The recent Court of Appeal judgment in JSC Mezhdunarodiny Promyshlenniy Bank v Pugachev has provided a welcome recap of the court’s approach to freezing orders over trust assets, and the circumstances in which a respondent can be ordered to provide information about assets which may or may not be susceptible to a freezing order. It also addresses the circumstances in which a foreign claimant will be required to fortify a cross-undertaking as to damages.
Procedural timeline
In November 2010, the claimant bank (Bank) was declared insolvent and a Russian “state corporation”, the Deposit Insurance Agency (DIA), was appointed liquidator. The deficiency was approximately $2.2bn and DIA brought proceedings in Russia against Mr Pugachev, alleging that he extracted money from it for his own benefit. The sums sought exceed $2bn.
In July 2014, Henderson J made a freezing order in support of the Russian proceedings. Amongst the assets specified in the order was “any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of any power of appointment, discretion or otherwise howsoever.”
Mr Pugachev disclosed his interest, as one of a class of discretionary beneficiaries, in five New Zealand-based trusts. However, he gave no details of those trusts other than their names. DIA then obtained a further order from Henderson J requiring Mr Pugachev to supply them with an affidavit setting out various details of those trusts, including details of their assets. He was also required, so far as he was able, to supply copies of the trust deeds relating to those trusts.
The trustees of the trusts applied to David Richards J to discharge those parts of Henderson J’s order relating to the trusts, but were unsuccessful. Mr Pugachev appealed against Henderson J’s disclosure order and the trustees appealed against David Richards J’s refusal to discharge this order.
Disclosure of trust information
The question for the court was whether it could require Mr Pugachev to provide information about the trusts and their assets in circumstances where it could not be shown that Mr Pugachev was to be regarded as the legal or beneficial owner of those assets.
The court could not approach this question on the basis that the trust assets themselves were caught by the freezing order. However, this was not determinative as the threshold test for asking questions was not the same as that for making a freezing order, and CPR 25.1(1)(g) gave a power to make an order directing a party to provide information about assets which might be the subject of a freezing order. The test for disclosure applied by Henderson J in Lichter v Rubin was approved, namely that there should be a reasonable possibility, based on credible evidence, that an application for a freezing order in respect of the relevant assets may be made.
Here, there was sufficient evidence to cross that lower threshold. In particular, the trusts appeared to be funding Mr Pugachev’s very expensive lifestyle. On that basis, Lewison LJ saw no reason to interfere with the decision of the first instance judges and dismissed the appeals of Mr Pugachev and the trustees.
Cross-undertakings as to damages
The court also dealt with three issues relating to the provision of cross-undertakings as to damages. The first was a complaint by the trustees that there was no undertaking to compensate them for loss suffered as a result of the disclosure exercise. This was dealt with shortly: they were covered for loss suffered as a result of the freezing order itself, which contained a standard form undertaking in relation to third parties. As for losses suffered by reason of the disclosure order, the court would require credible evidence that there was a realistic risk of loss before requiring such an undertaking.
The second issue was raised by DIA, in relation to the refusal of Rose J (who continued the freezing order originally made by Henderson J) to limit its cross-undertaking as to damages. It made three complaints: that Mr Pugachev should have been required to show some likelihood of loss, that the judge drew an inappropriate distinction between a corporate office-holder and an individual office-holder, and that she ought not to have looked at the possibility of external sources of finance.
Lewison LJ held that all three of these complaints were unfounded. In particular, in relation to the second complaint he considered that the judge was not simply distinguishing between individual and corporate office-holders. Instead she had focused on the fact that both DIA and the largest creditor (the Russian Central Bank) were effectively emanations of the Russian state. It was not inappropriate to treat a state-backed entity differently from an individual insolvency practitioner.
The final issue was the requirement imposed on DIA to fortify its cross-undertaking. Here the court disagreed with the first instance judge, and held that as Mr Pugachev had not provided any real evidence of business activity in the four years since he left Russia, it was inappropriate to require fortification of the undertaking.
Differences between the tests for ordering disclosure and freezing assets
In many cases, the real struggle for the claimant is not in obtaining (or retaining) the freezing order, but in obtaining disclosure from the defendant and identifying the assets which ought to be covered by the order. This decision is a welcome confirmation that the threshold test for ordering disclosure in relation to assets is significantly lower that that for freezing assets.
It is worth noting the varying formulations used in first instance cases, all of which were approved by Lewison LJ. First, in Parker v CS Structured Credit Fund, Gabriel Moss QC states that CPR 25.1(1)(g) “assumes that there is some credible material in which such an application might be based”. Later, in Lichter v Rubin, Henderson J said that “reasonable possibility [of an application for a freezing order], based on credible evidence, should be sufficient to found the jurisdictional requirement”, and went on to say that it was only necessary to show that a freezing order might be applied for and that there were credible grounds for making the application if so advised.
In particular, and reinforcing the relatively low test to be applied in a disclosure application of this sort, Henderson J highlighted that the court cannot determine, at the stage where a disclosure application is made, whether an application for a freezing order would be successful. Therefore, it appears now to be the case that the court need only ask itself whether there is credible evidence to show that the assets, if disclosed, might for the subject of a freezing order.
Uncertainty as to the proper scope of a freezing order
The part of the judgement which is, perhaps, likely to give rise to most argument in future concerns the proper scope of a freezing order and the scope of the “enforcement principle”, that is that assets should not be included within the scope of a freezing order unless it can be shown that the claimant would (if successful) be able to enforce against them.
The starting point was the summary of principle set out by Sir John Chadwick P in Algosaibi v Saad Investments Company (in particular at paragraphs 32-33) that, in the case of assets held by a third party, the court must be satisfied that there is good reason to suppose either that the potential judgment debtor can be compelled to cause the assets held by the third party to be used for the purpose of satisfying the judgment, or that there is some other process of enforcement through which the claimant can obtain recourse to those assets.
Lewison LJ noted that those paragraphs had been approved both at first instance and in the Court of Appeal, and he rejected the Bank’s argument that they were incorrect (holding that any errors were at the level of detail and did not affect the statement of principle). However, he also identified a discrepancy between the strict approach adopted by Sir John Chadwick P and the wider approach taken by Patten LJ in JSC BTA Bank v Solodchenko, when he held that paragraph 6 of the standard form of freezing order includes in the respondent’s assets those held by a third party in relation to which the respondent retains control, even if he does not retain beneficial ownership.
Thus the decision highlights a potential uncertainty in the proper scope of a freezing order, namely whether it only extends to assets against which execution can issue, or whether it also extends (as Patten LJ said in the JSC BTA Bank case) to assets under the direct or indirect control of the defendant, even if not susceptible to execution. Lewison LJ left this question open, but it he certainly seemed to favour the latter, particularly when he categorised the court’s approach as “shoot first and ask questions later”. Nevertheless, the express approval of the Algosaibi approach leaves the contrary position well arguable.
