim drew support for his view from the following part of the judgment issued by the Lebanese Cour de Cassation No.133 dated 17 December 1969 (Document [X]):
As it provides that the liability claim is subject to a five-year limitation period from the date of the general assembly where the members gave [were given] an account on their management, Article 171 LCC limits this time limitation period to the management faults, to the exclusion of the faults provided for in Article 166 LCC that stem from breaches of the law or to the articles of association.
165. In Professor’s Slim opinion, if the time limit in Article 171 LCC was not to be transported into Article 166 LCC, it followed that it was not to be transported into Article 178.
166. Maître Mattar was asked in cross-examination whether the five-year limitation period provided for in Article 171 LCC applied to a case brought in fraud against the directors under Article 166 LCC. He took rather a long time to answer this question but finally said that the five-year limitation period would indeed apply to such a case. His attention was then drawn to the passage from the part of the judgment issued by the Lebanese Cour de Cassation No.133 dated 17 December 1969 set out in paragraph 167 above and he was asked if he wished to change his answer. In reply he stood by his view that the five-year limitation period did indeed apply to claims under Article 166 and went on to say that he regarded the decision as wrong.
167. I accept Professor Slim’s evidence that that part of the judgment issued by the Lebanese Cour de Cassation No.133 dated 17 December 1969 set out in paragraph 167 above is clear authority that Article 171 LCC cannot be used to supplement Article 166 and that the ten-year limitation period provided for in Article 349 LCOC applies to claims against directors under Article 166. However, in my judgment, it does not follow from this decision that the start date of the five-year limitation period in Article 178 is when the damage resulting from the auditors’ fault occurred or was known to occur rather than the date of the meeting of the general assembly when the auditors presented the report about which complaint comes to brought under Article 178. I say this because there is no provision relating to auditors that is the equivalent of Article 166. Thus, dishonesty in the conduct of an audit or wilful default, where a blind eye is deliberately turned to misconduct by the board, stands to be brought under Article 178 and it follows in my opinion that this decision does not affect the reasoning underlying the view that the start date referred to in Article 171 should be implied into Article 178, namely: (i) there is a line running through the provisions dealing with how to operate a joint stock company, the directors’ liability, the auditors and the general assembly that connects all these things so that one has to take all these things into consideration in analysing and interpreting any one article of the connected articles31 ; and (ii) the liability of the auditors is a corollary of the liability of the directors because they (the auditors) oversee, they inspect, they supervise the working of the company.32
168. In my judgment, on the expert evidence put before the Court, particularly the view of Maître Mattar, the scholarly writings canvassed above in paragraphs 161 -164 and the judgment of the Beirut Court of First Instance (Decision 108 of the Beirut Court of First Instance, dated 15 November 2009) set out in paragraph 113 above, under Lebanese law the start date of the five-year limitation period in Article 178 is the date on which the auditors’ report in respect of the audit complained of was presented to the general assembly.
169. According to the Agreed Facts, DTL’s audit report in respect of the last audit about which the Claimants complain was presented to the general assembly of LCB on 26 May 2010. The limitation period for the claims in respect of this last audit therefore expired on 26 May 2015, yet the Claimants’ Claim Form was not issued until 19 July 2016. It follows that the Claimants’ Claims are all statute barred and issue 2 is answered accordingly.
170. Given my conclusion that the Claimants’ claims are statute barred, it is not strictly necessary to decide Issue 3. However, in case this matter goes further, I propose to state my findings on this issue, albeit briefly. In doing so, I have taken into account the written and oral submissions made by both parties.
171. In my opinion, since the DIFC Courts will be the forum for the trial of the Claimants’ claims, the DIFC Courts must go to Article 50 of the DIFC Law (Law No. 10 of 2004) and choose which of three laws of evidence listed there is to be applied and I have no doubt that it is the law of evidence applied in the courts of England and Wales that should be chosen.
172. This issue chiefly concerns the admissibility of statements and opinions expressed in the FinCEN Notice of 10 February 2011 and in the ESCA Violation Notices and the findings allegedly made by ESCA on 16 March 2008 and 1 December 2008.
The FinCEN Notice (the “Notice”)
173. In respect of this document, the question is to what extent its contents are admissible to prove that LCB did indeed engage in money laundering, a state of affairs I find the Claimants must prove in order to make out their case.
174. An important decision bearing on the resolution of this third issue is Hoyle v Rogers  EWCA Civ 257 where the question was whether a judge who tried a claim of negligence against a pilot who was at the controls of a vintage aircraft when it crashed had erred in admitting into evidence the report of an Air Accident Investigation Branch ("AAIB") investigation into the crash. The Court of Appeal held that the judge had been entitled to admit the report in respect of the statements therein of fact or opinion but not the ultimate finding of the investigation which was inadmissible under the rule in Hollington v Hewthorn  KB 587 on the ground that findings of fact made by another decision maker are not to be admitted in a subsequent trial because the decision at that trial is to be made by the judge appointed to hear it, and not another. However, the statements of facts falling short of the ultimate finding were held to be admissible, the weight of such evidence being a matter for the judge, and the opinions expressed in the report on the basis of expertise not shared by the judge were also admissible.
175. It is common ground that the Notice is evidence of the fact that the Notice was issued and of the effect of the Notice.
176. Pursuant to the decision in Hoyle v Rogers I hold that the findings of primary fact stated in the Notice are admissible hearsay, subject to weight.
177. I also accept the Claimants’ submission that the US Treasury Department’s Financial Crimes Enforcement Network has special expertise in identifying money-laundering and the risk factors and “red flags” which may be signs of money-laundering, and since its role in issuing notices is not a judicial or quasi-judicial one and there is no “trial or equivalent process”, I find that the Notice should be accorded the same status, mutatis mutandis, as was accorded to the AAIB report in Hoyle v Rogers.
178. I reject the Claimants’ submission that the Notice is admissible for its ultimate conclusion that LCB had been involved in money laundering on the ground that it falls within the “public documents exception”. This exception applies to “public inquisitions, surveys, assessments and reports made by public officers under a judicial or quasi-judicial authority in relation to matters of public concern” (see Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd  EWHC 507 (Ch) 507 at [123.3]) and in my opinion, the Notice is not the product of a “public inquisition, survey, assessment or report made by a public officer under a judicial or quasi-judicial authority.
The documents issued by ESCA
179. Applying the approach of the EWCA in Hoyle v Rogers to these documents, I find that any ultimate conclusion that Tabadul was in regulatory breach is not admissible but the statements of the sanctions imposed and other primary facts stated therein are admissible hearsay, it being up to the trial judge to evaluate the weight to be given to this evidence. The documents are also admissible as to the fact that they were issued on the dates they bear and as to consequences of their issuance.
180. I also find that ESCA has special expertise in the field of regulating financial services which renders statements of opinion or conclusions of fact based on this expertise admissible as expert evidence.
181. I reject the Claimants’ submission that the ESCA notices come within the “public documents exception”. The ESCA was not acting in a judicial or quasi-judicial capacity, when investigating LCBIH or in issuing the notices.
182. For the reasons given above I find as follows:
183. The loss claimed by the Claimants is recoverable under Lebanese law.
184. The Claimants’ claims are statute barred.
185. Whilst the ultimate conclusion in the FinCEN Notice that LCB had been used to facilitate money laundering is not admissible, the Notice is admissible as to the fact that the Notice was issued on the date it bears and as to the consequences of the Notice. Further, primary facts stated in the Notice are admissible as hearsay, subject to weight, and conclusions and opinions expressed therein are admissible, subject to weight, on the basis that they are the result of expertise that the Court does not have.
186. To the extent that the ESCA documents express an ultimate conclusion that Tabadul had violated the regulatory provisions specified in the documents, that ultimate conclusion is not admissible. Save for that matter, the documents are admissible as to the fact of their issuance on the date they bear and as to the consequences of issuance of the documents. Further, primary facts stated in the documents are admissible as hearsay, subject to weight, and conclusions and opinions expressed therein are admissible, subject to weight, on the basis that they are the result of expertise that the Court does not have.
Date of issue: 13 June 2021