[A list of participants in the events under Part II A(1)-(8) appears at p.xiii]
This sorry tale begins with a visit to London by Mr Michael Powell, then Deputy Prime Minister and Minister of Tourism, in or about November 1984 (he assisted the Inquiry in coming to give oral evidence willingly). At the offices of the High Commission for the Eastern Caribbean States he was introduced to Mr William Adams (and subsequently through him) to Mr Roger Morgan who was represented by many people as a wealthy businessman, with a suggestion of aristocratic background. The two men were the prime movers in starting the scheme to run a hydrofoils service around the Caribbean islands out of St Kitts.

Mr Adams, then aged 55, had a significant criminal record. At Cardiff Crown Court on 1 December 1980 he was sentenced to 4 years’ imprisonment; fined £50,000 (to be paid within 12 months, failing which a sentence of 12 months would run consecutively to the 4 years’ imprisonment0; ordered to pay £7,500 prosecution costs; and a criminal bankruptcy order for £289,088 in favour of the Department of Industry for an offence of conspiracy to cheat and defraud. As a company director of Galebourne Ltd he, and a co-director, had obtained plastic extrusion manufacturing machines in the United Kingdom, Switzerland and Taiwan, then invoiced the machinery to themselves, thus obtaining inflated Development Grants from the Department of Industry to the value of £269,723. He was discharged from Leyhill Open Prison on 26 July 1982 (having been in custody for eighteen months), his parole licence expiring on 27 July 1983. Over that year he reported to the Probation Officer at Brecon, Powys, Wales. Mr Adams’ association with Mr Morgan preparatory to their joint venture in the supply of hydrofoils to St Kitts (and the incorporation of Nautical Trading (St Kitts) Ltd on 15 December 1984, began in the wake of Mr Adams’ imprisonment for fraud. Documents reveal that Mr Morgan hired Mr Adams on 2 April 1984 as an advisor. Later in 1984 they both came to St Kitts.

No one involved in the subsequent events of the sale and purchase of the hydrofoils in March/April 1985 or of the Credit Agreement of 30 May 1986 was ever aware of Mr Adams’ criminal record. It is a matter of some surprise that those providing finance to Nautical Trading (St Kitts) Ltd never bothered to make inquiries about the credentials of the promoters of the hydrofoils project, let alone about the true nature of the project (see Part II A(3)). The main employee of Morgan Grenfell, which was the agent and manager for the consortium of funding banks (including itself) Mr Simon Jackson, a functionary in the South European Department of Morgan Grenfell, was unaware of any previous criminal records and had not thought to check up on the architects of the hydrofoil project. Yet Mr Jackson admitted to the Inquiry that he thought that Mr Adams (who often functioned under a pseudonym of Bill Evans and was known to possess two passports) was a “shady character”, although he seemed to exhibit much knowledge of the Caribbean and was in touch with prominent persons in St Kitts.

Ms Mitcham: Now why didn’t your bank carry out the normal due diligence in relation to people that you suspected; this man with two passports and two names?

Mr Jackson: This man was not operating the hydrofoil company as far as we were concerned. As far as we were concerned this was a business within St Kitts and we looked to the government knowing its own business, knowing what is good for the country, to look to the viability of a hydrofoil operation before they take responsibility for guaranteeing a debt of this magnitude.
Whether or not that was remiss of Morgan Grenfell, it cannot excuse the St Kitts and Nevis Government from making its own, separate inquiries. After all, governments are able to obtain information about the criminality of private citizens a good deal more readily than others. As and when the Government was contemplating its decision to sign the Credit Agreement as primary guarantor to the lending of US $25,330,000 to the borrower, Nautical Trading Ltd, it should have instigated an inquiry into the credentials of the prime movers of the project who were seeking and obtaining substantial finance for their business enterprise. By 1985 the names of Morgan and Adams (alias Evans) were known in government circles. The Government’s failure to make the necessary inquiries which this Inquiry managed to do thirteen years later, was serious. Had it been uncovered that one of the persons behind the activities of Nautical Trading was a fraudster, there would not have been any funding or any guaranteeing of the service of the loan agreement. Dr Kennedy Simmonds, both as Prime Minister and particularly as Minister of Finance, was remiss in not ordering officials in his departments to make inquiries. His failure was a serious lapse in financial administration responsibility. Likewise, Mr Tapley Seaton QC, as Attorney-General must share some of the responsibility for failing to uncover the background of the promoters of Nautical Trading (St Kitts) Ltd. Mr Seaton’s certificate of 3 June 1986 under clause 8(a)(vi) of the Credit Agreement, stating that Nautical Trading was “in good standing” was inaccurate to the extent that it did not reveal Mr Adams ‘ criminal record. Mr Seaton is to be criticised for this failure. Also in the autumn of 1986, both Michael Powell, the former Deputy Prime Minister and Minister of Tourism and Labour, Constance Mitcham, Minister of Women’s Affairs, were reporting that the company records were defective. The Inquiry has not had evidence from the High Commissioner Dr Claudius Thomas, since he is deceased. But one might have questioned him about his investigations (if any) about the “wealth” of Roger Morgan, who clearly was impecunious.
The Inquiry has not had the advantage of taking oral evidence from Mr Adams, but it has seen transcripts of two interviews - of 30 October 1997 and 1 May 1998 - conducted in London by officials of the Serious Fraud Office, at the second of which Inspector Sid Bloxom of the Royal Canadian Mounted Police attended as investigator on behalf of the Government of St Kitts and Nevis to determine whether there was any evidence of fraud or other criminal activity in connection with the sale and purchase of the hydrofoils and the ensuing financing of the sales agreement. Inspector Bloxom’s invaluable investigations in 1997 and 1998 culminated in a detailed report and oral evidence before the Inquiry on 5/6 October 1999. Much of what follows is gleaned from Inspector Bloxom’s statement and evidence, supported as it is by documentary evidence obtained from persons abroad - namely, Ian Fieldhouse (who in 1987 conducted an audit of Nautical Trading (St Kitts) Ltd for Price Waterhouse) Mr Rupert Wright (a lawyer who provided legal services to Nautical Trading (St Kitts) Ltd, Mr Morgan and Mr Adams from May/June 1986 in the aftermath of the signing of the Credit Agreement of 30 May 1986) and Mr David Mills (a London solicitor, specialising in Anglo-Italian legal matters, who acted for Mr Leopoldo Rodriguez from July 1986 onwards). All three London-based professional people gave evidence on 15 and 16 November by audio-link with St Kitts; their evidence was helpful in providing some of the background information and material concerning various transactions and in filling the huge gaps in the documentation absent from the files of government offices in St Kitts.

Government records of the relevant Ministries were searched by Inspector Bloxom. No files were found; the only document relevant to this aspect of the Inquiry which was located were two sets of minutes for meeting held by the Board of Directors of Frigate Bay Development Corporation. The minutes were dated 15 May 1985 and 26 March 1986, to which reference will be made. During the hearings in the autumn of 1999 three references were located in minutes of 17 May and 30 August 1985 and 4 April 1986.

Not even the Credit Agreement of 30 May 1986, to which the Government of St Kitts and Nevis was a party as primary guarantor was to be found in government files. A copy of the signed Credit Agreement was obtained eventually by the Attorney-General via a request to the Italian Embassy, Santa Domingo, Dominican Republic. This copy was provided to Inspector Bloxom in July of 1997 and became the springboard for Inspector Bloxom’s energetic investigation. Mr Wendell Lawrence, Financial Secretary to the Ministry of Finance and in the relevant years (1985/86) was director of Audit in the Ministry. In 1991 he was first made aware of correspondence form Morgan Grenfell about the hydrofoil affair and searched in vain for any departmental file containing the Credit Agreement. Copies of the agreement and ancillary documentation were supplied to Inspector Bloxom mostly by officers at Morgan Grenfell. The absence of official documentation is appalling. Either the documentation was never raised - which is unthinkable in the administration of a national government - or it has been lost, a distinct possibility since files were stored at a warehouse in Bird Rock which was destroyed during the damage done by Hurricane Hugo in 1989. Mr Powell told the Inquiry that he maintained a locked cabinet of files when he was Minister of Tourism, up to 1992. His offices were located at Government Headquarters, although the Permanent Secretary and staff were based at Development Bank Building. Mr Powell’s personal assistant, Ms Valda Richardson, told the Inquiry that she did not have access to the locked cabinet, nor did she open a file on the hydrofoil matter. She stated that she knew nothing about the matter; nor does she recall any discussions or documents in relation to the hydrofoils and Nautical Trading. Mr Larkland Richards, the permanent secretary in the Ministry also stated that he knew nothing whatsoever about the hydrofoils. In his statement Mr Richards said “I know zero about the matter.” The absence of knowledge in civil servants dealing with this important financial matter is astonishing. Even if they never saw the hydrofoils during 1985-1986 it is odd that they did not acquire knowledge of their existence through the media. The Inquiry has not spent any time investigating the cause for such a lamentable state of affairs. If the facts are indicative of a general malaise in the late 1980s in public administration in St Kitts and Nevis, steps need to be taken urgently to rectify the situation. From the way in which the present administration has functioned in relation to the working of the Commission of Inquiry, I am reasonably confident that what was happening in 1985/6 in the Prime Minister’s office, in the Ministry of Finance, in the Attorney-General’s Office and in the Ministry of Tourism, was a temporary aberrance. In Part III, below, I shall have to consider the events of the 1980s in the context of financial administration over the whole period of 1980-1999.

Nautical Trading (St Kitts) Ltd

On 15 December of 1984 Nautical Trading (St Kitts) Ltd was incorporated by the law firm of Terence Byron. The Director was Vincent Byron and the Secretary was Hyacinthe Byron. The initial share capital of the company was $2.00 EC which was later increased to $100.00 US. On 19 July 1985 a minute of the company shows that Roger Morgan representing Bluematt Investments Ltd (an Isle of Man Company) had offered to purchase the company for $100.00 US. In January 1986 the original directors were replaced by Roger Morgan and Stanley Gunter. Derek Francis became secretary for the Company. Gunter is the father-in-law of Morgan and Francis is a brother-in-law. At this point Bluematt Investments Ltd (BIL) became the 100% owner of Nautical Trading. Company documents show that Winifred May Adams, wife of William Adams, and Molly Morgan, wife of Roger Morgan, each held one share of BIL.

Mr Adams appears to have been the organiser and brains behind the formation of Nautical Trading and also is believed to have handled most of the arrangements and negotiations required in purchasing the hydrofoils and acquiring the necessary financing. The Inquiry has seen the Articles and Memorandum of Association, but nothing else. In a memorandum, dated 2 November 1992, Mr Tapley Seaton QC, records in two and a half A4 pages annual returns to the Registrar of Companies for 1987, 1988, 1990 and 1991. The memorandum ends: “ The above represents the entirety of the documentation in respect of Nautical Trading (St Kitts) Limited at the Companies Registry, Basseterre, St Kitts.” The Inquiry sought to obtain further information about Nautical Trading during the period of its contractual arrangements with the suppliers of the hydrofoils (and their trial run from August 1985 to March 1986) together with correspondence relating to the borrowing by Nautical Trading from the consortium of lender-banks of US $25,330,000 and any correspondence passing between Nautical Trading and the Government of St Kitts and Nevis relating to the primary guarantee of the loan. The Inquiry approached Mr Terence Byron whom the Inquiry was aware had handled the legal affairs of Nautical Trading, but he was unwilling to cooperate, ostensibly for reasons of legal privilege. Since any material would be unlikely to further the Inquiry’s investigation, the matter was not pursued. But it may be of assistance to future Commissions of Inquiry to note that legal privilege is overridden by the power of the Commission to order the delivery up of documents. Mr Byron would have been bound to hand over his files on Nautical trading, had the Commission issued him with a subpoena duces tecum. The Inquiry had hoped that, without issuing a subpoena, Mr Byron would nevertheless have assisted the Commission. He declined to do so.

When Mr Tapley Seaton QC on 3 June 1986 gave his certificate of “good standing” in favour of Nautical Trading (see Part II A(2)) he can hardly have been in a position to judge the validity of Nautical Trading. The company’s annual return for 1985 was filed only on 10 December 1986 and for the year 1986 not until 4 February 1988. Mr Seaton does not reveal whether, perhaps, he obtained a more positive response from Mr Terence Byron than did the Commission of Inquiry thirteen years later.

The Sale and Purchase of the Hydrofoils

The sale and purchase of hydrofoils was initially for five vessels. The contract, dated 4 March 1985, was between Aliscafi Snav Spa (SNAV) and Nautical Trading (St Kitts) Ltd. Two amendments, dated 4 April 1985 and 20 January 1986, were appended to the contract, the former amendment provided for parts, loading equipment and engine modifications; the latter altered the terms of the original contract from five vessels to three vessels, with the option to purchase the additional two vessels. The purchase price of the three vessels was US $29,800,000. A down payment of 15% of the purchase price - US $4,470,000 - was required as one of the conditions precedents to the Credit Agreement of 30 May 1986. (In this report I have, if only in the interests of brevity, not traced the labyrinthine transactions relating to the down payment of $4,470,000. I am satisfied that no one in St Kitts (other than Nautical Trading (St Kitts) Ltd) became involved in those monies).

It may be helpful, in understanding the role of the Government of St Kitts and Nevis, if at this stage I outline the background to the Credit Agreement of 30 May 1986 financing the purchase of the three hydrofoils. Seven international banks provided the finance. Morgan Grenfell, a merchant bank in the City of London was included as one of the lenders and acted as agent and manager of the lending-banks (Morgan Grenfell was a highly respected merchant bank until it was discredited as a result of its involvement in 1986 as banking advisers to Guinness plc. Guinness was alleged to have offered secret indemnities and success fees to certain purchasers of Guinness stock, the alleged effect of which was artificially to inflate or maintain the Guinness share price. The case resulted in the prosecution for corruption of Mr Ernest Saunders, the managing director of Guinness. Morgan Grenfell was subsequently sold to Deutsche bank, a German commercial bank). Morgan Grenfell handled the arrangements for the loan and for obtaining the insurance guarantee from the Italian export credit agency, Sezionne Speciale Per L’Assiciazione del Credito All’Esportazine (SACE).

The Credit Agreement of 30 May 1986 between Nautical Trading (St Kitts) Ltd as borrower, the Government of St Kitts and Nevis, as guarantor, Morgan Grenfell, as manager, the several banks as lenders and Morgan Grenfell, as agent “with the support of” SACE provided for a loan of 85% of the purchase value of the hydrofoils amounting to US $ 25,330,000. By a separate agreement between SACE and the lending banks, SACE agreed to indemnify the lending banks against loss arising out of the servicing of the loan. No valuation of the vessels was required, and no collateral was held to minimise the risk of default. Given the insurance guarantee by SACE, the seven banks were fully secured; there was no financial risk to the lenders entering into the financial arrangement. In turn SACE looked to the Government of St Kitts and Nevis as the primary guarantor of the loan. The legal effects of the Credit Agreement are fully dealt with in Part II A(4) below.

The banking arrangements for the loan were handled chiefly by Mr Simon Jackson who now works for the European Bank for Reconstruction and Development. Mr Jackson gave oral evidence before the Inquiry on Monday and Tuesday 18 and 19 October 1999. He was extremely helpful in taking the Inquiry through the thickets and masses of merchant banking and export credit agencies. He was disarmingly candid about the role of Morgan Grenfell. While he was of the opinion that the Government of St Kitts and Nevis “had not done its due diligence” on the commercial standing of Nautical Trading, he acknowledged that if the matter was being handled to-day, when financial regulations in the City of London have been tightened up, Morgan Grenfell might have felt a greater sense of duty to protect the guarantors of the loan. Accepting that Morgan Grenfell was a major lender and interested primarily in protecting its own interests, nevertheless it is my view that the St Kitts and Nevis Government could justly feel that it had been let down by such a reputable house of finance. That is not to say that the Government could be excused for not having taken all the necessary steps to protect is own financial situation and reduce or prevent financial exposure in the national interest.

The Feasibility of the Hydrofoil Project

Roger Morgan sent a telex on 26 March 1985 to Mr Simon Jackson outlining a feasibility study for hydrofoil operation in the West Indies. The document was the only feasibility proposal uncovered by the Commission of Inquiry, save for a report, completed in 1982 by J Hubard entitled “Project by a company of ship owners to navigate rapid sea routes in the archipelago of the Lesser Antilles with hydrofoil boats”. The Hubard report contains no costings or revenue forecasts. Copies of the feasibility study do not appear to have circulated widely. Mr Michael Powell thinks that he may have seen it. And Mr Ernest Pistana, managing director of the National Bank, was uncertain about whether he had received a copy, however he did produce a telex (from Roger Morgan to Simon Jackson) dated 26 March 1985 similar to the 1982 study. (His evidence on the financial aspect of the hydrofoil project is dealt with in Part II A(3) below.) At most he feasibility study was disseminated to one Minister, Michael Powell (responsible for tourism) and a banker advising on financial viability of the operator of the hydrofoil service, Nautical Trading. There are even doubts about that. Walter Simmonds of Simmonds & Associates, a St Kitts accountant appears to have received information from Mr Powell quoting the content of the Feasibility Study. Had the St Kitts and Nevis Government taken seriously its role as primary guarantor to the loan it would have informed itself of the feasibility study and submitted it to examination in the form of a departmental submission to Cabinet. It is another instance of the failure of Government to inform itself of the propriety of signing the guarantee to the loan of US $25,330,000. The main responsibility for that failure lies with Dr Simmonds, both as Prime Minister and as Minister of Finance.

The “Trial Runs”, August 1985 - March 1986

Two - not three - hydrofoils arrived in St Kitts on 5 August 1985. ZIZ Radio and Television in a news item proclaimed the arrival of a hydrofoil which was “as advanced and as well-equipped as any currently afloat” and was to become “the flagship of a central fleet of five [sic] such hydrofoils which will introduce a luxurious inter-island ferry service to the Caribbean.” This glowing report could hardly be sustained eight months later. The arrival of the two hydrofoil vessels, named the San Christobel II and the Jomanda, have always been viewed as pilot projects or trial runs. Under the 1985 sale and purchase agreement, the seller was bound to deliver the vessels which became the purchaser’s property on the draw-down date of 30 October 1986. The evidence suggests that the manufacturers sent down two second-hand vessels 9 months in advance of actual ownership to assist Nautical Trading to establish its service between the islands. Nevertheless, the Inquiry has adduced evidence to demonstrate the dismal results from the “trial runs”. Leopoldo Rodriguez wrote on 9 October 1985 that he had sent two hydrofoils down to St Kitts “to help Nautical Trading…to get on its feet financially and to help the company establish the routes. There will be no charge to Nautical Trading St Kitts Limited as it is a charge built into the purchase price. All takings will be paid to NTSK Ltd.” - hardly the language of a pilot project rather a part of a contract of purchase. The hydrofoils were intended to be in place at the start of a continuous service. Their early departure in March 1986 from St Kitts to San Juan in Puerto Rico and ultimately for sale in 1992 at a deflated price of US $380,000 to one of the seller’s Italian companies strongly suggests, not a trial run but part of the deceptive conduct of the fraudsters in Europe.

The financial results have never been reported in any financial statement. Some information - incomplete though it is - was obtained from Kisco Travel, the St Kitts agent for the operation of the service (Mr Uklin Richardson, the managing director of Kisco gave oral evidence at the Inquiry on 18 October 1999). Mr Kalesnikoff the Canadian accountant prepared a schedule documenting the known revenues.

The average monthly revenue was US $19,302 representing the transportation of 5,336 passengers over a six-month period. Information of expenses was likewise incomplete and suspect; expenses averaged US $22,970 per month. While the disclosed figures suggested a modest operating profit, the forensic accounting would conclude that it was “most probable that the hydrofoil operation recorded an operating loss”. The average monthly expenses of US $22,970 exceed the average monthly revenues of US $19,302 - a loss of US $3,668 per month.

There is some confirmation of the lack of financial success of the “trial runs” from correspondence in June 1987 passing between Mr David Mills (London solicitor, acting for Leopoldo Rodriguez after July1986) and Mr Rupert Wright (English solicitor acting for Roger Morgan and Nautical Trading). On 5 June 1987 Mr Mills writes:

“Let me deal first of all with your threatened action against my clients….your clients are quite in error in believing that there is any money due to the company (Nautical Trading) as a result of these activities (the hydrofoil operation). I am instructed that the costs exceed the income….”
Again on 25 June 1987 Mr Mills confirms that “there was no net income”. Contemporaneously, Mr Ian Fieldhouse the independent accountant from Price Waterhouse was providing gloomy prognostications of the whole venture. From internal documents from the files of Mr Ian Fieldhouse, an employee of accountants Price Waterhouse engaged to verify financial statements of Nautical Trading, the forecasts of profitability had been wildly optimistic. An internal memorandum of 5 June 1987 referred to the draft letter of 4 June 1987:

“ To CMB
From Ian Fieldhouse
Date 5/6/87
Re Nautical Trading

Chris
I would like the attached letter to be issued on Monday. I believe that in its present form it is fairly innocuous. The attached file notes should give the background to it. Basically, the operations are only expected to generate $447,000 before depreciation in a year which goes very little way to covering the company’s obligations of around $6m. It would appear to me that the venture was ill-conceived and could never be viable (italics supplied)…..”
The letter from Mr Fieldhouse to Roger Morgan was sent on 8 June 1987 and read as follows:
“8 June 1987

R Morgan Esq Nautical Trading (St Kitts) Limited
c/o Ashbury Services Limited
17a Lion Street
Brecon
S. Wales
Dear Roger,
NAUTICAL TRADING (ST KITTS) LIMITED (“NTSK”)
Captain Sciarrone’s financial projections commencing 1 May 1987 for NTSK which show an annual operating profit/positive cash flow of $447,000. The figures are rather simply derived and are possibly over-optimistic. However, I do not consider that much would be gained from investigating them in view of recent results and my conclusion below.
Under its present financial structure the company needs to generate an annual trading surplus of approximately $6,000,000 to meet its financial obligations which are primarily the interest and capital repayments on the syndicated bank loan.
The initial capital of the company after allowing for amounts due by Bluematt Investments Limited was $13,000,000.
On the basis of the cash flow projections referred to above and assuming that they are reasonable the company will be unable to meet its financial obligations, which from a UK perspective are tantamount to insolvency.
If the company were to be restructured by the injection of further capital, I do not believe that the prospective return would be commercially acceptable.
You should therefore take legal advice as to the position under St Kitts law, upon which I regret that I am unable to advise.
Yours sincerely,
Ian Fieldhouse”
Mr Fieldhouse’s assessment in June 1987 is confirmed by Mr Kalesnikoff after an exhaustive examination of all the information available. “…the Hydrofoil operation of NTS was never a viable proposition, it was destined to fail from the outset. The level of debt serving left NTS in no chance of success. Any responsible Government, entering upon a loan agreement is a prime guarantor to the loan, would indubitably have undertaken a study in early 1986, which would instantly have uncovered the inevitable predictions of a hopeless venture. That no such study, or anything remotely comparable, was undertaken discloses a serious, if not cataclysmic failure in financial administration. The Prime Minister, Dr Kennedy Simmonds must take the blame for such failure. The Disappearance of the Hydrofoils
Sometime in March 1986, at a time when the Prime Minister must have been actively considering signing the Credit Agreement - the Cabinet meeting at which the Prime Minister sought and obtained approval for putting his signature on behalf of the Government as primary guarantor was only a matter of days, on 4 April 1986 - the hydrofoils left St Kitts, never to return. That fact must have been known to Dr Simmons at the time it happened. Yet no steps were taken by anyone in authority to find out the whereabouts of the vessels, and what was intended to happen to them. The Commissioner of Police at the time, Mr Stanley Franks, told the Inquiry that he was not given any instructions by Government to conduct an investigation of the hydrofoils; nor did he initiate any inquiry on his own motion. Dr Simmonds admitted to the Inquiry that he took no steps to find out what had happened to the hydrofoils. His interests were focussed on the hotel projects promised by Roger Morgan; the two hydrofoils were, for him, of little interest. He regarded that as a private commercial matter of no direct interest to Government. The total indifference by Government to the fate of the hydrofoil project is consistent with the inattention, indeed oblivious approach to the project in relation to the Government’s impending acceptance of a substantial legal liability. It is to the acceptance of that liability that I now turn.

Part II A(2)
The Signing of the Guarantee to the Credit Agreement on 4 April 1986

Dr Kennedy Simmonds derived his authority to sign the guarantee to the Credit Agreement, other than by virtue of his office as Prime Minister and Minister of Finance, from Cabinet on 4 April 1986 (Appendix 10). There was no item on the agenda for that meeting relating to the Credit Agreement; nor was there any formal submission from either the Prime Minister’s office or from the Ministry of Finance. (No documentation has been uncovered from the files of either Ministry relating to the agreement. Even the Credit Agreement itself came into possession of the Inquiry only from abroad).

Item 2 in the Minutes of the meeting of 4 April 1986 read as follows:

" Hon. Prime Minister: BY MENTION: ….(c) Credit Agreement re National [sic] Trading (St Kitts) Ltd

…(c) Cabinet was then updated regarding a Credit Agreement relating to the Hydrofoil vessels and gave approval to the Agreement which was in respect of a loan of US $25,330,000 to Nautical Trading (St Kitts) Ltd and also authorised the Prime Minister and the Minister of Finance to signed the said Credit Agreement for an don behalf of the Government of St Kitts and Nevis.”
No discussion is noted in Cabinet minutes as having taken place, although Mr Powell, then Deputy Prime Minister and Minister of Labour and Tourism thought that some discussion did take place both at the Cabinet meeting and previously at informal meetings of Ministers, together with legal advisers, which he was unable to specify. And Mr Tapley Seaton QC, in answer to the questionnaire administered to him, said that negotiations leading up to the signing of the Credit Agreement were discussed on several occasions in Cabinet. He added that there were formal minutes of Cabinet kept in relation to the Credit Agreement. Mr Seaton is wrong about that. At a late stage in the hearings of the Commission of Inquiry - in fact at the final session on 10 January 2000 - it was suggested that the minutes of the Cabinet agendas and meetings from 1 January 1985 to 23 May 1986 were incomplete. It was pointed out that Cabinet at that time met regularly every week; hence there were minutes missing from the bundle provided by the Commission from the files of the Cabinet secretariat which would (or should) have recorded a formal submission, Cabinet discussions and decisions about Nautical Trading and the hydrofoils affair. The suggestion appeared to be wholly implausible. The evidence refutes any question of omission of Cabinet minutes during the period. Cabinet simply did not meet formally each and every week, as was suggested by Dr Simmonds in his oral evidence.
The chart for dates of Cabinet meetings in 1985 and from 1 January to 23 May 1986 - annexed to this report (Appendix 11) - reveal the following. In 1985 there were in all 39 meetings of Cabinet. Each meeting in that year was given a minute reference number - a label - in serial form, 1 through to 39. for the period of 1986 there was a similar numbering in serial form, from 1 through to 16 (for the first nineteen weeks in that year). If there had been any Cabinet meetings which did not find their way into the documentation, how could they have been fitted into a serial numbering, other than by way of a lettering or further numbering - e.g., 22A or 34-1? There were two occasions - 23 August 1985 and 16 May 1986 - when the minutes of Cabinet meetings due to be held on those days were missing. The agendas and any formal submissions for the two days are available and do not disclose any item referable to the Credit Agreement. Moreover, in August 1985 there was not in existence any draft of the Credit Agreement (the earliest appears in January 1986) and on 16 May 1986 the Cabinet had, on 4 April 1986, already given its approval for the Government’s signature to be affixed in advance of the dating of the Credit Agreement as 30 May 1986. Given those two omissions from the records of Cabinet activities, I find nevertheless that there is no bias for suggesting that the Credit Agreement was ever discussed in Cabinet other than on 4 April 1986. The only possibility is that additional Cabinet meetings, to make up the complement of 52 for 1985 and 19 for the first nineteen weeks of 1986, were held informally and hence unrecorded by the Cabinet secretariat. But those who made the suggestion of omitted Cabinet minutes discounted that alternative possibility. The suggestion of additional Cabinet meetings omitted from the Commission’s documentation is without foundation, other than as a flight of forensic imagination, conjured up to obfuscate the obvious. I find as a fact that the minutes of agendas and Cabinet meetings - 39 for 1985 and 16 for the period in 1986 - are a complete record of all formal Cabinet meetings. They contribute the totality of documentation relative to Cabinet attention to the Credit Agreement of 30 May 1986.

Cabinet Approval

By clause 8(a)(iii) of the Credit Agreement it was a condition precedent that a copy of a Cabinet Minute, certified by the Prime Minister and Minister of Finance, approving the Agreement should be received by the agent of the loaning Banks. The duly certified copy of the Cabinet meeting of 4 April 1986 was sent by letter to Morgan Grenfell on 29 April 1986. The letter also confirmed, under paragraph (iv) of Schedule B of the Credit Agreement (p.41 of Appendix 13), that there were no authorisations other than the Cabinet meeting of 4 April 1986 approving the Agreement.

Since I have found that at no relevant time was the issue of the hydrofoils ever brought to Cabinet, I am inclined to think that, were it not for the need to satisfy the condition precedent in clause 8(a)(iii) (p.15 Appendix 13), the Cabinet’s approval to signing as guarantor would never have been brought by the Prime Minister. The absence of any formal submission strongly suggests that no great significance was attached to the Credit Agreement.

The minute of 4 April 1986 referred to Cabinet being “updated regarding a Credit Agreement which was in respect of a loan of US $25,330,000.00 to Nautical Trading (St Kitts) Ltd….” If there had ever been an earlier account given to the Credit Agreement (which was certainly in circulation in draft not earlier than January 1986) the matter was never formally considered by Cabinet. The Cabinet minutes and agendas from January 1985 until 23 May 1986 were disclosed to the Inquiry, by order of Cabinet of October 1999. They revealed nothing pertaining to the Credit Agreement or, with two exceptions, to Nautical Trading (St Kitts) Ltd. They were:

1. On 17 May 1985, item 14 on the minutes made mention of Morgan Grenfell and the bankers willingness to act as agent and manager of funders of any prospective loan.

2. On 30 August 1985 an agenda item, in the form of a submission from the Acting Prime Minister/Minister of Labour and Tourism, Mr Michael Powell, relating to concessions to “Nautical Trading (St Kitts) Ltd on hydrofoil operation”, arose for decision. Mr Powell, who was in the chair in the absence of the Prime Minister, led the discussion that involved clarification of the terms of the concession. Mr Richard Caines, the Junior Minister of Finance, entered a note of caution: “ There have been many bad experiences with people who were allowed to enjoy certain concessions but who easily abused such privileges and facilities.” Cabinet approved the submission, “as amended”.
The contrast of that treatment by Cabinet with the way that the Credit Agreement was handled on 4 April 1986 is stark. There was no submission from a department of government indicating that the loan to Nautical Trading, as the borrower of $25,330,000, was being underwritten by the Government; there was no indication from the Prime Minister of the huge liability which the Government was undertaking - one-third of the country’s annual budget; neither the Prime Minister nor the Attorney General appeared to tell Cabinet the legal implications of guaranteeing this gigantic loan, although Mr Seaton told the Inquiry that he certainly gave his Cabinet colleagues his oral opinion of the Credit Agreement; the agreement itself does not appear to have been tabled for members’ consideration; at no time, from January 1986 to April 1986 is the matter of the hydrofoils and the financing of their sale and purchase ever brought to Cabinet. It is to be noted that a senior Minister in Dr Simmonds’ Cabinet of that time, Mr Hugh Heyliger, told the Inquiry that he had no idea that the guarantee in the Credit Agreement was restricted to the funding of the purchase price of the hydrofoils, and not to all the other projects which had been discussed in 1985. Yet at the Cabinet meeting the following week - on 11 April 1986 - the Prime Minister was, by contrast, giving “a detailed account” of a meeting with representatives of the Bank of Credit and Commercial International and negotiating a resolution from Cabinet for the Government to borrow US $1.5 million towards the payment of certain sugar lands and US $2.1 million for the purchase of shares in the national Bank from BCCI. What does one make of such a casual, not to say cavalier approach to the guaranteeing of a loan of over US $25 million? Either Dr Simmonds (and his Attorney-General) genuinely thought that the St Kitts and Nevis Government, as a party to the Credit Agreement of 30 May 1986, was truly engaging in “a mere formality” or, for reasons which are not clear, they were deliberately underplaying the financing of the sale and purchase of the hydrofoils. At the Inquiry it has been suggested that the Government’s liability (whatever it was) was being underwritten by a guarantee from Roger Morgan. Whatever is the answer to that conundrum the action of the Prime Minister disclosed a serious failure of duty at the very minimum, to inform his Cabinet colleagues of the Government’s participation in an agreement which involved such a large sum of money, irrespective of any liability which the Government itself might be incurring or the fact of an indemnity from one of the promoters of the hydrofoil project.
In his written statement to the Inquiry Dr Simmonds acknowledged that a guarantee was required of Government “and this was initially refused, and only agreed to when an indemnity was obtained from Roger Morgan.” I set out, with comment, his “understanding of the transaction”,

1. That hydrofoils would be constructed in Italy financed by a consortium of banks of which Morgan Grenfell was a principal agent.

Comment: the two hydrofoils that came to the island in August 1985 and remained until March 1986, were in fact second-hand.
2. The Government of St Kitts and Nevis relied on the advice and reputation of Morgan Grenfell: “ I am of the view that Morgan Grenfell had a fiduciary obligation to the Government of St Kitts and Nevis to warn the Government of any reservations it might have had as to the viability of the project and the reputation of the promoters.”
Comment: Morgan Grenfell, under the Credit Agreement, were in part financing the borrowing by Nautical Trading and acted as agents for the consortium of banks. As such, their primary interests were to protect their financial involvement: which they did. They owed no fiduciary duty to the Government of St Kitts and Nevis. That Morgan Grenfell had a similar obligation to make sure of sound financing is highly arguable.
3. SACE, the Italian State corporation, would give an export credit guarantee as the hydrofoils were being constructed (Italics supplied) in Italy by an Italian manufacturer.
Comment: True, SACE was supporting the Credit Agreement by an insurance guarantee, but only because the St Kitts and Nevis Government was to become the primary guarantor of the loan (see Part II A(4)).
4. That for the purposes only of comfort, St Kitts and Nevis would give a guarantee, but that there was no real or serious contemplation that St Kitts and Nevis would ever be called upon to pay in the even of any default.
Comment: This spells out the basis of the “mere formality” argument. It is nonsense both in law and in the real world of commerce.
5. To make assurance doubly sure, it was decided that no guarantee would be signed by St Kitts and Nevis until there was an indemnity in favour of St Kitts and Nevis by Roger Morgan. The indemnity was in the form of a counter/guarantee.
Comment: No indemnity was ever produced. Dr Simmonds initiated no investigation as to the credentials of Morgan.
6. The matter was brought back to Cabinet when the counter/guarantee was signed by Roger Morgan. The document was executed and should be in the Government files.
Comment: No counter/guarantee was ever produced; not even a draft has been uncovered from Government files. Nothing was “taken back to Cabinet” after 4 April 1986 (or indeed before 4 April 1986).
It is necessary to amplify the bald comment in two respects. First, in order to demonstrate his frame of mind immediately prior to 4 April 1986, Dr Simmonds produced for the first time in evidence on 10 January 2000, a draft of a letter, which was never completed, in answer to a letter (unseen by the Commission) of 18 March 1986 from Mr Michael Powell to the Prime Minister. (When I made a mild protest to Dr Simmonds of the failure to disclose this document, after frequent requests to him and his counsel to hand over to the Commission all relevant documents, no satisfactory answer was forthcoming). The letter, which I append herewith in manuscript and transcribed form, certainly reveals some informal cabinet discussions about the funding of the hydrofoil project. (In so far as it suggests a formal cabinet discussion about putting in place certain safeguards, I have already found that it could not have been formally decided upon.) The letter also disclose differences between Dr Simmonds and his Deputy Prime Minister about Government policy and strategy towards the development of tourist trade. None of that emerges from the Cabinet meeting of 4 April 1986, at which both men were present; the minute of that date merely records Cabinet approval to signing the Credit Agreement by Dr Simmonds. Second, Dr Simmonds insists that there was in existence then an indemnity from Mr Roger Morgan. Had such a document ever existed, there would have been copies at least in the files of Morgan Grenfell and in possession of Mr Morgan and his legal adviser, Mr Rupert Wright. While these three English sources have supplied a great deal of the Commission’s documentation (indeed, almost exclusively) it is strange that the vital indemnity from Mr Morgan is crucially missing. That such an indemnity exists finds support, it is claimed, from written evidence that Roger Morgan was engaged in discussions with the St Kitts and Nevis Government to indemnify a trilogy of projects (hotels, Hawaiian Village and a hydrofoil service) during negotiations in March 1985. But these could not have been related to the Credit Agreement which was linked exclusively to the sale and purchase of the hydrofoils and was considered only at the earliest by the autumn of 1985. One can conclude only that there is here a conflation of two unrelated events which have the barest verisimilitude of common facts. I find that there never was at any time any question of Roger Morgan providing an indemnity to the primary guarantor of the St Kitts and Nevis Government under the Credit Agreement.
Dr Simmonds’ responses are unsatisfactory on two accounts. First, they disclose an appalling lack of attention to detail. Second, they are inaccurate and demonstrate only too graphically that little, if any attention was ever paid to the Government’s responsibilities (whatever they might be) for its part in the framing and completion of the Credit Agreement.

There was a total failure (a series of failures) by Dr Simmonds to comply with the standards expected of a Prime Minister of a sovereign state.

Mr Tapley Seaton QC

As Attorney General and a member of Cabinet, Mr Tapley Seaton QC was responsible for advising the Government of St Kitts and Nevis on all legal matters. It was he to whom the Cabinet of Dr Simmonds would look for advice on the Credit Agreement of 30 May 1986. In his answer to the questionnaire (as noted above) Mr Seaton stated that the negotiations leading up to the signing of the Credit Agreement “were discussed on several occasions by Cabinet”. There is no record of the Agreement ever having been considered other than on 4 April 1986, let alone discussed. Mr Seaton’s memory is faulty in that respect. He does acknowledge that a formal minute of Cabinet was kept on 4 April 1986 in relation to approval of Dr Simmonds to sign the agreement. What is startlingly absent is any record that the members of Cabinet saw, and were taken through, the elaborate terms and conditions of the Credit Agreement. And Mr Seaton does not state positively that this was ever done. Above all, it was imperative for proper approval of Government’s signature as primary guarantor that Cabinet should be alive to the liabilities that Government was undertaking. Even if (as Dr Simmonds has frequently asserted) his signature was a “mere formality”, it was incumbent upon the Attorney-General to reassure his Cabinet colleagues either that the Prime Minister’s assertion was indeed the true legal effect of the Government’s signature as primary guarantor. Or, if (as is manifestly clear) the signing of the agreement involved the Government in potentially a massive financial liability, the Attorney-General should have explained that in some detail. Without that knowledge and information, there could be no valid approval to the Government entering into the Credit Agreement. I would have expected that any Law Officer, faced with a complex agreement providing financial assistance to a borrower within the jurisdiction, to have sought independent legal advice by seeking an opinion from leading counsel elsewhere in the Caribbean or in England. Mr Padfield expressed his astonishment that no opinion was sought at that time from independent counsel. That Mr Seaton appeared to rely on his uncommunicated legal judgment - his “in-house” expertise being adequate, according to him - is to disclose a serious failure on his part to act appropriately.

Mr Seaton, by his answers to the questionnaire, does not to this day, appreciate the nature and scope of the Credit Agreement. He states:

“The Government relied upon the fact that lending financing institutions had committed themselves to fully financing the Project, that involved significant hotel development and allied tourist attractions, that the Italian agency SACE would fully guarantee the Project and that there was in place an indemnity by Mr Morgan and Company in respect of that transaction.”
The Credit Agreement was solely concerned to finance the sale and purchase of the three hydrofoils; it had nothing to do with any “Project” concerning hotels and tourist attractions. There was no indemnity from “Morgan and Company”. The insurance guarantee by SACE, by an instrument dehors the Credit Agreement, was itself demonstrably dependent upon the primary guarantee of the loan by the St Kitts and Nevis Government. Any lawyer worth his salt would know that the systems of export credit guarantees is invariably linked to an assurance from the country that is the ultimate recipient of the development being funded from export credit agencies of the western world. Here again, Mr Seaton exhibits a serious failure to understand the legal consequences of the Credit Agreement.

Under clause 8(a)(vi) of the Credit Agreement (p.16 Appendix 13) the Attorney-General was obliged to give a legal opinion to Morgan Grenfell as agent for the consortium of the financing banks and to the banks itself.

In that opinion, given on 3 June 1986 as a condition precedent to the drawdown of the finance, Mr Seaton wrote:

“The Borrower [Nautical Trading (St Kitts) Co] is a company duly established, validly existing and in good standing under the laws of the state of St Kitts and Nevis and has full power, authority and legal right to own its property and assets and to carry on business.” [Italics supplied]
In his answers to the questionnaire Mr Seaton states that he:

“…did not make nor cause to be made any independent inquiries regarding the background of the individuals from abroad involving Nautical Trading. The Government of St Kitts and Nevis relied on the financing banks and the necessary checks which they would have signified by their loan approval of a project requiring financing.”
He did not know if a full review of the feasibility study of March 1985 was ordered by the Government. He was unable to state “what market studies, business plans, proforma financial statements” were done and presented. Nor whether they were discussed in order that Government could make a decision to sign as guarantor of the loan to Nautical Trading. In short, Mr Seaton seems to have done little to verify his certificate of “good standing” of Nautical Trading.

Mr Anthony Gonsalves submitted that in giving the legal opinion of 3 June 1986, pursuant to clause 8(a)(vi) of the Credit Agreement, the Attorney General was interpreting the phrase “in good standing” as referring to no more than the formal requirements of a limited liability company - incorporation, memorandum and articles of association, registration and the like - and did not refer to Nautical Trading’s financial status. The submission deserves consideration. Mr Tapley Seaton QC could be criticised only if plainly he had failed to investigate the affairs of Nautical Trading in order to assess its financial status.

Clause 8(a)(vi) of the Credit Agreement requires, as a condition precedent, “an opinion of the Attorney-General….to the effect set forth in schedule B” to be sent to the agent of the lending Banks. Schedule B provides:

“(i) The Borrower is a company duly established, validly existing and in good standing under the laws of the state of Saint Kitts and Nevis and has full power, authority and legal right to own its property and assets and to carry on business”
Subsequent paragraphs - under Roman numerals (ii) to (xii) (p.40 - 43 of Appendix 13) - contain other matters of formality. They are in brief: the Borrower’s and the Guarantor’s power to enter and perform the Credit Agreement, including the Guarantor’s full faith and credit obligations; the executing, delivery and performance of the Credit Agreement; compliance with any requirement of government and public bodies; interest paid on loan not being subject to any tax; contractual obligations constituting “direct, unconditional and general obligations”; no proceedings in the opinion of the Attorney General are currently pending or threatened which might have a “material adverse effect on the right or ability to perform” the contractual obligations; ability to sue and be sued, the choice of English law being a valid choice; the Borrower’s representatives being the authority to execute and deliver the Credit Agreement; and the continuing truth and correctness up to the making of the loan.

The legal opinion of 3 June 1986 signed by Mr Tapley Seaton QC recited, word-for-word, the whole of Schedule B (Clause 8(a)(vi) was not so emphatic or prescriptive; it called merely for an opinion “to the effect” of Schedule B). It would appear that Mr Seaton went through the items set forth in Schedule B almost mechanistically. Other than draw upon the formal information obtained from the Registrar of Companies, Mr Seaton admitted he made no inquires about Nautical Trading; and indeed his approach to 8(a)(vi) was that there was no requirement for him to do so, save possibly the requirement of his personal belief that Nautical Trading was not involved in litigation.

What meaning, then, should be given to the phrase, “in good standing”? In common parlance it refers to a person’s (including a legal person’s) reputation. And reputation is assessed from those with whom the individual has some relationship or connection. In the case of a limited liability company it would involve an assessment of trading activities and its financial dealings. As at June 1986, by which time the hydrofoils were no longer providing an inter-Caribbean island ferry service and Nautical Trading had ceased to receive any income, there would be a substantial query mark over the company’s financial status. Some doubt would be injected in the minds of any creditor of, or lender to the company. It cannot be that the funding banks were interested to know from the Attorney General only the formal requirements of company law. Indeed, their interest needed to be reassured, apart from the SACE guarantee and the primary guarantee by St Kitts and Nevis of the loan, that the Borrower of US $25 million was sufficiently financially sound to make the repayments on the loan. Any study in 1986, such as has been undertaken by the Commission in 1999 would have revealed predictably the precariousness, not to say parlous state of Nautical Trading’s financial affairs. My conclusion is that Mr Tapley Seaton QC wrongly judged that his function under Clause 8(a)(vi) was only the limited one argued for by Mr Gonsalves. But I cannot escape the fact that, at first blush, the phrase, “in good standing” is puzzling. It is only on a closer study of Clause 8(a)(vi) and Schedule B that one has to conclude that Mr Gonsalves’ ingenious submission is unarguable. In the circumstances it would be wrong to criticise Mr Seaton for what is, in essence, an error of legal judgment. I do not uphold the provisional criticism of which he was given notice. I would add only this: the nature of the obligation under 8(a)(vi) adds force to the valid criticism of Mr Seaton that he should have sought independent counsel’s opinion on the legal aspects of the Credit Agreement. Had he done so he would have been alerted to the fact that he was required to give his opinion on the financial status of Nautical Trading. Furthermore since there was a continuing obligation to inform the parties to the Credit Agreement, Mr Seaton should have been telling them by the autumn of 1986 that Nautical Trading was being financed out of debt and was insolvent (see Clause 11(b)(ii) of the Credit Agreement - p.25 of Appendix 13). This he failed to do.

Part II A(3)
The Financial Aspects

Forensic accountancy has become an integral part of expert evidence sought by courts of law and other forms of tribunal whenever financial matters need to be addressed. Expert evidence of accountants is employed across a broad spectrum of legal issues, and questions of complex financial calculation may be raised in relation to many different forms of legal proceedings. Such expertise played a vital part in this Commission of Inquiry in demonstrating the intrinsically financial hopelessness of the hydrofoil project and pointing out some major deficiencies in financial administration by the Government.

Mr Doug Kalesnikoff is a qualified chartered accountant from Saskatoon, Saskatchewan, Canada, practising for the last twelve years in the field of forensic and investigative accounting services, and providing expert evidence in the courts of Canada (on no fewer than 35 separate occasions). He prepared a forensic accounting review of the financial underpinning of the Frigate Bay Development Corporation to the Williams Commission of Inquiry and subsequently on the hydrofoil operation to this Inquiry. As the expert appointed by the Commission, he was demonstrably independent and impartial, not always the case where an expert is called by one party or another in an adversarial process. His final report in September 1999 covered those areas of direct concern to the Inquiry - (a) the capital structure of Nautical Trading (St Kitts) Ltd; (b) the cash flow requirement of the hydrofoil operation; and (c) the “trial run” of the hydrofoil operation, August 1985-March 1986, the last of which I have covered in the previous chapter, where I have drawn on Mr Kalesnikoff’s expertise.

Mr Kalesnikoff’s report was circulated to the participants in the Inquiry and he summarised his report orally before the Commission. His evidence was unchallenged. Indeed, in my view, such was the impressive quality of his report and its thoroughness that it was unchallengeable. I have no hesitation, therefore, in accepting in totality his findings on financial matters, and agreeing with his general conclusions. In the latter respect, I have been able to take into account a good deal of other evidence pertinent to the three topics.

Capitalisation of Nautical Trading

The first financial statement of the company was for the period from incorporation on 15 December 1984 until 21 December 1987. The capital structure, as at that latter date, was:

US $
Amounts owing to general creditors 1,638,472
Unpaid balance of syndicated bank loan 21,711,428
Called up share capital 13,000,000
(The share capital on incorporation was US $2.00, two shares of one dollar each.)
The “called up share capital” was further explained in a note to the statement. Prior to 6 February 1986 Bluematt Investments Ltd (BIL) owned 100% of the allotted shares of the company. By an agreement of 27 January 1986 the share capital was increased to US $6,000,000 on 6 February 1986 and 25% of the allotted shares were transferred to SNAV, the sellers of the hydrofoils on 17 October 1986; the share capital was increased by a further US $7,000,000 on 17 October 1986. BIL and SNAV were allotted 75% and 25% respectively of the new shares. Note 2 of the financial statement stated that “certain shares allocated to BIL are unpaid”. The reported paid-up capital of US $13 million was made up as follows:

US $
Down payment on hydrofoil purchase
(15% of purchase price) 4,470,000
Preliminary expenses incurred on the company’s behalf by BIL 1,530,000
Share capital increase on 17 October 1986 7,000,000
Total 13,000,000
The financial statements, as presented, gave the appearance of the existence of equity capital of US $13,000,000. Investigation by the Inquiry revealed that there was no equity provided. Mr Kalesnikoff’s comment was: “NTS was entirely financed through debt”. He went on to conclude that the company effectively became insolvent immediately after the draw-down (30 October 1986) of the loan. Once the position of the financing that was set aside to service the debt was extinguished - which happened by early 1988 - the loan became in default.

Cash Flow Requirements of Hydrofoil Operation

The annual cash flow demands of servicing the loan were substantial. NTS assumed an indebtedness of US $25,300,000 on 30 May 1986. That required payment of between US $5 and 6 million a year for the early years. Mr Kalesnikoff’s assessment of the reasonableness of hydrofoil service, at a level sufficient upon which to service the debt, was dismal. Significantly, since the only figures ever made available in 1985/86 to anyone in Government in St Kitts and Nevis were contained in the Feasibility Study, Mr Kalesnikoff’s conclusion was the figures contained in a ‘Feasibility Study’ dated March 1985 and the projections endorsed by W B Simmonds and E E Pistana - to which reference will be made - “are entirely unattainable and bear no resemblance to realistic projections.”

There is no evidence, at the very least before the Inquiry, to support the view that the Government made any inquiries about the financial state of NTS, save for Mr Tapley Seaton QC’s unsubstantiated, vapid claim in his certificate of 3 June 1986 that the company was “in good standing” (see Part II A(2)). Since Mr Seaton submitted that “no good standing”, in his view, referred only to the formal requirements of company law, he made no inquiries other than of the Company Registry. There is no evidence that the Prime Minister’s office or the Ministry of Finance performed any audit of the operations of the hydrofoils in late 1985 and early 1986. Apart from the Feasibility Study, no business plans, market studies, demographic analysis, operational budgets, capital budgets or financing plans were prepared. Indeed Dr Simmonds stated in evidence that he took no note of the estimates made by Mr Walter Simmonds and Mr Ernest Pistana (see below). In my view, it was essential that, before signing the loan agreement of 30 May 1986, some estimate of the viability of the hydrofoil operations based on those considerations should have been made. Had that been done, the dismal results of the hydrofoil service over that period, together with a review of NTS accounts would have revealed the imprudence and improvidence of taking on the obligations of a primary guarantee of US $25,330,000.

The Simmonds and Pistana Letters (Appendix 9)

The only evidence of some estimate of the profitability of the hydrofoil operation were two pieces of documentary material, which have emerged from sources other than governmental, in practice emanating from Mr Walter Simmonds (an accountant) and Mr Ernest Pistana (a banker). I deal with them separately. Although their written responses were addressed directly to Mr Michael Powell, the Deputy Prime Minister and Minister of Tourism, I have not regarded them as estimates supplied in response to a request directly from Government. As I have noted, Dr Simmonds placed no reliance on them.

The Walter Simmonds Letter of 7 June 1985

Mr Walter Simmonds (of Simmonds and Associates) was asked by Mr Michael Powell to give an opinion about the profitability of the hydrofoils, which by then had not yet arrived in St Kitts; hence there were no results of any “trial run”. The request from Mr Powell was received telephonically. Mr Simmonds made no note of the figures transmitted on the telephone; no accountancy fee was offered or paid. Mr Simmonds told me that he was unaware of the precise use to which information he supplied was subsequently to be put. Importantly, he did not think that the information he imparted was other than a rough estimate, based on inadequate material.

In his letter of 7 June 1985 Mr Simmonds wrote to the Deputy Prime Minister, Mr Powell, at Government Headquarters:

“I have examined the projections prepared by Nautical Trading (St Kitts) Ltd as requested by you. From the projections therein I am satisfied that an annual gross income in the range of US $40-45 million is attainable.”
No calculations and/or projections were supplied with the letter. The reference to projections regarding Nautical Trading could only have been a reference to the “Feasibility Study” sent by Roger Morgan to Simon Jackson. At that time it was anticipated that five hydrofoils would be supplied. The feasibility study at one point projected revenues at 100% occupancy for three hydrofoils, which would appear to amount to US $26,956,000. Mr Simmonds’ estimate of US $40-45 million of annual gross income surpasses even the optimistic forecast in the Feasibility Study, which, Mr Kalesnikoff thought, bore “little or no relation to reality and thus are wholly unreliable”. (Mr Kalesnikoff calculated the number of hydrofoil passengers required to attain Mr Simmonds’ sales estimate that would require 1,818,182 passengers per year or 4,981 per day. The “trial run” produced an average of 29 passengers a day).

Mr Pistana’s Letter of 22 June 1985

Mr Ernest Pistana, at the time, was managing director of the National Bank. He wrote on 22 June 1985 to Mr Michael Powell, Deputy Prime Minister, c/o the High Commissioner, Dr Claudius Thomas (now deceased) at the High Commission in London. The letter stated:

“Following your request we have examined the feasibility study of the Hydrofoil and the document [of 7 June 1985] supplied by Simmonds & Associates, chartered accountants. We fully agree with the valuation of the shares of Nautical Trading St Kitts Ltd and its forecast profitability.”
In an addendum to the letter, on different typeface, with the High Commission’s date-stamp of 26 June 1985, there appears the following:

“ We have been asked by the National Bank, St Kitts to add these words to the above [Mr Pistana’s letter of 22 June 1985]: ‘In our opinion the value of the shares of Nautical Trading St Kitts Ltd, is 91 million US dollars, one years turn over plus assets of 46 million US dollars’”
Mr Ingle M E Rawlins, who was then a junior diplomat at the High Commission, signed the addendum. Mr Rawlins gave oral evidence. Put bluntly, he was adamantine. He wrote the words, he told the Inquiry, at the instruction of the High Commissioner. Mr Pistana, likewise adamantine, denied that the Bank had ever asked for the additional words to be inserted. Mr Powell, to whom the letter was addressed, did not recall ever having given instructions to Mr Rawlins or to Mr Pistana. It is impossible now - in 1999 - to know the truth about the authorship of the addendum to Mr Pistana’s letter. It matters not how it came about. In any event the content of the addendum can be discounted as having any value. Mr Kalesnikoff’s comment on it is that the addition of value assets and years turnover to equate the value of shares is not in accordance with business valuation principles. He adds: “Thus, value of the shares at 91 million US dollars is grossly overvalued, even if the projections outlined by Mr Simmonds were attainable”: Which they were not.

My conclusions about the Simmonds/Pistana letters of June 1985 can be clearly stated. At that time, the arrangements by Morgan Grenfell for funding the sale and purchase of the hydrofoils were barely under way. A letter, dated 11 January 1985 containing a draft of clause 9 of the Credit Agreement, written by Morgan Grenfell to Mr Powell, must have the wrong year on it: it should have been 11 January 1986. That would fit in with the period between the sale and purchase of the hydrofoils in the spring of 1985 and the Credit Agreement of 30 May 1986. I have made a reference to this obvious error in dating, only because Ms Mitcham created much fuss and pother over the fact that some bit of the text of the letter on the bottom of page 1 did not attract the eye of the photocopying machine; the original of the letter has not been traced. Ms Mitcham submitted, rhetorically; “Can you be satisfied with this Mr Commissioner? Can you be satisfied that this letter has not been tampered with?” I am entirely satisfied that, given the context of the letter, there is nothing untoward about the content. The fact that Mr Powell put his signature to each page of he draft of Clause 9 (the Guarantee) indicates that the proposed guarantor was at the St Kitts end. Government consideration to its commitment as primary guarantor would not have been imminent, even if, by June 1985, it was even contemplating such action. Given the absence, post-June 1985, of anything - even a morsel - of governmental appreciation of the financial implications of its potential involvement in a substantial loan, the Simmonds/Pistana episode was, at best, peripheral, and at worst, irrelevant, to the Government’s thoughts and action about the forthcoming position as primary guarantor to the loan.

Neither Mr Simmonds nor Mr Pistana was ever officially instructed to provide estimates. Neither of them was paid for providing a service that, on the face of it, appeared to be professional. Mr Simmonds gave unsupported opinion on the profitability of the hydrofoils. I accept from him that he was unaware of the use to which his opinion would be put. Mr Pistana also was uncertain about the use to which the National Bank’s opinion would be put. When asked, at the oral hearings, whether in referring to “they” he meant the Government he said “I don’t think so.”

His denial of any question of responsibility for the addendum, renders it impossible to say that he thought that he was involved in any serious evaluation of the financial position of the hydrofoil project. Both men would have been professionally irresponsible, had they for one moment considered that they were engaged in giving professional advice. Contrariwise, I think they were supplying a ministerial friend with estimates which would be required in order to obtain the financing of the purchase price of the hydrofoils, and I suspect, although it is only a suspicion, that both men knew that this was what they were engaged in. The plain fact is that no responsible Minister (or indeed any civil servant) could conceivably have acted upon the opinions that were given unofficially and were never followed up by any study or analysis of the hydrofoil project. Moreover, the “trial runs” of the hydrofoils had not begun. Anyone providing an estimate would be bound to await the results of those “trial runs". Both Mr Simmonds and Mr Pistana could not have imagined that what they were engaged in, or been aware that their estimates formed part of any serious consideration by Government towards the hydrofoil project. Government was displaying total indifference to the hydrofoil project other than as part of a package of developments in tourism being proposed in the Spring of 1985. No question had arisen at that time about guaranteeing a huge loan to the borrower, a St Kitts company. Questions about guarantees to the Credit Agreement came along by, at the earliest, the end of 1985.

Whatever reliance could be placed on the Simmonds/Pistana letters - and I conclude that they constituted no more than the merest of guesses - no Government could be absolved from obtaining sound, professional advice, either upon professional opinion based on formal instructions or from civil servants within the Ministry of Finance advising Ministers. No such advice was ever sought or obtained. The Simmonds/Pistana letters are a total diversion from the consideration of the Inquiry to the duty of Government to protect national interest in matters of financial administration. Had any reliance been placed on the Simmonds/Pistana estimates, they would surely have been subjected to detailed study within the Ministry of Finance. None took place. Had the Government performed in 1986 any audit of the operations of the hydrofoils, from August 1985 to March 1986 the dismal results would have evident and thereby prompted extreme caution about becoming a guarantor to the Credit Agreement. There would also have been revealed the stark fact that Nautical Trading was entirely financed through debt.

Part II A(4)
The Law Applicable to the Credit Agreement: Contractual and Tortious Liability

As long ago as 30 April 1993 (in a telex to the Italian Government), the Government of St Kitts and Nevis had stated that, in becoming a primary guarantor under the Credit Agreement of 30 May 1986, the Prime Minister’s signature to the Agreement was “a mere formality”. It became apparent only at the beginning of the oral hearings of the Commission on 5 October 1999 how serious a legal issue it raised. (Indeed it was only when Ms Mitcham, the following day, made an opening statement (at my invitation) to counter Dr Cheltenham's opening statement that she pinpointed the legal issue. Did the Government of St Kitts and Nevis in 1986 and thereafter undertake an enforceable (albeit contingent) liability by signing as primary guarantor to a loan of US $25,330,000 to Nautical Trading (St Kitts) Ltd as the borrower of 85% of the purchase price of the three hydrofoils from an Italian supplier?

Since the Credit Agreement of 30 May 1986 was governed by English Law and the legal issues seemed to me to be of some complexity, if ultimately the law was clear, I decided to appoint a legal assessor to the Commission. (Elsewhere I have described the role and function of an expert giving evidence as an assessor.) Accordingly, I invited Mr Nicholas Padfield QC to provide that expert evidence. (His qualifications and professional practice are provided in an appendix, together with his written opinion. He supplied the Commission with his written opinion on 7 November 1999, which was distributed to the participants and is annexed to this report at Appendix 14.) He gave oral evidence on 15 November 1999 and was questioned on behalf of Dr Simmonds. At that time Mr Tapley Seaton QC was not available to attend to ask any questions, but later I indicated that he would be given an opportunity to ask questions. It had been hoped that that would have taken place when the Commission sat on 16 December 1999. Mr Padfield was at that time conveniently on the island. That turned out not to be possible. Mr Padfield kindly agreed to return to St Kitts and was present for questioning by Mr Gonsalves on behalf of Mr Tapley Seaton QC on 10 January 2000.

In seeking expert evidence on the legal issues relating to the Credit Agreement of 30 May 1986, in conjunction with the associated agreements and financial arrangements, I should make it clear what my function is, and what is not my function.

The legal issues relating to the Credit Agreement revolve around the applicable law, both of contract and of tort. Faced with such legal issues of contractual and/or tortious liability, a Commission of Inquiry must be careful not to usurp the function of the courts of law. If and when there is litigation afoot, to determine the claims and counter-claims of the parties to the litigation, the courts will be the final arbiters (unless the parties choose some form of alternative dispute resolution). The Commission of Inquiry could not in any event anticipate how any claim might be framed, or predict what defences to any claim there might be. There could be issues about fraudulent misrepresentation, interpretation of any relevant statute, or an assertion that any period of limitation had run its course. It would, therefore, be unhelpful (if not a discourtesy) to any judicial body for the Commission even to use the language of the law of contract or of tort. Breaches of contract or negligence are terms of art referable to legal proceedings and not to maladministration in government affairs. Ms Mitcham on 12 January 2000 posed the question - why is the Government wasting millions of tax payers’ dollars to prove it has a debt? Proving or disproving a debt is a judicial function, not mine.

The Commission of Inquiry is, on the other hand, empowered by the Commission of Inquiry Act and the specific terms of reference to investigate and (if necessary) to criticise the conduct of those who had the responsibility for committing the Government of St Kitts and Nevis to the obligations entered into by the guarantee in the Credit Agreement. Did Dr Simmonds and Mr Tapley Seaton QC, in their respective ministerial and administrative roles commit a serious failure (or a series of failures) to attain the standard of public duties expected objectively from a Prime Minister of the Government of a sovereign state (albeit a small country) and from the Government’s Law Officer? The answers to those questions can follow a review of the governmental approach to the relevant events that led up to the signing of the Credit Agreement on 4 April 1986, and continued thereafter.

The Law

The expression, “a mere formality” would normally signify that the penning of a signature to a document confirmed the contractual arrangements already entered into; the signing goes to form and not substance. But the signature on the document was not an empty gesture, importing no contractual or other liability. The creation of legal relations occurs, moreover, independently of a signed document. Yet the Government of St Kitts and Nevis in 1993 clearly meant to convey the idea that it had not entered into any legal relations. Dr Simmonds in his evidence on 10 January 2000 said that the phrase indicated that the guarantee carried with it no liability for any losses suffered by anyone connected with the Credit Agreement. It did, however, represent to the Italian Government that its signature of 1986 acknowledged, extra-legally, that it fully supported the hydrofoil project; that it would refrain from any political action which could jeopardise the investment; and that when the hotel was built (a project in an earlier agreement of March 1985) the Government’s “guarantee would be replaced by proper legal authority”. The final paragraph in the faxed message invited SACE to look to others to satisfy their requests for payment, since the Government of St Kitts and Nevis had never derived any profit or any money from the hotel project or the hydrofoils. These matters, extraneous to the Credit Agreement, were added ostensibly to indicate that the guarantee was in essence a “mere formality”.

The legal view of the previous Government, propagated now by the then Prime Minister, Dr Kennedy Simmonds, that no potential liability was incurred by the Government was, and is fundamentally flawed. My views on the law are based upon the valuable expert advice from my legal assessor, Mr Nicholas Padfield QC. The failure of the Government, then and now, to appreciate the legal nature and scope of the Credit Agreement is a prime factor in my concluding the responsibility of Dr Simmonds and Mr Tapley Seaton QC in their respective roles of Prime Minister and Law Officer.

The legal issues resolve themselves into three discrete questions:

1. Did Dr Simmonds’ signature on behalf of the Government as guarantor to the Credit Agreement give rise to any or no liability at law?

2. If there was some liability under the Credit Agreement, what was (and still is) the nature and extent of any such liability?
3. What (if any) is the effect on the liability of the Government of the discharge by SACE of the whole of the liability of the borrower (Nautical Trading) to the lenders (the consortium of seven Banks, including Morgan Grenfell)?
Contractual Liability, or Not A signature to an agreement binds the signatory - in this case the Government of St Kitts and Nevis. This rule stems from the law’s approach, that the signatories to the agreement of a commercial nature intend to create legal relations. In a commercial contract the burden - a heavy one - of proving that there was no intention to create legal relations is on the party asserting that no legal effect was intended. It might be suggested that “a mere formality” was a way of saying that there was no intention on the part of the Government that the Credit Agreement should have any legal effect. Mr Padfield has advised me (and I accept his advice) that, in his view, there can be no doubt that there was an intention to create legal relations. During the questioning of Mr Padfield on 10 January 2000, Mr Gonsalves, on behalf of Mr Tapley Seaton QC, cited the judgment of Mr Justice Donaldson in Brown Shipley & Company Ltd v Amalgamated Investment (Europe) BV to the effect that legal consequences may flow even if they were not intended by the parties to a contract. I regard that proposition as wholly exceptional on the facts of the case, and does not detract from the general principle that the words used in a contract objectively indicate the creation of legal relations. The reasons for any lack of doubt about the intention to create legal relations are manifest.
The Credit Agreement was a lengthy, complex international commercial credit agreement involving a substantial loan of US $25,330,000. It was prepared by a leading firm of London solicitors, Allen & Overy, and was plainly treated by the parties as an important agreement. Its subject matter was the advancement of a loan by an international syndicate of Banks of 85% of the purchase price of three hydrofoils (spare parts and other equipment) exported from Italy under an export credit by the Italian governmental agency which provides insurance guarantees to Italian exporters for projects in developing countries. The Government of St Kitts and Nevis was the vital link in the chain; without its guarantee of performance by Nautical Trading (St Kitts) Ltd of servicing the loan, no performance of the agreement could take place. The only inference that can be drawn from this elaborate contractual arrangement was that a main beneficiary would be the tourist economy of St Kitts. The seriousness with which the parties treated that arrangement and the detailed agreement was the requirement for conditions precedent to be carried out. These were in Clause 8(a)(iii) and (vi). These conditions precedent involved certifications of certain matters by Dr Simmonds and Mr Tapley Seaton QC. These certificates were anything but “a mere formality”.

Clause 8(a)(iii) required the acknowledgement by the Government (with certified documents to Morgan Grenfell, the agent of the Banks) that all relevant consents and authorisations had been obtained “necessary for the making and performance of the Agreement by and for the validity and enforceability of this Agreement against….the Guarantor (viz., the Government) and/or required in connection with….the guaranteeing of the Borrower’s obligations hereunder….” A copy of the minute of the Cabinet meeting, certified by Dr Simmonds approving the Agreement, was an express requirement of the Clause. The agent, Morgan Grenfell, duly received it. (I shall deal fully with the Cabinet meeting of 4 April 1986 at a later stage.)

Clause 8(a)(vi) required the opinion of the Attorney General as to the corporate status of the borrower, Nautical Trading Co. The written opinion of Mr Tapley Seaton QC , which was given on 3 June 1986 (as subsequently amended by letter dated 15 September 1986) stated, among other things, that (1) the Credit Agreement was valid and binding on the Government of St Kitts and Nevis and was enforceable against the Government in accordance with its terms; (2) the liabilities of the Government would be accorded “full faith and credit obligations of Saint Kitts and Nevis, irrespective of any future change in the composition of the government….; and (3) the Government’s obligations under the agreement will constitute direct unconditional and general obligations of, respectively, the Borrower and Guarantor (viz., the Government)”. Specifically, in his opinion of 3 June 1986 the Attorney-General stated:

“The Borrower is a company duly established, validly existing and in good standing under the laws of the state of Saint Kitts and Nevis and has full power, authority and legal right to own its property and assets and to carry on business.” (Italics supplied)
These steps, taken by Dr Simmonds and Mr Tapley Seaton QC, in compliance with the requirements of conditions precedent, suffice to make any suggestion, that the Government of St Kitts and Nevis was not intending to create legal relations, almost risible.

The matter does not rest there. Clause 10(a)(i) and (iii) (p.20 - 21 Appendix 13) of the Agreement, providing for representations and warranties given by the Government, mirrors the conditions precedent contained in Clause 8(a)(i) and (vi). Clause 10(b) has a special significance: the representations and warranties are continuing - “the representations and warranties…..shall survive the execution of this Agreement and the making of the Loan hereunder and shall be deemed to be repeated at the time for the making of the Loan and at all times while any amount payable hereunder is outstanding as if made at each such time with reference to the facts and circumstances existing at such time (Italics supplied)” Clause 11(b)(ii) reinforces the continuing obligation. It provides that the Guarantor will obtain and promptly renew, from time to time, all the contractual requirements to enable the Borrower and/or the Guarantor to perform their obligations. This means that, as events unfolded after May 1986, there was a continuing obligation on the part of the Government of St Kitts and Nevis to inform the parties of matters relevant to the Credit Agreement.

In short, the Credit Agreement could come into force only as and when the Government of St Kitts and Nevis complied with the conditions precedent. By its signature, it did just that. The Government accepted that the agreement was valid, binding and enforceable according to its terms. It accepted, moreover, that its obligations would constitute “direct unconditional and general obligations of, respectively, the borrower and guarantor (the Government)”. It finally recognised that its liabilities “were full faith and credit obligations”, irrespective of any change in Government.

Indubitably, the Government became legally liable under the Credit Agreement of 30 May 1986 when Dr Kennedy Simmonds signed as Prime Minister and Minister of Finance on its behalf. It is nonsense to claim otherwise. The compliance with the conditions precedent triggered off the drawdown of the loan of $25 million. It is not even a sustainable viewpoint, to the claim by Dr Simmonds, that he reasonably thought that the Government was not undertaking any legal liability. The plain fact is (as I shall find) that he never gave the matter the careful, indeed any sufficient consideration due to an important document containing such onerous obligations. At the very least, he should have armed himself with a legal opinion in writing, either from the Attorney-General or independent counsel. That he did neither is a factor of which I will have to take account in determining the question of maladminstration. It is conceded that any opinion was given orally by the Attorney-General who asserted that he had all the necessary expertise “in-house”. I do not agree. The Credit Agreement presented to him was such an important contract, involving a very large sum of money, that it demanded the kind of expert opinion that I have received from Mr Padfield. That similar legal advice was not obtained in 1986 was, according to Mr Padfield, astonishing. I agree.

The Government’s contractual obligations: their extent

Although the Government is described throughout the Credit Agreement as “guarantor” (its obligations as a “guarantee”) there is nevertheless a question whether the liability was confined to guaranteeing the servicing of the loan. From my stance as Commissioner of Inquiry, and not as a legal adviser to the Government, the point is academic. Yet, for the sake of completeness and because Mr Gonsalves was at pains to argue in favour of a guarantee and not an indemnity, I have thought it helpful to indicate now what precise liabilities the Government was undertaking. Mr Gonsalves argued in favour of a conclusion that the Government of St Kitts and Nevis was only a guarantor under the Credit Agreement. If that were the right conclusion (and I do not think it is) he goes on to assert that the Government’s liability to SACE would be dependent upon whether the insurance guarantee of 14 August 1986 was an insurance policy or a guarantee, on which point there appeared to be doubt under Italian law. Whatever maybe the position under Italian law as to the nature of the SACE agreement of 14 August 1986 the right to subrogation is unaffected. It was an express term of that agreement. It is precisely because the Commission of Inquiry must not usurp the function of a court that such an issue, as that raised by Mr Gonsalves of events post-May 1986, does not arise in the Inquiry.

The fact that no consideration has hitherto been given to the extent of the liabilities serves only to demonstrate how vital it was that, in entering upon the Credit Agreement, the Government should have known precisely what it was exposing its exchequer to. The total amount of any future indebtedness should have been one of the calculations in deciding where the Government should sign the Credit Agreement. That no such calculation was ever made is again a factor in determining the responsibility of Ministers. Mr Seaton told the Inquiry that in advising the Cabinet he took into account all the factors including specifically the Government’s policy towards the development of tourism. Whether he was right in that respect, it did not absolve him from giving a strict legal opinion on the scope and extent of the Credit Agreement based preferably upon independent advice or on advice from within his own department, irrespective of extra-legal considerations. The confusion of legal and extra-legal factors leads me to recommend that the function of the Attorney-General under sections 53(2) and 64(1) of the Constitution should be reviewed.

The Government’s liability as “guarantor” in Clause 9(a) (p.18-20 Appendix 13) - the governing Clause of the guarantee - is expressed in the following terms:

“In consideration of the Agent and the Banks, at the request of the Guarantor, entering into this Agreement and of the Banks agreeing to advance moneys to or for the account of the Borrower….the Guarantor hereby irrevocably and unconditionally guarantees the Agent and the Banks as principal obligor and not merely as surety (italics supplied) the due and punctual payment in full of all sums payable now or in the future to the Agent and the Banks by the Borrower under this Agreement when and as the same shall become due….”
By the use of the phrase, “not merely as a surety”, the Government committed itself as a surety or guarantor, and the creditor Banks were also entitled to treat the Government either as a primary obligor or principal debtor. This point is reinforced by the wording in Clause 9(a) that “the Guarantor will on first demand make good the default and pay all sums which may be payable as if the Guarantor instead of the Borrower were expressed to be the primary obligor (Italics supplied)”. The guarantor was, of course, not the principal debtor: that was the borrower. But in certain circumstance, the guarantor will, “on first demand”, become liable to “make good the default of and pay all sums which may be payable” by the borrower (the principal debtor) as if the guarantor were expressed to be the primary obligor (or principal debtor) and not the borrower.

The inclusion of such Clauses, which entitles the creditor to treat the guarantor as a principal debtor, does not convert the guarantee into an indemnity, but it may create a hybrid. As Lord Donaldson of Lymington MR (when he was Mr Justice Donaldson) said in General Surety & Guarantee Co Ltd v Francis Parker Ltd, if the Clause is a hybrid it means that the considerations of guarantee or indemnity overlap. There are indicators in the agreement that point to the liability being exclusively that of guarantor. Mr Padfield in his written opinion sets out the rival arguments:

“ There are in any event significant other indicators which suggest that , leaving aside the effect of the “primary obligor” issue, the liability of the Government is that of guarantor only. Those indicators are that:

(a) the creditor’s rights (the Banks) against the principal debtor (the Borrower) and against the guarantor (the Government) are the same: the Government will not be liable if the Borrower is not in default; nor is the Government liable for a greater amount than the Borrower; and
(b) Clause 9(c) preserves the creditor’s rights against the Government in the event that time is given to the borrower or the Borrower’s principal obligation to the creditor is varied; if the contract were not a “guarantee” but an indemnity, there would be no need for such a provision since the conduct of the creditor in giving time or varying the principal obligation of the debtor would not discharge the liability to indemnify: see Wester Credit Ltd v Alberry [1964] 1 WLR at 949-950, CA, per Davies LJ.
But for the entitlement of the creditor to treat the guarantor as a “primary obligor”, the Government’s sole liability under Clause 9 would in my view be that of a guarantor assuming a secondary liability for a principal debtor in the event of default on the principal obligation. It is, however, my view, that the Government is also liable as a “primary obligor” or principal debtor, if the creditor (the Banks) chooses to exercise its right to treat it as such. It is not entirely clear to me whether the exercise of the right to treat the Government as a principal debtor in substitution for the Borrower is unconditional or conditional. “First demand” guarantees (or performance bonds) are generally regarded as unconditional and require nothing more than a demand to trigger payment. The creditor, therefore, would not have to show a “default” by the Borrower, but merely to make the demand. In general, in the absence of fraud, which would require cogent evidence to establish, it would be presumed that the demand was made bona fide. A “conditional guarantee” on the other hand, requires there to have been a default prior to the demand being made.”
His conclusion - which he reiterated in answer to Mr Gonsalves’ questioning on 10 January 2000, and which I readily adopt - is that the nature of the obligation which the Government of St Kitts and Nevis undertook was a secondary liability as guarantor in the event of default by the borrower, the principal debtor. It also undertook a liability as the principal debtor in substitution of the borrower in the circumstances outlined. The extent of the Government’s liability was co-extensive with that of the borrower, irrespective of the Government being the guarantor or being treated as the principal obligor. Its obligations related to principal and interest due and payable by the borrower “until payment of such sums in full”. It was, and is a continuing obligation; and it is enforceable directly against the Government as a principal debtor. On any view of the legal liability incurred, the extent was commercially comprehensive, socially burdensome - the more so for a tiny state with limited resources - and politically vulnerable. Those factors alone called for the most anxious consideration based upon a full and detailed study of the legal obligations involved. No study was ever undertaken. The Role of SACE
In its faxed message of 30 April 1993 the Government boldly, if not imprudently (in an early draft the word was “impudently” which would not be too far off the mark) told the Italian Government that SACE should look to others than the Government of St Kitts and Nevis to satisfy requests for payment of US $40 million (the loan plus interest) that it had outlayed to the creditor Banks. That retort to the demands from Italy has been, in effect, repeated before the Inquiry. Indeed, Ms Mitcham asserted that SACE was never a party to the Credit Agreement: QED, no claim lay against the Government. It was further claimed, with breath-taking boldness that, since the Banks had been fully refunded the loan with interest, that was effectively the end of the matter. The opposite is the simple, legal truth. True enough, SACE was not a party to the Credit Agreement, although the recital - (B) - stated that the agreement was predicated upon the “support of Sezione Speciale per L’Assicurazione del Credito all ‘Esportazione (SACE)”, a fact that appears on the cover of the Credit Agreement. The fact that SACE was never a contracting party is of no importance. The material fact is that the creditor Banks made an agreement, dated 14 August 1986, with SACE, whereby the risk of default under the Credit Agreement was provided for. SACE was, thereby, subrogated to the rights of the creditor Banks. Before I develop the consequence of subrogation, it may be helpful to describe the nature and function of SACE, as it appears from the opinion of Dott. Proc. Antonino Samperi, a partner in the law firm of Studio Avv. Ercole Graziadei, which is derived from the documentation sent by Morgan Grenfell with the Credit Agreement.

SACE

Export guarantees are given by Government agencies in the countries of the developed world for the purpose of encouraging trade with territories in the under-developed world. Italy’s export credit agency, SACE, is a special department of the National Insurance Institute. The Law No.227 of 24 May 1977 recognised SACE’s “public” legal status with independent management. The Republic of Italy automatically guarantees the insurance commitments undertaken by SACE, provided that SACE does not exceed the maximum amounts comprised within the state annual budget.

By an agreement (the SACE agreement) of 14 August 1986 (be it noted, during the period leading up to the draw-down under the Credit Agreement) with the creditor Banks, SACE provided a guarantee to cover the loan guaranteed by the Government of St Kitts and Nevis. By Article 4 of the SACE agreement its guarantee was governed not only by the specific legislation relating to export guarantees “but also by provisions in the Civil Code referring to insurance in general and insurance against damages….” Dott. Proc. Antonino Samperi, an Italian lawyer, provided the parties to the Credit Agreement with an opinion that there were arguments for saying that, contrary to SACE’s own view, the agreement was not an insurance policy, but a guarantee - that is to say , a secondary obligation which would be dependent on the initial validity and enforceability of the underlying obligation. It matters not which is the correct view, because SACE has in practice paid out the full amount of the guarantee. The SACE agreement, which specifically recognised and inter-linked with the Credit Agreement, provided for SACE to be subrogated to the rights of the creditor Banks. Article 15 of the SACE agreement, under the rubric of SUBROGATION, provides as follows:

“15.1 Following payment of the Indemnity, SACE shall be automatically subrogated to all rights of the Guaranteed Parties deriving from the Loan Agreement and the Overseas Guarantee or of third parties who may become entitled to such rights in respect of which settlement has been made.

15.1 Without prejudice to the provisions of Art. 15.1 above, SACE shall be entitled to request that the Guaranteed Parties take all suitable action, including, but not limited to, the institution and prosecution of appropriate legal proceedings, in their own names but for the account and in the interest of SACE, to recover any amount for which they have been indemnified. The expenses for the recovery of such amount shall be payable by SACE on demand of the Managing Bank.”
The discharge by SACE of the obligations of Nautical Trading (St Kitts) Ltd did not mean that the Government of St Kitts and Nevis was, as a result, itself discharged from its obligations as guarantor. Quite the contrary: it was not Nautical Trading that discharged the obligations to the creditor Banks, but SACE. Since SACE was subrogated to the rights of the creditor Banks, and since the creditor Banks could call on the Government of St Kitts and Nevis as “primary obligor” under Clause 9(a) of the Credit Agreement, SACE can claim back from the Government the full amount of what it has paid out to the creditor Banks. That is the full amount which Nautical Trading as the borrower should have paid. Mr Padfield’s advice to me is that the Government of St Kitts and Nevis can be treated as the “primary obligor” and not merely as a guarantor of the principal debtor’s obligations under the Credit Agreement. I accept that advice. Since SACE is subrogated to the rights of the creditor Banks, and since the Government is the “primary obligor” under Clause 9(a) of the Credit Agreement, SACE likewise can treat the Government as a primary obligor. SACE may recover what it has paid out to the creditor Banks, on the basis that the Government is to be treated as if it were the borrower of the monies loaned to Nautical Trading. I should note an argument advanced by Ms Mitcham. She submitted that there was no indebtedness of US $25 million, since (among other things) “there can be no subrogation of the debt by SACE to recover any money from St Kitts and Nevis since it was the borrower who paid to insure the loan.” In fact the premium was paid by Mr Rodriquez, the Italian seller of the hydrofoils. In any event I reject this submission. Whoever pays the premium on an insurance guarantee in a complex international commercial transaction is irrelevant to the right of subrogation. In this case the right of subrogation was central to the whole Credit Agreement of 30 May 1986 and its surrounding arrangements, but for which the Credit Agreement would never have happened.
A Different Perspective

Even if it were arguable that the Government of St Kitts and Nevis was not contractually liable to SACE for the amounts paid out by SACE to the creditor Banks, there is an alternative way in which the law would affix responsibility on the Government of St Kitts and Nevis for the loss suffered by SACE. Given the interlocking relationship between the Italian exporter, the St Kitts company borrowing from a consortium of Banks the money to purchase the hydrofoils from the exporter, and the Italian export credit agency, expressly on the face of the Credit Agreement, supporting the lending of the money under an agreement with the creditor Banks, English law will readily import a duty on the part of the Government of St Kitts and Nevis to take care in performing its acknowledged tasks.

Starting from a House of Lords decision in 1963, called Hedley Byrne & Co Ltd v Heller Partners Ltd, up to 1999, the courts have developed a principle that it is a normal requirement from the circumstances of related activities that a person undertakes some responsibility outwith the law of contract - namely, in the field of tort liability. Where there is a contract, there is no difficulty about the contracting parties: the question is whether there is a warranty to perform some stated task. In order that a person can claim from another some legal remedy, there must be established a proximate relationship between that person and the person causing the former some loss or damage which brings them virtually into the position of persons contracting with each other.

In Hedley Byrne advertising agents had placed substantial forward advertising orders for a company on terms that they were personally liable for the cost of orders. They asked their bankers to inquire into the company’s financial stability; their bankers duly made inquiries of Hedley Byrne, merchant bankers, that gave favourable references - but stipulated that they were “without responsibility”. In reliance on the reference, the advertising agents placed orders that resulted in a loss of £17,000. The House of Lords held that a negligent, though honest misrepresentation, could give rise to an action for damages for financial loss caused thereby, apart from a contractual or fiduciary relationship. The basis for the action was that the law implied a duty of care when a party seeking information or assistance from a party possessed of a special skill or judgment trusts him to exercise due care, and that party knew or ought to have known that reliance was being placed on that skill and judgement. (The express disclaimer by the bankers in that case excluded a duty of care). The Hedley Byrne decision has been consistently applied in a number of analogous situations.

In Caparo Industries plc v Dickman and others the House of Lords, in five separate, concurring speeches, unanimously applied the Hedley Byrne decision and in the process indicated the factors to which significance was to be attached as guides to the existence, scope and limits of the varied duties of care which the law imposes. I cite only one passage from the lengthy judgments. Lord Oliver of Aylmerton said (at p.637E-F):

“…it is not easy to cull from the speeches in the Hedley Byrne case [1964] AC 465 any clear attempt to define or classify the circumstances which give rise to the relationship of proximity on which the action depends and indeed Lord Hodson, at p.514, expressly stated (and I respectfully agree) that he did not think it possible to catalogue the special features which must be found to exist before the duty of care will arise in the given case. Lord Devlin at p.530 is to the same effect. The nearest that one gets to the establishment of a criterion for the creation of a duty in the case of a negligent statement is the emphasis to be found in all the speeches upon ‘the voluntary assumption of responsibility’ by the defendant.”
That decision was again applied in the Court of Appeal in James McNaughton Paper Group Ltd v Hicks Anderson & Co (a case incidentally in which Mr Padfield appeared for the successful defendant). Neill LJ (p.122G - 123C) basing himself on Hedley Byrne and Caparo, adopted the analysis of recent jurisprudence in the Privy Council and the House of Lords made by Lord Bridge of Harwich in Hedley Byrne said (p.617-8):

“What emerges is that, in addition to the foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of ‘proximity’ or ‘neighbourhood’ and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other.”
Neil LJ added (p.123F-G) that “at this stage the common law of England will develop step by step” and (p.123H) that “in the absence of some general principle, to examine each individual case in the light of the concepts of foreseeability, proximity and fairness…” I should add that in both Caparo and Hicks Anderson, the courts found that there was no duty of care; in Caparo (the liability for economic loss due to negligent misstatement was confined to cases where the statement or advice had been given to a known recipient for the specific purpose of which the maker was aware and upon which the recipient relied and acted to his detriment; auditors were deemed not to have a special relationship with shareholders of the audited company who, like any other investor, might purchase additional shares. In Hicks Anderson, accountants who prepared draft accounts inaccurately describing the financial state of a group of companies under a threat of a take-over, owed no duty of care to the successful bidder who suffered loss as a result of the take-over.

In Hedley Byrne Lord Devlin (p.532) concluded his lengthy judgment by stating that the question of liability in negligence for careless misrepresentation is whether the person harmed can set up “a claim equivalent to contract, and rely on an implied undertaking to accept responsibility”. “Equivalent to contract” and “assumption of responsibility”, as the key elements of tortious liability, were affirmed most recently by the High Court of Australia in Esanda Finance Corp. Ltd v Peat Marwick Hungerfords.

The acceptance by the Government of St Kitts and Nevis in 1986 to be primary guarantor under the Credit Agreement classically exemplifies the twin elements. I have no doubt that the courts in England would consider that, in becoming a party to the Credit Agreement as a guarantor of the lending by the creditor Banks, the Government of St Kitts and Nevis was contractually liable to all the participants in the two interlocked contractual agreements in ensuring that it was appropriately taking on the burden of guarantor. It is the variegated contractual obligations with the representations and warranties that underpin the law’s imposition of a duty of care, made the more imperative by the continuing obligations of the guarantor, an obligation that survives to this day. Manifestly, there was both proximity between SACE and the Government of St Kitts and Nevis and, by the nature of the financial arrangements for the loan to Nautical Trading that the Government voluntarily assumed responsibility such as to impose a duty of care.

During the course of the oral questioning of Mr Padfield on 15 November 1999, I floated the idea of this different approach to the law’s imposition of liability on the Government of St Kitts and Nevis. He did not demur. He accepted the proposition that, given the circumstances of the interacting contractual obligations, English law would not be stultified in applying the law in the manner I have described. Neither Ms Mitcham nor Mr Gonsalves at any time addressed any argument to me on the lines of a tortious liability; they concentrated entirely upon the contractual liability under the Credit Agreement. Apart from the clear contractual liability, the question posed for me is: Given the duty of care, was the Government of St Kitts and Nevis in breach of that duty in signing the guarantee? Put another way, were there acts of maladaministration or mismanagement in the manner in which the Government should have satisfied itself of the propriety of its commitments under the Credit Agreement of 30 May 1986?

A footnote to the question: was the Prime Minister’s signature a “mere formality”? I have indicated that to describe the legal consequence of the signature as primary guarantor to the Credit Agreement as a “mere formality” was, and is wholly inappropriate, since it completed the liability for the loan. That description could be made only if the manner in which the Government of St Kitts and Nevis dealt with the negotiations leading up to 30 May 1986 was perfunctory, i.e., was simply setting the seal to an acknowledged liability of indemnity to lending Banks. That was not the case, although I confess that at times the inaction and lack of proper processing of the primary guarantee displayed inattention, indeed indifference to the administrative details.

Since I have concluded - as indeed any legal adviser should have concluded in 1986 - that the Government exposed itself to contractual and tortious liability on the default in the servicing of the loan, the conclusion must be a serious failure by Government. At every stage of the formation of the Credit Agreement (probably the end of November 1985 till 30 May 1986) there was an absence of attention to the facts of a complex document. It is not without interest that the letter of 11 January 1986 from Roger Morgan to Michael Powell, containing an early draft of Clause 9 of the Credit Agreement, was initialled by Mr Powell on each page of the Clause. Mr Powell, in his evidence to the Inquiry, had no recollection of seeing the document, although he acknowledged that the initials were his. I conclude that the document did not pass into the hands of Mr Powell’s government colleagues; no such document has been uncovered from government files, although it is asserted by both Dr Simmonds and Mr Tapley Seaton QC that the documentation relating to the Credit Agreement would have been in existence at least in 1992 and 1993 when the exchanges were taking place between the Governments of Italy and St Kitts and Nevis.

A tailpiece: It is asserted that it would invariably be wrong for a tribunal to conclude that something is unarguable if the legal issues or the documents to be construed are inherently complex. Thus, the assertion goes, Mr Padfield’s view that the Government’s submission that it incurred no liability in reality under the Credit Agreement is unarguable, is unsustainable; he should have concluded that the Government’s liability was at least in doubt.

I am reminded of what Lord Greene MR said in Cow v Casey:

“…it is not sufficient under an Order 14 [application for summary judgment] case to flourish the title of the Increase of Rent Restrictions Acts in the face of the court and say that is enough to give leave to defend [the defendant has a case to argue]. If a point taken under the Rent Restrictions Acts is quite obviously an unarguable point, the court has precisely the same duty under Order 14 as it has in any other case. It may take a little longer to understand the point and to be quite sure that one has seen all round it in a case under the Rent Restrictions Acts than in other cases, but when the point is understood and the court is satisfied that it is really unarguable, the court has the duty to apply the rule…” [Italics supplied]
Having fully canvassed the provisions of the Credit Agreement, I am convinced that the assertion that the Government of St Kitts and Nevis in 1986 undertook no legal liability is unarguable.

Part II A(5)
The Aftermath of the Draw-down, Post-31 October 1986

At the draw-down of the loan on 31 October 1986 everything was in place for the monies to be paid to the Italian suppliers in payment by Nautical Trading the borrower under the Credit Agreement. The two hydrofoils that went to Puerto Rico in March 1986 had not reappeared, and there was no prospect of them doing so; they turned up in Cyprus in 1992. Nautical Trading was, therefore, without income from the hydrofoil service that had ostensibly been contemplated by the sale and purchase of the three hydrofoils in early 1985. What transpired between the draw-down date and the breakdown in the repayments on the loan was to a great extent beyond the knowledge of Government, let alone any ability to influence events to stem the tide of financial losses to SACE and the Government of St Kitts and Nevis. The ministerial actions, such as they were, responded to a realisation that the whole enterprise was a fraud and that attempts at rescuing the situation were correctly tried and inevitably failed. What follows in the rest of this chapter is merely a chronicle of the major events, interspersed with reference to occasional ministerial action.

On 31 October 1986 the money transactions took place. Rodriguez of SNAV received US $25,330,000, the purchase price of the hydrofoils. On the same day SNAV, the supplier, forwarded US $12.2 million from Banco di Sicilia, Messina, to Morgan Grenfell. There were two transactions, one of US $10,450,000 for payment of 25% ownership acquired in Nautical Trading; the other, US $1,750,000 was to be separated in the accounts of Bluematt Investments Ltd, and Nautical Trading. (At this point Bluematt was 75% owner of Nautical Trading. SNAV owned the other 25%.) The US $10,450,000 was used to pay the deposit of US $6,465,634.41 & Deutsche Bank Luxembourg to satisfy a deed of indemnity and security for the first three payments of the loan and 85% of the third payment. US $270,310.11 was credited to Nautical Trading for operating capital. US $1,777,938.74 and US $1,936,116.74 was paid, through Morgan Grenfell, to Chase Manhattan Bank NA Luxembourg, in the names of Sycamore and Bramhall respectively, separate trust accounts that were corporate veils for Mr Morgan and Mr Adams, and represented their commissions on the sale of the hydrofoils. Around this time the directors of Nautical Trading were no longer in control of daily operations. Aliscafi SNAV S.p.a, the 25% shareholder (Rodriquez) was effectively controlling the operations of Nautical Trading.

The amount of US $1,750,000 was deposited to the account of Nautical Trading and used to pay Morgan Grenfell its management fee of US $506,000, expenses of US $150,000, first agency fee of US $15,000 and a bank commitment fee of US $53,826.25. The outstanding amount of US $1,025,173.35 was placed on deposit, alongside the US $270,310.11. It appears that Mr Rodriguez paid all the costs associated with the contract, in addition to the purchase of 25% shareholder interest in Nautical Trading. He also paid the premium on the insurance guarantee from SACE, an amount of US $861,760.

By the autumn of 1986, revenues to Nautical Trading began to dry up. Information from Puerto Rico (where the hydrofoils were apparently operating) is lacking. Bits of documentation did emerge from the London end of the various money transactions. By then the Government of St Kitts and Nevis had become alive to the problem, having indicated that it wanted to acquire a shareholding in Nautical Trading. On 1 December 1986 Roger Morgan’s legal adviser, Mr Rupert Wright telexed his client that a call had been received from Ms Constance Mitcham, the Minister for Women Affairs. She said that the Government had received the share certificate for US $1.25 million, but was concerned that the company documents were not current, the tax needed to be paid in relation to the share capital, and that a Board meeting should be held in St Kitts (they had invariably been held in Brecon, Wales) and a representative of the Government be appointed to the Board. The Government also wanted to be informed how much of the money had been drawn-down in relation to the loan.

Over the next three months Mr Morgan instructed Mr Ian Fieldhouse, Price Waterhouse, to investigate NTS ltd and also prepare statements of affairs for NTS Ltd. On 8 April 1987 Mr Michael Powell sent a telex to Rupert Wright advising him that the Government had concerns with NTS Ltd. It appears at this point that the Government no longer wanted to be involved in the operation. On 13 April 1987 Roger Morgan, Bill Adams, Rupert Evans and Ian Fieldhouse met to discuss the action that should be taken. Mr Fieldhouse completed both minutes of the meeting, as well as “off the record notes” of this meeting. It is evident from the contents of the “off the record notes” that Mr Adams clearly misrepresented and deceived Mr Fieldhouse as to his business activities and background.

Documentation from Price Waterhouse indicated that Mr Tapley Seaton QC attended a meeting on 20 May 1987 at the High Commission in London to discuss the problems with NTS Ltd. There is also a letter from Mr David Mills (solicitor for Leopoldo Rodriguez) to Mr Seaton concerning the problems with NTS Ltd company status and the provision in the agreement to transfer 20% of the shares of the company to the government. Mills again wrote on 5 June 1987 referring to the meeting of 20 May at the High Commission. Ian Fieldhouse’s notes of a telephone conversation with Rupert Wright on 7 October 1987 indicated that a meeting had occurred with the Attorney-General of St Kitts and Nevis, Wright and Morgan, and the content of the meeting concerned the transfer of shares to the Government. Another note of a call presumably on the same date:

“…Rupert called to keep in touch and to tell me that the question of purchase of the company by the Government of St Kitts is still being considered. He believes that they are faced with Hobsons choice, since if they do not attempt to run the company profitably, their guarantee for US $25 m will be called upon less any receipts on realisation of assets. It appears that presently the Cabinet is split two for and two against the deal. Those against wish to protest to the World Bank about Morgan Grenfell’s conduct. We agreed to keep each other informed if there were any further developments.”
The Attorney-General apparently believed there was still a future for NTS Ltd. Rupert Wright subsequently sent a draft agreement that had been approved by David Mills. He stated in his letter that he understood that the Government was meeting shortly to approve the proposed sale of shares to the Government, agreed to at that meeting in London on Tuesday 6 October 1987. The agreement is eleven pages in length.

On 19 November 1987 Mr Tapley Seaton QC sent a telex to Morgan Grenfell:

“…The Government is considering the matter of the proposed transfer of shares and the future of Nautical Trading (St Kitts) Ltd. The documentation submitted has been examined and we consider that further discussions among all parties are required so that all issues may be explored. Accordingly the Government proposes a meeting of all parties in St Kitts during the week of November 30 to seek to resolve all outstanding issues. We trust that a favourable response will be forthcoming from all concerned.”
Under the terms of the Credit Agreement the first instalment became due on 30 April 1987. The security deposit placed with the Deutsche Bank, Luxembourg, covered the first three principal instalments, and 85% of the fourth instalment. By the end of 1988, however, NTS Ltd was in default of its loan, and SACE was required to make the payments. The third instalment became due on 30 April 1988 and the fourth due in October 1988.

On 21 March 1992 Winnerstar Shipping Company Ltd, Cyprus agreed to purchase the three hydrofoils: San Christobal II, Princess Zoe and May W Craig. Winnerstar Shipping Company was incorporated 4 July 1991 and was represented by David Mills. The Italian authorities report that the actual owner and directing mind of Winnerstar is Vittorio or Giovanni Morace, the former General Manager of Aliscafi Snav SpA. The vessels were sold for US $380,000, a very low sale price, given the purchase value of US $29,800,000 in 1986.

By May of 1988, the Government of St Kitts and Nevis received telexes from the Embassy of Italy, Caracas, Venezuela notifying them that payments and interest due 29 April 1988 had not been paid by NTS Ltd and SACE had to pay the relative indemnity to Morgan Grenfell by 3 June 1988. The Italian Embassy indicated they would be grateful for any prompt and useful action to settle the matter. The Government of St Kitts and Nevis replied stating that the Attorney General would travel to Italy the week of 19 June 1988 to discuss the matter. The reply also states “…The Government of St Kitts and Nevis is taking all necessary prompt and useful action to ensure the payment by Nautical Trading St Kitts Limited of the outstanding interest due”. Mr Seaton did travel to Italy for this purpose and met with SACE officials, as well as Mr Cavalchini of the Ministry of Foreign Affairs, Italy.

A two-page report, dated 28 June 1988, titled “Director Announcement” (SACE - Special Division for Credit Insurance In Exports) was made. The report states that Mr Tapley Seaton QC was in the offices of SACE to explain the situation. Mr Cavalchini of the Ministry of Foreign Affairs also received him. The report states:

“…Mr Seaton declared that, because of some disagreements between the shareholders of the Nautical Trading St Kitts Ltd. (British shareholders for 75% and hydroplanes company for 25%) the hydroplanes could not be used and for this reason the expected monetary income destined to pay the debt contracted for the financing granted by the Morgan Grenfell was not realised…”
The report stated that Mr Seaton was striving to solve the matter out of court and the Government was examining the possibility of buying back the share of NTS Ltd. Subsequent to this report, there appears to be no other contact between the Government of St Kitts and Nevis and the Italian Government for some time, until the meeting between Mr Egone Ratzenberger and Dr Simmonds on 2 November 1992 (see Part II A(6)).

Around this time, the Italian prosecuting authorities began a criminal investigation of Leopoldo Rodriguez and Vittorio (or Giovanni) Morace of SNAV and officials of SACE the former two are alleged to have:

“…conspired together and with others, contrary to Article 640 and 640 bis of the Italian Penal Code, to defraud SACE the Italian Export Credits Guarantee Department in relation to the guarantee of a contract between Aliscafi SNAV, an Italian company located in Messina and Nautical Trading (St Kitts) Ltd, a company located in St Kitts and Nevis, for the supply by SNAV to Nautical of three hydrofoil ferries to the value of US $29,800,000.”
For reasons of the inadequacy of the documentation (particularly at the St Kitts end of the transactions) the unavailability of crucial witnesses from abroad who could fill in some of the gaps in the Commission’s present state of knowledge, I make no findings in respect of anyone in Government in St Kitts and Nevis during the period from 31 October 1986 until to-day, save for two exceptions. First, the meeting of 2 November 1992 between the Italian envoy and the Prime Minister throws light on the attitude of the Government of St Kitts and Nevis to its liability under the Credit Agreement. Second, there is the response of Dr Simmonds and Mr Tapley Seaton QC to the Letters Rogatory of 1996 (see Part II A(7)).

Part II A(6)
The Meeting of 2 November 1992

Italy’s interests in the Caribbean are exercised principally out of its mission at Santo Domingo in the Dominican Republic. The Italian Ambassador in 1992, Dott. Rosselini, felt concern about the consequences to his country resulting from the default by Nautical Trading Co of St Kitts on the Credit Agreement. He reported back to his Government in Rome that someone from the Inspectorate within the Ministry of Foreign Affairs should conduct an investigation and meet with Ministers in the Kennedy Simmonds administration to clarify the circumstances of the hydrofoils and discuss the Italian Government’s disquiet about the huge liability which SACE had suffered under its insurance guarantee of 1986.

Mr Egone Ratzenberger, who was then the Deputy Inspector General in the Ministry, was sent as Ambassador-Pleinipotentiary to conduct the investigation. Together with Ambassador Rosselini, he arrived in St Kitts on All Saints Day 1992, and the next day the two Italian diplomats were received by the Prime Minister, Dr Kennedy Simmonds and one other Minister for a meeting at government Headquarters lasting about an hour. The meeting was not attended by any civil servant, and no official note came into existence. Mr Ratzenberger made his own contemporaneous note, from which he composed his report of 28 November 1992. This report was an internal document, not intended for circulation. Subsequently, when the Italian authorities on 13 November 1995 sought judicial assistance in the form of Dr Simmonds and Mr Tapley Seaton QC being examined in St Kitts as witnesses in Italian criminal proceedings, an English translation of Mr Ratzenberger’s report accompanied the letters of request. The English version of the report was circulated to participants in the Inquiry for any observations.

Mr Ratzenberger came to St Kitts to give oral evidence on 16 November 1999, but due to the activities of Hurricane Lenny he was unable to be called to give evidence until the morning of 20 November 1999. The circumstances of the Inquiry arranging for Mr Ratzenberger to be taken on a Saturday morning in the wake of the devastation caused by Hurricane Lenny provoked a minor storm from Dr Simmonds. On Friday 19 November 1999 on the local radio he denounced the Commission of Inquiry for its insensitiveness, and concluded that it showed how “evil” the Commission was. The Commission issued a statement that evening (which was similarly broadcast) explaining that Mr Ratzenberger had to return on the Saturday to his post as Ambassador to the Republic of Slovakia in Bratislava. Counsel for Dr Simmonds were contacted in order that they might attend to ask questions of Mr Ratzenberger. In the event Mr Vernon Viera alone, on behalf of Dr Simmonds, did attend. With pronounced courtesy and gentle effectiveness, he asked Mr Ratzenberger a number of pertinent questions (Mr Viera was insistent that he was not “questioning” Mr Ratzenberger; rather he was putting the matter relating to the 1992 meeting “in its context”. The impression that Mr Viera gave was that he was, in effect, apologising for his client’s outburst on the radio the previous day.)

Mr Ratzenberger produced before the Commission of Inquiry the original version of his report in the Italian language, and stated that he regarded the translation into English as “very good”. Hence, no point was taken by Mr Veira of any difference in meaning between the Italian and English versions. But Mr Viera prefaced his questioning by saying that Mr Ratzenberger’s report and oral evidence relating to what Dr Simmons is recorded as having said had to be interpreted in the diplomatic context of the meeting of 2 November 1992. Mr Ratzenberger did not demur from that proposition, so far as it was intended to reflect Dr Simmonds’ interpretation of what he was recorded as having said on that occasion. I have no hesitation in so deciding the full impact of that meeting. It would have helped me to arrive at that position, had there been on the files of the Prime Minister’s office a record from the Kittitian side of what was said. I am unsure whether in similar situations in other democratic countries there would have been present a civil servant taking a note. But since transparency and public accountability - the twin pillars of good governance - were not notable features of the Simmonds administration, I am not surprised that no record appears to have been made. Without a Kittitian version of the meeting, the Commission is, once again, handicapped. The natural inclination is to prefer the version that is recorded. But, in fairness, I have adopted initially a neutral stance.

While Mr Ratzenberger was highly critical of the Government of St Kitts and Nevis - “ The Government of St Kitts and Nevis is certainly responsible of serious negligence and disconcerting irresponsibility towards our country.” - he did not spare Morgan Grenfell - “the bank never expressed uncertainty towards operations in territories” until recently under the British Crown, therefore the banking system had the “possibility to get concrete information. It would be necessary to present a denunciation of a similar attitude by the appropriate banks.” - or his own country’s agencies - “it is also necessary….to question the Italian maritime authorities, the export company and everybody else capable to contribute to reconstruct the different phases of the affair…” The responsibility of all those who participated in arranging the loan for the purchase of the hydrofoils is a matter for later considerations on two matters which Mr Ratzenberger recorded responses form Dr Simmonds. Most of the talking on the Kittitian side was conducted by the other person present. Dr Simmonds in his evidence to the Inquiry has been unable to recall who it was accompanied him; he could not say whether it was a fellow Minister or an officer in the Ministry of Foreign Affairs. Mr Ratzenberger could say only that he thought it was the person responsible for the harbour.

The two matters were: first, on the question of providing information about the movements of the hydrofoils. Dr Simmonds, in confessing that “nothing was done” in that regard, was recorded as being “embarrassed, but not too much”. That confession was confirmed by Dr Simmonds when giving evidence to the Inquiry. The failure to trace the whereabouts of the hydrofoils, post-March 1986, is a topic for a later chapter.

Second, Mr Ratzenberger asked Dr Simmonds what he thought about the development of the affair, to which Dr Simmonds is recorded as having “limited himself to make his apologies and to hope that our government would ‘give a pardon’ for this debt.” Before the Commission of Inquiry, Mr Ratzenberger affirmed Dr Simmonds’ remarks and stressed how he was certain that the word “pardon” was used. On the face of it, it would appear that Dr Simmons was conceding the liability (at least in part) of his Government as the guarantor of the loan and was seeking release from the legal consequences of the admitted indebtedness. It was more than an apology because, unlike the apologist, the giving of the pardon had to come from the Italian Government. Initially, in his written responses to the Commission Dr Simmonds would have me interpret it as simply an expression of regret for what has happened without conceding that the Government of St Kitts and Nevis had incurred any legal liability. It is true that this liberal, even generous interpretation of “seeking a pardon” is consistent with all other pronouncements from the St Kitts and Nevis government. For example, in response to the faxed message of 30 April 1993 from the Italian Government - no doubt a direct follow-up of the report which Mr Ratzenberger made to his Government - the St Kitts and Nevis Government was hotly denying any legal liability by the reference to the signing of the guarantee as a “mere formality”. Indeed, Dr Simmonds was simultaneously giving the impression to Mr Ratzenberger that the Government of St Kitts and Nevis would not meet its obligation. Mr Ratzenberger records that, in respect of the failure to trace the hydrofoils, “perhaps also for other reasons that cannot be confessed the persons in charge of St Kitts preferred to wait, since the Government was aware that they would not pay nothing for the debt they imprudently contracted.” Allowing for the dubiety of the double negative, I interpret Mr Ratzenberger as having ruefully, if critically accepted that nothing financial was forthcoming from this Caribbean source. And so it has proved to be. The Italian Government has taken no legal action, either in the courts of St Kitts, in Italy or England where the law relating to sovereign immunity from suit would not appear to allow any escape for the St Kitts and Nevis Government. In the result, Dr Simmonds, speaking for his Government has, in effect been given “the pardon” he asked for. And since “the pardon” has been granted, without resort to any legal proceedings, Dr Simmonds might interpret that consistently with his assertion - incorrectly, as I have found in chapter Part II A(4) on the relevant law - that the guarantee he signed did not give rise to legal liability. In the questioning of Dr Simmonds, it appeared that Dr Simmonds had been willing to accept his Government’s liability if the Italian Government was in turn agreeable to assist in developments on a broader basis in the future.

There is no conflict in the factual evidence. What Mr Ratzenberger heard, and recorded in his report of 1992 (and endorsed in 1999) carries total conviction. The only area of difficulty arises from a possible cultural gap. Mr Ratzenberger understands and speaks English with a fluency that one would expect of an Italian diplomat of distinction. He readily conceded in his oral evidence that Dr Simmonds may not have been confessing to legal indebtedness. With that Mr Ratzenberger would have no quarrel, save for the emphatic point that the Italian Government was insisting on St Kitts’ legal liability. The “pardon” is a word susceptible to demonstrate a subtle difference between a confessed liability from which relief was sought, and an expression of sorrow for a failed enterprise for which liability lay elsewhere than with the borrower and any guarantor.

Irrespective of any rival contentions over legal liability for the loss suffered by SACE (and hence the Italian Government) there was the clearest indication on all sides that the affair of the hydrofoils was a scandal waiting to be fully investigated. On any view a number of persons and organisations were partially to blame. But who, when and how? Any responsible Minister would instinctively have responded to the exchange of information and views at the meeting on 2 November 1992, by setting up a Commission of Inquiry. At that time it might have been possible to engage the interests of both the Italian and British Governments in a joint inquiry, or an inquiry in St Kitts supported and in part funded by the two European countries. There is no evidence that Dr Simmonds (as Minister for Inquiries) gave the slightest consideration to such a move. And even now the idea of a Commission of Inquiry would not be regarded by Dr Simmonds as permissible. If, as appears to have been the case, the Italian government, via SACE, was deciding to forego legal proceedings, the forebearance of the Italians deserved to be matched by a willingness on the part of the St Kitts and Nevis Government to find out the truth and to determine where blameworthiness lay. Good governance, in my view, dictated the deployment of a Commission of Inquiry. It ill-becomes Dr Simmonds, in 1992 and now in 1999, constantly, with manifest partisanship, to berate the present Government for setting up the Commission of Inquiry in 1997, albeit belatedly and at considerable cost. No doubt any commission of Inquiry in 1993 would, as I have found now in 1999, have come to the conclusion that the Government in St Kitts and Nevis was seriously at fault in 1986 in entering into a palpably imprudent and improvident contract of guarantee of a loan of US $25,330,000. The fact that Dr Simmonds and his political colleagues would inevitably have been found wanting in their administration of affairs pertaining to the Credit Agreement is no excuse for denying the public an exposure of a commercial scandal involving its Government. Indeed, the suspicion of governmental maladminstration rather than external fraud is a factor that should have weighed heavily in favour of a Commission of Inquiry. Such a step taken by the Government of St Kitts and Nevis might have gone a long way towards assuaging the understandable irritation felt by the Italian Government. The meeting of 2 November 1992 should have proposed Dr Simmonds to set up a Commission of Inquiry at the latest in 1992.

Part II A(7)
The Letters Rogatory 1996 - 2000

Mr Egone Ratzenberger’s translated report of 28 November 1992 was received as an enclosure to a letter of request, dated 13 November 1995, from two assistant prosecutors in Rome investigating in connection with criminal proceedings against officials of SACE and officers of ALISCAFI SNAV. In the light of information revealed in Mr Ratzenberger’s report about the Italian Government’s inability to verify the various responsibilities for the disappearance of the hydrofoils, the Rome prosecutors were requesting that the former Prime Minister, Dr Kennedy Simmonds and the former Attorney General, Mr S W Tapley Seaton QC, should give evidence in the Italian criminal proceedings concerning, among other things, “the non-payment of the state of St Kitts that vouched for the operation [and] for the credit misstatements concerning the financing granted” by the seven banks to Nautical Trading. The two prosecutors asked to be allowed to be present at the examination [see over]. The letter of request was made through the recognised diplomatic channels to the Minister of Justice (i.e. the Attorney-General) of St Kitts asking for judicial assistance from the authorities of foreign country in pursuance of the comity of nations. The formal Letter of Request (Rogatory Commission) was received by the St Kitts and Nevis Government from the Italian Embassy in Santo Domingo on 17 January 1996; a supplementary letter was received on 4 March 1996. There had been an intimation in November 1995 of the forthcoming request. On 22 May 1996, Crown counsel appeared before Mr Justice Neville Smith who requested that material about the criminal proceedings in Rome should be supplied. On 25 June 1996 Crown counsel filed a supplementary affidavit exhibiting the further information from the Italian Government. On that day an ex parte order was made by Mr Justice Redhead, and a date for examination of the two witnesses was set for October 1996; fresh dates were set for November 1996. Dr Haynes Blackman, the Chief Magistrate, was appointed to be the examiner. By letter, dated 19 November 1996, Dr Blackman indicated that he would await the outcome of the summons, which had been filed on 13 November 1996, to set aside the subpoena on Dr Simmonds and Mr Seaton to attend for examination as witnesses. It had been made abundantly clear in the letter of request that Dr Simmonds and Mr Seaton were in no way liable as witnesses to any penal sanction. This evidence was simply designed to gather material for the criminal proceedings.

To complete the events that followed the application to set aside the subpoenas, hearings on the application by Dr Simmonds and Mr Seaton took place before Mr Justice Neville Smith in November 1996 and January 1997. Judgment on the summons to set aside the subpoenas was delivered by the judge on [date] February 1997. The judge upheld a submission that since the independence of St Kitts and Nevis in September 1983, the English legislation governing the jurisdiction to supply evidence to foreign tribunals had lapsed, and that nothing had replaced it under the laws of St Kitts and Nevis. The letter of request was therefore invalid. The Attorney General gave notice of appeal against the judgment of Mr Justice Neville Smith. Indeed, I am bound to proceed on the assumption that the judge accurately stated the law of St Kitts and Nevis; unless and until such time as the Eastern Caribbean Court of Appeal reverses him, that is the law. Under the existing law, there is no formal machinery for examining Dr Simmonds and Mr Seaton before the Chief Magistrate as witnesses in the Italian proceedings.

The point for this Inquiry remains, however, whether Dr Simmonds and Mr Seaton acted properly in their approach to the request from the Italian authorities for evidence in the criminal court in Rome. In other words, should Dr Simmonds and Mr Seaton have indicated their unqualified willingness to assist the Italian prosecutors and, if necessary to that end, to waive any jurisdictional hurdle to giving evidence? Why did they frustrate the Italian request by issuing the subpoena to se aside the ex part order of Mr Justice Redhead?

Mr Seaton in his answers of 4 October 1999 to a questionnaire, said that “when the letters of request came from the Italian prosecuting authorities in November 1995/January 1996 I did not give any reason for not readily acceding to the request that I give evidence as a witness. I passed the documents to my solicitors for review. They advised that the matter was not in order and that the documents were significantly defective. They informed counsel [Mr Fitzroy Bryant, now deceased] that he should put his documents in order and that once that was done I would have no difficulty in acceding to the request. I could not accede to an improper and invalid request. The court [referring to the judgment of Mr Justice Neville Smith] agreed with the position of my counsel”. Dr Simmonds’ response was to like effect. In their oral evidence on 10 January 2000 the two men reaffirmed their written evidence. Mr Seaton was insistent that throughout he desired to co-operate and as and when the defect was remedied he would be only too happy to comply. Dr Simmonds did not adopt that stance. He indignantly claimed that it was his “constitutional right” to consult his lawyer and object to defective procedure in the letters of request and that in any event it was improper for the Commission of Inquiry to be engaged in considering this matter since it was not within the terms of reference. It was pointed out to Dr Simmonds that as long ago as 5 October 1999 counsel for the Commission had indicated in his opening statement that the Commission was interpreting its terms of reference to include the issue of the letters rogatory; indeed Ms Mitcham on the following day, in her opening statement, made no objection to that interpretation. She could hardly have done so because interpretation of terms of reference is a matter for the Commission of Inquiry. Subsequently, because there appeared to be some doubt about whether the Commission’s interpretation was correct, the Governor-General’s warrant of 14 July 1999 was amended on 13 October 1999 to include the letters rogatory issue within the terms of reference - for the avoidance of doubt (Appendix 1).

For what purpose did the two men hand over the documents to their legal advocate? Was it done with a view to facilitating their appearance before the Chief Magistrate? Or were they seeking some advice which could avoid compliance with the letters of request? If the former was the true position, the advice that the documentation was not in order ought not to have led to the issue of the subpoena to set aside the order for the public examination made by Mr Justice Redhead. Assuming (as it turned out, a valid assumption) that in the early part of 1996 the legal advice was correct in indicating a lack of jurisdiction, the choice was available to Dr Simmonds and to Mr Seaton to accept the lack of jurisdiction, to inform the Attorney-General’s office of this viewpoint and offer to find a way round the dilemma. This was not done; instead the legal advice was adopted - I am tempted to add “gleefully” - in order to frustrate the process of giving evidence in court of a friendly foreign state. Issuing the subpoena to set aside the court orders is hardly the message of someone wanting to accede to a request, but finds himself unable to do so on some technical legal ground. The proper responses would have been to acknowledge the legal hurdle and seek to find a way round the difficulty. In that they did not adopt such a stance, they are to be criticised for not assisting the Italian authorities, particularly since neither of them was in any conceivable way in jeopardy from either Italian or St Kitts tribunals. Any expressed desire to achieve the outcome of becoming witnesses was, and is in my view insincere. They had no need whatsoever of challenging the letters of request in court proceedings, unless, of course, they had some reason or motive for not wishing to co-operate. Could there be an explicable reason why Dr Simmonds and Mr Seaton were unwilling to expose themselves publicly, even if they were immune from any direct consequence of giving evidence to the Italian criminal court?

The stance adopted by Dr Simmonds and, by reference, Mr Seaton was always that the Government of St Kitts and Nevis never at any time undertook any legal responsibility for the non-servicing of the Credit Agreement. That stance has been maintained before me in this Inquiry. By appearing as witnesses before the examiner and being subject to cross-examination on oath, their remonstrating of “no liability” would be put to the test, as it has been in the course of this Inquiry, with the conclusion that there was a demonstrable liability.

At the time of deciding to avoid the examination before the Chief Magistrate - that is in 1996/1997 - there was no Commission of Inquiry looking into the hydrofoil affair. The Commission of Inquiry was initiated in July 1999, long after the ruling of Mr Justice Neville Smith. The problem facing Dr Simmonds and Mr Seaton was that their protestation of a “mere formality” or “no liability” might be severely tested by the two assistant prosecutors. Dr Simmonds would undoubtedly have been faced with the report form Mr Ratzenberger that Dr Simmonds had, contrary to the declared position of his Government, admitted liability (in part at least) and had asked for a “pardon”. That would be embarrassing, even if he was able to refute the precise utterance.

Mr Seaton faced a similar dilemma. In June 1988 he had visited the offices of SACE and to the Italian Ministry of Foreign Affairs in order to explain the situation which arose whereby the insurance guarantee had to be implemented. SACE observed that the insurance guarantee would never have been granted, save for the guarantee of the loan by the Government of St Kitts and Nevis. An announcement of 26 June 1988 from the Special Division for credit insurance in exports stated “...the financing is supported by a complete guarantee of refund by the Government of St Kitts”, to which Mr Seaton is reported to have “admitted the validity of this consideration”. Mr Seaton was further reported as saying that his Government “will try to solve the question out of court as to the new terms of the loan”, and later, “...the authorities of St Kitts agree that the observance of the previous obligations affects any other commercial relationship between the two countries...” All these factors point strongly to an acceptance (if qualified) by Mr Seaton of financial obligation as at June 1988, when there had been only the first default on repayment of the loan.

My conclusion is that Dr Simmonds was not keen to undergo the examination by the Italian prosecutors, and readily seized upon the legal advice from Mr Terence Byron that the documentation on the letters of request was faulty. Much too readily, he (together with Mr Seaton) then took the opportunity of the available challenge in the courts, so as potentially to avoid the embarrassment of any query about their actions over the Credit Agreement. I do not find acceptable the motivation for not co-operating fully with the Italian authorities. Even if they were reluctant to comply with the letters of request, that was not a valid reason for declining to assist in the Italian criminal proceedings. Either way - a sincere desire to accede “readily” to the request to give evidence, or finding an excuse to challenge the legal process of letters of request - the two men are to be criticised. If the former was the case, the choice was theirs to circumvent any procedural defects in the documentation. If the latter, they were impermissibly taking refuge in any procedural defect to avoid facing awkward questions in the public forum of the Chief Magistrate. Dr Simmonds protested that he was bound to act on his lawyer’s advice. When I pointed out to him that the aphorism - “lawyers should always be on tap, but never on top” - Dr Simmonds disagree that the choice was his to reject any legal advice, if he thought that it was proper to do so.

Now that any such embarrassment no longer pertains, because the evidence about the responsibility of Dr Simmonds and Mr Seaton has been fully explored in the Inquiry, the two men should feel uninhibited in giving assistance to the Italians in the criminal proceedings. Those proceedings are extant; in November 1999 the Rome court adjourned the trial pending the obtaining of a report by a forensic accountant. Dr Simmonds and Mr Seaton should, on reading this report, instantly agree to collaborate with the Italian authorities in finding some way of providing their evidence, other than by way of (defective) Letters Rogatory. If the Italian authorities are willing to pay all their expenses to Dr Simmonds and Mr Seaton, the evidence could be given in Italy, thereby circumambulating the formal international requirements of obtaining foreign evidence. On giving of an undertaking to give such evidence, the Government of St Kitts and Nevis should discontinue its appeal against the decision of Mr Justice Neville Smith. I am confident that the Attorney-General will respond on the undertaking being given in writing by both men. By the nature of the Letters Rogatory, it will require an undertaking from both. In that way, public funds will be saved. I would further recommend that the Government should introduce legislation in accordance with modern statutes to give effect to Letters Rogatory.

PART II A(8)
Conclusions

The role played by the Government of St Kitts and Nevis as a primary guarantor in the financing of the sale and purchase of the three hydrofoils was a fiasco. It was a breakdown in the functioning of government and in the administration of its financial obligations - in this instance, in the context of an international commercial transaction involving major European institutional support for a project in a developing country. Everything that happened up to the signing of the Credit Agreement of 30 May 1986 was predicated upon the Government of St Kitts and Nevis accepting the legal obligations of a primary guarantor to the loan of US $25,330,00 to Nautical Trading (St Kitts) Ltd. The acts and omissions, which demonstrated the breakdown in the financial administration, were primarily, if not exclusively traceable directly to the Prime Minister and Minister of Finance, Dr Kennedy Simmonds. The Attorney-General, Mr Tapley Seaton QC, as the government’s legal adviser and member of the Cabinet bears some responsibility for the failure of the Government to meet the standards of public administration that should have been manifest in the signing by Dr Kennedy Simmonds of the Credit Agreement. (The list of the serious failures in public (financial) administration is provided at the end of this chapter).

It will not have escaped the reader of this part of the Inquiry that the conclusions are confined to the role of the Government of St Kitts and Nevis, through its Prime Minister and Minister of Finance in putting his signature to the Credit Agreement of 30 May 1986. But that role is part only of a wider picture of, what can only be described as an Anglo-Italian fraud whose tentacles stretched out to an unsuspecting (perhaps insufficiently suspicious) unsophisticated small state in the Caribbean.

The Inquiry has seen much documentation that discloses a massive raid on funds supplied by an export credit agency (the Italian SACE) and guaranteed by a consortium of banks, in turn guaranteed or indemnified by the Government of St Kitts and Nevis. The Commission has heard evidence that pointed strongly to a fraud and the likely fraudsters: criminal proceedings are afoot in Italy against officers of the Italian hydrofoil sellers and officials of SACE. While the Commission has been able to obtain written statements from three professional advisers to either the lender or borrower under the Credit Agreement (and was able to take oral evidence from them by audio-link with London and Milan) and to hear directly from Mr Simon Jackson, a former employee of Morgan Grenfell which was part of the consortium of the lending banks, there were large gaps in the knowledge of the Commission. While it had transcripts of interviews, conducted by the serious fraud office, of both Roger Morgan and William Adams (alias Evans) it has not been able to take evidence directly from them. Neither has the Commission been able to hear any evidence from the Italian end of the various transactions, save for the invaluable evidence from Mr Egone Ratzenberger about a meeting in 1992. Hence the picture is incomplete. In consequence, the Inquiry has perforce had to limit its findings to those aspects of the total purchase that focus on the action of the Government of St Kitts and Nevis. It cannot be too strongly emphasised that there has not been a scintilla of evidence in the totality of the material before the Inquiry that anyone connected with Government in St Kitts and Nevis (or indeed any Kittitians) has been a party to any fraud; or more important, that anyone in St Kitts and Nevis received any bribe or engaged in a corrupt bargain over the hydrofoil affair. Corruption, only in the narrowest sense of improper use or a serious failure to use, executive power can be laid at anyone’s door. It is mismanagement or maladministration of the affairs of state that have been exclusively under scrutiny by the Inquiry. Thus most of this Part of the report is focused on what led up to the Prime Minister’s signature on the Credit Agreement of 30 May 1986, the date of the draw-down of the loan under the Credit Agreement because they touch on aspects of public administration in St Kitts and Nevis are dealt with - namely, the activities of the Attorney General when default on the loan began in 1988; the meeting of Dr Kennedy Simmonds with the Italian envoy, Mr Egone Ratzenberger on 2 November 1992; and the response of Dr Simmonds and Mr Seaton to the issues of the Letters Rogatory in 1996. Otherwise, the larger issues about the nature and scope of the Anglo-Italian fraud find no place in this report.

The reader of this report might, nevertheless reasonably expect to be told of some explanation for the serious failures in public administration over the signing of the Credit Agreement. Absent any financial gain, directly or indirectly to any individual in St Kitts and Nevis, the answer seems to point to one driving force on the part of Dr Simmonds and his administration. I detect that the Government of the day had an overweening desire, born out of a misplaced sense (or, rather, an arrogance) of political power, to derive benefit to the islands of St Kitts and Nevis from foreign sources in the promotion of tourism, to the detriment (almost non-observance) of the demands of good governance.

In his submissions to the Commission of Inquiry Mr Tapley Seaton QC claimed that in tendering his legal advice to Cabinet on 4 April 1986 (and informally earlier) he took into account a number of non-legal factors and concluded that the decision to approve the Prime Minister’s signature to the Credit Agreement was a “matter of Government policy”. He misunderstood his role at that juncture. This result leads me to think that the role of the Attorney-General under the Constitution should be reviewed.

Managerial judgment, administrative skills, financial transparency and accountability, if they were ever in contemplation, were simply jettisoned or ignored in pursuance of a wrongly-assumed non-liability. No attention was paid to matters of good governance. The thorny issue of compatibility between good governance and small states is addressed in Part IV A below.

List of Serious Failures

I have not the slightest hesitation in coming to the conclusion that Dr Simmonds and Mr Seaton failed in a variety of respects to achieve the standard required of, respectively, a Prime Minister and an Attorney General. I list them:

1. There never was a proper survey or study by a Government department of the viability of the hydrofoil project. It does not appear that the feasibility study, sent to Morgan Grenfell in March 1985 by Mr Roger Morgan, was ever examined by Ministers or officials in the St Kitts and Nevis Government, with the exception of Mr Michael Powell. What Mr Powell provided, by way of Walter Simmonds’ assessment of profitability and Mr Pistana’s evaluation of Nautical Trading’s shareholding was wholly inadequate for any governmental purpose. These assessments were so crude as to be no more than informal guesses on which no reliance could be placed by executive government. It appears the project was never viable nor was there a remote chance the it would ever be.

2. There was never any legal opinion of sufficient weight and scope given to the potential liability of a guarantor under the Credit Agreement. In so far as Mr Seaton was providing legal advice it was deficient for such a serious issue as the signing of the guarantee with the potential financial exposure to the Government.

3. The terms and conditions of the Credit Agreement were never made the subject of a formal submission to Cabinet, and were never subjected to any scrutiny by Ministers.

4. The Cabinet approval on 4 April 1986 for Dr Simmonds to sign the guarantee was improperly considered, since there was no formal submission. The Agreement was not placed before Cabinet members and the minute disclosed no information about the loan to Nautical Trading, or its size.

5. The certificate given by Mr Tapley Seaton QC to the lenders that Nautical Trading was a company in “good standing” was founded on little or wholly inadequate inquiry about the trading activities of Nautical Trading.

6. Government never subjected the terms and conditions of the loan of US $25,330,000 to any public scrutiny, either through the National Assembly or by way of departmental review, or any public statement to the media.

7. No inquiry was ever made by any member of the St Kitts and Nevis Government of the credentials of Mr William Adams (alias Evans) or Mr Roger Morgan who were the promoters of Nautical Trading, which was the borrower under the Credit Agreement.

8. Reliance by the Government of St Kitts and Nevis on Morgan Grenfell to conduct an inquiry into the credentials of Mr Adams and Mr Morgan was misplaced. Morgan Grenfell’s interests, primarily if not exclusively, were both the protection of the consortium of Banks (including itself) from any loss and the insurance guarantee from SACE.

9. The Government of St Kitts and Nevis ought to have made an assessment of the value of the assets which it was guaranteeing. Was that not a failure of public administration; after all, the value was inflated five times?

10. The Government failed both to investigate properly (or at all) the background of the persons who were the foreign promoters of St Kitts company, Nautical Trading, and to have a voice and/or presence on Nautical Trading’s Board of Directors. The attempt made after May 1986 to be represented could be likened to an attempt to close the stable door after the horse had bolted.

11. The Government failed to make sure that St Kitts and Nevis remained the headquarters of the hydrofoil operations; the indifference of the Government to investigate the departure from St Kitts waters was a serious omission, since the protection of the guaranteed assets was very much Government business.

12. There is no reliable evidence that any senior civil servant was ever involved in preparing the Government’s response to the requirement to sign the guarantee on the Credit Agreement.

NOTICE OF PROVISIONAL CRITICISMS

Mr Tapley Seaton QC

1. That at no stage of the negotiations leading up to the signing of the Credit Agreement of 30 May 1986 did you order a proper investigation of Nautical Trading (St. Kitts Ltd.) for the purpose of advising the Prime Minister and Minister of Finance on the propriety of Government becoming a primary guarantor. (Upheld)

2. That you improperly gave in paragraph (i) of your legal opinion of 3 June 1986 (pursuant to clause 8(a)(vi) of the Credit Agreement) that Nautical Trading (St. Kitts) Ltd. was a company in “good standing” under the laws of St. Kitts and Nevis. (Not Upheld)

3. That you failed, at the Cabinet Meeting of the 4 April 1986 (or at a Cabinet Meeting in the months preceding that meeting) to explain to Cabinet members the full impact and meaning of the Government’s contingent liability under the forthcoming Credit Agreement of 30 May 1986. (Upheld)

4. That you failed to obtain independent leading counsel’s opinion as to the legal implications for the Government being primary guarantor under the Credit Agreement, on the grounds that the obligations on the Government were sufficiently serious to warrant outside legal advice. (Upheld)

5. That at no time, following the request from the Italian authorities on 17 January 1996, have you indicated either to the office of the Attorney-General of St. Kitts or to the Italian authorities that you would be willing to assist the prosecutor in Rome by agreeing to give evidence, irrespective of the validity of the Letters Rogatory. (Not Upheld)

6. That you improperly gave instructions to your solicitors which had the effect of frustrating the Italian criminal proceedings when you were not in jeopardy in the Italian criminal proceedings. (Upheld)

7. That you failed contemporaneously to ensure that the necessary documentation evidencing the Government’s participation in the Credit Agreement was kept in the files of the Attorney-General’s office. (Upheld)

8. That, having regard to the legal consequences to the Government in becoming the primary guarantor to the Credit Agreement, you should have advised against the Prime Minister and Minister of Finance signing the guarantee. (Not Upheld)

NOTICE OF PROVISIONAL CRITICISMS

Dr Kennedy Simmonds

. That in you capacity as Prime Minister and Minister of Finance you acted negligently in signing on 29 April 1986 the Credit Agreement of 30 May 1986. (Upheld)

2. That in seeking on 4 April 1986 the approval of Cabinet to you signing the Credit Agreement, you acted improperly in both not including the item on the Cabinet agenda on 2 April and failing to insure that the mention of the matter by you was accompanied by departmental submission (see item 2(c) on the Minutes of Cabinet meetings for 4 April 1986). (Upheld)

3. That in your capacity as Minister of Finance you failed to give instructions to officials in the Ministry to prepare submissions on the Credit Agreement. (Upheld)

4. That in your capacity as Minister of Finance throughout 1985 and up to 29 April 1986 you failed to ascertain sufficiently the viability and profitability of the hydrofoil project envisaged by the Credit Agreement of 30 May 1986. (Upheld)

5. That you improperly acted upon the information supplied to you (via your Deputy Prime Minister, Michael Powell) from Walter Simmonds in his letter of 7th June 1985 and from Ernest Pistana in his letter of 22nd June 1985, together with appended note from Ingle Rawlins (acting on the instructions of the High Commissioner in London). (Dismissed)

6. That in promoting the financial arrangements for the project of the hydrofoils you improperly kept the whole matter under the secrecy of government by not bringing the matter to Cabinet (other than on the 4 April 1986), not taking the matter to the National Assembly, and not in any way making the Government’s involvement in the Credit Agreement as the primary guarantor known to the public of St. Kitts and Nevis. (Upheld)

7. That in agreeing on behalf of the Government of St. Kitts and Nevis to become the primary guarantor to the Credit Agreement of 30 May 1986 you were acting irresponsibly towards Sezzione Speciale Per L’Assicurazione Del Credito All’Esportazione (SACE) - the Italian export credit agency - and therefore towards the government of Italy. (Upheld)

8. That in authorising the telex of 30 April 1993 (see supplemental bundle, pp.36-40) you improperly suggested to the government of Italy that its export credit agency SACE “should look to others [than the government of St. Kitts and Nevis] to satisfy their request for payment”, you being aware that the government of St. Kitts-Nevis was a primary guarantor under the Credit Agreement of 30 May 1986. (Upheld)

9. That at no time, following the request from the Italian authorities on 17 January 1996, have you indicated either to the office of the Attorney-General of St. Kitts-Nevis or to the Italian authorities that you would be willing to assist the prosecutor in Rome by agreeing to give evidence, irrespective of the validity of the Letters Rogatory. (Upheld)

10. That you improperly gave instructions to your solicitors which had the effect of frustrating the Italian criminal proceedings when you were not in jeopardy in the Italian criminal proceedings. (Upheld)

11. That on the disappearance from St. Kitts in or about March 1986, you failed to order an investigation by the police and other authorities to search for the whereabouts of the Hydrofoils. (Upheld)

12. That on the issue about the disclosure to the public of the default in the servicing of the loan by Nautical Trading (St. Kitts) Ltd. on the Credit Agreement 30 May 1986 and the contingent liability of the government of St. Kitts-Nevis in the early, you ought to have ordered a Commission of Inquiry under the Commission of Inquiry Act. (Upheld)