JSC Mezhdunarodniy Promyshlenniy Bank & Anr v Pugachev [2015] EWCA Civ 139

Analysis

In the early 1990s, Mr Pugachev founded the JSC Mezhdunarodniy Promyshlenniy Bank (the bank) in Russia. It became one of Russia’s largest privately owned commercial banking groups. On 4 October 2010, the Russian Central Bank revoked its banking licence and appointed a ‘temporary administration’ and on 30 November 2010 it was declared insolvent by the Russian court and placed into temporary administration. The state corporation ‘Deposit Insurance Agency’ (the DIA) was appointed as liquidator. Mr Pugachev left Russia for London in 2011. The Russian liquidation of the bank was recognised by an order of Henderson J of 11 July 2014 under the Cross Border Insolvency Regulations 2006. The deficiency in the bank’s assets on liquidation was approximately $2.2bn.

The DIA brought proceedings both in England and in Russia against Mr Pugachev, alleging that he extracted money from the bank for his benefit and for companies under his control. A freezing order (the freezing order) in respect of the Russian proceedings was granted by Henderson J on 11 July 2014, prohibiting him from removing assets up to the value of £1.1bn from England and Wales and including at para 7(c) ‘any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of an power of appointment, discretion or otherwise howsoever’. The freezing order also required him to provide details of ‘all his assets worldwide exceeding £10,000 in value as at the time this order is served whether in his own name or not and whether solely or jointly owned, giving the value, location, and details of all such assets’. Disclosure was provided in a schedule dated 23 July 2014, which simply stated that Mr Pugachev was a discretionary beneficiary of five New Zealand trusts. Apart from setting out the name of the trusts, no further details were given. The claimants therefore applied to Henderson J for an order that Mr Pugachev give further information, setting out the identity of the trustees, settlors protectors and other beneficiaries, and the details of the assets subject to the trusts. Henderson J granted the order (Henderson J’s order). He held that the words in para 7(c) of the freezing order were wide enough to encompass the interest of a member of a class of potential beneficiaries under a discretionary trust, and that Mr Pugachev was compelled to disclose his status as beneficiary under the trusts. He further held that the court had power to make ancillary orders which would enable the trust interest to be ascertained and policed by the claimants, and that he should make the disclosure order sought.

The trustees then applied to David Richards J to discharge those paragraphs of the Henderson J’s order. David Richards J refused (David Richards J’s order). The terms of the freezing order were that the claimants give a cross-undertaking in damages amounting to $75m. Mr Pugachev applied for an order discharging the freezing order unless the claimants gave a cross-undertaking unlimited in amount, and also fortified it by making an appropriate payment into a bank account in England held under order of the Court. Rose J made an order (Rose J’s Order) that the cross-undertaking was unlimited in amount, and ordered that the claimants pay fortify it with a payment of $25m. Mr Pugachev appealed against Henderson J’s Order, the trustees appealed against David Richards J’s order, and the claimants appealed against Rose J’s order.

In support of their appeal, Mr Pugachev and the trustees argued that his interest as a discretionary beneficiary was not within the scope of para 7(c) of the freezing order. This was consonant with the underlying purpose of a freezing order which was normally limited to keeping available those assets which could be subject to some form of execution in the event of judgment being entered against the defendant in question. The mere fact that he might exercise some form of influence or control over an asset in question is insufficient. What is required is that the defendant can compel its application towards the satisfaction of a judgment debt. That was not true of an interest under a discretionary trust. In support of their appeal of Rose J’s order, the claimants argued that Rose J’s refusal to impose a limit to the cross-undertaking was contrary to established practice of the courts. Second, they focused on Rose J’s statement that there was ‘no danger here of individual liquidators putting their personal assets at risk’ and argued that the judge made an error of principle in distinguishing the position of a state-backed entity from that of an individual professional insolvency practitioner. Third, they argued that the judge should not have looked at the possibility of external sources of finance when considering whether the claimants should be provided to give an unlimited cross-undertaking.

Held:

1. 1) Paragraph 7(c) of the freezing order distinguished between two kinds of interest. The first was an interest under a trust, and the second was an interest which may arise by virtue of the exercise of any discretion. That was the interest of a member of a class of beneficiaries created by a trust in whose favour a discretion could be exercised. Even if the interest of a beneficiary under a discretionary trust could not be the subject of execution, the words of para 7(c) were clear enough to encompass it.
2. 2) Mr Pugachev had disclosed those interests. Unless it could be said that the trusts were shams or that the trustees did whatever Mr Pugachev asked, he could not be regarded as owning the assets themselves. The court was not in the position to accept that the trustees acted at Mr Pugachev’s behest, but issues had been raised which required fuller explanation.
3. 3) CPR 25.1(1)(g) was intended to provide machinery for the provision of information in advance of an application for a freezing injunction. It was only necessary to show that a freezing order might be applied for, and whether or not the application would be successful was not a matter on which the court could form a view at that stage; it need only be satisfied that there were credible grounds for making an application if so advised.
4. 4) While Mr Pugachev’s interests in the trusts were within the scope of the freezing order, his assets themselves were not within its scope. However, if the threshold test for including an asset within the scope of a freezing order is not met, the court was not powerless. The bank did not ask that the trust assets be brought within the scope of the freezing order immediately, rather for the opportunity to test its assertion that Mr Pugachev was the effective owner of those assets against his (and the trustees’) assertion that he was not.
5. 5) If its assertion was correct, it might be in a position to apply for the scope of the freezing order to be widened. If its assertion was incorrect, then that application would fail. However, the courts concern that the sophisticated and wily operators should not be able to make themselves immune to the courts’ orders militated against denying the DIA that opportunity.
6. 6) Henderson J therefore had jurisdiction to make the order that he did, and David Richards J had jurisdiction to refuse to set it aside. Once that position had been reached the exercise of that jurisdiction was a question of judicial discretion and the court was not persuaded that in light of the evidence taken as a whole, either judge exercised his discretion in an impermissible manner.
7. 7) To the extent that the trustees sought to broaden the cross-undertaking to extend to the order requiring Mr Pugachev to make disclosure, it was for them to adduce credible evidence that there was a realistic risk of loss. They had not done so.
8. 8) Fairness rather than the likelihood of loss led to the requirement of a cross-undertaking. At the stage when the freezing order is granted, nothing has been decided and the court cannot be seen to prefer the interests of one litigant over another. The claimants were not correct that the defendant had to show that the freeing order was likely to cause a loss before a cross-undertaking of unlimited amount was required.
9. 9) The judge did not make an error of principle in distinguishing the position of a state-backed entity from that of an individual professional insolvency practitioner. Nor were the claimants correct in submitting that the availability of funds could be dismissed as irrelevant. The judge was entitled to take into account the lack of evidence about what efforts the DIA had made to persuade substantial creditors for whose benefits the recoveries would enure, to back the cross-undertaking.

10) There was no evidence upon which to build a picture of an established pattern of business activity from which it could be inferred that the freezing order would cause loss. The judge did not descend into any detail about why she reached the general conclusions that she did, and they were simply unsustainable on the evidence. Permission to appeal against Rose J’s decision to order fortification of the cross-undertaking should therefore be granted.

JUDGMENT LEWISON LJ [1] There are three appeals before the court, all of which relate to powers exercisable in connection with the grant of a freezing order. The questions that they raise are: i) Does the court have jurisdiction to order a member of a class of beneficiaries under a discretionary trust to make disclosure …

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