8th December 1996

Transparency demands explanation for the withdrawal of legal action

Point of View By a Legal Correspondent

Former Cornel & Company nominee director of Hotel Developers Ltd., (the owning company of the Hilton Hotel) and now Government Nominee Director, Nihal Sri Ameresekere, withdrew the derivative action No. 3155/Spl filed by him in the District Court of Colombo against the Japanese Consortium, Mitsui & Taisei seeking a declaration that the consortium is not entitled to any payment whatsoever in terms of the relevant agreements for the construction of the Hilton Hotel and that the company is entitled to a reimbursement of all monies paid and received by the consortium.

The withdrawal of this celebrated case on October 23, alleging a massive fraud against the Japanese contractors has been effected in the newly created High Court hearing commercial cases and presided over by High Court Judge. P. Wijeratne. The case, which was pending trial in the District Court of Colombo, before District Court Judge Chandra Ekanayake, has been transferred to the Commercial High Court on the ground that it comes under the First Schedule of the High Court of the Provinces (Special Provision) Act No. 10 of 1996.

However it is being argued in legal circles that the Case. No. 3155/Spl is a derivative action for a declaration that no money is due to the Japanese and not an action under the Companies Act and no debt demand or damages is claimed. Consequently its transfer to the Commercial High Court is the subject of some argument. Incidentally, it was Mr. Wijeratne himself who as District Judge, granted the injunctions sought by Mr. Ameresekere way back in September 1990.

The withdrawal and the consequent dismissal of the action has been effected by Mr. Ameresekere without notice to the 5th to 11th defendants in the case, notably Cornel Perera, Chairman and Managing Director of HDL who facing charges before the Special Presidential Commission of Inquiry in respect of the same allegations made by Mr. Ameresekere in this case which he has now withdrawn.

The motion for withdrawal was supported by President's Counsel K. Kanagiswaran who originally obtained the interim injunction against the Japanese. Mr. Kanagiswaran is now a Government Nominee Director on the HDL Board. Present in Court and consenting to the withdrawal on behalf of HDL was A.S.M. Perera, P.C. Additional Solicitor General who is also now a Government Nominee Director on the HDL Board. Consequent to the application for withdrawal, High Court Judge Wijeratne has dissolved the interim injunction issued by him as District Judge and has dismissed Mr. Ameresekere's action.

Mr. Ameresekere, a Management Accountant, previously in the employment of Cornel & Co. Ltd., attracted tremendous public attention when he filed his celebrated action in September 1990 in the District Court of Colombo alleging a fraud perpetrated by the Japanese consortium in the construction of the Hilton Hotel and restraining them from receiving any payments on the contracts. He sought a declaration that the Japanese consortium is not entitled to any payments for the construction of the hotel and that HDL is entitled to a reimbursement of the monies already paid and received by the contractors.

The action, filed by Mr. Ameresekere in his capacity as a shareholder of HDL, was described as a "derivative action" and the first of its kind in Sri Lanka where a shareholder has filed an action in the interests of the company and on its behalf without any personal benefit to himself. Mr. Ameresekere was hailed as an exemplary citizen prepared to spend his time and money in the interests of the public and the company with a view to vindicating a massive fraud.

The Case against the Japanese contractors was presented very ably by his Senior Counsel K. Kanagiswaran, P.C.

A.S.M. Perera who was then a Senior State Counsel appeared on behalf of HDL and resisted the application for an injunction sought by Mr. Ameresekere/Kanag-Iswaran.

On the strength of the averments made by Mr. Ameresekere enjoining orders were granted by Mr. Wijeratne, the then DJ, restraining HDL from making payments to the Japanese consortium. At the time of the filing of the action in September 1990, the payment due to the consortium amounted to US $135 mn. and negotiations were on to settle at around US $60 mn. (subsequently the amount soared in June 1995 due to the stalemate caused by the injunction). The District Judge was of the view that the questions raised by Mr. Ameresekere in this action as to whether there was a fraudulent collusion to "deviously siphon out foreign exchange from the company and the country, ought to be considered at a "full trial" and upon a consideration of the evidence adduced at such trial." He held however that Mr. Ameresekere had made out a prima-facie case for the grant of interim relief even in the light of the defendants pleading, objections and submissions.

In Appeal the Supreme Court, affirmed the position of the District Judge that there was a prima-facie case for the grant of the relieves claimed by Mr. Ameresekere. Justice A.R.B. Amarasinghe in a classic judgment (which is also reported in the prestigious (Commonwealth Law Reports) held that Mr. Ameresekere had established a prima-facie case against the Japanese that HDL is entitled to the final relieves claimed by him. The final relieves if granted would have absolved HDL from making any payments whatsoever to the Japanese contractors and also entitled them to claim reimbursement of the amount already paid. This would have saved the country and HDL nearly US $120 mn. based on the agreements signed on June 28, 1995.

The manner in which the case was withdrawn is today the stuff of intense legal discussion. Lawyers argue that a derivative action is filed in the interests of the company and the plaintiff must satisfy court that the withdrawal is in the interests of the company. How can the company benefit from this withdrawal if it stands to loose an enormous sum of money by the withdrawal without any commensurate benefits accruing to it? Should not the plaintiff satisfy court, after notice to all the parties, and preferably by a public announcement of his intention to withdraw in advance? Why was notice dispensed with as far as some of the defendants were concerned?

Despite the Supreme Court affirming that there was a prima-facie case against the Japanese consortium and the Government and HDL standing to benefit immensely by the declarations sought, why did Mr. Ameresekere decide to withdraw his action (and thereby give credence to Mr. Perera's often repeated public assertion that he will dare not get into the witness box in a court of law to justify his allegations?) A District Court judgment (which is subject to a statutory right of Appeal up to the Supreme Court) and the findings of a Special Presidential Commission of Inquiry are totally different. The members of an SPC are appointed by the President "to inquire and report" to the President whenever it appears to the President that information should be obtained by the President in regard to any matter of public interest. There is no appeal from a finding of an SPC and what is more the entire procedure adopted is quite unlike that of a regular Court where the procedure is adversarial.

Mr. Ameresekere's allegation of a fraud committed by the Japanese firms in the construction of the Hilton Hotel was accepted right from the beginning by the new Government when the President herself declared that these contractors had siphoned off five floors. The President also appointed a Special Presidential Commission to inquire into and report to her. At the time of the appointment of the Special Presidential Commission the trial in the District Court Case was pending. The trial was due to begin on March 27, 1992 after the disposal of the interim injunction application by the Supreme Court but up to the time of the withdrawal it was not taken up. Postponements were obtained by the plaintiff on eleven occasions in view of the possibility of a settlement and the trial never commenced.

The truth or otherwise of the allegation of fraud made by Mr. Ameresekere could have been decided only at the conclusion of the District Court Case after hearing evidence of all parties including Mr. Ameresekere. Then there would have been a proper judicial and an enforceable finding on the Hilton matter.

It is pertinent to observe that in the interim injunction appeal the Supreme Court itself observed: "Whether the plaintiff (Mr. Ameresekere) will in fact establish the circumstances upon which he bases his derived rights to obtain the declarations of a permanent as distinct from an interim nature is, of course, a matter that will depend on what the evidence will lead the learned District Judge to decide at the end of the trial."

The Government indicated its acceptance of the unproved allegations of Mr. Ameresekere in the District Court case by agreeing to a series of demands made by Mr. Ameresekere as a condition precedent to his withdrawal of the case which act would enable the Japanese to obtain payment.

Agreement No. 4 spells out the detailed obligations undertaken by the Government and HDL to meet Mr. Ameresekere's demands to withdraw his case.

What is more, Mr. Ameresekere has ensured that he will not be affected in any way by his unproved allegations even in the future by inserting Clause 6 in Agreement No. 3 to read.

"The Government shall and will hold Mr. Ameresekere his heirs, executors and administrators freed from and/or indemnified against and/or saved harmless from any claims demands action or consequences of whatsoever kind or nature rising from this case."

Having regard to the Government's stance on Mr. Ameresekere's allegations and the commitment it was already made under the Agreements the question arises whether any finding now made by an SPC will be of any benefit to anybody.

The Japanese were anxious to obtain the installment payments long overdue from HDL and it is the court injunction of Mr. Ameresekere that stood in their way. Mr. Ameresekere began his negotiations with the Japanese for a lifting of the injunction before the present Government took office. As far as the Japanese were concerned Mr. Ameresekere held the whip hand. He could withdraw his action at any time and permit the Japanese to obtain payments or he could drag on the District Court action for years and prevent them obtaining anything.

Mr. Ameresekere's negotiations with the Japanese during the administration of President Wijetunga were not successful and the opportunity for a successful settlement presented itself with the new Government assuming office in 1994 and appointing Messrs Ameresekere, Kanag-Iswaran and A.S.M. Perera, the main actors in the Hilton case to the Board of Directors of the HDL.

After negotiations, the Japanese Directors of Mitsui and Taisei who were specially flown from Japan and then Treasury Secretary and now Central Bank Governor A.S. Jayawardene on behalf of the Government, Mr. Ameresekera and his counsel succeeded in authoring four detailed agreements which were entered upon by Mr. Ameresekera, the Government, HDL (represented by the new Board of Directors appointed by the Government) and the Japanese Contractors Mitsui & Taisei on June 28, 1995. Director representing public shareholders Romesh de Silva, P.C. and Directors representing Cornel & Co., Ms. T.P. Perera and Cornel Perera, Chairman and Managing Director were kept out of the negotiations and agreements.

By the first agreement (Agreement No. 1) entered into by Mr. Jayawardene on behalf of the Government and the Japanese Contractors Mitsui & Taisei and HDL the Government and HDL undertook to pay the Japanese US $120 million in 15 equal annual installments together with interest in respect of the construction in accordance with the Schedule of payments annexed to the said Agreement. This included around US $10 million not covered by the State Guarantee.

Agreement No. 2 entered on the same day was between Mr. Jayawardene on behalf of the Government and Hotel Developers Ltd. This Agreement was to record the creation of a collateral obligation on the part of HDL to the Government to perform and observe the terms of Agreement 1.

Agreement No. 3 was between Mr. Jayawardene and Mr. Ameresekere. By this Agreement the Government accepted the allegations of Mr. Ameresekere in the District Court case. The preamble to this Agreement states that Mr. Ameresekere has instituted D.C. Colombo Case No. 3155/Spl in good faith in the interest of HDL and its shareholders including the Government. The Agreement goes on to state all relieves claimed in the Agreement "attributable to Mr. Ameresekere instituting and/or settling the said District Court Colombo actions numbered 3155/Spl and 3231/Spl and or acting or purporting to act in furtherance thereof and/or reaching Agreement as referred to herein and further the Government shall and will support and/or assist Mr. Ameresekere in any matter whatsoever connected therewith."

In other words even if an SPC were to find that there was no fraud and Mr. Ameresekere's allegations were baseless the Government has undertaken to defend Mr. Ameresekere and to have him indemnified from any future action taken by any affected party.

Mr. Ameresekera however reserves the right to proceed against any of the Directors of Hotel Developers (Lanka) Ltd., and/or any companies they represent/represented and/or the Secretaries and/or the Counsel of Hotel Developers (Lanka) Ltd., and/or any other connected persons in connection with any of the aforesaid matters.

The question now arises since Mr. Ameresekere agreed to withdraw his case only "upon the due fulfillment of the conditions precedent has the Government complied with all the conditions precedent stipulated in the said Agreement? If not why did Mr. Ameresekere agree to withdraw his case without waiting for the Government to comply with them.

As soon as this Government came to power Mr. Ameresekere was demanding transparency in Government and advocated establishing a branch of Transparency International of Berlin purely to create awareness of fraud and corruption and to create a sense of fear and shame.

One question which is now being asked is should not Mr. Ameresekere now withdraw his withdrawal and establish once and for all in a regular Court of Law his allegations of fraud and prove to everybody that when it comes to transparency he is the most transparent of them all!