Relfo Ltd (in liquidation) v Bhimji Velji Jadva Varsani

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 30 June 2008
• Neutral Citation: [2008] SGHC 105
• Date: 30 June 2008
• Subject Matter: Knowing receipt,Whether evidence established that prima facie case of knowing receipt made out,Trusts,Tax avoidance,Constructive trusts,Revenue Law,Company transferring money to third party just before resolution for winding up passed,Company claiming money that will be used to pay foreign tax liabilities,International taxation,Whether claim amounted to an indirect enforcement of foreign revenue laws
• Docket Number: Suit No 612 of 2006
• Published date: 03 July 2008
• Defendant Counsel: Leo Cheng Suan and Teh Ee-Von (Infinitus Law Corporation)
• Court: High Court (Singapore)
• Plaintiff Counsel: Manoj Sandrasegara, Tan Ming Fen and Sheryl Wei (Drew & Napier LLC)

30 June 2008 Judgment reserved.

Judith Prakash J:

1 The plaintiff company’s claim against the defendant is founded on restitution. The plaintiff claims that a sum of US$878,479.35 was credited to the defendant’s bank account in Singapore by reason of a breach of trust or fiduciary duty on the part of the plaintiff’s director, one Devji Ramji Gorecia (“Mr Gorecia”). The ground on which the plaintiff asserts a right to the return of the money is that the defendant received the money knowing of the breach of duty or dishonestly assisted Mr Gorecia in his breach of duty.

2 The defendant disputes the claim on both legal and factual grounds. As far as the facts are concerned, at the end of the plaintiff’s case, the defendant elected not to call evidence. He submitted that the plaintiff had not made out a prima facie case and that he had no case to answer. In the alternative, the evidence led for the plaintiff was so unsatisfactory or unreliable that the court should find that the burden of proof had not been discharged. In any event, the defendant says that on the law, the plaintiff’s case ought not to be allowed because it had been commenced for the benefit of the United Kingdom Inland Revenue (“UKIR”) and for the sole purpose of collecting money to meet the plaintiff’s tax liability to the UKIR. The UKIR is now known as Her Majesty’s Commissioners for Revenue and Customs (“HMRC”) but throughout the trial the earlier appellation was used.

Background

3 The plaintiff company was incorporated in the United Kingdom in January 1996. From the time of its incorporation up to June 2001, the defendant, Bhimji Velji Varsani, a citizen of the United Kingdom, and his brother each held 25% of the plaintiff’s shares. Mr Gorecia and his wife held another 25% of the plaintiff’s share capital. There were two other minority shareholders. The defendant’s father, Mr Gorecia, and the two minority shareholders were the directors of the plaintiff.

4 The plaintiff was incorporated to carry on the business of property and land development. In June 2001, it sold a property for approximately £4m. After the sale, the plaintiff’s tax liability was estimated to be about £1.26m. At a board meeting held on June 2001, it was agreed that a sum of £3,546,518 net of tax would be distributed to the then shareholders of the plaintiff as dividends. This sum was duly paid out as agreed to all the shareholders except Mr Gorecia and his wife. Concurrently, all the other directors apart from Mr Gorecia resigned and Mrs Gorecia was appointed a director of the plaintiff. On the same day, all the other shareholders, including the defendant, transferred their shares in the plaintiff to Mr and Mrs Gorecia at nominal values. Thereafter, the Gorecias were the plaintiff’s only directors and shareholders.

5 The plaintiff’s business operations from July 2001 onwards consisted of various loans made by the Gorecias to a connected company. Mr Gorecia also caused the plaintiff to make various purported investments in the Ukraine and in Moscow. Some funds were invested in the money markets.

6 On 26 April 2004, the UKIR issued a Notice Warning of Legal Proceedings to the plaintiff in relation to the tax liability incurred in 2001. The Notice stated that the plaintiff owed UKIR £1,409,871.30 and that payment in full settlement had to be made before 10am on 3 May 2004. As at 30 April 2004, the plaintiff had a balance of £506,707.62 in its bank account with HSBC. This was insufficient to pay the UKIR and Mr Gorecia who had said that he had previously advanced the plaintiff a sum of £100,000 in director’s loans.

7 No payment was made to the UKIR on 3 May 2004. Instead, on 4 May 2004, Mr Gorecia gave instructions for a sum of £500,000 to be transferred from the plaintiff’s HSBC account into the account of one Mirren Ltd (“Mirren”), a company registered in the British Virgin Islands.

8 On 5 May 2004, a sum of US$878,479.35 was remitted to the defendant’s account with Citibank, Singapore branch (“Citibank account”). The party that remitted this sum was another company, Intertrade Group LLC (“Intertrade”). On 10 May 2004, the sum of US$878,469.35 (after deducting US$10 for bank charges) was credited into the defendant’s Citibank account. Three days later, the defendant transferred a sum of US$100,000 from his Citibank account to Mr and Mrs Gorecia.

9 The next development was that on 23 July 2004, it was resolved at a meeting of the plaintiff’s members that the plaintiff be wound up voluntarily as it could not by reason of its liabilities continue its business. The same meeting further resolved that one Mark Reynolds of Valentine & Co be appointed as liquidator of the plaintiff. At the first meeting of the plaintiff’s creditors held later that same day, however, the creditors’ nomination of Mark Reynolds as liquidator was rejected. Instead, the creditors resolved to appoint one Timothy James Bramston of Kingston Smith & Partners LLP to be liquidator of the plaintiff. His appointment was supported by the plaintiff’s majority creditor, the UKIR. The only other creditor of the plaintiff at that time was Mr Gorecia and the debt owed to him was only a fraction of that owed to the UKIR.

10 Mr Bramston is an accountant who specialises in insolvency related matters, particularly in investigative insolvency work involving making claim-based recoveries on behalf of creditors. Prior to his appointment as liquidator of the plaintiff, he had worked on many occasions for the UKIR; his estimate was between 50 and 100 times. About 80% of Mr Bramston’s business came from the UKIR. Mr Bramston testified that, generally, he was approached by UKIR to handle cases where the insolvent company had a possible claim against a third party on the basis that he would become liquidator of the company in order to prosecute its claim on a no win/no fee basis. Mr Bramston would work with a team of people including solicitors and counsel who were prepared to do the work on the same basis. Expenses for disbursements would be funded by the company in liquidation or, if there were no assets available, by Mr Bramston’s firm. If the recovery was successful, Mr Bramston would recover his expenses and be paid a fee. The amount remaining would be paid to the creditors of the companies.

11 In this particular case, Mark Reynolds, the person nominated by the Gorecias to be the liquidator, telephoned Mr Bramston and advised the latter that he was not comfortable with the case. Mr Bramston then contacted an officer in the UKIR who investigated the case and decided that it was a matter on which the UKIR needed to take an overview. The first creditors’ meeting was therefore attended by two officers from UKIR and, at their request, by Mr Bramston. Those were the circumstances in which the UKIR decided to appoint Mr Bramston to be the liquidator. He accepted that appointment on his usual “no win/no fee” terms.

12 Mr Bramston stated that as the plaintiff’s liquidator, it was his responsibility and duty to investigate the plaintiff’s affairs and to try and recover the plaintiff’s assets where possible. He duly commenced such investigations and also appointed a firm of solicitors to advise him on all issues pertaining to the liquidation of the plaintiff.

13 By August 2004, Mr Bramston was of the view that the Gorecias may have been in breach of several sections of the UK Insolvency Act stemming from various purported investments and transfers of funds which they had caused the plaintiff to make. These actions had resulted in the plaintiff incurring a loss of at least £2,125,963.53. As a consequence, action was taken against them by the UK Insolvency Service. In the event, both Mr and Mrs Gorecia were disqualified from acting as directors for varying periods.

14 In the meantime, Mr Bramston met Mr Gorecia to discuss and negotiate a settlement with regards to the plaintiff’s claims against Mr and Mrs Gorecia. The discussions culminated in the settlement agreement dated 29 October 2004 (“the Settlement Agreement”) entered into between the Gorecias and Mr Bramston as liquidator of the plaintiff. By this agreement, the liquidator agreed to accept £700,000 in “full and final settlement of all claims of whatsoever nature, whether existing or in contemplation arising from or incidental to the liquidation of Relfo Limited against Mr and Mrs Gorecia and/or the Gorecia family”. This settlement agreement was ratified by the approval of the plaintiff’s majority creditor, the UKIR, given on 1 November 2004. The Gorecias duly paid the settlement amount.

15 At the time of the Settlement Agreement, Mr Bramston was informed by Mr Gorecia that the £500,000 that had been transferred by the plaintiff to Mirren on 4 May 2004 was for an investment involving the purchase of a container of computer goods to be distributed in Moscow. Mr Gorecia said that this investment was lost when the company in which the plaintiff had invested through Mirren was placed in liquidation. Mr Bramston, however, made further investigations to see whether he could recover any money in respect of this asset. These investigations eventually led to the discovery of the money in the defendant’s Citibank account.

The proceedings

16 As pleaded in the Statement of Claim (Amendment No. 1) filed on 17 September 2007, the plaintiff’s case against the defendant is as follows:

(a) in their capacities as directors of the plaintiff, Mr and Mrs Gorecia owed the plaintiff fiduciary duties including the duty to act in good faith and in the best interests of the plaintiff and a duty not to act for a purpose collateral to and/or against the purposes conferred by the plaintiff’s articles of association;

(b) further, as directors of the plaintiff, Mr and Mrs Gorecia were trustees of such of the plaintiff’s assets and property that were in their possession or control;

(c) on 4 May 2004, a day after the deadline imposed by the UKIR for payment of outstanding tax, in breach of...