REUTERS | Ilya Naymushin

Is full disclosure always necessary under the worldwide freezing order regime?

The question of adequate disclosure required by a defendant to a worldwide freezing order (WFO) was discussed in the case of PJSC Tatneft v Gennady Bogolyubov and others.

Background

The second defendant in this matter was Mr Kolomoisky.

The claimant, Tatneft produces crude oil and is based in Tatarstan, Russia. Tatneft is part owned by the government of Tatarstan, which in turn is a member of the Russian Federation. The Russian Federation also holds a controlling share in Tatneft.

The originating proceedings in the case alleged that Mr Kolomoisky and his co-defendants were involved in a fraudulent scheme to divert payment for oil supplied by Tatneft in 2007.

At the same time as issuing proceedings, Tatneft applied for a WFO prohibiting each of the defendants from disposing or dealing with their assets up to the limit of US $380 million. As part of that WFO, it was ordered that all of the defendants’ assets exceeding £10,000 in value, wherever situated, were to be disclosed. The disclosure was ordered in the usual way; disclosure of the assets was to be made within 48 hours of service of the WFO and confirmed by affidavit seven days later.

There was a delay in effecting service on Mr Kolomoisky, service eventually being effected on 5 August 2016.

Mr Kolomoisky gave disclosure in his first asset list, within the timescales demanded. It was clear from this list that he had assets worth far in excess of the maximum sum frozen under the WFO. Mr Kolomoisky issued an application for an order varying the WFO to provide that the asset list provided by him comprised the required full disclosure. Mr Kolomoisky also made a jurisdictional challenge to the WFO. The application for variation was stayed until the matter regarding jurisdiction was finalised. The jurisdictional challenge came to an end in November 2017 when Mr Kolomoisky’s application to appeal was denied by the Supreme Court.

The application

The basis for Mr Kolomoisky’s application for variation of the WFO was that the disclosure should be limited to the asset list delivered to the claimants in September 2016 and subsequently updated by way of Mr Kolomoisky’s second affidavit dated 27 November 2017.

In support of his application, Mr Kolomoisky disputed the merits of the main claim. He stated that the claim had already been settled in Russia and therefore Tatneft was estopped from relitigating matters which had been disposed of by the Russian Courts.

In relation to his application, Mr Kolomoisky claimed that the asset disclosure order part of the WFO should only be made to the extent necessary to allow the claimant to police the injunction. He went on to say that once sufficient assets had been disclosed to the claimant, the claimant had the sufficient protection that he needed to receive as a result of having obtained the freezing order.

Mr Kolomoisky further argued that in such a circumstances, further disclosure is not necessary to ensure that a freezing order is effective and the court ought not to grant it.

In response, Tatneft stated that the disclosure obligations imposed on Mr Kolomoisky were the standard form disclosure applications of a WFO. Such disclosure obligations are prescribed by the Commercial Court Guide and CPR 25.

Their main argument was that full disclosure is the norm and there was no good reason for any change of principle.

The decision of Cockerill J

Cockerill J decided the application on 10 May 2018. She did not agree with Mr Kolomoisky. She is quite clear in her judgment:

“The first problem is that this approach is a cherry picker’s charter. Just as an initial limitation would, a limitation at a later stage would enable a Defendant to deliberately disclose only his most difficult assets to enforce against and then side step the rest of the obligation. This would plainly subvert the purpose of the Orders both as to freezing and as to policing the freezing order by disclosure.

Also… it means that the original disclosure order becomes almost meaningless for contempt purposes. If a Defendant need as a matter of principle, only disclose up to the amount frozen he can ignore the Order in substance without being subject to the sanction of contempt. That would be a surprising conclusion.

It also puts the order effectively in the control of the defendant. If your argument advanced on behalf of the applicant is correct, he can properly decide what to disclose and what not and this is of course exactly what Tatneft says is happening here.”

Commentary

This further cements the importance of disclosure during freezing order proceedings as outlined in both the Commercial Court Guide and CPR 25.

WFOs are not granted lightly. It is a most draconian measure and an applicant for a freezing order has to overcome a high bar to persuade a court that a defendant’s assets should be completely frozen.

This is a welcome decision which gives clarity to practitioners when advising high net worth individuals.

Notes for practitioners

When on the receiving end of a worldwide freezing order it is important to be clear with your client exactly what is expected under the disclosure obligations.

A recipient of a freezing order will usually try to resist providing disclosure as was the case here.

As well as advising recipients of the contempt ramifications of not complying with an order, practitioners should be keen to point out the cross-undertaking that is a requirement of a freezing order. This will provide the defendant with comfort should the order be later found to have been wrongfully granted.

Hodge Jones & Allen Claire Kitchen

Leave a Reply

Your email address will not be published. Required fields are marked *