Claim No. CFI 029/2018
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
BETWEEN
THE INDUSTRIAL GROUP LTD
Claimant/Defendant by Counterclaim
and
ABDELAZIM EL SHIKH EL FADIL HAMID
Defendant/Claimant by Counterclaim
ORDER WITH REAONS OF JUSTICE SIR RICHARD FIELD
UPON the Court considering the orders made herein on 3 March 2020 and on 27 May 2020
AND UPON the Court considering the Defendant’s restored application to strike out (the “Meraab Claim”) pleaded as an amendment to the Claimant’s Points of Claim served on 10 June 2020
AND UPON considering the Claimant’s reply dated 2 July 2020 to the said application and the Defendant’s further submissions dated 9 July 2020
IT IS HEREBY ORDERED THAT:
1. The Meraab Claim pleaded in the amended to the Particulars of Claim dated 10 June 2020 be disallowed and struck out.
2. The total sum of AED 1,109,794.77 shall be paid out of Court to the Defendant within 7 days from the date of this Order.
3. The Claimant will pay the Defendant’s costs of the restored application to be assessed, by the Registrar, on the standard basis if not agreed.
Issued by:
Nour Hineidi
Deputy Registrar
Date of Issue: 26 October 2020
At: 4pm
SCHEDULE OF REASONS
Introduction
1. The Defendant applies for: (i) an order striking out what has become called the Meraab Claim as pleaded as an amendment of the Particulars of Claim dated 10 June 2020; and (ii) an order that the total sum of AED 1,109,794.77 shall be paid out of Court to the Defendant.
2. The proposed new pleading (ignoring the parts of the previous pleading now excised) reads as follows:
The Defendant’s Unlawful and Negligent Authorisation of Credit to the Meraab Establishment for Trading (“Meraab”)
26. Meraab was a customer of the Claimant. By August 2015, Meraab’s debt from unpaid receivables with the Claimant had reached approximately SAR 7,669,707.54. On 2 September 2015, the Claimant’s subsidiary SAAF supplied goods to the value of SAR 1,718,750 to Meraab Establishment. This supply was done on the direct authority and with the approval of the Defendant, who was the Vice President of Finance and Planning and the most senior employee in the Claimant’s Finance Department. In this role, he was responsible for finance for the entire group. By authorizing the sale of the products for the invoice of SAR 1,718,750 in breach of the credit policy; the overall debt level increased to SAR 9,388,457.54.
Breach of the Credit Policy and the Defendant’s Contract of Employment:
27. The Defendant’s contract of employment with the Claimant, dated 27 March 2013, states at Article 6.2 that:
“you [the Defendant] will comply with the Company’s rules, policies and procedures, both written and oral, as are announced by the Company from time to time and you will comply with all applicable laws and regulations. You will always maintain the highest standards of professional conduct, will not discredit your superiors or the Company, and will ensure that your conduct at all time reflects the Company’s values and code of ethics. It is incumbent upon you to read and understand the Company’s rules, policies and procedures, and in signing this Contract, you undertake to do so. (Emphasis Added).”
28. Accordingly, in terms of his contract of employment, the Defendant was under a strict contractual obligation to comply, at all times, with any and all of the Claimant’s, “rules, policies and procedures”. This included the Claimant’s Credit Policy and Procedures effective January 2012 (the “Credit Policy”), which was endorsed by the Defendant.
29. Paragraph 5.2 of the Credit Policy states that, “The Corporate Credit Controller or the Corporate Comptroller/Manager, Treasury together with the Vice President of Finance/Director, Finance and Planning may release the credit from “on hold” as appropriate up to a maximum of 20% of the existing credit limit. The amount released will not exceed US$ 50,000 (United States Dollars Fifty Thousand).”
30. The Defendant’s authority to release a credit for the Claimant’s customers, in terms of his contract of employment, was capped at US$ 50,000. Only the Claimant’s Chairman, Sheikh Hussein Al-Banawi, had the authority to increase the US$ 50,000 cap. This fact was known to the Defendant. The Defendant’s personal decision to approve the resumption of sales to Meraab on 2 September 2015 for orders totaling SAR 1,718,750 was a clear breach of the Claimant’s Credit Policy; and therefore, a breach of the express terms of his contract of employment with the Claimant. At all material times, the Defendant was under a duty to comply with the Credit Policy as part of his contract of employment with the Claimant, which included paragraph 5.2 thereof.
31. Article 2.1 of the Credit Policy, expressly identifies how credit risk arises. It states that the “[g]ranting of credit or extending existing credit involves risk, which arises when our customers are unable to pay their debts to us in a timely manner.” As per Article 2.1, the purpose of the policy was not simply to manage the risk associated with the repayment of a particular invoice. The principal purpose of the Credit Policy was to control the amount of credit granted so as to ensure that the overall debt is repayable, and not simply that the forthcoming invoices are repayable by a debtor.
32. This is emphasized by the Credit Policy’s reference to financial risk. The policy defines the Credit Risks in Clause 2.2. It states that “[c]redit risks encompasses financial risks, market risks, operational risks, legal risks and transactional risks.” Accordingly, Annexure 1, Part 1 defines Financial Risk as “… the risk that our customer will not be able to generate adequate cash flows to meet his obligations.”
33. The grant of credit to Meraab allowed Meraab to generate the cash flow to pay the forthcoming invoices, without concern regarding the increasingly higher levels of debt with the Claimant. By the end of 2018, Meraab’s receivables alone constituted more than ten percent (10%) of the outstanding receivables at a group level and as such, tangibly deterioated (sic) the working capital for the group.
34. By allowing Meraab to continue to accumulate debt notwithstanding the credit hold, the Defendant provided Meraab with the opportunity to generate cash flow for new purchases, without having to provide any justification or determination to his superiors (as required under the Credit Policy) as to whether Meraab had the means to generate the cash flow to pay for all the debt, and not simply the invoices for the latest purchases.
35. Further, the third paragraph of Clause 2.3 of the Credit Policy provides another reason for the credit control function. It states that “[t]he Credit Control Function will also recognize the early signs of a customer’s inability to pay on time and take necessary measures to manage the risk.”
36. When the credit hold was triggered in August 2015, it had served its purpose. It flagged the credit risk, several years in advance. Nonetheless, the Defendant bypassed the Chairman in managing the risk, contrary to the requirements of the Credit Policy.
37. More egregiously; however, the Defendant’s actions prevented the Claimant from taking the necessary actions to recover the debt at an earlier stage when the level of debt was SAR 7,669,707.54, instead of waiting for higher levels of debt prior to taking the necessary actions to recover the debt.
Negligence:
38. The acts of the Defendant set out in paragraphs 26 to 37 not only constitute a breach of the express terms of his employment contract, but the extension of credit was also a breach of his implied duty of reasonable care and competence to be expected by the Claimant of an employee occupying the position that the Defendant held within the organization.
39. Further, the Claimant avers that the provisions of Article 18 of the DIFC Law of Obligations applied to the Defendant in his capacity as the Claimant’s Vice President of Finance and Planning and the Defendant’s performance fell below the standard expected of a competent Chief Financial Officer or Vice President of Finance and Planning, and he failed to apply the professional skill and expertise required of someone who had the responsibilities of the finance function necessary to properly perform his role as Vice President of Finance and Planning. The Defendant is liable for failure to comply with these duties under Article 17.
40. Pursuant to Article 158(2)(b) of DIFC Law No. 5 of 2005, the DIFC Law of Obligations, the D e f e n d a n t in his capacity as the Chief Financial Officer of the Claimant was a fiduciary as to his employer, the Claimant. Indeed in accordance with Article 159 of the DIFC Law of Obligations, the Defendant owed a fiduciary duty of loyalty to the Cllaimant , which in accordance with Schedule 3 of that Law, includes the duty of care, skill and diligence as exercised by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the Defendant.
41. The relationship between the Claimant and the Defendant was sufficiently proximate for a duty of care to exist – the Defendant was a longstanding and senior employee of the Claimant, and in whom the Claimant had reposed significant trust.
42. The Defendant knew that the Claimant relied upon him and trusted him to oversee the finance function and to implement the Claimant’s policies related to finance and planning.
43. It was reasonably foreseeable that negligence on the part of the Defendant to not comply with the Credit Policy would cause the Claimant loss and harm. The Defendant, by virtue of his senior position with the Claimant and by virtue of having signed the Undertaking, the Code of Ethics and the Policy on Authorization Limits, knew the importance of adhering to standard accounting and financial processes and adhering to the Claimant’s policies and procedures to protect the Claimant’s interests. In particular, it was, or should have been obvious to the Defendant that the failures to adhere to the Claimant’s Credit Policy exposed the Claimant and its entire Group to a serious risk of losses with respect to the accumulated debt.
44. As a longstanding, trusted senior employee in charge of the Claimant’s finance function, it is just, fair and reasonable in the circumstances that the Defendant should owe a duty of care to the Claimant.
45. Pursuant to Article 21 of the Law of Obligations, the Defendant owed the Claimant a duty to exercise the standard of care of an ordinary skilled Chief Financial Officer or Vice President of Finance and Planning to avoid causing loss to the Claimant.
46. The Defendant’s conduct demonstrates that he was negligent and in breach of his duty of care to the Claimant which has caused the Claimant loss and damage, not simply as an employee but also as a fiduciary.
The Loss:
47. The release by the Defendant of credit to Meraab from “on hold” on 2 September 2015, increased Meraab’s debt to the Claimant to a total SAR 9,388,457.54. Since that time, the Claimant has only been able to reduce the debt to SAR 9,073,184. Therefore, in addition to the losses of SAR 7,669,707.54 which the Claimant incurred prior to the unauthorized credit increase, the Claimant incurred losses of SAR 1,403,475.99.46 for the additional unauthorized unpaid debt, which would have been entirely avoidable if the Defendant had complied with the Credit Policy on 2 September, 2015 instead of approving it contrary to the Credit Policy.
48. On 20 February, 2019 the competent Saudi court issued a judgment against Meraab for the amount of SAR 9,823,139.54. The judgment is a default judgment, because Meraab did not attend the hearings. To date, only SAR 750,000 has been recovered from this total amount of SAR 9,823,139.54.
49. The remaining debt of SAR 9,073,139.54 was originally recorded in the financial statements as an asset in the Claimant. However, due to the failure of making timely payments, there have been provisions made in its financial statements that this debt may not be repaid including the loss of SAR 1,403,475.99.
50. The Claimant has now had more than a year to attempt to collect on the judgment dated 20 February, 2019 but has been unable to do so. Therefore, the loss of the financial asset of SAR 1,403,475.99 for the portion of the loss which the Defendant granted without authorization of the Claimant has taken place.
51. Accordingly, the Claimant suffered loss and damage in the sum of SAR 1,403,475.99 for the portion of the loss which the Defendant granted without authorization, as a direct result of the Defendant acting outwit (sic) and in breach of the clearly stated terms of his employment contract with the Claimant, and/or negligence, for which loss the Defendant is accordingly liable.
SAAF:
52. SAAF is a wholy owned subsidiary of the Claimant. As a result, the financial accounts of SAAF are consolidated with the financial accounts of the Claimant. The accounts of the Claimant are reconciled on a monthly basis with the accounts of SAAF. Had the loss been collected, SAAF would have transferred these amounts to the Claimant, and the Claimant would not have realized the loss.
3. The original Meraab Claim alleged that: (i) the Defendant, in breach of duty, had authorized a sale by the Claimant’s subsidiary, SAAF, to Meraab the price for which was SAR 1,718,750 when Meraab was already indebted to SAAF in the sum of SAR 7,756,396.54; and (ii) the resulting loss was SAR 1,718,750 on the basis that three years later Meraab had not repaid that sum to SAAF. This claim was struck out by an order of the Court issued on 3 March 2020 on the grounds that the pleading was not within the leave granted to amend the Particulars of Claim by Judicial Officer Maha Al Mehairi to plead further particulars of the claims arising out of an investigation by Ernst & Young, since the claim had not emerged from that investigation. However, the Court gave the Claimant leave to re-plead the claim as a free-standing claim unconnected with the Ernst & Young investigation on terms that the replacement pleading identified the contractual duty alleged to have been breached and set out full particulars how the alleged breach caused the alleged loss of SAR 1,718,750.
4. The re-pleaded claim was challenged by the Defendant on the grounds that it did not satisfy the requirements laid down by the Court in its order of 3 March 2020. This challenge succeeded, the Court holding that: (i) the claim was still included in that part of the pleading dealing with claims arising from the Ernst & Young investigation; (ii) it was extremely difficult, if not impossible, to decipher what was being freshly pleaded from what was being excised from the previous pleading; and (iii) since the claim was for a one-off extension of credit to Meraab for the SAR 1,718,750 transaction it lacked sufficient particulars of how the alleged breach of contract or negligent act caused the loss alleged to have been suffered by the Claimant bearing in mind that: (a) Meraab had made subsequent payments to SAAF which together exceeded SAR 1,718,750 many times; and (b) Meraab’s indebtedness was owed to SAAF, not to the Claimant.
5. Rather than prohibiting the Claimant from having another go at asserting a claim in respect of the grant of credit to Meraab, which would have been open to the Court to order, the Court gave the Claimant one last chance to produce an acceptable pleading that addressed the identified deficiencies in the two previous attempts to plead the claim. The Court stipulated in the order of 27 May 2020 that the substitute claim should be a free-standing pleading entire in itself which pleaded a “one-off grant of credit to Meraab” in respect of the SAR 1,718,750 purchase from SAAF and set out the contractual terms relied on rather than referring to annexed documents.
6. The direction by the Court that any substitute claim should be for a “one-off grant of credit to Meraab” was quite deliberate. The two previous iterations of the Claimant’s Meraab Claim very clearly alleged that the Defendant’s conduct complained of consisted in approving the SAR 1,718,750 sale by SAAF to Meraab and this was directly reflected in the pleaded loss sought to be recovered – SAR 1,718,750. There was no suggestion that the Defendant was culpably responsible for an on-going hike in the credit limit granted to Meraab. The Court therefore thought it appropriate that if the Claimant was going to be given one last chance to get its house in order there must be consistency in the characterization of what the Defendant was being alleged to have done that had caused damage to the Claimant.
7. It is to be noted that the Claimant did not seek to appeal the order of 27 May 2020.
8. The Claimant’s claim as now pleaded is not for SAR 1,718,750 as it had been in the two previous iterations of the claim, but is for SAR 1,403,475 this being the difference between: (a) the sum owed when the sale to Meraab for SAR 1,718,750 was sanctioned – SAR 7,756,396.54; (b) the debt owed by Meraab to SAAF before proceedings were launched in KSA some years later – SAR 9,388,457.54; less (c) SAR 750,000 that has subsequently been recovered.
9. This fundamental reformulation of the claim is wholly at odds with the Court’s order of 27 May 2020 that any final substitute claim proffered must be in respect of a “one-off grant credit to Meraab” in respect of the SAR 1,718,750 purchase from SAAF. The reformulated claim is also predicated on an acceptance by the Claimant that subsequent payments made by Meraab to SAAF have more than covered the SAR 1,718,750 that was due for the transaction alleged to have been sanctioned by the Defendant. Since the proposed substitute claim is outwith the liberty granted to the Claimant to serve a further substitute claim, it must be and is hereby disallowed and struck out.
10. There are also other substantial reasons for disallowing and striking out this claim. Meraab’s trading debts with SAAF were owed to SAAF and not to the Claimant. The loss pleaded in the first two iterations of the claim and the primary loss pleaded in the third iteration is accordingly not a loss suffered by the Claimant but by its subsidiary, SAAF. In the claim now under review, the Claimant seeks to by-pass this uncomfortable but irrefutable fact by pleading that because SAAF’s financial statements are consolidated with those of the Claimant and because the accounts of the Claimant are reconciled on a monthly basis with the accounts of SAAF: “[h]ad the loss been collected, SAAF would have transferred these amounts to the Claimant, and the Claimant would not have realized the loss”.
11. Despite the fact that the pleading under review was the last chance afforded to the Claimant to plead its Meraab Claim, no evidence has been put before the court to verify the averment that: “[h]ad the loss been collected, SAAF would have transferred these amounts to the Claimant, and the Claimant would not have realized the loss”. Instead, in paragraph 20 of the Claimant’s submissions in reply to the reinstated strike out application, it is airily asserted that “the Claimant should be permitted to submit evidence to substantiate the claim further”. I have no hesitation in stating that this approach is wholly unacceptable. The assertion that sums on SAAF’s trading account with Meraab would have been transferred to the Claimant raises many questions. A subsidiary cannot simply gift elements of its trading income to its parent company as part of the consolidation of financial statements. It was therefore essential for convincing evidence to have been put before Court explaining how amounts shown in SAAF’s trading account with Meraab would have been “transferred” to the Claimant if there had no grant of credit to Merraab in respect of the SAR 1,718,750 purchase by Meraab from SAAF on 2 September 2015. The Claimant’s failure to adduce such evidence is accordingly fatal and stands as an additional reason why this third substitute claim must be set aside and struck out.
Conclusion
12. The Claimant has had many months to produce a coherent and legally sound claim in respect of the alleged approval by the Defendant of the SAR 1,718,750 transaction between SAAF and Meraab, but for the reasons given above in paragraphs 6 – 11 it has failed to do so. It follows that the Defendant’s challenge to the third iteration of the Meraab Claim now before the Court succeeds, with the consequence that claim must be set aside and struck out and the Claimant debarred from advancing a claim based on the failings that have been persistently alleged against the Defendant in respect of the supply of goods on 2 September 2015 by SAAF to Meraab for the invoiced sum of SAR 1,718,750.
13. Four sums totaling AED 1,009,794.71 were awarded to the Defendant by the order of 3 March 2020 but they were directed to be paid into Court rather than paid to the Defendant in light of the possibility that the Claimant might serve a substitute coherent and lawfully sound Meraab Claim that overtopped this figure. This the Claimant has failed to do and accordingly I order that AED 1,009, 794.71 be paid out of court to the Defendant within 7 days from the date of this Order.