JSC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev & Ors [2015] EWCA Civ 906

Text for publication with redactions (indicated by square brackets) to omit information derived from the Defendant’s disclosure made pursuant to orders of the Chancery DivisionCase No A3/2015/2544[2015] EWCA Civ 906
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE (CHANCERY DIVISION)
MRS JUSTICE ROSE
HC/2014/000262 (formerly HC14D02752)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Friday 14 th August 2015
Before
LORD JUSTICE JACKSONLORD JUSTICE RYDERLORD JUSTICE BEAN
Between
(1) JSC MEZHDUNARODNIY PROMYSHLENNIY BANKClaimants(2) STATE CORPORATION “DEPOSIT INSURANCE AGENCY”Claimant(1) SERGEI VIKTOROVICH PUGACHEVDefendant/(2) KEA TRUST COMPANY LIMITEDRespondents(3) FINETREE COMPANY LIMITEDRespondent(4) BRAMERTON COMPANY LIMITEDRespondent(5) BLUERING COMPANY LIMITEDRespondent(6) MARU LIMITEDRespondent(7) HAPORI LIMITEDRespondent(8) MIHARO LIMITEDRespondent(9) AROTAU LIMITEDRespondent(10) LUXURY CONSULTING LIMITEDRespondent(11) VICTOR SERGEYEVITCH PUGACHEVRespondent
Ben Griffiths, Tim Akkouh and Patrick Harty (instructed by Hogan Lovells) for Claimants (Appellants)Hearing Hearing date : 11 August 2015
JUDGMENTLord Justice Bean :
[1]This is an application for permission to appeal from an order of Rose J refusing to grant a worldwide freezing order against nine corporate respondents in aid of a claim against the First Respondent, Mr Sergei Viktorovich Pugachev (“Mr Pugachev”), and further injunctions against Mr Pugachev and his son, Victor, the Eleventh Respondent. The hearing before us was, like the hearing before Rose J, in private and without notice.[2]In 1992 Mr Pugachev, together with a partner, founded the First Claimant bank (“Mezhprom”). In November 2010 the Moscow Arbitrazh Court declared Mezhprom to be insolvent, opened liquidation proceedings and appointed the Second Claimant (“the DIA”) as liquidator. On 25th January 2011 the Russian authorities began a criminal investigation with regard to the insolvency of Mezhprom and three days later Mr Pugachev fled Russia.[3]On 2nd December 2013 the Claimants began proceedings against Mr Pugachev in the Moscow Arbitrazh Court. On 11th July 2014 Henderson J, the first of eight judges of the Chancery Division to have considered this case so far, granted a worldwide freezing order without notice in aid of the Moscow proceedings.[4]The worldwide freezing order contained the usual orders for disclosure. On 23rd July 2014 Mr Pugachev provided a schedule of assets in purported compliance with that order. The stated value of the disclosed assets was $70 million. The assets listed in the schedule included interests as a discretionary beneficiary of a number of trusts.[5]On 25th July 2014 Henderson J made an order (“the trusts disclosure order”) requiring Mr Pugachev to swear an affidavit identifying the trustee(s), settlor(s), any protector(s) and the beneficiaries of each of the trusts and details of the assets which were subject to those trusts, together with copies of the trust deeds. The trusts disclosure order was stayed pending appeal. At a hearing on notice on 29th July 2014 the worldwide freezing order was continued.[6]It is unnecessary to set out every interlocutory step in this litigation, but it is sufficient for the moment to note that an application by the original trustees of the trusts to set aside the trusts disclosure order was refused on 30th October 2014 by David Richards J, and an application by Mr Pugachev to set aside the worldwide freezing order was dismissed on 15th January 2015 by Mann J.

The first hearing in the Court of Appeal

[7]On 27th February 2015 this court (Arden, Lewison and Christopher Clarke LJJ) gave judgment dismissing appeals by Mr Pugachev and the original trustees of the trusts against the trusts disclosure order of Henderson J and the order of David Richards J refusing to set it aside.[8]The substantive judgment ([2015] EWCA Civ 139) was given by Lewison LJ with whom Arden and Christopher Clarke LJJ agreed. Lewison LJ said:
“10. This is not an appeal against the original freezing order. Nor is it an application to vary its terms. The question for us is whether, under the terms of the freezing order as made, the judge was right to order him to provide information about the discretionary trusts. That in turn is a question of interpretation of the scope of the freezing order, which must be considered in the light of the nature of the interest of a member of a class of potential beneficiaries under a discretionary trust, and the purpose of making freezing orders. … 13. A beneficiary under a discretionary trust has a right to be considered as a potential recipient of benefit by the trustees. That is an interest which equity will protect. The trustees must apply some objective criterion in deciding whether or not to exercise their discretion in favour of a particular beneficiary; so that each beneficiary has more than a mere hope. But that right is not a proprietary interest in the assets held by the trustees, although it can be described as an interest of sorts: Gartside v IRC [1968] AC 553, 617-8. In some areas of the law, such as matrimonial finance, legislation is drawn widely enough to enable the court to take into account the likelihood that trustees will exercise their discretion in favour of a particular beneficiary in deciding what provision to make for a former spouse on divorce: Whaley v Whaley [2011] EWCA Civ 611. But even then the trust assets are not owned by the beneficiary spouse. … 15. On the face of it assets held by the trustees of a discretionary trust would not be amenable to execution if judgment is entered against one of the class of potential beneficiaries at the suit of a third party. The trustees might in such circumstances decide to confer a benefit on the beneficiary to save him from bankruptcy; but that would be a matter for them. If they did exercise their discretion in favour of a particular beneficiary the amount of the benefit would thereupon cease to be a trust asset and would become the asset of the beneficiary. It would then truly be his asset.”
[9]Lewison LJ went on to consider the judgment of Sir John Chadwick, sitting as President of the Court of Appeal of the Cayman Islands, in Algosaibi v Saad Investments Company Ltd (CICA 1 of 2010), which was considered in this court in JSC BTA Bank v Ablyazov (No. 10) [2014] 1 WLR 1414. He noted that in Ablyazov, Beatson LJ identified three guiding principles:
“i) The enforcement principle. The first and primary principle is that the purpose of a freezing order is to stop the injuncted defendant dissipating or disposing of property which could be the subject of enforcement if the claimant goes on to win the case it has brought, and not to give the claimant security for his claim. ii) The flexibility principle. The jurisdiction to make a freezing order should be exercised in a flexible and adaptable manner so as to be able to deal with new situations and new ways used by sophisticated and wily operators to make themselves immune to the courts' orders or deliberately to thwart the effective enforcement of those orders. iii) The strict interpretation principle. Because of the penal consequences of breaching a freezing order and the need of the defendant to know where he, she or it stands, such orders should be clear and unequivocal, and should be strictly construed.”
[10]At paragraph 56 of his judgment, Lewison LJ cited the well-known decision of this court in SCF Finance Co v Masri [1985] 1 WLR 876. The claimants had obtained a freezing order not only against the defendant's bank accounts in London but against his wife's as well, on the ground that he was carrying on business using that account. The wife applied to discharge the injunction against her on the ground that the account was hers. The question was whether the court should accept her assertion without further investigation. Hirst J said "no" and this court upheld his decision. Lloyd LJ gave the only reasoned judgment. He said:
"For convenience I would summarise the position as follows: (i) Where a plaintiff invites the court to include within the scope of a Mareva injunction assets which appear on their face to belong to a third party, e.g. a bank account in the name of a third party, the court should not accede to the invitation without good reason for supposing that the assets are in truth the assets of the defendant. (ii) Where the defendant asserts that the assets belong to a third party, the court is not obliged to accept that assertion without inquiry, but may do so depending on the circumstances. The same applies where it is the third party who makes the assertion, on an application to intervene. (iii) In deciding whether to accept the assertion of a defendant or a third party, without further inquiry, the court will be guided by what is just and convenient, not only between the plaintiff and the defendant, but also between the plaintiff, the defendant and the third party. (iv) Where the court decides not to accept the assertion without further inquiry, it may order an issue to be tried between the plaintiff and the third party in advance of the main action, or it may order that the issue await the outcome of the main action, again depending in each case on what is just and convenient. (v) On the facts of the present case the judge was in my view plainly right to hold that he could not decide the matter without further inquiry…"
[11]Lewison LJ continued at [57]:- “… the critical point is that in our case the assets of the trusts themselves are not within the scope of the freezing order. The "good reason to suppose" test in paragraph (i) [of the cited passage from SCF Finance Co v Masri] supports the making of the freezing order itself. It justifies a policy of "shoot first and ask questions later" but only where there is "good reason to suppose". What are already within the scope of the freezing order granted by Henderson J are Mr Pugachev's interests in the trusts, whatever those may be. The underlying trust assets are not. There appears to be a dispute between the claimants on the one hand, and Mr Pugachev and the trustees on the other, about whether in reality Mr Pugachev is in effective control of the trust assets. As I have said, I do not consider that the court is in a position to reach even a provisional conclusion on the current state of the evidence. But it is here, in my judgment, that the principle of flexibility comes into play. I do not consider that if the threshold test for including an asset within the scope of a freezing order is not met, the court is powerless. The bank does not ask that the trust assets be brought within the scope of the freezing order immediately. It asks for the opportunity to test its assertion that Mr Pugachev is the effective owner of those assets against his (and the trustees') assertion that he is not. If its assertion is correct, it may then be in a position to apply for the scope of the freezing order to be widened. If its assertion is incorrect then an application to that effect will fail. But in my judgment the court's concern that sophisticated and wily operators should not be able to make themselves immune to the courts' orders militates against denying the DIA that opportunity. As Robert Walker J put it in International Credit and Investment Co (Overseas) Ltd v Adham [1996] BCC 134, 136:
"… the court will, on appropriate occasions, take drastic action and will not allow its orders to be evaded by the manipulation of shadowy offshore trusts and companies formed in jurisdictions where secrecy is highly prized and official regulation is at a low level." "… the court will, on appropriate occasions, take drastic action and will not allow its orders to be evaded by the manipulation of shadowy offshore trusts and companies formed in jurisdictions where secrecy is highly prized and official regulation is at a low level."

Subsequent developments in this litigation

[12]The effect of the decision of the Court of Appeal upholding the trusts disclosure order was that Mr Pugachev was now required to provide the disclosure pursuant to the order of Henderson J which had been stayed pending the appeal. On 2nd March 2015, on the claimants’ without notice application, Peter Smith J made an order of the type approved in Bayer AG v Winter [1986] 1 WLR 497 restraining Mr Pugachev from leaving the jurisdiction and ordering him to deliver up any passport in his possession. When this order was served on him he delivered up a Russian diplomatic passport but (in breach of the order) failed to notify the claimants’ solicitors of the existence of a French passport. Peter Smith J determined at a hearing on 6 March 2015 that Mr Pugachev was in breach of both the trusts disclosure order and the passport order. On 10 March 2015 Rose J made an order for disclosure of the trusts information against Ms Natalia Dozortseva, a Russian lawyer and key adviser to Mr Pugachev. She also made a Bayer v Winter order against Ms Dozortseva.[13]On 17 March 2015 an application by Mr Pugachev for permission to appeal against Mann J’s decision refusing to set aside the worldwide freezing order was refused on the papers by Sir Robin Jacob. The inevitable application renewing the permission application to an oral hearing followed and is listed for 27th October 2015.[14]On six working days between 23 March 2015 and 20 April 2015 Mr Pugachev was cross-examined on his assets, living expenses and other matters (including Ms Dozortseva’s disclosure affidavits before Hildyard J.[15]On 23 April 2015 the Moscow Arbitrazh Court gave judgment for the claimants for RUR 75.6 billion (approximately US$ 1.5 billion).[16]On 22May 2015 Hildyard J considered and dismissed an application by Mr Pugachev to suspend the passport order to enable him to attend a hearing before French magistrates in connection with complaints raised by him against certain employees of the DIA. Mr Pugachev applied for permission to appeal and was represented (as he had been before Hildyard J) by leading and junior counsel instructed by Luxury Consulting Ltd. This court (Floyd LJ and myself) refused the application on 29 May 2015. So the passport order remained in force.[17]On 1 June 2015 Mr Pugachev was observed boarding a yacht, the MV Victoria, berthed in a marina at Chatham. On the same day, Henderson J granted an injunction requiring Mr Pugachev to disembark from the MV Victoria and restraining him from boarding any boat or ship. This order was continued at a hearing on notice on 5th June 2015 by Asplin J. On 12 June 2015 Hildyard J ordered Mr Pugachev to provide a further affidavit by 3 July 2015 addressing certain matters arising out of his cross-examination and continued the passport order meanwhile.[18]On 18 June 2015 Mr Pugachev’s appeal against the decision of the Moscow Arbitrazh Court was dismissed. We were told that he is seeking to bring a second appeal before the Russian Court of Cassation.[19]On 23 June 2015 the last confirmed sighting of Mr Pugachev within the jurisdiction took place. Shortly afterwards he fled the country in breach of the passport order. He has since confirmed in an affidavit that he has left the jurisdiction in breach of the passport order. He is now, apparently, in the south of France.[20]On 1st July 2015 a search order was made in relation to two residential properties in this jurisdiction, the offices of Luxury Consulting Ltd in Knightsbridge and the MV Victoria. The search order was executed on 3rd July 2015. On 21st and 22nd July 2015 a hearing took place before Rose J on an application by Mr Pugachev and Luxury Consulting Ltd to set aside the search order. On 27th July 2015 Rose J gave judgment dismissing the application. In the course of a detailed judgment she said, at [95]:- “Mr Pugachev left the country without any explanation and in apparent breach of the order of the court. He cannot complain if the court infers from this behaviour and from his previous deplorable conduct in these proceedings that he had no intention of complying with other aspects of the disclosure that is still in train. For the same reason I reject the criticism that Mr Pugachev makes that there was insufficient evidence of likely destruction of documents to justify making the order. Mr Pugachev had not only left the country in breach of the Hildyard order but there is a long list of alleged breaches of many other orders made against him and other judges who have dealt with this matter have found him evasive.”[21]In the meantime there had been a development which led to the present hearing. The original trustees of the trusts, the second to fifth respondents, are four New Zealand trust companies. They were represented in this jurisdiction by Farrer & Co LLP. On 24July 2015 Farrers sent a letter to the Court copied to the claimants stating that the original trustees had been given notice by Mr Pugachev and his son Victor of their removal and replacement as trustees by four newly incorporated New Zealand companies, the 6th to 9th respondents.[22]The claimants sought and obtained from Rose J permission to use information obtained from the trusts disclosure order to serve the worldwide freezing order on [a London clearing bank]. On being served, [the bank] notified the claimants that it would freeze Luxury Consulting Ltd’s bank accounts with it but would not freeze bank accounts held in the names of the trusts.

The application to extend the freezing order to the trusts

[23]On 30th July 2015 Mr Stephen Smith QC on behalf of the claimants applied to Rose J on a without notice basis to extend the worldwide freezing order to the second to tenth respondents inclusive, that is to say the four original trustee companies, the four new trustee companies and Luxury Consulting Ltd. The freezing injunction was sought on three alternative bases. The first was that the trust assets were in fact still beneficially owned by Mr Pugachev, and that the trustees could therefore be subject to a freezing order under the jurisdiction established in SCF Finance v Masri [1985] 1 WLR 976 and TSB International v Chabra [1992] 1 WLR 231. The second basis was that the claimants have a good arguable case under either section 423 of the Insolvency Act 1986 (transactions to defraud creditors) or section 339 of the same act (transactions at an undervalue) and that even if the assets have been transferred away from Mr Pugachev’s beneficial ownership the trustees hold them subject to any enforceable court process to satisfy a judgment against Mr Pugachev. The third alternative basis was that the trustees hold the assets subject to the control of Mr Pugachev and it is appropriate to infer from that fact that they may be available to satisfy a future judgment against him.[24]The evidence in support of the application was contained in a lengthy affidavit of Mr Michael Roberts, the partner in the Claimants’ solicitors with conduct of the case. It contains 37 pages of main text and a further 31 pages of appendices setting out the dramatis personae in the case, the history of the litigation and details of the parts played by various trust companies and members of Mr Pugachev’s family. I will not even attempt to summarise it but I note the following points in particular.[25]Firstly, [for reasons set out in detail in the unredacted version of this judgment, the terms of the Trust Deeds support] the claimants’ case that Mr Pugachev is in effective control of the trusts.[26]Mr Roberts’ affidavit also summarises the evidence that Mr Pugachev was the settlor who placed most of the assets into each of the Trusts and that Victor was the settlor of the remainder of the assets. The beneficiaries of the trusts include Mr Pugachev. Mr Roberts also notes a number of events which I have set out in the history of the litigation such as Mr Pugachev fleeing the jurisdiction in breach of the passport orders; the fact that the MV Victoria has been moved out of the jurisdiction in breach of an order of this court; and the description by Rose J of Luxury Consulting Ltd as Mr Pugachev’s “personal wallet”. […] Mr Roberts also states that in the immediate aftermath of the worldwide freezing order granted by Henderson J, Mr Pugachev drew very substantial sums […] from a number of the Trusts, or other trusts controlled by him, in order to finance his personal expenditure.[27]In an extempore oral judgment delivered on the afternoon of 30th July 2015 Rose J dismissed the application. She gave five reasons:-(1) the claimants had not adopted the correct procedure for bringing the issue of the true ownership of the Trust assets before the court;(2) The claimants had delayed unduly in making the application;(3) There was no evidence of a risk of dissipation of the assets which would not already have taken place, nor that the new trust companies were likely to act irresponsibly;(4) It was not expedient to grant the relief sought because the original trustees had made an application for directions to the appropriate court in New Zealand which could deal with the matter;(5) No injunction was necessary as against Luxury Consulting Ltd because Barclays had (at least for the time being) agreed to freeze the two accounts held with them by that company.[28]With respect to the judge, I take a different view on all five points. (1). The proper procedure[29]It has been established since the relatively early days of freezing injunctions that an order may be made against a third party who is holding assets on behalf of a defendant against whom an injunction has been granted. In SCF Finance Co Ltd v Masri [1985] 1 WLR 876 an injunction was granted against the defendant’s wife, who was not joined as a party, on the grounds that there was a good arguable case that the assets in her name were, in truth, her husband’s. In TSB Private Bank International SA v Chabra [1992] 1 WLR 231 a freezing order was granted against a company where there was a good arguable case that it was under the defendant’s control: the company was joined as a defendant to the claim. Such an order is ancillary to the main freezing injunction and is granted to make that order more effective. An order under what is now often called the Chabra jurisdiction will not be made if there is no real risk that the Chabra defendant will deal with assets in such a way as to prevent the claimant from obtaining recourse to them to enforce any judgment given against the defendant. But if such a real risk does exist, a Chabra order should be made against the third party on without notice basis. Once the assets held by the third party are frozen, the case can be returned to court on notice so that any disputed questions of ownership or control can be resolved.[30]I accept Mr Griffiths’ submissions that there is a good arguable case that the assets held by the trusts are in reality assets of, or under the control of, Mr Pugachev. As even the above condensed history of this litigation shows (and I have omitted a number of hearings, none of which shows Mr Pugachev in a favourable light) there is at least a good arguable case that he is taking every possible step to keep his assets out of the reach of this court. The terms of the Trust Deeds and the change of trustees on 24th July 2015 reinforce that conclusion. The case appears to me to be a classic one for a Chabra order, made in the first instance without notice to either the defendant or the third party said to be acting on his behalf. (2). Delay[31]The judge held that the Claimants had delayed unduly in applying to extend the freezing order, and that the essential information had been available to them as long ago as March 2015. The Claimants take issue with this finding, both on the basis that since March Mr Pugachev has fled the jurisdiction in breach of orders of this Court, and that on 24 July 2015 the original trustees of each of the Trusts were all replaced.[32]Rose J held that the replacement of the trustees was not a significant change. In what is understandably brief reasoning in an extempore oral judgment she noted that the directors of the newly incorporated trust companies included Ms Dozortseva, a New Zealand solicitor called Mr Lenihan and a Mr Willem Smit “about whom no one has been able to find out anything for the time being”, but concluded that “it does not seem to me that there is enough evidence before me to show that the new trust companies are particularly shady or particularly likely to act in an irresponsible way and I do not regard that recent development as sufficient to justify making the orders that are sought today.”[33]I cannot agree with this analysis. I accept the submissions on behalf of the claimants that the timings in the change of the trustees, coming shortly after Mr Pugachev’s flight from this jurisdiction and other apparent breaches of the worldwide freezing order clearly supports the inferences that the change was intended to ensure that the trustees complied with his wishes and that therefore there is an increased risk of dissipation of the assets. No explanation is available to the claimants or to us of why the original trustees have been removed or replaced by newly incorporated bodies. As to their directors: one of the directors of the original trustee companies was a Mr Patterson, who is accepted to be a leading New Zealand trusts lawyer. Mr Lenihan does not appear to be a solicitor of the same standing as Mr Patterson. Ms Dozortseva is a close business associate of Mr Pugachev and has herself been party to placing misleading evidence before the court.[34]In any event it is not generally the rule that delay in applying for a freezing injunction or an extension of a freezing injunction is a bar in itself to the obtaining of relief. It may mean in some cases that there is no real risk of dissipation and that if the claimant had seriously thought that there was, an application would have been made earlier. But that cannot possibly be said in the present case. I agree with the observations on this topic made by Flaux J in Madoff Securities International Ltd v Raven [2011] EWHC 3102 (Comm). If the court is satisfied on the evidence that there remains a real risk of dissipation it should grant an order, notwithstanding delay, even if only limited assets are ultimately frozen by it. (3). Risk of dissipation[35]It will be apparent from what I have said so far that I consider that the claimants have shown a good arguable case under this heading as well. It cannot be assumed that the original trustees will already have dissipated the assets. They have apparently recently indicated that they had not transferred assets to the new trustees. Whether Mr Pugachev or his son has been in a position [………..] to require them to do so may be a matter to be decided either in this jurisdiction or in New Zealand, but that possibility is not a reason for refusing an extension of the worldwide freezing order to the old and new trustees.[36]I also respectfully disagree with a supplemental reason given by the judge for refusing an order in respect of properties within the jurisdiction which are “not particularly liquid”. [………] In any event, these are points for determination at a contested hearing for all parties represented. (4). Expediency[37]The judge held that it would be “inexpedient” within the terms of section 25(2) of the Civil Jurisdiction and Judgments Act 1982 to grant an injunction against the original trustees and the new trustees because to do so might conflict with whatever the New Zealand court orders. It appears that the information given to Rose J that the New Zealand court was to rule on an application by the trustees on the 30th July 2015 turned out to be incorrect; there was a first hearing on 10 August 2015 and a return date has been set for 17 August 2015. In my view the appropriate way to deal with the possibility of discord between this jurisdiction and any order which may be made in New Zealand is to give the usual liberty to all parties (including the original and new trustees) to apply on notice to a judge of the Chancery Division to vary the order.[38]It is unnecessary at this hearing to determine jurisdictional arguments. [………………][39]In my judgment the expediency test under s 25(2) is amply satisfied. (5). The position of Luxury Consulting Ltd[40]I have already noted Rose J’s vivid description of this company as Mr Pugachev’s “personal wallet”. She considered it unnecessary to grant relief against the company on the basis that Barclays have agreed to freeze two accounts which they consider are covered by the existing freezing order against Mr Pugachev. But, as the claimants point out, only two accounts have been thus frozen, namely those disclosed by Mr Pugachev; his disclosure has repeatedly been inadequate and evasive; and there is nothing to stop Luxury Consulting Ltd opening other bank accounts, possibly in other jurisdictions, into which to receive payments on Mr Pugachev’s behalf. The judge appears to have accepted that a Chabra order against Luxury Consulting would otherwise be justified. I would extend the freezing order to cover this company as well as the trusts.

Conclusion

[41]For these reasons I would grant permission to appeal from the order of Rose J, allow the appeal and extend the worldwide freezing order in the terms sought by the claimants.

Lord Justice Ryder:

[42]I agree.

Lord Justice Jackson:

[43]I also agree.

Cited in 17 later judgments

and 8 more of the most senior