QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| NATIONAL BANK TRUST
|- and -
|(1) MR ILYA YUROV
(2) MR SERGEY BELYAEV
(3) MR NIKOLAY FETISOV
(4) MRS NATALIYA YUROVA
(5) MRS IRINA BELYAEVA
(6) MRS ELENA PISCHULINA
Mr Patrick Goodall QC, Mr Simon Atrill and Mr Nick Daly (instructed by Mishcon de Reya LLP) for the First and Fourth Defendants
Hearing dates: 19-21 July 2016
Crown Copyright ©
Mr Justice Males :
The case in outline
"All of these problems placed the Bank in a very precarious financial position. …
As a result, there was considerable concern that if those losses had all been recorded on the Bank's balance sheet, it would have had its licence revoked by the Central Bank of Russia and consequently been declared bankrupt. For obvious reasons, the Bank's management wished to do everything possible to prevent this from happening, and took steps to manage its balance sheet using its pre-existing offshore structure (as I will describe in more detail below). …
The vast majority of the transactions involving 'Bank companies' (i.e. those which were held on behalf of and for the benefit of the Bank) were a means of managing the Bank's balance sheet. As I explained above, the Bank was in financial difficulties as a result of the losses it had made or was anticipated to make on its loan book. Therefore, it was decided to use the Bank's developing offshore network to effectively defer the point at which the Bank's bad debt would be recorded on its balance sheet. This was done by advancing loans to Bank companies, with repayment dates a few years later, which were then used to service other loans owed to the Bank by other companies. …
Revocation of the Bank's licence would of course have been a disaster for the Bank and its customers, and so I believe that this action was justified as an attempt to avoid this disaster. Of course, I accept that the transactions were somewhat artificial in that they were circular. However, they were not intended to cause any harm to the Bank. In fact, they were intended to save the Bank from collapse, and to avert the consequences of the harm that the Bank had already suffered through earlier bad loans. …
This kind of solution, i.e. circular transactions intended to defer bad debt ruining the balance sheet, was very common in Russia at the time … It may be that this was not strictly in accordance with Russian banking regulations, but it was common practice in Russia and was seen as a valid way of dealing with an otherwise near-impossible situation that the whole Russian banking industry was encountering."
The failures of disclosure relied upon
a. The bank failed to disclose important aspects of Russian law, which governs the bank's claims, along with the existence and terms of the defendant's employment contract with the bank which included a provision limiting his liability.
b. The bank failed to provide any adequate disclosure of related proceedings in Russia and Switzerland and its involvement in them, including that: (i) in the Russian criminal proceedings, a freezing order had been obtained against the defendant (on an inter partes basis), and the bank had submitted a civil claim against him; and (ii) in the Swiss criminal complaint, the bank had sought a criminal seizure of the defendant's bank accounts.
c. The bank failed to provide proper disclosure in relation to the Settlement Agreement it had entered into with Mr Ben Worsley.
d. The bank failed to disclose that the defendant's case would be that the companies that were involved in balance sheet management were owned and operated for the benefit of the bank (i.e. bank companies) and that the funds advanced to them were not misappropriated to his personal use (and consistent with that position, the defendant had, inter alia, instructed accountants to undertake a "tracing" exercise at great expense, which was provided to the bank, and which Mr Worsley said would "save" the shareholders).
e. The bank failed to disclose the existence of resolutions passed at the annual general meetings of the bank approving transactions (on an annual, general basis) with the shareholders, plus a number of corporate vehicles in which they had an interest.
f. The bank failed to provide proper disclosure in relation to the purpose and terms of the DIA Report.
Full and frank disclosure – the law
a. A fact is material if it is one which the judge would need (or wish) to take into account when deciding whether to make the freezing order.
b. Failure to disclose a material fact will sometimes require immediate discharge of the order. This is likely to be the court's starting point, at least when the failure is substantial or deliberate.
c. Nevertheless the court has a discretion to continue the injunction (or to impose a fresh injunction) despite a failure of disclosure; although it has been said that this discretion should be exercised sparingly, the overriding consideration will always be the interests of justice.
d. In considering where the interests of justice lie, it is necessary to take account of all the circumstances of the case including (without attempting an exhaustive list) (i) the importance of the fact not disclosed to the issues which the judge making the freezing order had to decide; (ii) the need to encourage proper compliance with the need for full and frank disclosure and to deter non-compliance; (iii) whether or to what extent the failure to disclose was culpable; and (iv) the injustice to a claimant which may occur if an order is discharged leaving a defendant free to dissipate assets, although a strong case on the merits will never be a good excuse for a failure to disclose material facts.
e. The interests of justice may sometimes require that a freezing order be continued, but that a failure of disclosure be marked in some other way, for example by a suitable order as to costs.
The approach to applications to discharge for failures of disclosure
"… issues of non-disclosure or abuse of process in relation to the operation of a freezing order ought to be capable of being dealt with quite concisely. Speaking in general terms, it is inappropriate to seek to set aside a freezing order for non-disclosure where proof of non-disclosure depends on proof of facts which are themselves in issue in the action, unless the facts are truly so plain that they can be readily and summarily established, otherwise the application to set aside the freezing order is liable to become a form of preliminary trial in which the judge is asked to make findings (albeit provisionally) on issues which should be more properly reserved for the trial itself. …
Secondly, where facts are material in the broad sense in which that expression is used, there are degrees of relevance and it is important to preserve a due sense of proportion. The overriding objectives apply here as in any matter in which the Court is required to exercise its discretion. …
I would add that the more complex the case, the more fertile is the ground for raising arguments about non-disclosure and the more important it is, in my view, that the judge should not lose sight of the wood for the trees. …
In applying the broad test of materiality, sensible limits have to be drawn. Otherwise there would be no limit to the points of prejudice which could be advanced under the guise of discretion."
(1) Russian employment law and the defendant's employment contract
(2) The Russian and Swiss criminal proceedings
(3) The Settlement Agreement with Mr Worsley
"54. In relation to the alleged conduct of [the shareholders], evidence has been gathered from the DIA's, and now Otkritie's, on-going investigations (as explained by Mr Popkov) and from Mr Worsley, whose evidence is particularly striking because he had first-hand, contemporaneous interaction with [the shareholders] and was involved in setting up their network of secret companies. The claims are based in large part on documentary evidence of the terms and (non-)performance of the loans, and the connections between the borrowers and [the shareholders] exposed by Mr Worsley (and supported at least in part by the documents he has provided, including the various trustees and shareholding documents, and of course the Dianthi/Willow River/RCP transaction documents).
55. This has provided a very solid and credible basis for the factual allegations described above. …"
"In relation to the offshore companies and their assets, Mr Worsley is co-operating with Trust Bank as many of those assets are held by companies that he controls. In return, Trust Bank has agreed to pay a monthly retainer to Mr Worsley of US $32,500 and to indemnify him against any claims that may be made against him by third parties (including [the shareholders]) in relation to any new instructions (but not for acts that happened in the past). Mr Worsley also agreed to provide a witness statement setting out truthfully his dealings with [the shareholders] and Trust Bank. Of course, Mr Worsley may have his own agenda, although it appears to me that he is telling the truth based on the reviews conducted by new management into the various loans."
"… [the shareholders] appear to contend that Mr Worsley's evidence and loyalty has been 'bought' by the Bank's agreement to pay Mr Worsley a retainer and to offer him an indemnity in respect of his acts since he has agreed to cooperate (but not his earlier acts). It is a fact that Mr Worsley is being paid for his cooperation, but there is no good reason to consider that his evidence is not in fact truthful. … It is in fact consistent with the facts emerging from the documents."
"Mr. Justice Leggatt: … Well, obviously he is in a position where his evidence may be challenged in various respects.
Mr. Pillow: Of course, and you have seen the financial side of ---
Mr. Justice Leggatt: Those are fairly obvious ---
Mr. Pillow: Quite.
Mr Justice Leggatt: --- including the fact that he had been paid $2,000 a month or whatever it is.
Mr. Pillow: Exactly, my Lord. That is what it is. You have seen the material now.
Mr. Justice Leggatt: Yes."
a. The payments due to Mr Worsley were not merely by way of monthly retainer but included substantial sums (running to several hundred thousand dollars) for the provision of various services as well as a percentage of between 1.5% and 4% of the net value of certain assets recovered.
b. While the bank's evidence referred to an indemnity in relation to claims arising out of his future acts for the bank and to the absence of any indemnity in respect of past conduct, the agreement also includes (i) a release of any claims by the bank, (ii) a promise by the bank to provide support and assistance in any proceedings against Mr Worsley relating to his past conduct and to consider providing an indemnity, and (iii) a promise to tell any prosecutor or other authority that any claims which the bank may have against Mr Worsley have been amicably resolved and that the bank does not wish to pursue any prosecution or complaint against him.
(4) The defendant's case and the tracing exercise
"It is not Trust Bank's case that the entire US $830 million lost by Trust Bank was stolen by [the shareholders] or their personal benefit. The losses were caused by a combination of [the shareholders] misappropriating money by channelling into their own projects; their paying off other bad loans, including to their companies; and misconduct by [the shareholders] over many years. It is also likely that the losses have been exacerbated by the deterioration of the Russian real estate market and the contraction of the Russian economy due to international sanctions and the drop in oil prices, coupled with the dramatic devaluation of the rouble."
(5) Resolutions passed at the bank's annual general meeting
(6) The DIA report
Conclusion on failure to disclose
Risk of dissipation of assets
a. The claimant must demonstrate a real risk that a judgment against the defendant may not be satisfied as a result of unjustified dealing with the defendant's assets.
b. That risk can only be demonstrated with solid evidence; mere inference or generalised assertion is not sufficient.
c. It is not enough to rely solely on allegations that a defendant has been dishonest; rather it is necessary to scrutinise the evidence to see whether the dishonesty in question does justify a conclusion that assets are likely to be dissipated.
d. The relevant inquiry is whether there is a current risk of dissipation; past events may be evidentially relevant, but only if they serve to demonstrate a current risk of dissipation of the assets now held.
e. The nature, location and liquidity of the defendant's assets are important considerations.
f. Whether or to what extent the assets are already secured or incapable of being dealt with is also relevant.
g. So too is the defendant's behaviour in response to the claim or anticipated claim.
"Whilst, having regard to the purpose of the rule, the discretion is one to be exercised sparingly, I would not wish to define or limit the circumstances in which it may be exercised."