England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		23 November 2018

Friday 23 November 2018

MRS JUSTICE MOULDER

(14.27 pm)

Ruling by MRS JUSTICE MOULDER

1. At the CMC on 25 and 26 September 2018 Mr Justice Andrew Baker made an order for standard disclosure in relation to numbered points in the agreed list of issues. He also provided for disclosure to be made in relation to any further issues agreed or directed pursuant to an application for disclosure in relation to other issues in the agreed list of issues or arising out of the statements of case.
2. The order provided for any such application to be issued and served by 12 October 2018.
3. The claimant made such an application on 15 October 2018.
4. The claimant now seeks disclosure on issues raised which the claimant says arise out of the statements of case and are important to the determination of the claimant's claim at trial.
5. The application was heard last Friday on 16 November and with insufficient time allowed for judgment, the hearing was adjourned for judgment to be given.
6. The background to this matter is that in essence the claimant asserts that a fraud was perpetrated by the defendants against a company known as "SK", which was Tatneft's commission agent for the supply and sale of oil.
7. The claimant's case is (as set out in paragraphs 55 to 80 E of the amended particulars of claim) that there was a scheme defined as the "Oil Payment Siphoning Scheme". This involved the alleged misappropriation of payments made by the Ukrainian company UTN for oil sold by SK to UTN. In particular the claimant asserts that the scheme involved:

(i) the defendants taking control of intermediary companies, Taiz, Tekhnoprogress and Avto;

(ii) orchestrating a series of sham (sale and purchase) transactions to siphon sums into offshore companies controlled by the defendants; and

(iii) subsequently arranging for the three intermediary companies to be put into bankruptcy.

8. The claimant claims pursuant to article 1064 of the Russian civil code that the unlawful acts caused harm to SK because it did not receive payment for the oil to which it was entitled. Tatneft claims as assignee from SK.
9. The issues before the court which fall for determination were:

(i) whether the disclosure sought by the claimant on the outstanding issues identified (and as narrowed in correspondence) should be ordered;

(ii) whether the issues on which disclosure should be ordered should be set out by way of an amendment to the list of issues or through a separate list.

10. Turning to the legal framework, at the CMC Mr Justice Andrew Baker made an order for standard disclosure to be given in relation to specific issues and provided in the order for the claimant to make an application for disclosure in relation to other issues.
11. The disclosure order by reference to the issues was then to be standard disclosure.
12. CPR 31.5(7) provides for the court to determine the appropriate orders for disclosure having regard to the overriding objective and the need to limit disclosure to that which is necessary to deal with the case justly.
13. In this case an order is sought in relation to certain issues.
14. In deciding whether to order disclosure the court has to decide whether disclosure is necessary in order to deal with the case justly. Counsel for the claimant submitted that if disclosure is ordered as sought by claimant, the defendants could come back to court if the disclosure exercise turned out to be disproportionate, and further that it is a matter for the trial judge to decide whether the evidence impacts on the trial as "distortion or distraction". I do not accept that this is the correct approach. It is for this court to determine whether disclosure should be ordered on the particular issues and that must be by reference to the overriding objective.
15. In oral submissions counsel for the claimant stressed the importance of circumstantial evidence in a case of fraud and the need to piece together evidence in such cases.
16. Counsel for the claimant also submitted that it was important to have regard to other findings of dishonest conduct to consider the inherent improbability of fraud and counsel relied in particular on Mr Justice Eder at paragraph 89 in his judgment in Otkritie v Uromov [2014] EWHC 191 (Comm), where he said:

"If a court is satisfied or it has been admitted that a defendant has acted fraudulently or reprehensibly on one occasion, it cannot necessarily be considered inherently improbable that such a defendant would have done so on another."

17. In this respect counsel for the claimant relied on the principle of similar fact evidence being admissible and referred the court to the authority of the House of Lords in O'Brien v Chief Constable of South Wales Police [2015] 2 AC 534. Counsel for the claimant submitted that in this case the evidence involved events of apparently similar character and such evidence is admissible subject to the conditions that it should not distort the trial or have undue prejudice or be disproportionate.
18. Counsel also submitted that the scheme took place in the context of a wider process to gain control of UTN and oust the claimant and that motive is relevant to the case in fraud.
19. The defendants were separately represented at the hearing although counsel for the second, third and fourth defendants adopted in part the submissions made by counsel for the first defendant. I highlight in particular the following submissions made on behalf of the defendants:

(i) the court may in its approach to disclosure weigh the importance of the issue to the claims actually being made;

(ii) while counsel for the first defendant accepted that in allegations of fraud it is often necessary to rely on matters of inference or circumstantial evidence to make good the claim, counsel submitted that the court should not order disclosure of everything sought, in particular in relation to matters of background or peripheral relevance. It was further submitted that the Oil Payment Scheme was alleged to have taken place in a narrow window from March to June 2009;

(iii) for the defendants it was also submitted that the claim is brought by the claimant as assignee of SK and therefore the background is irrelevant;

(iv) that train of enquiry documents are appropriate in cases involving allegations of fraud but it is not appropriate to order enhanced disclosure before standard disclosure;

(v) the ousting scheme, if established, was not of any significant probative value.

20. I accept the importance of circumstantial evidence in this case but in my view this is not a case of similar fact evidence of the kind envisaged in O'Brien. O'Brien was a case where officers had used oppressive and unprofessional methods and what was sought to be adduced was evidence of other occasions on which the officers had used the same or similar methods.
21. In this case, the claimant is seeking to rely on elements of the alleged scheme to oust the claimant from UTN. However, in my view the nature of what occurred in the alleged "ousting" scheme is not similar fact evidence. It is not evidence of the defendants behaving in a similar manner or engaging in similar type of conduct. It is evidence of other matters which if proven may amount to what was termed "reprehensible behaviour", but it seems to me that the claimant does not go so far as in these proceedings as to allege the behaviour was fraudulent. Rather, counsel for the claimant submitted that the previous conduct showed that the defendants worked together and collaborated and using illegitimate means (which I understand to be a reference to the alleged use of force in the reinstatement of the fourth defendant) sought to cause the claimant harm. This is not evidence of the kind of conduct alleged to have occurred in relation to the Oil Payment Siphoning Scheme and in my view is not similar fact evidence. Accordingly, I do not accept that disclosure can be justified on the basis that the ousting scheme or elements of it amount to similar fact evidence.
22. Counsel for claimant submitted that the ousting scheme is relevant to motive.
23. For the defendants it was submitted that there was a clear financial benefit to the defendants from the alleged Oil Payment Siphoning Scheme and therefore it is not necessary to look at the motive for the transaction being structured in the way alleged in order to provide a motive for the alleged scheme.
24. Counsel for the claimant accepted that the ousting scheme is not the claimant's cause of action in these proceedings. However, I accept that the ousting scheme forms part of the pleaded context in which the steps taken as part of the OPSS are alleged to have occurred and reliance is placed by the claimant on certain matters which are alleged to have occurred as part of the ousting scheme as matters from which the court is invited to infer unlawful conduct.
25. The court cannot assess at this stage the probative value of that evidence which is ultimately a matter for trial. But the court does have in mind the need for the claimant to rely on matters of inference and circumstantial evidence in a case of this nature. Thus, the ousting scheme is not in my view to be regarded as separate and distinct.
26. Further, I do not accept the submission for the defendants that because the claim is brought by the claimant as assignee of SK the ousting scheme is necessarily irrelevant, given in particular the reliance by the claimant on its pleaded case on elements of that ousting scheme.
27. Against that background I turn to the specific issues on which disclosure is now sought and which remained the subject of disagreement between the parties.
28. 11B related to Korsan. This is dealt with at paragraphs 19 and 20 of the amended particulars of claim where it is pleaded that in December 2006 Korsan, a joint venture between the first and third defendants, purchased shares in UTN from Nezavisimost, a company controlled by the third defendant, and it is further alleged that the acquisition was with the aim of ousting Tatneft from UTN.
29. The proposed issues are:

11B1: what interest was held by the defendants in December 2006 and subsequently? Was Korsan a joint venture?

2: was Nezavisimost controlled by the third defendant.

3: what was the purpose of the purchase?

30. For the claimant, counsel submitted that the acquisition of the stake gave Korsan locus standi to bid at the sham auction for the claimant's indirect shareholding in UTN, using the proceeds of the OPSS. Counsel for the claimant submitted that the claimant needed to show that the defendants are part of the Korsan company at that stage to "kickstart" the argument that the defendants have combined in the ousting scheme to remove the claimant's interest.
31. For the defendants it was submitted that these issues go to the circumstances in which the acquisition occurred and not to the alleged scheme in 2009. Further, that Nezavisimost was not alleged to be part of the fraud in 2009 and was not one of the companies through which the money flowed.
32. It is common ground (paragraph 26 of the list of common ground and issues) that in 2006 the first and second defendants had an interest in Korsan and Korsan acquired its interest from a company in which the third defendant had an interest of 50% or more.
33. Counsel for the third defendant accepted that the third defendant owned 50% of Nezavisimost.
34. I do not accept the submission for the claimants that the issues in 11B are essential issues. I have regard to the need to limit disclosure to that which is necessary to deal with the case justly.

It is a matter which relates to the original purchase of a stake in UTN in 2006. Although it is referred to in paragraph 82(vi) of the amended particulars of claim and thus relied on by the claimant in paragraph 88 as a matter going to unlawful conduct, it is in my view not an issue in respect of which a disclosure order should be made given that the interests of the defendants are largely acknowledged and in my view the acquisition has little significance in terms of its bearing on the OPSS and events in 2009.

35. I therefore reject the application in relation to paragraph 11B.
36. Turning to 11C, this relates to whether the defendants were behind the reinstatement of the fourth defendant at UTN in October 2007, including the court applications which preceded his reinstatement and the events by which he was reinstated.
37. The issues proposed are:

1: was the fourth defendant instructed by Mr Korban or the defendants?

2: was Mr Korban a close associate of the second defendant?

3: did the fourth defendant make a decision on behalf of UTN to stop payment for oil supplied by Tatneft?

4: did the fourth defendant procure the dismissal of Tatar nominated members of the UTN management board?

5: if the defendants were behind the reinstatement of the fourth defendant what was the purpose of the defendants procuring or supporting the reinstatement?

38. It was submitted for the claimant that this is part of the wider scheme referred to in paragraphs 21 and 22 of the amended particulars of claim and the claimant relies on matters in paragraph 82 of the amended particulars of claim linking the defendants to the OPSS, in particular subparagraph (i) that the fourth defendant entered the premises of UTS and took control on the express instructions of Korban. As referred to above, at paragraph 88 of the amended particulars of claim the claimant relies on matters as constituting unlawful acts and pleads that unlawful conduct is to be inferred from the facts and matters set out in paragraph 82.
39. For the defendants it was submitted to the extent that the issue is the degree of control over UTN, such that they are to be treated as privies of UTN for the purposes of the Ukrainian judgment, this is already covered by issue 6.
40. Taking the subparagraphs of 11C in turn, in relation to 11C1 and 11C2 the second defendant admits that Mr Korban was an associate and insofar as it was pleaded against the fourth defendant, it was admitted for the fourth defendant. I do not see that it is just and proportionate to order further disclosure at this stage.
41. In relation to 11C3, this in my view is covered by issue 23, which puts in issue the reason why UTN decided not to make payment for oil in 2007 and thus in my view the issue for the purposes of disclosure is covered by issue 23.
42. 11C4: I cannot see that this is an issue in this case which justifies disclosure. It is submitted for the claimant that it is part of the ousting scheme and shows the ability of the defendants to control the internal workings of UTN. However, that of itself does not make it an issue on which disclosure should be ordered in these proceedings as being necessary to deal with the case justly having regard to the issues in respect of which disclosure has already been ordered.
43. 11C5: again, I cannot see that this is an issue which needs to be ordered given the other matters already within the scope of disclosure including issue 23.
44. I therefore reject the application in relation to paragraph 11C.
45. 11D was not pursued before me.
46. In relation to 11E:

1, the proposed issue was did the defendants procure or were they involved in the write-off of the claimant's shares held (through AmRuz and Seagroup) in UTN and

2: did the defendants procure or were they involved in the auction to sell shares formerly held by AmRuz and Seagroup.

47. It was submitted for the claimant that the claimant's position is that the proceeds of the OPSS were used by Korsan to acquire the shares at the auction.
48. For the defendants it was submitted that this is not said to be part of the claim and it was described in the amended particulars of claim (at paragraph 28) as having occurred in parallel.
49. In my view these are matters which go to the issues in the case even though the ousting scheme itself is not the cause of action. In paragraph 82 of the amended particulars of claim the claimant expressly relies on the auction and the purchase by Korsan of shares previously held by AmRuz and Seagroup as facts and matters linking the defendants to the OPSS. Thus, whilst the claimant is not relying on these matters as being unlawful, the claimant does say that it demonstrates the link to the defendants and the OPSS. Whilst not every matter referred to in the pleadings can be said to be an issue on which disclosure should be ordered, in my view these particular issues are not to be regarded as irrelevant background but are issues which are potentially sufficiently relevant and on which it would be just and proper to order disclosure.
50. I therefore direct disclosure of the issues in 11E1 and 11E2.
51. Turning to 11F, which relates to the acquisition by Korsan of a further stake in UTN in 2009:

1: did Korsan arrange matters so it could acquire a stake in UTN unopposed at auction?

2: what was the source of funding of Korsan's acquisition?

52. Counsel for the claimant submitted that this completes the narrative, it goes to the use of proceeds and shows who benefits from the scheme.
53. For the defendants it was submitted that it postdates the scheme and the application of the proceeds is not probative.
54. In my view these are matters which go to the issues in the case. In paragraph 82 of the amended particulars of claim the claimant expressly relies on the facts and matters set out at paragraph (ii), the purchase by Korsan in the auction in 2009 of the stake previously held by AmRuz and Seagroup. It relates to events in 2009 and is closely linked in time to the OPSS. At this stage the court is not in a position to assess whether the evidence will in fact be probative but it is of relevance as to the use of the monies and forms part of the narrative around the time of the alleged fraud and potential circumstantial evidence. I therefore do order disclosure in relation to 11F.
55. In relation to 11G:

1 was the removal of the claimant from the UTN shareholder register as a result of court proceedings initiated by UTN and Korsan.

2: was the stake formerly held by the claimant acquired by Viloris.

3: what interest did the defendants have in Viloris?

56. Counsel for the claimant submitted that these issues show control over the internal workings of UTN a matter of few months after payment and completes the picture of fraud.
57. For the defendants it was submitted that it relates to how the claimant lost its stake in UTN and postdates the scheme which is in issue.
58. Again, this is expressly referred to at paragraph 82 of the amended particulars of claim at (iii). It is sufficiently linked in time in my view to the alleged fraud to be regarded as part of the narrative and potential circumstantial evidence. I therefore direct that disclosure should be ordered on this issue in 11G.
59. I turn then to the subsidiary matter of whether the issues should be clarified through an amendment to the list of issues.
60. For the claimant it was submitted that this was what was contemplated by Mr Justice Andrew Baker, that the list of issues is a reference point both for disclosure and for evidence and it would be sensible therefore to incorporate the additional issues into the general document.

The claimant in oral submissions however indicated that this was not an issue which the claimant pursued with any force.

61. For the defendants it was submitted that according to the Commercial Court guide the list of issues should be in general form, identifying key issues, and that it will lose its utility if these amendments are incorporated.
62. As I indicated in the course of the hearing, I note that for the present the claimant's approach is in accordance with the broad purposes set out in the Commercial Court guide. However, having regard to the approach which this court will be adopting from 1 January when the pilot scheme on disclosure comes into operation I can see merit in having the scope of disclosure set out in a separate document, particularly in a case like this where the list of issues would otherwise become so lengthy it risks losing utility for other purposes.
63. Accordingly, I direct that the issues for the purposes of disclosure should be set out in a separate list.