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URL: http://www.bailii.org/ew/cases/EWHC/Ch/2017/756.html
Cite as: [2017] WLR(D) 263, [2017] 1 WLR 4264, [2017] EWHC 756 (Ch)

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		Neutral Citation Number: [2017] EWHC 756 (Ch)
		Case No: CR-2016-002375

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF DALNYAYA STEP LLC (IN LIQUIDATION)
AND IN THE MATTER OF THE CROSS-BORDER INSOLVENCY REGULATIONS 2006
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

Royal Courts of Justice
The Rolls Building,
London, EC4A 1NL

10/04/2017

B e f o r e :

MRS JUSTICE ROSE
____________________

Between:

	(1) IVAN CHERKASOV (2) WILLIAM BROWDER (3) PAUL WRENCH	Applicants
	- and –
	NOGOTKOV KIRILL OLEGOVICH, THE OFFICIAL RECEIVER OF DALNYAYA STEP LLC (IN LIQUIDATION)	Respondent

____________________

Mr Joe Smouha QC and Mr Ciaran Keller (instructed by Kobre & Kim (UK) LLP) for the
Applicants
Mr Daniel Bayfield QC and Mr James Willan (instructed by Olswang LLP) for the Respondent

Hearing date: 23 March 2017
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Mrs Justice Rose:

1. Introduction

This is an application for security for costs brought by Mr Cherkasov, Mr Browder and Mr Wrench, whom I will refer to collectively as the Hermitage Parties. The person from whom they are seeking security is Mr Nogotkov who is, or claims to be, the liquidator appointed by a Russian court to carry out the liquidation of a company called Dalnyaya Step LLC ('DSL') incorporated in the Republic of Kalmykia in the Russian Federation.

Applications for security for costs are governed by CPR 25.12 which provides as follows:

"Security for costs

25.12 – (1) A defendant to any claim may apply under this section of this Part for security for his costs of the proceedings. …

(2) An application for security for costs must be supported by written evidence.

(3) where the court makes an order for security for costs, it will-

(a) determine the amount of security; and

(b) direct –

(i) the manner in which; and

(ii) the time within which

the security must be given."

CPR 25.13 provides:

"Conditions to be satisfied

25.13 – (1) The court may make an order for security for costs under rule 25.12 if -

(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(b) (i) one or more of the conditions in paragraph (2) applies, or

(ii) an enactment permits the court to require security for costs.

(2) the conditions are-

(a) the claimant is-

(i) resident out of the jurisdiction; but

(ii) not resident in a Brussels Contracting State, a State bound by the Lugano Convention, a State bound by the 2005 Hague Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982;

…"

The costs for which the Hermitage Parties seek security are their costs of a hearing listed to take place over five days in November 2017. That hearing will consider two applications. The first is the Hermitage Parties' application to set aside a recognition order obtained by Mr Nogotkov on 8 July 2016 after a short hearing before Registrar Barber. That recognition order was granted pursuant to the Cross-Border Insolvency Regulations 2006 (S.I. 2006 No 1030) ('CBIR'). The order described Mr Nogotkov as the official receiver of DSL appointed by order dated 27 November 2015 of the Arbitrazh Court of the Republic of Kalmykia, Russian Federation. It ordered that the liquidation of DSL commenced on 9 September 2015 pursuant to the relevant Federal Law concerning insolvency "be recognised as a foreign main proceeding in accordance with the UNCITRAL Model Law on cross-border insolvency" as set out in Schedule 1 to the CBIR. The grounds on which the Hermitage Parties will seek to set aside that recognition order are primarily that the making of the order was manifestly contrary to public policy.

The second application to be heard in November is Mr Nogotkov's application pursuant to Article 21(1)(d) and Article 21(1)(g) of Schedule 1 to the CBIR and section 236 of the Insolvency Act 1986. Section 236 empowers the court on the application of the office holder to summon to appear before it various people including any officer of the company and any person who may have in his possession any property of the company or any information concerning the business, dealings, affairs or property of the company. In his section 236 application Mr Nogotkov seeks the production of DSL's documents from the Hermitage Parties and a summons for each of them to attend for questioning. The Hermitage Parties will resist that application also primarily on the basis that the jurisdiction to grant it relies on the existence of the recognition order which they say should be set aside.

The following points are common ground for the purposes of the application for security for costs before me:

i) the condition in CPR r 25.13(2)(a) is satisfied because Mr Nogotkov is resident in Russia which is not a contracting state of the kind referred to in r 25.13(2)(a)(ii);

ii) if the Hermitage Parties are successful in November and Mr Nogotkov is ordered to pay their costs, it will be difficult, if not impossible, for any costs order to be enforced by the Hermitage Parties against Mr Nogotkov in Russia;

iii) Mr Nogotkov has no assets within this jurisdiction;

iv) the costs of the hearing in November are likely to be substantial (£400,000 according to Mr Nogotkov's estimate and over £1.8 million according to the Hermitage Parties);

v) the Hermitage Parties have a reasonable prospect of succeeding in setting aside the recognition order and resisting the section 236 application in November;

vi) Mr Nogotkov has sufficient funds to enable him to put up money for security for costs so that any award by this court will not stifle Mr Nogotkov's ability to participate in the hearing in November.

2. The Cross-Border Insolvency Regulations 2006

The CBIR incorporate into English law the Model Law on cross-border insolvency as adopted by the United Nations Commission on International Trade Law on 30th May 1997, known as the UNCITRAL Model Law. Regulation 2 of the CBIR provides that the UNCITRAL Model Law shall have the force of law in Great Britain in the form set out in Schedule 1 to the Regulations. Schedule 1 sets out the UNCITRAL Model Law with certain modifications to adapt it for application here. Regulation 2 further provides that the courts can use various instruments when interpreting the Model Law, including the Guide to Enactment of the UNCITRAL Model Law (UNCITRAL document A/CN.9/442) issued by UNCITRAL in May 1997 (the 'UNCITRAL Guide').

The UNCITRAL Model Law as set out in Schedule 1 provides that it applies when assistance is sought in Great Britain by a foreign court or a foreign representative in connection with a foreign proceeding. The term "foreign proceeding" is defined as a collective judicial or administrative proceeding in a foreign State pursuant to a law relating to insolvency, in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation. A "foreign representative" means a person or body authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor's assets or affairs or to act as a representative of the foreign proceeding.

The relevant element of the Model Law for our purposes is Article 15 which provides that a foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed. That application must be accompanied by specified evidence showing the commencement of the foreign proceeding and the appointment of the foreign representative.

Article 17 then provides:

"Article 17. Decision to recognise a foreign proceeding

1. Subject to article 6, a foreign proceeding shall be recognised if—

(a) it is a foreign proceeding within the meaning of sub-paragraph (i) of article 2;

(b) the foreign representative applying for recognition is a person or body within the meaning of sub-paragraph (j) of article 2;

(c) the application meets the requirements of paragraphs 2 and 3 of article 15; and

(d) the application has been submitted to the court referred to in article 4.

2. …

3. An application for recognition of a foreign proceeding shall be decided upon at the earliest possible time.

4. The provisions of articles 15 to 16, this article and article 18 do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have fully or partially ceased to exist and in such a case, the court may, on the application of the foreign representative or a person affected by recognition, or of its own motion, modify or terminate recognition, either altogether or for a limited time, on such terms and conditions as the court thinks fit."

Article 17 is thus expressed to be subject to Article 6 of the Model Law. Article 6 provides:

"Article 6. Public policy exception

Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of Great Britain or any part of it."

Other provisions of the Model Law as set out in Schedule 1 to the CBIR include:

i) Article 19 which provides for the court, at the request of the foreign representative, to grant urgent relief to protect the assets of the debtor or the interests of the creditor;

ii) Article 20 which sets out the effects of recognition of a foreign proceeding, broadly that a stay and suspension come into effect of the same scope and effect as if the debtor had been made bankrupt or a company had been made the subject of a winding up order under the relevant domestic legislation;

iii) Article 21 which sets out the relief that may be granted upon recognition of a foreign proceeding, including in subparagraph (1)(d) relief providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets affairs, rights, obligations or liabilities and in subparagraph (1)(g) granting any additional relief that may be available to a British insolvency office holder under the law of Great Britain.

Schedule 2 to the CBIR deals with the form and content of the various documents that must be provided to the court by a foreign representative seeking a recognition order. These include the swearing of an affidavit to be attached to the application. That affidavit must contain or have exhibited to it various items aimed at establishing to the satisfaction of the court that the requirements for recognition are met. Paragraph 4(1)(d) of Schedule 2 provides that the affidavit must contain "any other matters which in the opinion of the applicant will assist the court in deciding whether to make a recognition order".

Paragraph 5 of Schedule 2 provides that on hearing a recognition application, the court may in addition to its powers under the Model Law to make a recognition order dismiss the application, adjourn the hearing conditionally or unconditionally or make any other order which the court thinks appropriate. Part 6 of Schedule 2 sets out the court procedure and practice with regard to principal applications and orders including an application for recognition. It covers the filing of the application, the service of the application, the conduct of the hearing and the notification and advertisement of the order. At the hearing, according to paragraph 25, amongst the people who may appear or be represented are, with the permission of the court, "any other person who appears to have an interest justifying his appearance": see paragraph 25 (1)(j).

Part 8 of Schedule 2 provides for the court to examine misfeasance by a foreign representative, including examining the conduct of a person who purports to be the foreign representative in relation to a debtor. Again, an examination under this paragraph may be held on the application, with the permission of the court, of any other person who appears to have an interest justifying an application.

Paragraph 30 of Schedule 2 provides that the Civil Procedure Rules and the practice and procedure of the High Court, including any practice direction shall apply to proceedings under the Regulations in the High Court with such modifications as may be necessary for the purpose of giving effect to them. In the case of any conflict between any provision of the CPR and the provisions of the CBIR, the latter shall prevail.

Paragraph 41 provides that in any proceedings under these regulations, orders of the court may be enforced in the same manner as a judgment to the same effect. Paragraph 42 prescribes the title to be given to "Every proceeding under these regulations" and paragraph 43 requires the court to keep records of all proceedings under the Regulations and to cause to be entered in the records the taking of any step in the proceedings and such decisions of the court in relation thereto as the court thinks fit. The court must also open and maintain a file in each case and that file must be open to inspection by various people including any person who has the leave of the court: see paragraph 46.

Schedule 5 to the CBIR contains templates for the various applications and orders referred to in the Model Law and Regulations including the application for recognition and the recognition order.

The UNCITRAL Guide contains the following relevant guidance. In the section setting out general guidance on recognition, paragraph 29 and 30 makes clear that since one of the key objectives of the Model Law is to establish simplified procedures for recognition, if the provisions of the Model Law are met, the court should recognise the foreign proceeding without further requirement.

However, this is subject to Article 6 about which paragraph 30 of the UNCITRAL Guide says:

"30. Article 6 allows recognition to be refused when it would be "manifestly contrary to the public policy" of the State in which recognition is sought. This may be a preliminary question to be considered on an application for recognition. No definition of what constitutes public policy is attempted as notions vary from State to State. However, the intention is that the exception be interpreted restrictively and that article 6 be used only in exceptional and limited circumstances (see paras. 101-104). Differences in insolvency schemes do not themselves justify a finding that enforcing one State's laws would violate the public policy of another State."

3. The current insolvency of DSL

Many of the circumstances surrounding the insolvency of DSL are contentious, but these facts are agreed between the parties at least for the purposes of this application and the hearing in November:

i) DSL was a Russian subsidiary of the Hermitage Fund, a Guernsey unit trust which before 2006 was the largest international fund investing in Russian capital markets through Russian subsidiaries.

ii) Mr Browder is a British citizen and was the founder and the CEO of Hermitage Capital Management Ltd which acted as an adviser to the manager of the unit trust, HSBC Management (Guernsey) Ltd. He was based in Russia between 1996 and 2005 and was General Manager of DSL for certain periods. Mr Cherkasov is a Russian citizen and was a member of Hermitage Capital LLP. He was also the general manager of DSL for some time. He was granted asylum in the UK in 2012. Mr Wrench is a British citizen and former managing director of the entity that managed the Unit Trust and director of the entity that was General Manager of DSL at some point.

iii) A dispute arose as to whether DSL had failed to pay the taxes due to the Russian Federal tax authority. The Russian Federal tax authority concluded in 2005 that very substantial amounts of tax were owed by DSL for 2001 and 2004.

iv) In August 2006 DSL was placed into an insolvency process at the suit of the tax authority in Russia.

v) In June 2007 a Russian court declared DSL insolvent and appointed as liquidator a Mr Dolzhenko who had been the interim manager for the company since September 2006.

vi) In October 2007 DSL was removed from the Russian companies register and ceased to exist as a matter of Russian law. Mr Dolzhenko had failed to identify any property or funds of the company and so was unable to discharge the company's alleged debts.

vii) In 2015 DSL was brought back to life (purportedly the Hermitage Parties say) when the Russian Federal tax authority applied to the court to reverse the decision of October 2007. The insolvency proceeding to which the recognition order relates was then also revived.

viii) Mr Nogotkov was (purportedly) appointed as official receiver in November 2015.

ix) Mr Nogotkov is funding his activities as a liquidator of DSL himself on the basis that he will have his out of pocket expenses reimbursed out of any recoveries and will also receive by way of compensation a percentage of any recoveries. Mr Nogotkov says that this arrangement is pursuant to a Russian Decree adopted in October 2004 concerning the remuneration of the official receiver of an 'absent debtor', a term which includes DSL. Under this Decree he will receive 10% of any recoveries. If he makes no recoveries, he will be paid a nominal amount by the Russian tax authorities which may also be required to reimburse his out of pocket expenses. This is a common way he says for insolvency practitioners to be paid in Russia.

x) All the Hermitage Parties have in their possession documents and information relating to DSL falling within the categories covered by Mr Nogotkov's section 236 application.

4. The public policy argument

Beyond those bare facts, the parties put forward very different accounts as to why DSL was resurrected in 2015. The Hermitage Parties say that this second liquidation is unlawful and ineffective and serves no legitimate purpose. They argue that it is one step in a long and abusive campaign on the part of the Russian Government to attack the Hermitage Parties, particularly Mr Browder. Mr Browder has in the past been active in exposing corruption and fraud within prominent Russian companies. He was expelled from Russia in 2005 because of this. They say that the Hermitage Fund was the victim of a $230 million tax fraud in 2007 carried out with the approval and assistance of the Russian Interior Ministry and the Russian Tax Authority acting with criminal elements. They rely on a report by the Council of Europe which described the $230 million fraud as a corporate raid. It is common ground that the hearing in November will proceed on the assumption that the tax fraud took place as the Hermitage Parties allege.

The fraud was discovered and pursued by Hermitage's then lawyer Sergei Magnitsky. His pursuit of the fraud led to him being imprisoned for nearly a year without trial in Russia and he died in custody there in 2009. His death led to an international outcry, prompting the US Congress in December 2012 to pass on a bipartisan basis the Sergei Magnitsky Rule of Law Accountability Act 2012. This Act prohibits those involved in the detention and death of Mr Magnitsky from entering the US or using the US financial system. As at 24 February 2017 there are 44 people affected by that ban.

The Hermitage Parties say that this legislation has itself prompted a backlash by the Russian Government seeking to prevent the passage of the Act. They point to a series of actions taken by the Russian Government against Mr Browder, including the issue of a warrant for his arrest and several attempts to extradite him from countries in Europe. All these attempts have been rejected on the grounds that they are politically motivated. Criminal proceedings have also been launched against Mr Browder and Mr Cherkasov in relation to DSL. Again, the Hermitage Parties say that both the UK Government and Interpol have repeatedly refused requests by Russia for assistance in relation to those proceedings on public policy grounds.

The Hermitage Parties support these serious allegations with evidence that international organisations and governments and other bona fide independent organisations have condemned various aspects of the retaliatory campaign being pursued by the Russian authorities against the Hermitage Parties.

As regards the second liquidation of DSL itself, the Hermitage Parties say that there is contemporaneous evidence of the fact that this is another salvo in this campaign and that the whole resuscitation of DSL was designed to be a pretext for attacking the Hermitage Parties in England. They point to an email dated 16 March 2013 to Mr Nogotkov's solicitors asking them whether, if DSL was restored to the register, that would enable a receiver to sue Mr Browder and Mr Cherkasov in London. That email was sent by Mr Pavlov who is one of those seriously implicated by Mr Magnitsky in the tax fraud committed in 2007. Again, it is common ground that the applications in November will proceed on the assumption that Mr Pavlov encouraged the Russian Interior Ministry and or the tax authorities to re-open investigations into Mr Browder and DSL.

Mr Nogotkov's version of events is very different. Mr Nogotkov says that the reason why the liquidation of DSL was reopened was that extensive asset stripping of DSL by its former officers including the Hermitage Parties has now come to light. This was new information that had not been known about when the first liquidation was terminated in 2007. On 17 August 2015 the Russian Tax Authority applied to the Kalmykian Court to reverse the decision of 22 October 2007 because of newly discovered facts, namely that criminal proceedings had been initiated by the Police against Mr Dolzhenko in respect of his activities as the official receiver of the Company. He describes how on 9 September 2015 the Kalmykian Court revoked the decision of 22 October 2007 and extended the period of liquidation proceedings against the Company. He then states that the Russian Tax Authority has reinstated the company to the Russian companies register.

Mr Nogotkov says that he understands from reviewing court papers filed by the Tax Authority that it is alleged that Mr Dolzhenko had not discharged his duties to the Kalmykian Court or to creditors because he failed to investigate the making of payments out of the Company's assets during 2004 to 2005. It is those payments that Mr Nogotkov wants to ask the Hermitage Parties about.

Mr Nogotkov has outlined the matters he wants to ask the Hermitage Parties about including:

i) the sale of DSL's shareholding in the Russian giant energy company Gazprom between 15 and 23 December 2004 for about $104 million most of which was, he says, then paid out in dividends to other subsidiaries of the Hermitage Fund;

ii) the transfer of $12.1 million from the company to another wholly-owned subsidiary of the Hermitage Fund;

iii) the payment of about $20 million by the company to another account it had opened at a bank which later lost its licence as a result of its engagement in money laundering.

Mr Nogotkov's case is that there is strong, unanswered evidence that DSL was asset stripped whilst subject to civil and criminal investigations into its tax affairs. Mr Nogotkov seeks an order for the production of documents from, and the oral examination of, the Hermitage Parties. He hopes thereby to understand the asset-stripping that took place, who was responsible and where the assets have gone. Ultimately this may enable Mr Nogotkov to take action against the Hermitage Parties to recover the assets or obtain compensation for the benefit of the company.

5. The making of the recognition order

Mr Nogotkov issued his recognition application on 3 May 2016. The application described the foreign proceeding in respect of which recognition was applied for as the liquidation proceedings in relation to DSL in Kalmykia. The application states that the requirements of Article 2 of the Model Law are met and that the evidence referred to in Article 15 (2) of the Model Law is contained in or exhibited to the affidavit in support of the application. The accompanying affidavit was sworn by Mr Nogotkov on 29 April 2016. He sets out his qualifications and describes the relevant Russian insolvency law, the nature of the court in which the insolvency proceedings have been commenced and the process of that court. He describes the previous appointment of Mr Dolzhenko and the meeting of the creditors which took place on 4 May 2007. He states that in fact there was only one creditor of DSL, the Russian Tax Authority. He then describes the liquidation of the company and the termination of the insolvency proceedings on 22 October 2007. He states at paragraph 25 of his affidavit: "I am not aware of anything having occurred in relation to the Company between the termination of the liquidation proceedings and the events described below".

He describes his own appointment as the Official Receiver of DSL. He says he is authorised to administer the liquidation of the debtor's assets for the benefit of DSL's creditor and in doing so he may exercise his duties and rights pursuant to the current Russian insolvency law in both the Russian Federation and other jurisdictions. There are then some paragraphs about the service of documents in Russia asking the court to dispense with the need for service on the company since he is in effect the person upon whom such a document should be served.

At paragraph 40 of the affidavit Mr Nogotkov says:

"40. If the court is content to recognise the Company's liquidation as a foreign proceeding, and my appointment as official receiver as the appointment of a foreign representative, such that it makes an order under Article 17 of Schedule 1 to the 2006 Regulations, I will in due course apply for relief pursuant to Article 21. In particular, I wish to obtain information, including documents, about the Company's affairs and assets from former officeholders of the Company and other persons previously connected with the running of the Company who are resident or domiciled in England and Wales pursuant to section 236 of the Insolvency Act 1986. I am conducting parallel enquiries in Kalmykia and other territories of the Russian Federation."

The affidavit did not therefore mention the Hermitage Parties by name nor did it refer to any of the history of the matter as I have outlined above or contain any other material to alert the court to a potential public policy issue. The skeleton argument prepared by junior counsel then acting for Mr Nogotkov (not the same counsel as appeared before me) also did not refer to the history of the matter. Indeed, under the heading "Formal requirements" it stated in respect of Article 17(1)(c) that no public policy considerations arise under Article 6.

I have read the transcript of the short ex parte hearing that took place before Registrar Barber on 8 July 2016. At the start of the hearing the Registrar asked counsel to refer her to anything he wanted her to take particularly into account. Counsel summarised the material in the affidavit, showed her the formal documents exhibited to Mr Nogotkov's affidavit and explained how the formal requirements are met in this case. Counsel then said that:

" … given that the court has jurisdiction, that there are no public policy considerations arising, and there is a purpose to this order, in the sense that he wishes to undertake investigations in this jurisdiction, I submit that the jurisdiction is made out and that the court should recognise the liquidation as a foreign main proceeding as we have set out in the draft order."

He then presented the draft recognition order to the Registrar. Towards the end of the hearing, counsel said in respect of costs that it was not necessary to deal with costs since "there is no respondent as such, there is no adverse party against whom one could make a costs order." The recognition order was duly made.

The Hermitage Parties describe the failure of Mr Nogotkov and his team to bring any of the contentious background to the application to the attention of the Registrar as staggering. The Hermitage Parties will submit at the hearing in November that the recognition order should be set aside not only pursuant to Article 6, but also because of what they describe as the "serious and flagrant breach" by Mr Nogotkov and his legal team of their obligations to give full and frank disclosure to the court of all matters relevant to the question whether the court should make the order sought.

Following the grant of the recognition order Mr Nogotkov wrote to the Hermitage Parties seeking documents and information. On 9 August 2016 Kobre & Kim (UK) LLP, solicitors acting for the Hermitage Parties replied to Mr Nogotkov's letter setting out the background from their point of view, as I have described it above. They asserted that the matters raised in the request for information "engage a complex factual and legal background involving collusion between corrupt Russian public officials and a Russian organised crime syndicate to defraud the Russian state of $230 million in tax revenue".

In response to that Mr Nogotkov made a witness statement dated 22 August 2016 to which he exhibited the Kobre & Kim letter and stated that he wished to make clear for the avoidance of any doubt that he had no involvement in any of the matters alleged in Kobre & Kim's letter, if they occurred. He goes on to say:

"I did not inform the Court of the alleged fraud (or the death of Mr Magnitsky) as part of the Recognition Application because I did not believe that those allegations (whether or not they are correct as a matter of fact) had any connection to this Company or its liquidation at all. However, given that it has now been alleged by Kobre & Kim that the liquidation of the Company is a "manifestation" of the alleged criminal scheme relating to a USD 230 million fraud and that I am "controlled" by the perpetrators of that scheme, I consider that it is only proper for this matter to be brought to the attention of the Court which granted the Order at the earliest opportunity and I do so now."

That witness statement was sent to Registrar Barber who acknowledged its receipt and directed that the recognition order stands and that no further action was required.

On 27 September 2016 Mr Nogotkov issued his application against the Hermitage Parties under section 236 of the Insolvency Act. That application was served with a hearing date of 27 October 2016. The day before that hearing the Hermitage Parties issued their security for costs application. That application was supported by a witness statement of Mr Hayes, a solicitor in Kobre & Kim. That set out in some detail the Hermitage Parties' contention that the reopening of the DSL liquidation eight years after the company was removed from the companies register "is inseparable from the story of the Hermitage Parties' decade-long struggle against corrupt Russian public officials, organised crime, and state-sponsored persecution."

There was then an inter partes hearing for directions before Registrar Jones. The directions made in Registrar Jones's order of 27 October 2016 recorded the Hermitage Parties' undertaking to issue an application to set aside the recognition order and to preserve all books, papers, records and documents belonging to DSL which are in their possession or under their control including electronic copies of documents. The Registrar set a timetable for the service of evidence and adjourned the applications to a judge.

There was a further directions hearing before Ms A Tipples QC sitting as a deputy judge of the High Court in January 2017. She made an order giving directions leading up to the hearing before me.

6. Identifying a 'claim' or 'proceeding'

The question of what is a 'proceeding' or 'claim' for the purposes of CPR 25.12 arises directly in relation to the section 236 application where Mr Nogotkov argues that the application is neither a claim nor a proceeding so that security for costs cannot be ordered even though in that application Mr Nogotkov is clearly the 'claimant' and the Hermitage Parties are clearly the 'defendant'. But the same issue also arises in relation to the set aside application where the dispute is between whether, as the Hermitage Parties argue, that application is part and parcel of an overall 'proceeding' commenced by Mr Nogotkov's application for recognition order or whether the set aside application is itself a free standing 'proceeding' in which the Hermitage Parties are the claimant and Mr Nogotkov is the defendant.

I have set out the text of CPR 25.12 above. The rule does not contain a definition of a claim or proceeding but CPR r 2.3 defines a 'defendant' as 'a person against whom a claim is made'.

The leading case on the nature of a claim or proceeding for the purpose of the grant of security for costs is GFN SA & ors v The Liquidators of Bancredit Cayman Limited (in official liquidation) [2009] UKPC 39 ("Bancredit"). That case concerned a Cayman Islands bank which had become insolvent and was placed in official liquidation. A proof was submitted by three creditor companies but rejected by the liquidators. When the creditors challenged the rejection of their proofs, the liquidator applied for security for costs in relation to the applications. The Privy Council held that the power of the court to order security for costs lay in the inherent jurisdiction of the court to control its proceedings. However, that jurisdiction was to be exercised in accordance with the settled practice of the courts.

As to whether the creditors' application was a proceeding within the meaning of CPR 25.12 the Privy Council emphasised that it was the substance of the proceedings and not their form that was important. Lord Scott of Foscote noted that there was a good deal of judicial guidance on the nature of proceedings contemplated by the references in the relevant Cayman Islands statute and in Order 23 r 1, the Cayman equivalent to CPR 25.12. He quoted from the judgment of Buckley J, an acknowledged master of company law practice, in In re Pretoria Pietersburg Railway (No 2) [1904] 2 Ch 359, 362 where he said "wherever a person resident abroad comes forward as an actor in a winding up, whether voluntary, or under supervision, or by the court, the ordinary rule as to security for costs applies". Lord Scott then referred to Taly NDC International NV v Terra Nova Insurance Co Ltd [1985] 1 WLR 1359 where Parker LJ, discussing the nature of the proceedings to which the security for costs jurisdiction applies, said (at pages 1361-1362 of Taly):

"In my judgment the proceedings referred to in the rule, if they are not an action, are at least proceedings of the nature of an action and refer to the whole matter and not to an interlocutory application in some other proceedings. Were it otherwise, it appears to me that chaos would reign, every time an interlocutory application was taken out by a defendant the plaintiff would be able to say, 'The plaintiff is in the position of the defendant in this application and the defendant is in the position of the plaintiff. They are proceedings. Therefore I ought to have security for the costs of this application'. One has only to examine that to see that it cannot have any foundation whatever."

Lord Scott also referred to C. T. Bowring & Co (Insurance) Ltd v Corsi Partners Ltd [1994] 2 Lloyd's Rep 567 in which a number of dicta relating to the nature of "proceedings" that can sustain an application for security for costs can be found. That case concerned an application by a plaintiff for security for costs of a defendant's application for an enquiry as to damages suffered by the defendant as a result of the grant to the plaintiff of an interlocutory injunction. The Court of Appeal made clear in that case that the reference to "proceedings" could not be construed as including an interlocutory application in existing proceedings. Ordinary principles of construction, including the eiusdem generis rule, confine the words to legal proceedings comparable to an action or suit in that they are commenced by a form of originating process.

Lord Scott in Bancredit went on to consider other kinds of interlocutory proceedings. For example, he referred to a committal application made by a party to an action on account of an alleged breach of an injunction. Such a committal application could be made by interlocutory application and the hearing of the application would normally be regarded as an interlocutory proceeding. But Lord Scott said:

"23. … It makes no sense for the ability of an alleged contemnor to obtain security for costs of the committal application to depend upon whether the application were made by interlocutory application in an existing action or by the commencement of a new action. In either case the nature of the application would be in substance the same. In the former case the applicant for the committal order, whether plaintiff or defendant in the existing action, would be in the position of plaintiff in the committal application and, therefore, a potential object of the security for costs application …"

Further, Lord Scott considered the case of an application to set aside a compromise of an action on the ground of misrepresentation or concealment of material facts. Such an application would usually be made in a new action and there could be no question but that the new action would constitute "proceedings" for the purposes of the relevant rule. If the original action were technically still on foot the application to set aside the compromise could be made by interlocutory motion in the still existing action. In such a case the applicant would be in the position of a plaintiff and the respondent in the position of the defendant whatever their respective roles in the existing action. Lord Scott said that the ability of the court to entertain an application by the respondent for security for costs of the applicant's application to set aside the compromise "could surely not be denied on the ground that the application was not in form an originating process and so did not constitute "proceedings" for [security for costs] purposes" see paragraph 24.

Lord Scott then drew a distinction between on the one hand an interlocutory application designed to regulate or assist in some way the conduct of the substantive action between the parties and on the other hand, an application which, although interlocutory in form, raised issues as to the rights of the parties which were in substance independent of the issues in dispute in the parent action. The former kind of application would not constitute "proceedings" for the purposes of CPR rule 25.12 but the latter would normally do so.

On the facts of Bancredit itself, Lord Scott held that the application to reverse the liquidators' rejection of the appellants' proofs of debt was in substance an originating application. The application would determine the substantive, as opposed to merely procedural, rights of the would-be creditors in the winding up. The liquidator was therefore entitled to make an application for security for costs.

Lord Neuberger of Abbotsbury MR, with whom three other JJSC agreed, also held that each of the applications made by the creditors was an action or other proceedings within the Cayman Order 23 r 1. He agreed that it must be right at least as a general rule that when deciding whether a particular application is one for which security for costs can be ordered "the court must look at the substance of the application as opposed to its strict form" (see para 31). He went on:

"32. In my judgment, viewed in the light of these principles, the applications in the present case were originating applications falling within the expressions I have just quoted. They brought before the court issues which were not previously before the court, and which would not otherwise have been before the court; and, although brought in the context of a winding up ordered by, and under the ultimate supervision of, the court, these applications were essentially free-standing. The applications arose because of Bancredit Cayman Ltd's insolvency and because of a dispute as to whether that company was genuinely indebted to the appellants (as they claimed and the liquidators denied) or to other claimants (as the liquidators claimed and the appellants denied). The winding up proceedings merely provided the forensic framework in which the applications were made, or the procedural launch pad from which the applications were issued. Indeed, in his engaging submissions, [counsel for the creditors] realistically accepted that the applications were in substance originating proceedings. This concession must be right given that these applications would admittedly be originating proceedings if this was a voluntary or creditors' winding up and all the facts were otherwise identical."

Lord Neuberger did not express a view on the other examples that Lord Scott had considered such as committal applications or the setting aside of a compromise of action. He concluded that this reticence was not meant to imply that he positively disagreed with anything Lord Scott said on those issues, but merely that he preferred to leave them for determination when they had been subject to fuller argument.

Autoweld Systems Ltd v Kito Enterprises LLC [2010] EWCA Civ 1469 concerned the issue which frequently arises as to whether the court should grant security for costs to a defendant who has brought a counterclaim against the claimant. Black LJ with whom Rimer and Sedley LJJ agreed, said: (emphasis added)

"59. … The judge accepted, and was entitled to accept on the material before him, that if the defendant successfully defended the claim they would be at very serious risk of not recovering any damages on the counterclaim. The defendant had not begun the litigation nor was there anything in this case … to lead one to suppose that they were about to do so when the claimants brought their claim. … Faced with the reality of the claim, they responded to the proceedings by pleading the entirety of the claims which they considered open to them but that does not, in my judgment, amount on these facts to advancing a counterclaim with an independent vitality of its own. It must be borne in mind that the design of the rules is to protect a defendant (or a claimant placed in a similar position by a counterclaim) who is forced into litigation at the election of someone else against adverse cost consequences of that litigation."

The reference in that judgment to whether a counterclaim has "an independent vitality of its own" comes from the judgment of Bingham LJ in In Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307. There Bingham LJ considered whether a defendant bringing a counterclaim is to be regarded as a claimant against whom security for costs can be ordered. He stated at 317D:

"... the question may arise, as a matter of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?"

That "independent vitality" test as the test for when a counterclaim is regarded as something more than simply defensive to the claim and hence as being a claim in respect of which the defendant can be ordered to provide security has been cited in several subsequent cases.

(a) The November hearing looked at as a whole

The primary argument put forward by Mr Smouha QC on behalf of the Hermitage Parties was that, following the Privy Council's guidance in Bancredit that one must look at the substance and not the form of proceedings, I should consider the content of the hearing in November taken as a whole. At that hearing, he submits, Mr Nogotkov will be trying to retain in place the recognition order and obtain relief against the Hermitage Parties under section 236. The Hermitage Parties will be opposing the grant of the recognition order and resisting the section 236 application. The court should not salami slice those proceedings into component parts. It is clear that at the November hearing, the Hermitage Parties will be the defendants and they are therefore entitled to claim security for costs against Mr Nogotkov as claimant.

I do not consider that Bancredit goes so far as to say that one looks at the nature of the particular hearing for which security is sought rather than at the application to be heard at that hearing. To look at the matter on a hearing by hearing basis may lead to an arbitrary result depending on case management decisions that were taken without having in mind any implications for the security for costs jurisdiction. The nature of the set aside application must be determined on its own; the answer to whether that is a proceeding in respect of which the Hermitage Parties can seek security should not depend on the happenstance of whether Mr Nogotkov issues his section 236 application before or after the set aside application is resolved.

The court must look at the individual applications to see whether the Hermitage Parties are entitled to apply for security, although I accept that if they are so entitled then the quantum and kind of security ordered may be influenced by practical factors such as the shape of the hearing in November.

(b) The application to set aside the recognition order

The first question is therefore whether the set aside application is a claim or proceeding by itself, in which case the Hermitage Parties are the claimants or whether it is part of the proceeding brought by Mr Nogotkov for recognition of the Russian insolvency proceedings in which case Mr Nogotkov is the claimant.

Mr Bayfield QC for Mr Nogotkov argues that it is a free-standing claim. It is the Hermitage Parties who have voluntarily initiated the set aside application, who have brought issues before the court for determination which are not otherwise before the court, and who are seeking relief on that application which would not otherwise be in issue. It is Mr Nogotkov who has no choice but to defend himself against the set aside application. The set aside application is, he argues, a free-standing proceeding in which the Hermitage Parties have themselves invoked the court's jurisdiction to seek relief which is not otherwise in play. Further, he argues that the set aside application is not a purely defensive response to the section 236 application because if the set aside application is granted that would prevent Mr Nogotkov seeking relief against parties other than the Hermitage Parties.

Mr Bayfield argues that the court cannot treat the recognition application itself as the relevant claim in respect of which the Hermitage Parties are seeking security for costs. First, he says the recognition application is not a claim at all, it is a sui generis form of application which has no respondent. The Hermitage Parties are not parties to the recognition application and they are not people against whom the claim for recognition is made. No relief is sought against them in that claim. Rather by analogy with Bancredit, he argues that the recognition application is simply the "launch pad" for the set aside application just as the winding up proceedings for Bancredit were the launch pad for the creditors' application challenging the liquidators' rejection of the proofs.

In my judgment, the recognition application brought by Mr Nogotkov is properly described as a proceeding within the meaning of CPR 25.12. There are many regulations in the CBIR that point in favour of this conclusion. There are detailed provisions in both the Model Law and in Schedule 2 to the CBIR which specify how the application is to be commenced, conducted and determined. Article 15 stipulates the documents that must accompany the application and sets out the test to be applied by the court in deciding whether to grant the application. The Model Law contemplates interim applications being made for urgent relief within the confines of the recognition application: see Article 19. That interim relief must be granted in the context of some wider proceeding and that proceeding can only be the application for the recognition order. Articles 20 and 21 of the Model Law and various paragraphs of Schedule 2 to the CBIR set out the kinds of relief that may be granted by the court beyond the simple grant of recognition. There are provisions in Schedule 2 dealing with the service of the application for recognition on various persons (paragraphs 21 to 24); for all proceedings under the CBIR to be allocated to the CPR multitrack (paragraph 3); for the enforcement of orders of the court made under the Regulations (paragraph 41); as to the title to be given to "Every proceeding under these Regulations" (paragraph 42); for the keeping, inspection and advertisement of the records of all proceedings under the Regulations (paragraphs 43 to 48); and for the costs of the proceedings to be decided by detailed assessment (paragraphs 64 to 66). I do not see how all this activity can take place without there being some kind of claim or proceeding brought by the foreign representative; this cannot all be done in a legal vacuum.

As to whether the Hermitage Parties can properly be described as the defendants to the recognition application, in my judgment they can. The Model Law and Schedule 2 clearly contemplate a number of circumstances in which there will be a party opposing the grant of the recognition order. First there is the circumstance which is the one which has arisen here where a person wishes to contend pursuant to Article 6 that the grant of the recognition order would be manifestly contrary to the public policy of the jurisdiction in which the order is sought. There are other circumstances in which a party antagonistic to the grant of the order or the conduct of the foreign representative may emerge. Article 4 of the Model Law contemplates "a person affected by recognition" challenging the grant of recognition if he can show that the grounds for granting it were fully or partially lacking or have fully or partially ceased to exist. Such an application can lead to the modification or termination of recognition either altogether or for a limited time on such terms and conditions as the court thinks fit.

On the question of whether, when applying to set aside the recognition order, the Hermitage Parties should be treated as effectively the defendants to the application for the recognition order, Mr Smouha also relies on Diag Human SE v The Czech Republic [2013] EWHC 3190 (Comm) ('Diag'). In that case the claimant, Diag, brought an ex parte application in the High Court to enforce an arbitration award by which arbitrators had awarded the claimant some £135 million in damages and £140 million in interest. The defendant resisted enforcement on the basis that the award was not yet binding because there was an outstanding application for review. An application to set aside the permission to enforce was issued by the defendant and was fixed for a two day hearing with substantial evidence to be adduced by both sides. The defendant issued an application for security for the costs of that application to set aside. Burton J dealt first with the defendant's case as to nondisclosure by the claimant on the ex parte application. He recorded that the claimant had not disclosed to him when he was the judge hearing the ex parte application, that there was a dispute as to whether there was a binding award. The judge noted that there was nothing improper about bringing an application for enforcement on the basis that the award was binding since the claimant was "thoroughly sceptical" as to the strength of the defendant's arguments. But he said there was an issue that the claimant did not disclose the existence of the dispute. He referred to the importance of full and frank disclosure in support of an application which in the first instance is made without notice. Burton J accepted that it was very likely that he would have made the same order as he did but he said "there must have been at least a risk" that he would not have made the order but would instead have directed the claimant to issue a claim form without making the order: see paragraph 8. He went on to say:

"9. However I am satisfied that the Claimant should be deprived of any advantage it may have gained by having the ex parte order made in its favour. There may be no such advantage, but one of the debates that took place at the hearing before me was whether the Defendant was, because it was making an application to set aside and had the onus of proof of establishing its case by way of challenge to the award, not really in the position of a defendant such as to be an applicant for security for costs. Of course the main argument, so far as it was material to the outcome, concentrated on the fact that the Defendant bears the onus of proof, but if there is any additional strength to the Claimant's case by virtue of this application being one to set aside an order, rather than one by the Claimant to enforce inter partes ab initio, the non-disclosure on the ex parte application must deprive the Claimant of that argument. [Counsel for the claimant] did not resist that proposition once I formulated it."

I accept Mr Smouha's submission that I should follow the approach adopted in that case. I cannot of course form any view as to the rights and wrongs of the underlying, long-running dispute between these parties. But Mr Nogotkov accepts that this application should be approached on the basis that the Hermitage Parties have a reasonable prospect of succeeding in their set aside application on the grounds both that the grant of the recognition order was manifestly contrary to public policy and that there was a failure to give full and frank disclosure to Registrar Barber.

That concession is unsurprising given that Mr Nogotkov in his third witness statement describes the research that he carried out into DSL both before and after his appointment as its liquidator in November 2015. He said that his Internet researches revealed that DSL was part of the Hermitage fund of companies. He already knew in general terms about the allegations that there had been a fraud involving the Hermitage group. He also knew of the death of Mr Magnitsky because the story had been very well publicised in Russia. However, he says he "quickly reached the conclusion that the liquidation of DSL has to be unrelated to the USD 230m fraud". Mr Nogotkov also recalls that he read Mr Browder's book Red Notice: How I became Putin's No. 1 Enemy either before or after his appointment. Mr O'Sullivan, the partner in Olswang LLP with conduct of this matter on behalf of Mr Nogotkov, says in his second witness statement sworn shortly before the security for costs hearing that his firm Olswang LLP was aware of the existence of the $230 million fraud and the "alleged retaliatory campaign" before the making of the application for the recognition order. Without waiving privilege, he says that the recognition application was prepared with the benefit of advice from his firm. He personally was aware of Mr Browder and his campaign relating to his alleged ill-treatment of himself and Hermitage by the Russian Federation. He took the view to which he still adheres that this material was irrelevant and so it was not necessary to refer to this in the course of the application for the recognition order.

In these circumstances, it seems to me likely that if some of the background which I have described had been disclosed to Registrar Barber, she may well have adjourned the application and directed that notice of the application be served on the Hermitage Parties so that an inter partes hearing could be held to resolve the public policy issue before the order was granted. I note that paragraph 30 of the UNCITRAL Guide (quoted in paragraph 20, above) comments that where Article 6 of the Model Law is in issue: "This may be a preliminary question to be considered on an application for recognition".

If that had occurred, there can be little doubt that in substance the Hermitage Parties would have been the defendants to that application and that they would have been entitled to seek security for their costs of resisting the making of the recognition order. Mr Nogotkov should therefore be deprived of the advantage of having obtained the recognition order ex parte obliging the Hermitage Parties to bring an application to set it aside.

There is nothing in the point that the set aside application has an "independent vitality" because it would deprive Mr Nogotkov of the ability to use Article 21 of the Model Law against anyone whether these parties or otherwise. There are many occasions where the relief sought by a defendant has implications for many other persons not before the court, for example where a declaration as to the construction of the clause in a contract contended for by one party can affect the enforceability of that clause in contracts with other persons who have entered into a contract in the same terms. That does not deprive a defendant of his status as such. The Hermitage Parties are not seeking any separate relief themselves and the set aside application is purely a defensive stance taken against a recognition order which Mr Nogotkov accepts was sought and obtained in order then to bring the section 236 application against them.

I was also referred to Snowden J's judgment in In Re OGX Petróleo e Gás SA [2016] EWHC 25 (Ch). He also emphasised the need for full and frank disclosure to the court by an applicant for recognition of a foreign insolvency proceeding in relation to the effect that such recognition might have on third parties. In that case an ex parte application was made before Mann J for recognition of the liquidator of the company in circumstances where the grant of the order would impose a stay on an arbitration that had been brought by a creditor. The witness statement accompanying the application for recognition order failed to draw attention to the fact that the agreement under which the arbitration had been instituted had been entered into after the relevant date for the purposes of the Brazilian insolvency proceedings. This meant that the Brazilian proceedings did not cover the arbitration claim. At the ex parte hearing, Mann J was not told that the contract pursuant to which the arbitration taking place was not subject to the foreign proceedings even though he specifically asked counsel whether there was any reason why the automatic stay arising from the recognition should not occur. After the order had been served on it, the creditor immediately protested and made an urgent application for the order to be set aside or varied to permit its arbitration to proceed. The creditor contended that Mann J had been misled or at very least that the order had been obtained by material nondisclosure of the fact that the reorganisation plan for which recognition was sought did not apply to the claims in the arbitration but the automatic stay arising on recognition did.

Snowden J noted that the only purpose for which recognition of the foreign proceeding was sought under the Model Law in that case was to obtain a stay to prevent the arbitration. He also said that OGX plainly proceeded on the basis that it was only required to inform the English Court of the matters necessary to obtain recognition, irrespective of whether or not the recognition order might be upheld if subsequently challenged. That approach also seemed to have influenced the answers given to Mann J drawing attention to a point about satisfaction of the requirements for recognition but making no reference to the obvious point that could have been raised by the creditor. Snowden J held that this approach to the formulation of the evidence OGX placed before the court was wrong. The court hearing an application for recognition has a discretionary power to modify from the outset the stay which will come into effect on the making of its order:

"58. … Accordingly, it seems to me that a foreign representative who seeks recognition without notice ought to place before the court any material of which he is aware which is relevant to the exercise of that discretion."