JSC BTA Bank v Solodchenko & Ors [2010] EWHC 2404 (Comm)

[2010] EWHC 2404 (Comm)Case No HC10C0262
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of JusticeDate Wednesday, 22 September 2010
The Strand
London
WC2A 2LL
Before
MRS JUSTICE PROUDMAN
Between
JSC BTA BANKClaimant/ApplicantROMAN VLADIMIROVICH SOLODCHENKODefendantPAUL KYTHREOTISDefendant/RespondentJASON CHRISTIAN HERCULESDefendantsCELINA HOLDING INVESTMENTS LIMITED (FORMERLY BUBRIS INVESTMENTS LIMITED)DefendantSHORELINE INVESTMENT HOLDING LIMITED (FORMERLY GRANTA INVESTMENT HOLDINGS LIMITED)DefendantNAFAZKO INVESTMENTS LIMITEDDefendantOLOFU INVESTMENTS LIMITEDDefendantMYMANA HOLDINGS INVESTMENTS LIMITED (FORMERLY KYMA INVESTMENT HOLDINGS LIMITED)DefendantMABCO INCDefendant(10) CALERNEN FINANCE INCDefendant(11) ASTROGOLD CORPDefendant(12) GRUNDBERG INCDefendant
(Transcript of WordWave International Limited)A Merrill Communications Company
Judgment
[1]MRS JUSTICE PROUDMAN: This is the application by the claimant, a Kazakh bank, to commit the second defendant, Paul Kythreotis, for contempt of court constituted by breach of provisions of an order requiring him to disclose his assets and to provide answers to questions listed in the order. The provisions were contained in a freezing order made by Mr Justice Henderson without notice on 26 July 2010, (the July order). The freezing aspects were confirmed by Mr Justice Newey on notice on 6 August 2010 and his order expressly preserves the disclosure provisions of the July order.[2]These are, I am told, the fifth set of proceedings in this jurisdiction about frauds totalling billions of dollars against the bank, the others having been brought in the Commercial Court. In this present action, the claimant bank claims that it is a victim of fraud. The claim is that in January 2009 certain blue chip bonds, with a nominal value of $290 million, were transferred without consideration from the bank to the fourth to the eighth defendant companies, which are all registered in the British Virgin Islands, on the instructions of the first defendant, a director and a chief executive of the bank at the material times. It is alleged that the bank had done no business with the fourth to the eighth defendants, there was no commercial purpose to the transfer and there was no benefit to the bank or justification for the transfer. It is alleged that the transfer arose out of the fact that the bonds were used as security for obligations owed by the fourth to the eighth defendants to a third party or third parties.[3]Norwich Pharmacal relief was granted in the British Virgin Islands to the bank, as a result of which the bank has been able to trace what happened to the money to a limited extent. The bank says that its money was transferred from the fourth to eighth defendant companies to the ninth to twelfth defendant companies and thereafter the trail has gone cold.[4]The first defendant, described by Mr Smith QC, the bank's counsel, as "on the paying side", is being sued for breach of duty. He has indicated an intention to defend the claim. He is the anchor defendant for the purposes of Article 6 of the Judgments Regulation, that is to say Council Regulation (EC) No 44/2001 of 22 December 2000, which provides:
"A person domiciled in a Member State may also be sued: where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments arising from separate proceedings."
[5]Mr Kythreotis, the second defendant with whom I am concerned, was a director of the fourth and eleventh defendants. He is, as described by Mr Smith, on "the receiving side". I have also been taken through the evidence in some detail by Mr Smith to show that Mr Kythreotis was, at all material times, very closely connected with the fifth to eighth defendants, as well as the fourth and eleventh defendants. It is thus said that he was at the heart of all the defendant companies' dealings. The claim against him is that, in bad faith and dishonestly, he assisted the grant of a security and the transfers in January 2009. His liability is framed as breaches of the law of the British Virgin Islands, Cyprus and Kazakhstan.[6]Mr Kythreotis is a British national living in Cyprus. He is domiciled in a Member State of the European Union and no permission was required for service of the process on him in Cyprus.[7]On 23 July 2010, the bank applied without notice for a worldwide freezing injunction, a proprietary injunction and related relief against the second to the twelfth defendants. Mr Justice Henderson granted the relief and the order was sealed on the same day, 26 July. The order contained a penal notice.[8]Paragraph 5 stated that the frozen amount of Mr Kythreotis's assets was US$68,286,517.36. Paragraph 8 sets out the worldwide nature of the relief.[9]The July order at paragraphs 12 to 14 contained disclosure provisions. Mr Kythreotis was required to provide details of his assets over £10,000 in value and answer a series of specific questions listed in schedule D to the July order about what happened to the bond proceeds. The information was to be provided within seven working days of service of the July order and verified by affidavit within ten working days of service, in the events which happened 10 and 13 August respectively. I observe that seven working days was evidently considered sufficiently long by Mr Justice Henderson and Mr Justice Newey to enable Mr Kythreotis to provide the information or to make representations to the court on the return date as to why he could or should not do so.[10]Paragraphs 12(2) and 13(2) of the July order warned Mr Kythreotis of his right to refuse to give disclosure on the grounds of self-incrimination. Paragraph 19 of the July order expressly entitled Mr Kythreotis to apply to the court to vary or discharge the July order.[11]I have read the affidavit of Marios Pavlou, a private service process officer appointed by the Supreme Court of Cyprus, and I am satisfied that the July order was personally served on Mr Kythreotis on 29 July 2010. The covering letter from the bank's solicitors specifically drew attention to Mr Kythreotis' disclosure obligations and the importance of compliance. In any event, Mr Kythreotis admits such service in the affidavit to which I shall refer.[12]On the return date, 6 August 2010 (before the date for compliance with the disclosure obligations) none of the defendants was present or represented. Mr Justice Newey continued the freezing order and, as I have said, his order expressly provided that it was without prejudice to the disclosure obligations of the July order.[13]The bank has pursued the fourth to eleventh defendants for contempt in the British Virgin Islands and the High Court there made an order on 6 September last sequestrating their assets.[14]There was no response from Mr Kythreotis to the July order or any communication relating to the action. On 10 August, the date for compliance with the first part of the disclosure order, the bank's solicitors wrote chasing him. Again, there was no reply. On 25 August 2010, the application notice in this committal application was issued. The present application notice, Mr Hardman's affidavit in support and a draft order were served personally by Mr Pavlou on 27 August 2010. Again, there is evidence of service and again that service is admitted by Mr Kythreotis. I am told by Mr Smith that no acknowledgment of service or defence in the action has been served by Mr Kythreotis.[15]The power of the court to commit for contempt is the court's ultimate weapon in securing compliance with its orders. However, as it is a powerful one which can deprive the subject of his liberty, it must be exercised only where the court is sure that the alleged contemnor is in breach of an unambiguous order.[16]The authorities explain that the object of a committal order is twofold: punishment and coercion; in other words, to punish conduct in defiance of an order of the court, and to hold out the threat of future punishment as a means of securing the protection that an injunction is primarily there to afford. See Lightfoot v Lightfoot [1989] 1 FLR 414 at 416. This second object is itself potentially divisible into two. The threat of punishment can be used to enforce compliance with an existing order or, where nothing can be done about a breach which has already taken place, for example of a non-molestation order in a family context, to provide a deterrent against further breaches in the future. See Shalson v Russo [2001] WL825761, per Mr Justice Neuberger, at page 1.[17]The burden of proof is on the claimant to establish the contempt and the standard of proof is the criminal standard. In other words, the claimant has to satisfy me so that I am sure that the alleged contempts have been established. In the time-honoured phrase, the matter must be beyond reasonable doubt.[18]It is a contempt of court to commit a breach of a court order. A breach will include acting in a manner calculated to frustrate the purpose of the court order. The act constituting the breach must be deliberate rather than merely inadvertent but an intention to commit a breach is not necessary, although lack of intention to flout the court's order is relevant to penalty. A committal to prison for contempt will almost certainly require a knowing and deliberate breach of an order.[19]In order to make a finding of contempt, I have to be satisfied to the relevant standard that;(a) Mr Kythreotis received notice of the order. As I have said, I am satisfied it was duly served on him.(b) the hearing is more than 14 days after service of the application: PD 4.2. It is.(c) the order is clear and unambiguous on its face. I am so satisfied. It contains a penal notice and the effect was also explained. The terms clearly stipulated what the defendant was required to do.(d) he understood the order. It contains a penal notice, as I have said. The effect was explained in correspondence as well. He is a British citizen and a lawyer, so it says in his description of himself at Companies House. He is a director of several English companies. I infer that he had knowledge of all the facts which would make non-compliance a breach of the July order. He has, again in the affidavit to which I shall refer, admitted this. This affidavit was sworn in English and it is understood that his English is good.(e) the application notice is in the form required by PD 2.6 and 3. It is.(f) the defendant deliberately failed to comply with the July order. I draw that inference and in any event he admits that he acted intentionally.(g) the proceedings are justified and proportionate to the breach. In my judgment, they are both.[20]Until Monday, that is the day before yesterday, there was no response from Mr Kythreotis to the application, although it was served on him on 27 August last. On Monday afternoon, the day before the hearing, the court received a skeleton argument from leading counsel very recently instructed by Mr Kythreotis. The applicant's solicitors received a letter from Byrne and Partners, solicitors also very recently instructed by Mr Kythreotis, and an affidavit of Mr Kythreotis in draft which has since been sworn.[21]However, Mr Kythreotis remains in Cyprus, where his affidavit was sworn, and does not appear on the application, although he is represented by leading counsel, Mr Stanley QC. In practical terms, a committal order can have no immediate effect because Mr Kythreotis is in Cyprus and would not in fact go to prison at once.[22]In his affidavit, Mr Kythreotis admits service as alleged and knowledge of the July order and accepts that he has not complied with his duties to provide information under the July order. He apologises unreservedly for his behaviour. He therefore admits breach, but it was not entirely clear to me from some of what he says in his affidavit whether he admits that he acted in contempt of court; that is to say, in full knowledge and understanding of what was required of him by the July order and his obligations to comply. Mr Stanley confirmed that Mr Kythreotis does admit that he acted intentionally in disregard of the July order and thus in contempt.[23]Mr Stanley said, on instructions, that the affidavit contains Mr Kythreotis' explanation of his behaviour but it is not put forward as an excuse. In summary, what is said is, as Mr Stanley put it, that on receiving the various court documents Mr Kythreotis put his head in the sand. He regarded the matter as one affecting a client of his, whom he does not name for reasons he gives, and not one with which he ought to be concerned. The only matter which might go some way to providing an excuse is that Mr Kythreotis describes an illness from which he was suffering in the summer and says that it clouded his judgment. However, he does not rely on this as an excuse. I observe in passing that all process was served personally on Mr Kythreotis at his place of work.[24]Again, Mr Stanley made it clear that Mr Kythreotis does not contend that his apology to the court has yet purged his admitted contempt. However, he now wishes to comply with the July order as soon as he can. He asks for time until 28 September 2010, that is until next Tuesday, to do so. Mr Stanley also submits that Mr Kythreotis has begun the process of compliance by disclosing the assets described in the letter from his solicitors. Indeed he has disclosed some assets not covered by the July order because they are below the limit of financial value required for disclosure.[25]I make a finding that there has been a contempt and that it is a contempt which is in principle a serious one. In deciding this, I take into account the fact that Mr Kythreotis has been frank with the court in admitting his contempt and apologising for it, although I also note that the bank had to go to the trouble of proving service and all the other factors to which I have adverted before the admission was made.[26]The bank is not proceeding by way of committal for vindictive or technical purposes. First, it needs to know the whereabouts of Mr Kythreotis' assets if the freezing injunction is to be of any use at all. Secondly, the bank cannot begin to trace the monies it says belong to it, unless he answers the specified questions. The prospects of recovery are thus reduced with every day that passes and the bank suffers serious prejudice because of non-compliance. That prejudice practice may be irremediable. It may be within Mr Kythreotis' knowledge, but it is not within that of the bank.[27]I adopt and endorse the comments of Mr Justice Mann in this regard in Heidelberg Graphic Equipment Ltd v Hogan, [2004] EWHC 3090 (Ch) applied by Mr Justice Lewison in Aspect Capital Ltd v Christensen [2010] EWHC 744 (Ch).[28]Neither counsel asks me to adjourn the application until Mr Kythreotis can be brought before the court by a bench warrant. Both parties accept that this is an unrealistic course, since he remains in Cyprus, and I have seen the test for adjournment on those grounds laid down in International Finance Corporation v DSNL Offshore Ltd [2005] EWHC 534 (Comm) and noted JCS BTA Bank v Stepanov [2010] EWHC 794 (Ch).[29]However, Mr Stanley submits that the fair course is to adjourn the committal application to give Mr Kythreotis the opportunity to purge his contempt. Mr Smith says that I should make a finding of contempt and fix the appropriate sentence now, I should then consider whether to suspend that sentence to see whether Mr Kythreotis complies with the requirements of the July order, as he now says he is willing to do.[30]Mr Smith says that the disclosure of assets which has been provided is evidently incomplete, nothing is said about any real property and Mr Kythreotis' lack of assets is suspicious, bearing in mind that his business was to deal as an agent for other parties in moving huge sums of money and it is to be inferred that he would have earned some significant sums himself. Mr Smith says that lack of assets gives rise to the suspicion that Mr Kythreotis has moved some of his money out of the reach of the bank in breach of the freezing order. Of course I cannot determine such a matter on the evidence at present before me. Mr Kythreotis has revealed some of his assets and Mr Stanley says I can draw no conclusion from the lack of real property. In any event, it is acknowledged that the process of disclosure is as yet incomplete.[31]An important problem with Mr Kythreotis' evidence to date is that it does not address the issue of the questions required to be answered by paragraph 13 of the July order at all. He does not say whether he has made any preliminary investigations into the matters raised. Mr Smith submits that for someone at the heart of the companies who received the monies that is a very significant omission.[32]Mr Kythreotis admits, as I have said, that he received the July order on 29 July and the committal application on 27 August and says he had tried to instruct English solicitors from 13 September onwards. However he does not explain why he said nothing until Monday to the bank or its solicitors or what, if anything, he has done to make investigations which would enable him to answer the questions.[33]However, it is important that Mr Kythreotis says that he is now willing to comply with the July order. In effect, he says, to use the expression used by Mr Justice Laddie in Taylor Made Golf Company Inc v Rata [1996] FSR 528 that "the penny has dropped".[34]Only once he has complied will the court be in an informed position to determine the effect of the breach and what prejudice it may have caused on the facts.[35]I am not in a position to assess the genuineness of Mr Kythreotis' expressed desire to comply with the July order. I can only observe that he has expressed the intention to do so at the last possible moment and possibly in the hope of avoiding an immediate committal order. He has had several opportunities to attend court and has chosen not to do so. He has not attended court to be cross-examined on his affidavit. As Lord Justice Waller, giving the judgment of the Court of Appeal in Phillips v Symes [2003] EWCA (Cir) 1769 said, at 51:
"Where someone has purported to comply with either undertakings or orders to make disclosure by affidavit, we doubt whether it is right to place the deponent in the position that unless he is prepared to be cross-examined on his affidavits they count for nothing at all. On the other hand, without cross-examination, the court is entitled to attach little weight to them: see Comet Products UK v Hawketts Plastics Ltd [1971] 2QB67 CA."
[36]Mr Smith says I should not adjourn the sentencing aspects of this present application. The time has come, he says, for the dual objects of punishment and coercion to be employed as Mr Kythreotis' admissions do not detract from the evidence that there has been contumacious flouting of the July order. A further period of grace would not be fair to the bank, for which huge amounts of money are at stake and time is of the essence. Moreover, once the court has found that there has been an intentional disregard of its orders, the court ought to consider the proper punishment as a matter of urgency.[37]I do not agree. It is impossible to determine what length of sentence is appropriate or, if there is satisfactory compliance with the July order, if a custodial sentence is appropriate at all without seeing what happens. I considered the authorities on suspension of custodial sentences in general terms overnight for the purpose of understanding the jurisdiction I am asked to exercise. It was obvious from those authorities that the court had to determine whether a custodial sentence is necessary, then, if so, to decide on the appropriate length of term and, only then, to decide whether to suspend and, if so, on what conditions or for what period. Suspension is primarily aimed at ensuring compliance; in a case like this, primarily compliance with the existing orders for disclosure. I only had to consider the application of the decided authorities to the existing facts to realise that it would in my judgment be wrong to try and pass sentence without knowing whether Mr Kythreotis is sincere in his assurance that he wishes now to provide the information ordered in the July order. A short adjournment would put the court in a better and, most importantly, fairer position to determine how to deal with the admitted contempt.[38]I therefore make a finding of contempt but adjourn the matter for sentence to a week today at 10.30 am. That is on the basis that Mr Kythreotis has said that he will comply with all the information provisions in the July order by 4.00 pm on 28 September 2010.

Cited in 6 later judgments