England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/04/2010

Mr Justice David Steel :

1. This was an application by the 6^th to 12^th Respondents to discharge or vary a freezing order granted to the Claimant on 11 March 2010 following an ex parte hearing. Since preparing this judgment I have been told that the parties have come to terms on the basis of the provision of security. The parties nonetheless invited me to give judgment which I agreed to do.
2. It was a domestic freezing order and was made, so far as these Respondents were concerned, on the basis that they transferred funds to bank accounts within the jurisdiction for onward transmission to the First Defendant. I shall refer to them as the "RT" companies. It is now common ground that RT 2 and RT 8 are dormant and that RT6 and 7 do not in fact have bank accounts within the jurisdiction. It is thus accepted that they should no longer be the subject of the freezing order and the application is therefore only concerned with RTs 3, 4 and 5.
3. It was not and is not suggested that the Claimant ("Yukos") has any claim against the RT companies. The first and principal defendant is OJSC Rosneft Oil Company ("Rosneft"). There is no need to rehearse the background to the claim in any detail. It is sufficient to say that Yukos seeks to enforce four arbitration awards against Rosneft. That is resisted on the basis that the awards have been set aside by decisions of the Russian courts. The present application, however, proceeds on the admitted assumption for present purposes only, that Rosneft remains indebted to the claimants in the sum claimed (approximately £390 million) since in purporting to set aside the awards the Russian Courts were not acting impartially and independently but at the behest of the Russian Government. It is further to be assumed, again for present purposes only, that unless restrained Rosneft would take steps to frustrate any judgment by seeking to put its assets beyond the reach of Yukos.
4. The basis upon which the RT companies were joined as parties was summarised in the skeleton argument furnished at the ex parte hearing. It set out the following propositions:-

i) There was evidence to suggest that the RT companies (all incorporated in Jersey and owned by nominee shareholders) were controlled by Rosneft.

ii) They were used as vehicles for the purchase and on sale of oil. Yet for example Shell had produced documents in respect of a specific purchase from RT 5 where the shipping documents showed Rosneft as the shipper and Rosneft had written to record the need for payment under "our contract".

iii) It followed that the RT companies were Rosneft's "puppets" and acted on Rosneft's behalf in conducting the oil trades.

iv) Thus payment to the RT companies' London bank accounts would be available for enforcement:

a) because the assets were held as a nominee of Rosneft; or

b) Rosneft controlled, directly or indirectly, the RT companies.

Reference to this connection was made in Gee: Commercial Injunctions, 5th Ed at para. 13.007.

5. In support of the inter partes application to set aside the freezing order, the RT companies have now served a number of affidavits of a Miss Harris. She is a director of EQ Directors One Ltd and EQ Directors Two Ltd which are the "appointed corporate directors" of the RT companies. These corporate directors are beneficially owned by charitable trusts. Equity Trust (Jersey) Ltd. is the trustee, and Miss Harris is a director of that company as well.
6. She asserts that the assets of RT companies were not held as nominees for or under the control of Rosneft. The bank accounts were established at the request of Rosneft's bankers so as to ensure that payment obligations were settled into accounts controlled by the banks. Thus the RT companies were simply intermediary purchasers of oil from Rosneft thereafter selling on to an offtaker such as Shell.
7. In seeking to justify the continuation of the freezing order in the light of the evidence and of documentation that has now been made available, Yukos pursues a somewhat different line of attack. In particular it was no longer suggested that the RT companies are nominees of Rosneft. As regards the question of control, it is now accepted that the RT companies are not subsidiaries of Rosneft, that the receivables are not as such assets beneficially owned by Rosneft, and that security arrangements in favour of various banks are paramount. The case is now put on the basis that although the RT companies are third parties, they have no independent purpose of their own, and only exist for the purpose of passing oil sale money from the buyer to Rosneft and no one else.

The contractual arrangements

8. The contractual arrangements as they now appear are as follows:-

i) Rosneft has borrowed money from various lending banks. In the case of RT5 for example it is Calyon. At the same time Rosneft entered into a five year contract to sell oil to RT 5 and RT 5 entered into a five year contract with a number of buyers under which RT 5 could sell oil to them. The terms on which Rosneft sells to RT 5 are back to back with the terms upon which RT 5 sells to the buyers.

ii) At regular intervals there are auctions at which buyers such as Shell, BP, Gunvor and Vitol bid for individual cargo lots. Those are conducted by Rosneft but in the name of RT 5. Rosneft selects the successful buyer for each lot and arranges documentation and shipment to a consignee nominated by the buyer.

iii) There are two invoices, one between Rosneft and RT 5, and one between the latter and the buyer. The prices in each case are identical.

iv) Arrangements are in place so that it is agreed between Rosneft, RT 5 and buyer, that the buyer acts as RT 5's agent and agrees to perform all of RT 5's obligations (save for payment of the price) so that Rosneft is able to deliver the oil directly to the ultimate buyer. Any claims are to be dealt with directly between the buyer and Rosneft and there is no right of recourse against RT 5.

v) The RT companies have no business of their own. Their only function is to act as the buyer and seller of the cargoes as described. Further the obligation of an RT company to pay Rosneft for the oil which it has purchased only arises once the buyer has paid the RT company.

vi) The RT company's right to the purchase price from the buyer is assigned to the lending bank. The contractual arrangements between Rosneft, the RT company and the buyer, require that the price be paid into an account in the RT company's name designated by the lending bank. That account is charged to the lending bank as security for the performance of Rosneft's obligations under the relevant loan facility.

vii) If there were an event of default under the credit facility when the payment came into RT 5's account, the lending bank would have the right as assignee and chargee to take the money, although this has never happened.

viii) As a result of the contractual arrangements to which the bank, Rosneft and RT are parties, if Rosneft is not in breach when payment for the oil comes in, the money must be transferred to a "Passport" account of Rosneft with a Russian bank.

ix) At no stage does the RT company have any independent interest in the money which passes through its account. Its only purpose is to act as a conduit through which the proceeds of the sale of the oil pass from the ultimate buyer to Rosneft.

x) Thus the monies which the RT company receives can only be used for two purposes. Either they are used by the lending bank under the security arrangements or they are paid to Rosneft. Since Rosneft has not been in breach of its loan obligations, in practice the oil proceeds which pass through the RT company's account are destined for Rosneft and Rosneft only.

The law

9. There was a dispute between the parties as to the scope of any jurisdiction to freeze assets in the hands of a third party where the claimant has no cause of action against that third party and the third party does not hold the assets as a nominee of, or a trustee for, the primary defendant.
10. It was the submission of RT that no jurisdiction existed absent beneficial ownership (that is to say where the primary defendant was the beneficiary of the relevant money under a trust) and that there was binding Court of Appeal authority to that effect. Yukos submitted that there was no jurisdictional limit on the power to injunct assets of third parties, subject of course to any considerations relevant to the exercise of discretion.
11. Before turning to the authorities which are directly relevant, it is worth rehearsing some general principles:

a) Jurisdiction to grant an interlocutory injunction (of which a freezing order is but an example) is available under section 37(1) of the Senior Courts Act 1981 in all cases where it is "just and convenient" to do so.

b) The purpose of a freezing order is so that the court "can ensure the effective enforcement of its orders". To this end the aim is to ensure that there is a fund to meet any judgment.

c) The jurisdiction is to be exercised in a flexible and adaptable manner although usually a freezing order is directed at assets beneficially owned by the defendant.

12. The question that therefore arises is whether the courts have confined the jurisdiction to circumstances where the third party holds or controls the money as trustee or whether the jurisdiction may be broader.
13. The starting point from the perspective of the RT companies is the decision in TSB Private Bank International S.A. v Chabra [1992] 1 WLR 231 where it was held that, so long as the claimant had a good arguable cause of action against one defendant, there was power to grant an injunction against another defendant against whom no cause of action lay, provided that the claim to the injunction was "ancillary and incidental" to the cause of action against the initial defendant.
14. Chabra was cited in Yukong Line Ltd v Rendsburg Investments Corporation [2001] 2 Lloyd's Rep 113. In a passage at para. 44, Potter L.J. said:-

"Although it is plain that the Court's Charbra-type of jurisdiction would only be exercised where there are grounds to believe that a co-defendant is in possession or control of assets to which the principal defendant is beneficially entitled, it does not seem to me that the jurisdiction is limited to cases where such assets can be specifically identified in the hands of the co-defendants."

15. RT submitted that this constituted binding authority to the effect that, absent equitable ownership of an asset under a trust on the part of the defendant, no freezing order could be made against a third party in possession or control of that asset. It followed, it was further submitted, that the decision in C. Inc v L [2001] 2 Lloyd's Rep 459 and in HM Revenue & Customs v Egleton [2006] EWHC 2313(Ch) on which the claimant's relied were wrongly decided.
16. I am unable to accord the passage cited above with the significance suggested by RT. In Yukong, the allegation centred on the transfer of the first defendant's assets to another company also controlled by a Mr. Yamvrias, the third defendant. The claim against Mr. Yamvrias was dismissed by Toulson J although a freezing order against him was continued. On an application to discharge that order, Aikens J. held that it had been properly granted as "ancillary and incidental to the order against Rendsberg" to pay the asset into court. As regards the inquiry into any damages under the undertaking that Mr. Yambrias had sustained, there had in fact been no loss.
17. Mr. Yambrias appealed. One of the principal issues on the appeal was whether the Chabra-type jurisdiction could be exercised where the relevant assets could not be specifically identified. Although it may well be that Potter L.J. was using the words "beneficially entitled" in the conventional sense of constituting an equitable interest in the assets, I am not persuaded that the court was doing other than briefly summarising the Chabra-type jurisdiction. Indeed the whole premise for the successful appeal was that specific assets did not need to be identified and thus no question of beneficial ownership arose. In my judgment the court was not invited to consider the legitimate outer reaches of the Chabra-type jurisdiction and should not be treated as having done so.
18. In the meantime the Australian High Court had handed down its judgment in Paul Cardile v LED Building Proprietary Ltd. [1999] HCA 18. The case concerned freezing orders made against the shareholders and associate company of a housing construction company against which proceedings for breach of copyright had been brought. The justification for seeking a freezing order was the payment of substantial dividends to those parties.
19. In summary the court concluded on appeal by the shareholders:

a) The court should be cautious in making any order extending to the property of persons who are not substantive defendants and cannot be shown to have frustrated the administration of justice.

b) But the jurisdiction is not limited to circumstances where a third party holds property beneficially owned by a defendant.

c) One guiding principle where restraint of third parties is sought is the existence of some process which may be available to the potential judgment creditor pursuant to which, whether by appointment of a liquidator or otherwise, the third party might be obliged to help satisfy the judgment.

20. This decision of the Australian High Court was considered in detail by Aikens J. in C. Inc v L supra. He concluded that the Australian court had, in setting out the general principle that assets in hands of third parties could be frozen even when not beneficially owned by the potential judgment debtor, nonetheless required "that there must be some causal link between the fact that the claimant has obtained a judgment against the principal defendant and thus has a legal right as a consequence of that liability giving rise to the judgment, to go against the assets of the third party".
21. In C. Inc v L a freezing order was sought against the defendant's husband (who was outside the jurisdiction) following judgment in default against the defendant. Adopting Cardile (despite it is to be noted Yukong having being cited) Aikens J. concluded:-

i) On the assumption that the defendant was the trustee or agent of her husband then "as soon as she incurred a liability to the claimants, she had an accrued right to an indemnity from her husband".

ii) The entitlement to the indemnity could be enforced by her or by a receiver.

iii) It followed that although the assets of the husband were not beneficially owned by his wife, the right exercisable against the wife in turn gave rise to a right against the husband.

iv) Thus the freezing order against the husband would be incidental to the claimant's right against the wife.

22. Before turning to the decision specifically relied upon by Yukos, I should mention in passing a decision of Deputy High Court Judge Bartley-Jones QC. in Dadourian Group International Inc. v Azury Ltd. [2005] EWHC 1768 (Ch) and in particular a passage at paragraph 30. Having cited C v L to the effect that "generally it must be arguable that the assets even if in the third party's name, are in fact beneficially owned by the relevant defendant before a Chabra-type injunction" could be made he went on:

"30. For my part I do not believe it is necessary to establish beneficial ownership in the strict trust law sense. Clearly, if assets are held on a bare trust then the Chabra-type jurisdiction can be exercised. But, in my judgment, even if the relevant defendant of the substantive claim has no legal or equitable right to the assets in question (in the strict trust law sense) the Chabra-type jurisdiction can still be exercised if the defendant has some right in respect of, or control over, or other rights of access to the assets. The important issue, to my mind, is substantive control."

I regard that passage as persuasive. I doubt the need to establish a structure under English trust law in determining the jurisdictional scope of a freezing order which would commonly involve both domestic and foreign parties.

23. Against that background I turn to HM Revenue and Customs v Eggleton [2006] EWHC 2313 (Ch). The claim arose out of a V.A.T. carousel. An issue arose as to the legitimacy of a freezing order where the respondent was not alleged to hold or have any custody of assets belonging to the defendant. Having cited Cardile and C. Inc v L Briggs J. observed:

i) Although anxious to accept Aikens J's view that the jurisdictional borderline as described in Cardile is not strictly confined to the Chabra requirement of the third party having control over assets belonging to the defendants, he was troubled about the implications of an uncontrolled extension of the jurisdiction.

ii) However, he was not persuaded that a causative condition could be discerned in the reasoning in Cardile.

24. He concluded his judgment as follows:

"41. The conclusions to which I have come on the question of jurisdiction are as follows. First, the time has come for the English Courts to recognise, consistently with the carefully considered conclusion of the High Court of Australia, that the jurisdiction to grant freezing orders against third parties is not rigidly restricted by the Chabra requirement to show that, at the time when the order is sought, the third party is already holding or in control of assets beneficially owned by the defendant. However attractive that test is as a bright and focused boundary-line, it does not seem to me to accord with the dictates of justice and commonsense. To take a simple example, it would operate so as to distinguish between a case in which the third party misappropriated an asset of the defendant and held on to it and a case in which in otherwise identical circumstances the third party misappropriated the asset and dissipated it. It makes no sense that the first of those third parties should be amenable to the freezing order jurisdiction whereas the second, however separately wealthy, should not. In both cases the defendant or its officeholder would have an equally viable restitutionary personal claim, the frustration of which by yet further asset dissipation by the third party would in turn detract from the efficacy of any order for the winding up or bankruptcy of the defendant and from any prior judgment for which winding up or bankruptcy was a means of enforcement.

42. Secondly, it seems to me that once the relatively clear Chabra boundary line is breached, there is no wider boundary which has any sufficient clarity to serve as a workable condition to the existence of jurisdiction, than the broad confines of the second limb of the principle in paragraph 57 of the main judgment in Cardile. In particular, it seems to me that a rigid causation test is too narrow and potentially unjust, in particular because it would protect third party fraudsters who had in reality caused the claimant's loss from exposure to a freezing order while exposing honest third parties such as Mr L in the C Inc. case because the claimant's claim was the cause of their exposure. By contrast, the supposed "sufficient connection test" which Mr. Shaw sought to extract from the minority judgment in Cardile, while having much to say for it in terms of justice and common sense, and being similar to the test which identifies the circumstances in which a third party may because he has become mixed up in the defendant's wrong doing, be obliged to assist the claimant with the provision of information, is by its nature so subjective and unfocused as to make it quite unsuitable as the boundary for the existence of jurisdiction. It may however be a valuable tool in the analysis of the question of discretion."

25. For my part, I am also un-persuaded that Cardile contained any "causation" condition. Equally in company with Briggs J, although a sufficient degree of causation or connection was available on the facts in C Inc. v L, I consider that the application of such a test in all cases would be unduly rigid. Accordingly, I would accord a question of connection or causation as pertinent to the general question of discretion to which I now turn.

Discretion

26. Absent any proprietary interest on the part of the defendant in assets held by a third party it is appropriate to consider the extent to which the defendant has some interest in or control over the asset going beyond an actual or potential cause of action against the third party. This must be the more where as here it is not suggested that there is any causative link or other connection between the claimant's claim (in the form of monies due under an arbitration award) and the assets in the third party's hands (formed of the sale proceeds for oil).
27. Rosneft's interest in the funds in the third party's bank accounts is formidable:

i) absent any exercise of the bank's security, the monies can only be paid to Rosneft.

ii) indeed irrevocable instructions to that effect have been given by the bank to accomplish that.

iii) the banks have never exercised any claim under the security documents.

iv) RT are parties to a back to back sale of the oil shipments, but have no other role or involvement.

v) transfer of the price apart, RT has no function as regards the sale or purchase: Rosneft acts as its agent in conducting the auction, selecting the winning bidder and preparing the documents: the buyer acts as his agent in regard to the buyer's role.

vi) RT is held harmless from any liability in regard to the sale transactions (or otherwise).

28. In short, the RT companies are special purpose vehicles with no business or assets of their own. They exist solely to provide a portal for transfer of the purchase price in a manner preserving the bank's security. RT have no interest in or control over the monies. Allowing for the bank's security, the money is, as submitted by Yukos, Rosneft's in all but name.
29. It is common ground that any sums in the account are exposed to recovery by Yukos, if necessary by the appointment of a receiver. Accordingly Yukos submits that it is clearly just and convenient for a freezing order to be made since it is accepted for the purposes of this application that otherwise Rosneft would take steps to dissipate the assets upon payment to them. But there are a number of factors relied upon by RT as demonstrating that it would nonetheless be appropriate to discharge the injunction:-

i) First it is submitted that any cause of action on the part of Rosneft to recover the monies is only occasioned by the imposition of the freezing order. But in my judgment this does not adequately reflect the fact that only Rosneft is entitled to the money absent the invocation of the bank's security interest which has not happened. Accounting to Rosneft is a straightforward feature of the existing and future course of business.

ii) Second it is suggested by RT that the freezing order would put Rosneft in default under the credit agreement. This is not made out. The express terms of the agreement provide that a default arises only if:

(a) the payment of the sale price is not made to the Passport account; and

(b) if there is also a failure to pay a loan instalment.

Notably Rosneft has not sought to participate in the present hearing to make good the suggestion that the freezing order would place it in default. So far as RT is concerned it is insulated against any liability in that or any respect. At its highest the imposition of a freezing order would only create one of the threshold requirements to Rosneft being in default.

iii) RT draws attention to the fact that despite Yukos having obtained a domestic freezing order, the outcome is that a Jersey company is restrained from paying a debt due to a Russian company. This is categorized as a creeping foreign element. But the fact remains that the relevant asset is in a bank account within the jurisdiction. Any claim pursued under the agreement between Rosneft and RT, whether by Rosneft or by a receiver, is expressly governed by English law, and such disputes to be resolved by arbitration in England.

iv) Lastly, RT rely on the fact that since the order was granted, Yukos has also sought and obtained a freezing order in Jersey against RT. Whilst, if maintained, this would render the present order redundant, it is a material counter consideration that RT are seeking to discharge the Jersey order.

30. Accordingly Yukos submits, in my judgment properly, that it is clearly just and convenient for a freezing order to be made since it is accepted for the purposes of this application that otherwise Rosneft would take steps to dissipate the assets upon payment to them. Subject to the amendments already referred to, I would refuse the Respondents' application to discharge the order. However, as already noted, this has been overtaken by events and I make no order.