Arros Invest Ltd v Nishanov [2004] EWHC 576 (Ch)

Case No CH/2003/APP/0825

[2004] EWHC 576 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Appeal against the order of Master Moncaster

dated October 28, 2003 (HC02 C 02648)

Venue Royal Courts of Justice

Strand

London WC2A 2LL

Date Tuesday, March 23, 2004

Before

MR JUSTICE LAWRENCE COLLINS

Between

ARROS INVEST LIMITEDAppellant

RAFIK NISHANOVRespondent

JUDGMENT

(Approved by the Court for handing down)

Mr Andrew Twigger (instructed by Howard Kennedy) for Appellant/Claimant

Mr Jonathan Brettler (instructed by Edwin Coe) for Respondent/First Defendant

Hearing Hearing Date: March 17, 2004

Judgment

[1]This is an appeal by Arros Invest Ltd ("the claimant") from the order of Master Moncaster of October 28, 2003. In a very full and careful judgment, the Master set aside service on the first defendant ("Mr Nishanov") on the ground that he had not been served with the claim form before it had expired, and refused to extend its validity. The appeal is from the first part of the order.

[2]The claim is made by the claimant against its two former directors in relation to the alleged diversion of $4.9 million belonging to the claimant. The claimant was wound up by the court on June 7, 2000 on the petition of Tatneft, a Russian oil trading company. The petition debt was an arbitration award of about US$4,900,000 representing the price of crude oil purchased by the claimant from Tatneft. The claimant brought these proceedings against its former directors (Mr Nishanov and Mr Fazlyev), alleging that they had dishonestly diverted from the claimant the bulk of the proceeds of sale of the oil purchased from Tatneft and sold on by the claimant to Lukoil. These proceedings are in substance a claim by Tatneft, which is funding the liquidator, that it was defrauded by both Mr Fazlyev and Mr Nishanov in the oil purchase transaction.

[3]Mr Nishanov has had a distinguished diplomatic and political career, and he denies the allegations.

[4]The procedural history is as follows:(a) Permission to serve the claim form out of the jurisdiction was given on August 12, 2002, and it was issued on September 17, 2002;

(b) The period of validity of the claim form consequently expired on March 17, 2003: CPR Rule 7.5(3).

(c) The claim form (with translations and accompanying documents) was sent by registered mail on March 12, 2002 by a Russian lawyer, Mr Tsepov;

(d) The claim form was sent (through a private courier company acting on behalf of the Russian postal service) to a property which Mr Nishanov owned, but at which he did not reside, at the time;

(e) The claim form was delivered at that address (which was Mr Nishanov’s registered address for the purposes of the nationality rules of the Russian Federation) on March 13, 2003, and a "confirmation of receipt" was signed by Ms Davydova, a babysitter employed by Mr Nishanov’s tenants;

(f) Mr Nishanov did not himself receive the claim form until March 19, 2003 (i.e. two days after the expiry of the validity of the claim form).

[5]Mr Nishanov applied on April 16, 2003to set aside service on the grounds that(a) the claimant failed to serve the proceedings on him within the 6 month period allowed by CPR Rule 7.5(3); and

(b) permission to serve out ought to be set aside because the claimant had failed to demonstrate a good arguable case or a prima facie case against Mr Nishanov on the merits or on the jurisdiction of the court under CPR Rule 6.20.

[6]It was agreed at the hearing before the Master that the question of service ought to be disposed of first: if Mr Nishanov had not been served, the other questions did not arise in relation to the proceedings.

[7]Mr Nishanov’s position at the outset of the proceedings was that service should have been effected through diplomatic channels. But the Russian Federation is a party to the Hague Service Convention which provides in Article 10:

"Provided the State of destination does not object, the present Convention shall not interfere with¾ (a) the freedom to send judicial documents, by postal channels, directly to persons abroad, (b) the freedom of judicial officers, officials or other competent persons of the State of origin to effect service of judicial documents directly through the judicial officers, officials or other competent persons of the State of destination, (c) the freedom of any person interested in a judicial proceeding to effect service of judicial documents directly through the judicial officers, officials or other competent persons of the State of destination."

Russia has not objected to such methods of service.

[8]By CPR Rule 6.24(1)(a):

"(1) Where a claim form is to be served out of the jurisdiction, it may be served by any method¾ (a) permitted by the law of the country in which it is to be served: …"

II Applicable Russian Code for service: evidence

[9]Domestic Russian rules on service of proceedings depend on whether the case comes within the jurisdiction of the courts of common jurisdiction or courts of specialised jurisdiction. In the case of the former the Code of Civil Procedure ("CPC") applies, and in the case of the latter the rules of the specialised jurisdiction apply. In the present case the only specialised jurisdiction which is potentially relevant are the Arbitrazh courts, which deal with (inter alia) commercial disputes. Their procedure is governed by the Arbitrazh Procedural Code ("APC").

[10]The first issue on this appeal is whether it is the service provisions of the CPC or of the APC which apply. This point arises because it is common ground that if the proceedings are of a character which, had they been commenced in Russia, would fall within the CPC, and not within the APC, then service would not have been validly effected by post. The Master assumed in favour of the claimants that the APC applied, but went on to hold that service had not been effected in time. By Respondent’s notice Mr Nishanov argues that the Master ought to have determined the application in his favour on the ground that the CPC applied.

[11]The evidence developed in this way:(a) In his witness statement in support of the application Mr Nishanov said that the documents were delivered to a property at which he no longer resided, and that the claimant did not adopt the correct channels in arranging for service. The person who signed for the documents at the residence was the babysitter. The proceedings should have been served through diplomatic channels.

(b) In correspondence the claimant’s solicitors indicated that they had been entitled to serve process under CPR Rule 6.24(1)(a) in accordance with the CPC, and that it was permissible to serve the proceedings with translations by registered post with notice of receipt addressed to the last known address.

(c) Mr Tsepov made a witness statement on July 15, 2003 for the claimant in which he said that he had arranged for service on the registered address of Mr Nishanov. Employees of his firm attempted to serve Mr Nishanov personally, but it turned out that he was not at the address, although a person or persons at the address confirmed that the apartment was owned by him. Following unsuccessful attempts to trace and serve him personally, the proceedings were sent by registered mail to the registered address.

(d) Mr Nishanov’s solicitors produced on July 15, 2003 a witness statement, to which they appended an opinion of Mr Liakhov, in which he said that under the Civil Procedure Code of the Russian Federation personal service was required (subject to some exceptions not relevant in this case).

(e) On July 17, 2003 Master Moncaster ordered that the claimants should serve any further evidence by 4 p.m. on August 14, 2003, and that unless such evidence was served by then they be debarred from relying on any further evidence and that Mr Nishanov serve any evidence in reply by September 18, 2003, and that the application be adjourned to be heard on October 1, 2003.

(f) As a result the claimants produced an expert report by Ms Olga Baglay dated August 13, 2003, and Mr Nishanov produced an expert report by Andrei Liakhov dated September 18, 2003.

(g) Shortly before the substantive hearing before the Master on October 1, 2003, the claimant’s counsel’s skeleton argument sought to rely on provisions of the APC which Mr Nishanov says were not the subject of Ms Baglay’s evidence, but to which he responded by producing at the hearing before Master Moncaster further material in the form of an email from Mr Liakhov dated September 30, 2003.

[12]Ms Baglay is a qualified Russian lawyer employed by Messrs Watson Farley & Williams, and has practised in litigation and arbitration for some eight years. But she does not hold herself out as a specialist in Russian civil procedure. Nor does Mr Liakhov, a qualified Russian lawyer employed by Messrs Norton Rose, who has both academic and professional qualifications, appear to do so.

[13]The only provisions relating to the jurisdiction of the APC which were before the court were these: Article 33 "1. Arbitrazh courts deal with cases of: 1) Insolvency (bankruptcy); 2) Disputes concerning the establishment, reorganisation and liquidation of organisations; 3) Disputes concerning refusal to grant state registration, evasion of registering legal entities and individual entrepreneurs; 4) Disputes between a shareholder and a shareholding company, parties to other types of business associations and societies, themselves resulting from the activity of business associations and societies, excepting labour disputes; 5) Protection of business reputation in business and other economic activity; 6) Other cases resulting from business and other economic activity specified by the Federal Law. 2. Cases stated in part 1 of this article are examined by the arbitrazh court regardless of whether the parties involved in the legal relationship from which dispute or claim has arisen, are legal entities, individual entrepreneurs or other organisations or individuals." 16. " Powers of Russian Federation Arbitrazh Courts in examining cases with foreign nationals. 1. Arbitrazh Courts in the Russian Federation examine cases involving commercial disputes and other matters relating to business and other economic activity, with foreign organisations, international organisations, foreign nationals, persons without citizenship involved in business and other economic activity (hereinafter referred to as foreign nationals), if: 1) The respondent is to be found or resides in the Russian Federation, or if the respondent’s property be in the Russian Federation; …"

[14]Miss Baglay’s evidence was this:

"15. Domestic Russian rules on service of claim forms are contained in two separate procedural codes which are applicable depending on whether the courts of common jurisdiction or the arbitrazh (i.e. commercial) courts have jurisdiction over particular case. In case of proceedings in the courts of common jurisdiction, the Civil Procedure Code of the Russian Federation shall apply. In case of disputes in arbitrazh (commercial) courts the applicable rules shall be the rules contained in the Arbitrazh Procedural Code of the Russian Federation (24 Jul 2002, 95-FZ) which came into force in Russia on 1 September 2002 (the "

APC"). 16. Insolvency proceedings (including proceedings involving foreign parties) are exclusively governed by the APC (see Articles 33.1.1. and 247 of the APC in ‘OMB-2’, pp 74-75). Thus, if the proceedings in this matter were issued in Russia they would fall within the scope of the APC, and not the Civil Procedure Code."

[15]In response Mr Liakhov said:

"11. … Ms Baglay suggests that the APC should apply to this claim as this is a bankruptcy claim. It is her only argument supporting her purported assertion that the APC should apply to this claim. However, Ms Baglay does not substantiate this assertion that these are insolvency proceedings and she provides no definition of insolvency proceedings. If she contends this only because the Claimant is in liquidation then this contention is incorrect under Russian law because bankruptcy/insolvency claims in Russia are defined in Article 2 of the Bankruptcy Law of the Russian Federation No.123-FZ dated 26 October 2002 as claims to declare a debtor incapable of satisfying his/its payment obligations or its/his obligations to the creditors in full (page 6 to 7 of exhibits AL 1). 12. It is unclear whether Ms Baglay is asserting that these are bankruptcy proceedings because the Claimant is in liquidation or because the proceedings involve claims against the Defendants as individuals which in some way means the proceedings are classified as insolvency proceedings. If the latter is the case then I also confirm that the rules for personal bankruptcy have not entered into force yet and until they do, pursuant to Art.231(2) of the Bankruptcy Law (page 8 of exhibit AL 1), such claims are to be heard in the courts of general jurisdiction under the CPC. 13. This view is supported by several prominent Russian lawyers. In particular, I refer to the commentary to the APC by Editor-in-chief, Guev A.N. in which he states that ‘personal bankruptcy rules are not in force yet, as the relevant changes have not been introduced to the Civil Code. Thus the arbitrazh courts have no jurisdiction over personal bankruptcy cases.’ "

[16]Shortly before the hearing on October 1, 2003, the claimant, in counsel’s skeleton argument, relied on Article 33.1(2) (disputes concerning the establishment, reorganisation and liquidation of organisations) and (4) (disputes between a shareholder and a shareholding company), also Article 247, as providing additional bases for the application of the APC.

[17]In answer, in his email of September 30, 2003 Mr Liakhov said that the main criteria for whether a case fell within the APC was set out in Article 27, namely that the dispute must be of an economic nature and/or relate to entrepreneurial activity (i.e. any activity which had profit making as its main purpose, and only if undertaken by persons duly registered as "entrepreneurs"). The APC did not apply to bankruptcy cases. Article 247 was simply a provision relating to territorial jurisdiction, i.e. if the dispute in question was of an economic nature, and if there was a link with the Russian Federation, then the case would be within the jurisdiction of the Arbitrazh courts. It did not widen the jurisdiction of the courts in disputes with a foreign element. He also suggested that the other provisions of Article 33.1 did not apply in the absence of personal bankruptcy.

III The arguments

[18]Mr Nishanov says that it was common ground that these proceedings were not insolvency proceedings for the purposes of the APC, and there was no evidence from Ms Baglay to the effect that heads (2) and (4) of Article 33.1 or Article 247 brought the case within the APC. If her witness statement could be taken as an opinion that they applied, there was no evidence from her with reasoned conclusions, and Mr Liakhov’s reasoned opinion, which accorded with the natural meaning of the provisions, was to the opposite effect and should be accepted. In these circumstances the Court could not properly find that the new grounds (or any of them) applied.

[19]The claimant was debarred from serving any further evidence after August 14, 2003. It could not circumvent this debarring order by seeking to adduce further evidence, which had to come from its expert, in its skeleton argument. It accordingly failed to establish that the proceedings were taken out of the CPC by the APC. There was no suggestion that service was effected under the CPC. It therefore failed to establish that service had been effected.

[20]The claimant’s position is that the evidence was only unsatisfactory because of a misunderstanding of Ms Baglay’s report. The claimant accepts that Mr Liakhov demonstrated that these proceedings were not themselves insolvency proceedings.

[21]Mr Nishanov’s lawyers and expert knew that what was being said was that the APC applied to the kind of case brought by the claimant. In those circumstances, it was incumbent on Mr Liakhov (as part of his duty to help the court, which overrides any obligation to Mr Nishanov – CPR 35.3) to consider whether the APC applied for any reason. In those circumstances, Mr Liakhov had had ample opportunity to consider the matter and the Master should not have given any weight to his e-mail, produced for the first time at the hearing. The e-mail does not shed any real doubt on the conclusion that these proceedings would fall under the jurisdiction of the APC.

[22]If the evidence of several expert witnesses conflicts as to the effect of foreign sources, the court is entitled, and bound, to look at those sources in order itself to decide between the conflicting testimony: Bumper Corporation v Commissioner of Police of Metropolis

[1991] 1 WLR 1362

at 1369, per Purchas LJ. There is nothing in the apparently clear wording of Articles 33 and 247 to suggest that the APC would not apply to the kind of proceedings brought by the claimant in this case if they were brought in Russia.

[23]Article 33 covers, amongst other matters, (2) disputes concerning the establishment, reorganisation and liquidation of organisations" and (4) "Disputes between a shareholder and a shareholding company, parties to other types of business associations and societies, excepting labour disputes". Nothing said by Mr Liakhov explains why the other categories are not applicable.

[24]In relation to Article 247 of the APC, Mr Liakhov argues that this does not widen the jurisdiction of the Arbitrazh courts to hear other kinds of dispute, but only enables them to hear disputes which would otherwise be within their jurisdiction but which involve a foreign element. This is not what the article actually says and that the commentary of Professor Yakovlev on which Mr Liakhov relies has not been provided. But even if (which is not accepted) Mr Liakhov is correct, this has no effect on the applicability of Article 33.

IV Conclusions

[25]The claimant accepts that it would be inappropriate to rely on service in accordance with a code which plainly could not apply to this kind of case (e.g. if it applied only to matrimonial or criminal proceedings). I accept that CPR Rule 6.24(1)(a) has to be applied with a reasonable degree of flexibility when applied to foreign systems of law, but it is plain that where it is common ground that the claimant has not complied with the service provisions of the basic code of the CPC, and seeks to rely instead on the rules relating to a specialist jurisdiction such as the APC, the onus is on the claimant to show, by expert evidence, that the rules of that specialist jurisdiction would have applied to the proceedings had they been proceedings in the foreign country.

[26]Ms Baglay said that "Insolvency proceedings (including proceedings involving foreign parties) are exclusively governed by the APC (see Articles 33.1.1 and 247 of the APC…). Thus, if the proceedings in this matter were issued in Russia they would fall within the scope of the APC, and not the Civil Procedure Code". But it became common ground that the insolvency jurisdiction in the APC did not apply to the case. 27 I am satisfied that the only head relied upon by Ms Baglay in her witness statement was that of insolvency proceedings, and that her reference to Article 247 was simply a reference to the international jurisdiction of the Russian court, and not an opinion that the case came within the APC for reasons other than insolvency. The claimant was barred from adducing any further evidence, and did not apply to adduce any further evidence. Consequently, by the time of the hearing before the Master, there was no evidence (as opposed to argument unsupported by evidence) on which he could have come to the conclusion that the APC applied by virtue of other provisions of the APC.

[28]If I were wrong on that, then her opinion is unreasoned, and contradicted by that of Mr Liakhov, whose opinion (albeit somewhat unclear on the reasons for the inapplicability of Article 33.1(2) and (4)), is in accordance with the plain meaning of the provisions. I am satisfied on his evidence that the claimant has not shown that this is a dispute concerning the liquidation of the claimant within Article 33(2) or a dispute between shareholders under Article 33(4). I am also satisfied that Article 247 is not a provision dealing with the substantive scope of the APC, but simply a provision dealing with its application to international cases, and that there is no evidence before the court which would enable it to find that the service provisions of the APC were applicable. Since it would follow that the CPC would apply, and it is common ground that the personal service provisions of the CPC were not complied with, the appeal must fail.

V Other issues

[29]I will deal shortly with the other issues, which do not now arise in view of my decision that the APC has not been shown to apply. The Master found that the claimant had sent the claim form to Mr Nishanov at his registered address by registered post with confirmation of receipt. He held that this conformed with Article 125(3) of the APC and was therefore a valid method of service in Russia. But he held that there had not been valid service because the purported confirmation of receipt was signed by someone not authorised to do so.

[30]It was common ground that the postal courier who had delivered the claim form had, under the Russian postal regulations (which contain rules requiring the person who signs a confirmation of receipt to have authority from the addressee), incorrectly allowed Ms Davydova to sign the confirmation of receipt, but the claimant appeals on the ground that the postal regulations are irrelevant to the question whether there is a confirmation of receipt for the purposes of service, and that in any event it is not necessary for the purposes of service to have a signed confirmation of receipt. Mr Nishanov says that the Master was right to hold that service was invalid because the baby-sitter had no authority, but in any event service on his registered address, as opposed to his actual residence, was insufficient.

[31]The final issue, which may simply be a different way of putting the second issue, is on what date the proceedings were served, March 12, 2003 (when the documents were delivered to the postal courier), March 13 (when they were delivered to the address and signed for by the babysitter) or March 19 (when they were actually received by Mr Nishanov).

[32]The claimant submits that it would not be within the spirit of the CPR generally (and CPR 6.24(1)(a) in particular) to hold that service is only to be regarded as taking place when Mr Nishanov actually received the documents. It is submitted that service took place at the latest on March 13, 2003, when Ms Davydova signed the confirmation of receipt.

[33]There is a conflict of evidence on whether service at the registered, as opposed to actual, residence is sufficient. Ms Baglay said that, even if someone no longer resides at his registered address, he "has to bear the consequences of official documents of various kind[s], including court documents, being sent to his registered address". Mr Liakhov said that the fact that there is no obligation to live at the registered address "means that in proceedings governed by the CPC the serving party has to take steps to ascertain the actual address at which the other party resides".

[34]There is also a conflict between the experts on the question whether a valid confirmation of receipt is a pre-condition of valid service of proceedings by registered post. Ms Baglay’s evidence relied, on Resolution No 11 of the Plenum of the Supreme Arbitrazh Court dated December 9, 2002, which:(a) enables a claimant to prove service even in the absence of an acknowledgement of receipt by producing documents evidencing the dispatch of the Claim Form; and

(b) allows a receipt signed by "an appropriate person acknowledging the receipt…" to stand as proof of service. This again contemplates a party other than the defendant signing for the documents.

[35]The claimant says that whether the Postal Regulations have been complied with is not, therefore, determinative of the question of whether the Arbitrazh court would regard service as having been carried out.

[36]Under Russian procedure the statement of claim must be served on the defendant before it is issued by the court. Article 126(1) of the APC provides that before it is issued the claimant must produce (inter alia) acknowledgement of receipt or other documents confirming the despatch to the other parties of the statement of claim. Consequently, a valid signed confirmation of receipt is not a pre-condition of service.

[37]Ms Baglay’s conclusion regarding date of service was:

"with regard to a date of service, such issue will not generally arise under Russian procedure but if this question was determined by a Russian court, the court would in my view be satisfied that the service was effected on Mr Nishanov sufficiently in advance to enable him to prepare for the hearing, i.e. more than 15 days prior to a hearing."

[38]Mr Liakhov’s opinion is that the pre-action service rules in Chapter 13 of the APC (in which Article 126 appears) are irrelevant, and that the relevant rules are in Chapter 12, dealing with notification of court documents. Article 123 provides:(a) Parties are "deemed to be notified in the appropriate manner if, by the commencement of the court hearing … the Arbitrazh court is in possession of information as to the receipt by the addressee of a copy of the legal document"; and

(b) In circumstances where the post office has said that a copy of the document cannot be delivered due to the absence of the recipient from his address, he is also considered to be appropriately notified.

[39]There is not only a conflict of evidence on the technical issues relating to service, but the evidence is not entirely clear. My conclusion is that where it is common ground that Mr Nishanov had not received actual notice, the onus is on the claimant to show that the method of service adopted was adequate and in compliance with the local rules. I do not consider that the claimant has shown that. In particular, there is no reasoned evidence to show that service on the registered residence is sufficient when the claimant knows that the defendant is not actually resident there. Nor is there any evidence that the Russian court would regard the date of service as March 13 (still less, March 12, the date of despatch). The claimant, having waited until the last possible moment, and not having applied for an extension of the time for service of the claim form, has only itself or its advisers to blame for the failure to effect proper service.

[40]The appeal will therefore be dismissed.