Jersey Unreported Judgments

Companies - costs judgment.

[2013]JRC209

Royal Court

(Samedi)

28 October 2013

Before     :

W. J. Bailhache, Q.C., Deputy Bailiff, sitting alone.

 

Advocate W. A. F. Redgrave for the Plaintiff.

Advocate K. M. Purkis for the First and Third Defendants.

judgment

the deputy bailiff:

1.        By its re-amended Order of Justice, the plaintiff convened the defendants before the Court and asked for various relief namely that the Court should:-

(i)        Order that injunctions obtained on an interim basis remain in place until further order of the Court. 

(ii)       Order the first defendant to pay to the plaintiff the sum of US$44,342,706.71 plus 80,000 Russian rubles, being the sums alleged to be due under some Russian judgments. 

(iii)      Declare that the assets of the second defendant are held by it as agent and/or nominee and/or on bare trust for the first defendant and can therefore be applied in satisfaction of the said Russian judgments. 

(iv)      Enforce the judgment at paragraph (2) above against the assets of the second defendant by piercing the corporate veil of the second defendant. 

(v)       By way of alternative, declare that the transactions completed in July and August 2010 were void and should be set aside, and that the second and fourth defendants accordingly take steps to transfer ownership to the third defendant of the shares which were transferred in July and August 2010, and otherwise make restitution to the third defendant for the value of those shares. 

2.        As is clear from other judgments given by the Court already, summary judgment in relation to the second prayer for relief set out above was given on 25^th April, 2012, subject to the further order that the judgment should not be enforced without leave. 

3.        The remaining matters were listed for trial before this Court for a period of three weeks commencing Monday 30^th September, 2013.  The second and fourth defendants had indicated that they would not be participating in the trial, although they had filed answers in the proceedings.  The first and third defendants had also filed pleadings denying the claims which were to be heard on 30^th September, and indeed those defendants also had outstanding an application for leave to amend their answer which was resisted, and that application was due to be determined on the first morning of the trial. 

4.        Extensive trial documents had been put together, and arrangements made for interpreters and for evidence to be taken from the first defendant by video link from Moscow. 

5.        In the circumstances it came as some surprise to the plaintiff and to the Court that approximately 15 minutes before the opening of the hearing, the first and third defendants conceded by their counsel the relief set out at paragraph 1(3) above, thereby accepting that the assets of the second defendant, which were conceded to include the shares in a number of companies set out in the Schedule to the Act of Court, were held by it as agent and/or nominee and/or on bare trust for the first defendant, subject to any bona fide claims of third party creditors of those companies respectively as at 30^th September, 2013.  In the light of that concession, there was no need for the case to proceed because a primary claim of the plaintiff had been conceded.  The Court adjourned the question of costs by consent to 15^th October, 2013. 

6.        On that day, I sat to hear an application by the plaintiff for an order against all the defendants for the plaintiff's costs to be paid jointly and severally on an indemnity basis.  As to that, Advocate Purkis conceded on the part of the first and third defendants that an order for costs should be made, but she asserted it should be made on the standard basis.  Advocate Redgrave for the plaintiff also requested an order for the immediate payment of £350,000 on account of costs, which Advocate Purkis resisted. 

7.        Having heard argument, I made the orders that the first and third defendants should jointly and severally pay the costs of the plaintiff of and incidental to the Jersey proceedings to date on an indemnity basis save insofar as those costs had been the subject of specific orders previously.  I also ordered that the first and third defendant should pay to the plaintiff forthwith the sum of £350,000 on account of those costs.  I indicated that the reasons for these decisions would be circulated later.  This judgment contains those reasons. 

8.        Following those orders being made, Advocate Redgrave applied on behalf of the plaintiff for indemnity costs of and incidental to the application for costs.  Advocate Purkis resisted this application, asserting that it had not been at all unreasonable to resist the application for indemnity costs in the proceedings to date.  I reserved my decision on that argument, and that decision appears below. 

9.        There was no dispute before me as to the principles which should govern an award of indemnity costs.  They are well settled.  In Leeds United FC Limited-v-Weston [2012] JCA 088, there is a useful review of the leading cases by Jones JA at paragraphs 4-7.  In summary the position is:-

(i)        The Court has a wide discretion as to when it makes an award of indemnity costs. 

(ii)       In considering the question, the Court will consider whether there has been some culpability, abuse of process such as deceit, underhanded or unreasonable behaviour, abuse of court procedures, or the submission of voluminous and unnecessary evidence.  This is sometimes referred to as a "special or unusual feature" to justify the award of indemnity costs. 

(iii)      It is not necessary that the actions of the paying party should be malicious or vexatious, although obviously if they are, the Court is more likely to find a culpability which merits an award of indemnity costs. 

(iv)      It is, in reality, a question of what would be fair and reasonable in all the circumstances. 

10.      For my part, I adopt the question as put by Beloff JA in C-v-P-S [2010] JLR 645 when he said:-

"The question will always be - is there something in the conduct of the action by one of the parties or the circumstances of the case which takes the case out of the norm in a way which justifies an order for indemnity costs, recognising that there will usually be some degree of unreasonableness?"

11.      Advocate Redgrave submitted for the plaintiff that although the logic of an indemnity costs order could justify disturbing the existing orders, he was not proposing that the Court follow that course.  He did contend that the first defendant's conduct had been unreasonable.  He contended that it was possible to impute the first defendant's conduct to the second and fourth defendants and in the early stages the conduct of the second and fourth defendants to the first defendant. 

12.      For the purposes of his claim for indemnity costs, Advocate Redgrave submitted that it was not necessary that the Court reach a conclusion that the structure was put together for a fraudulent purpose.  Nonetheless, the first defendant must have known from the moment of transfer of assets that he was the real owner, and he used the structure to conceal that reality from his creditors.  For two years he has resisted making assets available to the plaintiff.  He has done so by advancing a positive case that the second defendant's assets are not available for enforcing the judgment debt.  The entire basis of his case was a false one, and therefore this was unreasonable conduct which justifies an indemnity award.  Advocate Redgrave agreed that it was the plaintiff's case that the first defendant had in fact set up the structure for a fraudulent purpose, but it was not necessary to reach that conclusion for the award of indemnity costs.  He did contend that there was no evidence of any legitimate purpose.  Furthermore, even if that was not right and that was a legitimate purpose at the time the structure was put in place, it was clear once the litigation started that he knew what the truth was, namely that he was the beneficial owner of all the assets, but he advanced deliberately a false case to the effect that he was not.  It was submitted that the first defendant's argument was knowingly and completely bogus. 

13.      If the first defendant had not taken these steps, Advocate Redgrave submitted, a lot of litigation and work would have been unnecessary.  He pointed out that the material facts of the case have not changed since proceedings were served upon the first defendant in December 2011.  Having had the opportunity of taking legal advice, the first defendant could have conceded the plaintiff's claim at any point.  Instead he elected to do everything within his power to obstruct the enforcement of the judgment debts against him.  As was said in the plaintiff's skeleton:-

"This is not merely a case of a defendant running a legitimate legal argument and then facing the music.  There never was any merit to his defence, and he knew it.  There never was a dispute on the underlying facts.  The entire proceedings have been an exercise in wasting the time and money of the plaintiff and the court.  The plaintiff should recover these costs on the fullest possible basis."

14.      The first defendant's objections to an award of indemnity costs were based on these grounds:-

(i)        It was conducive to resolution of litigation that a party should capitulate, and the fact that such capitulation might come shortly before trial, or even at the beginning the trial, is not as a matter of policy relevant for the purposes of determining whether an indemnity costs order ought to be made.  In broad terms, I accept that submission.  By itself, the fact that a settlement offer is made shortly before the hearing is not enough to justify of itself an award of indemnity costs for the policy reason which I have just mentioned.  It may, however, be part of the picture.  If it were the case that the concession is made very late in the day so that the defendant might have had the advantage of the defended litigation for an extended period, that might be a relevant feature.  In some cases, making the settlement offer at the very last minute might enhance the applicant's claim for indemnity costs upon the basis that there would be additional hardship if the claimant had to sustain the difference between indemnity and standard costs over a long period.  As Advocate Purkis accepted in her submissions, the matter has to be looked at in the round. 

(ii)       It is unfair to the first defendant to say that he conducted his case on the basis of a lie.  It was submitted that it was common ground back in 2010 that the Russian Courts would not acknowledge a beneficial interest in property, and as no security was taken over the property owned by these various Russian companies, the first defendant was entitled to conclude that it was only his personal wealth that was at risk.  He could only answer the case that was put to him.  When first brought, the Order of Justice asserted that either the corporate veil should be pierced or that the July and August 2010 transfers should be set aside as part of a Pauline action.  In both cases, it was said that the claims raised novel points in law.  There were good arguments for defending the claim that it was possible to pierce the veil of a Jersey foundation.  There were equally good arguments to say that the Pauline claim could be resisted upon the basis that the transferor was not the debtor.  In both cases these were novel points of law which the first defendant was entitled to argue. 

(iii)      Since the commencement of the proceedings, things have changed.  For the first time Russian law accepted that there might be a difference between beneficial interests and legal title, and the Courts were prepared to make orders for the enforcement of a personal debt against real estate owned by a company.  Furthermore, the enforcement efforts in Russia had proved effective, and the assets apparently "protected" by the structure involving the second defendant were no longer protected.  On top of that, the plaintiff's case changed with the pleading introduced in July 2013.  Advocate Purkis submitted that although the plaintiff claims that its decision to seek leave to amend was based upon the decision of the Supreme Court in Prest-v-Petrodel Resources Limited and Others [2013] UKSC 34, and in particular the analysis of Lord Sumption in which he distinguished cases based upon the concealment principle from those based upon the evasion principle, in truth the claim was a good old fashioned equitable claim which did not need the Prest refinement, but that had not been pleaded.  The first defendant could only answer the claims actually made.  It was when the change was introduced in the pleading that the first defendant and his advisers recognised that there was in truth no case to put.  The law had not changed, but the landscape had because the plaintiff belatedly found an appropriate case to plead. 

(iv)      It was said that the second and fourth defendants were authors of their own misfortunes.  They had been separately represented.  There was no common interest defence privilege.  While it might be so that the first defendant had corporate information that these defendants did not have, the notion that he prevented them from keeping records is not warranted.  Advocate Purkis submitted that he, the first defendant, paid the service providers and he expected them to do what they should have done.  There was no basis for imputing their poor conduct to him. 

(v)       It was submitted that the plaintiff's behaviour had not been uniformly good either.  The plaintiff had commenced process all over the world and by obtaining the travel ban prevented the first defendant from travelling to give evidence and instructions.  It was obvious from looking at the orders made in this case that the Court had occasionally made costs orders against the plaintiff, which shows the Court's view that the plaintiff's conduct had not been good.  Secondly, in this connection, she relied upon the clean hands issue.  It was asserted that the plaintiff had purchased documents, which enabled it to frame its case.  It must have known that those documents had been taken in breach of a duty of confidence.  Mr Melnikov, the plaintiff's lawyer, had deposed that the documents have come from a BVI company and that the plaintiff had paid for them.  All in all, it was submitted therefore that the plaintiff had not come to this litigation with clean hands and should not have the benefit of an indemnity costs award. 

(vi)      To the extent that the Court was considering what the motivation might have been on the first defendant's part for putting the structure together, the Court should desist from making any findings.  Advocate Purkis submitted that I had not heard from the first defendant in support of his case, which was that there were good business reasons for the structure, namely to facilitate investment, and there was also the point, pleaded in the first defendant's answer, that the structure had been put together for the protection of the interests of his daughter on inheritance. 

15.      Advocate Purkis gave me these last submissions in response to my question as to how I should deal with the allegations about the first defendant's motivation.  I asked those questions because it seemed to me to be clear that if I were satisfied that the first defendant had put together this entire structure for the purposes of defeating the claims of his legitimate creditors, in particular the plaintiff, then that might be a special feature which, unrelated to the way in which the litigation had been conducted, would justify an award of indemnity costs.  In my judgment, the right approach to this issue of ascertaining intention or motivation is this.  The concession which the first defendant made on the first morning of the hearing was not a concession which went to his motivation in putting the structure together.  It follows that his pleaded case remains.  That pleaded case was that the re-organisation came about on the proposal of Mr Krasavin, who was to receive a 10% interest in the real estate assets managed by the group of which the first defendant was general director.  It was averred that Mr Krasavin wanted the group to be restructured so that he could attract new investment, and also so as to ensure that his own interest was clearly reflected in a holding structure through a single holding vehicle.  It is asserted by the first defendant that he wanted to attract new investors, to reduce operational costs, to ensure outstanding debts could be settled, and to avoid any difficulty with inheritance for his daughter.  The first defendant averred that he approved the formation of the structure, could not recall details of the documents which he was asked to sign and did sign, and had no direct involvement in the implementation of the structure until he became President of the Kopernik Group in February 2011. 

16.      It would be an odd result, in dealing with a claim for indemnity costs where the first defendant's motivation might be relevant, that the first defendant be able to assert that his motivation cannot be assessed because he has not given evidence - when the reason for him not giving evidence lies in a concession which goes to the heart of the plaintiff's case.  It seems to me that I am entitled to reach a judgment on this issue, having regard to all the evidence which is put before me.  This includes the affidavit evidence of the first defendant. 

17.      I am in no doubt that one of the governing motivations of the first defendant was the creation of a structure which would enable him to defer, if not avoid, settlement of his liabilities to the plaintiff.  It is clear that the underlying structure was already extremely complex in June 2010.  At that stage, the first defendant was the beneficial owner of a raft of BVI companies through nominee shareholders.  He was also the beneficial owner of a number of Cyprus companies, which own the relevant Russian companies which own the real estate, again through nominee shareholders.  I am ready to accept that there may have been genuine commercial reasons for Russian land, with development potential, to be held by a Russian company the shares of which were owned by Cyprus companies, the shares of which were held by nominees for the first defendant.  I am ready to accept that for taxation or other commercial reasons, it might have been desirable to interpose between the first defendant and the Cyprus companies a raft of BVI companies.  I am even ready to accept that there is a commercial case for the interposing of the fourth defendant to hold the shares in the raft of BVI companies, upon the basis that Mr Krasavin was to have 10% of the whole, and it was convenient to allocate him a 10% share in the fourth defendant albeit that this was subsequently acquired by the first defendant.  So there might have been some good commercial reasons for at least part of the structure.  I reject the submission that the attraction of the structure to investors was one such good commercial reason.  For my part I cannot see why an investor, as opposed to Mr Krasavin as an employee/partner, with an interest in one or more of the underlying Russian real estate investments should want to invest in a minority interest in the fourth defendant with all the difficulties which would be apparent in securing any return on his investment.  The changes introduced in 2010 would not be necessary for the purposes of attracting such investors.  The fact that there is no evidence that any person was attracted to such an investment from 2010 rather confirms the instinctive view that this was not a natural structure for investors. 

18.      I can understand why Mr Krasavin might want to see his 10% interest reflected by a 10% interest in the holding company, which turned out ultimately to be the fourth defendant.  The first defendant could have retained a 90% interest in that company as well.  However, he chose not to do so.  Instead there was interposed between him and the fourth defendant the Jersey foundation, the second defendant.  This could not have been done with a view to attracting investment.  It is not obvious that it was done for the protection of his daughter, whose interests are not guaranteed, at least directly, by the foundation.  But of course it could have protected the daughter's interests to the extent that it kept her father's assets away from the reach of her father's creditors. 

19.      Advocate Purkis had submitted that it was common ground in 2010 that the Russian courts would not recognise beneficial interests.  I accept that is so because counsel for both parties have over the course of this litigation made that submission to me from time to time.  In fact, such a belief is consistent with an intention to place assets beyond the reach of creditors by the changes to the structure which were in fact introduced. 

20.      I also take very much into account the timing of these transfers.  According to the first defendant's pleaded case, Mr Krasavin and others proposed a new holding structure in February 2010.  On 28^th January, 2010, and 12^th February, 2010, the plaintiff had commenced two sets of proceedings in Russia to recover the loans claimed to be due.  Judgments for the total sum involved were obtained on 26^th May, 2010.  Some three weeks later, the first of the transfers of shares in the structure was made.  The second defendant was incorporated on 5^th July, 2010, and over July and August the remaining shares were transferred.  During this time the first defendant was appealing the Russian judgments and those appeals were dismissed in September and November 2010.  The timing of the relevant transfers and the setting up of these new structural arrangements seems to me to be clearly linked with the progress of the proceedings in Russia. 

21.      If it were necessary to do so, I would conclude on the balance of probabilities, and on the evidence which was before me in the Court bundles, that the first defendant intended to put the assets out of the reach of its creditors when the structural changes were introduced between June and August 2010.  However, I do not even have to reach that conclusion, in my judgment, for the purposes of deciding that an order for indemnity costs is appropriate.  Regardless of what the first defendant intended, there is no dispute that he knew that when the assets were put into the hands of the second defendant, judgment had been taken against him in Russia for significant sums.  Despite that apparent transfer of ownership, he retained a large measure of control over those assets by the actions of the directors of the BVI, Cypriot or Russian companies, and by the management of the real estate through the Russian management company Kopernik Group.  On the first day of the trial he conceded that for the first time that the assets held by the second defendant were held as nominee for him.  In my judgment, Advocate Redgrave is right to submit that the whole defence, from the very outset, was based upon a lie.  That is a sufficiently unusual feature which takes this case out of the ordinary.  It is not a matter of a legitimate, although wrong, view being taken of the law or of the facts.  It is a case where there has been the deliberate advancing by the first defendant of a position which he knew to be untrue.  From the outset, the costs incurred have been wasted.  The first defendant has secured by the transfers and changes in this structure and by his defence of these proceedings, a two year delay in settlement of his debt in full.  There is no reason in my judgment why the plaintiff should have to bear the difference between standard costs and indemnity costs in the circumstances.  The whole defence was an abuse of the procedure of this Court. 

22.      I reject the view that the first defendant was merely responding to the pleaded case of the plaintiff, and that it was only in July 2013 that the Prest amendments were made.  Under paragraph (1)(c) of the original Order of Justice, the plaintiff asked the Court to declare "that the assets of the second defendant are the property of the first defendant and can be applied in satisfaction of the same Russian judgments".  From the outset, that has been denied. 

23.      I am not persuaded that the argument that the plaintiff itself does not come with clean hands takes the first defendant far.  At best, this defendant was prepared to run a defence based on what he knew was a lie - the claim that the second defendant did not hold the underlying assets for him compared with the concession that it held the assets as nominee or bare trustee for him.  The fact that the plaintiff was prepared to buy documentary evidence of this convoluted structure in order to establish its claim, assuming it was, does not in my judgment amount to a lack of clean hands.  There has been no false statement made to the Court that I can identify.  If it is a case of fighting fire with fire, the first defendant lit his first. 

24.      For these reasons I consider that the appropriate award, to the extent that costs have not otherwise been awarded, is that the first and third defendant pay jointly and severally the costs of the plaintiff of and incidental to the proceedings on an indemnity basis. 

The claim for an immediate payment on account

25.      It is common ground between the parties that there is an inherent jurisdiction in the Court to order an interim payment on account of costs.  This jurisdiction was considered by the Court in the case of Centre Trustees (CI) Limited-v-Van Rooyen [2009] JRC 133.  In that case, Clyde-Smith, Commissioner, noted that it was now common practice in England to order interim payments on account of costs and that the general approach there was to order one half of the untaxed costs of the successful party by way of interim payment.  The learned Commissioner concluded, at paragraph 7:-

"Whilst the successful party will receive interest on any sums found due under the taxation process, I accept the proposition that, in fairness to the successful party, there is no good reason to keep it out of a sum which it is likely to recover on a conservative basis in any event."

26.      I accept the submission of Advocate Purkis that making an interim order is not, in Jersey, "the usual practice".  There is no presumption that such an order will be made, with the burden falling on the paying party to show cause why it should not. 

27.      In this case, I am satisfied that it is right to exercise my discretion to make an order for a payment on account at this stage.  The original debts have been outstanding since at least 2010 when the Russian judgments were given.  The fact that the plaintiff is a wholly owned subsidiary of a Russian clearing bank does not mean that the bank should be required to carry the expense of being out of its money in circumstances where a different kind of plaintiff might not.  As is clear from my decision in relation to the claim for indemnity costs, this is a case where the first defendant has, by his defence of the Jersey proceedings and the use of the structures which have been put in place following the taking of the Russian judgment, achieved a delay of over three years since the debt fell due.  Debtors should pay their debts if they can. 

28.      In this case, the first defendant has submitted his 17^th affidavit in the proceedings, which is said to provide grounds upon which the Court should not make an order for an interim payment.  In this affidavit, the first defendant indicates that he has no savings, no free funds of his own to finance his costs, and has been involved in litigation in a number of jurisdictions - Russia, BVI, Cyprus and Jersey, engaging lawyers in each of those jurisdictions.  He says he is unable to obtain any commercial loans from third parties because he is already in debt and that debt grows as he continues to incur legal costs defending the various proceedings.  He has no current source of income, as he is on unpaid leave from the offices of Kopernik Group.  Indeed, most of the group assets he says have now been sold. 

29.      For the purposes of this application only, I am prepared to accept that the first defendant has no personal assets of his own outside the structure of which the second defendant is the head.  I rather assume that, if the plaintiff had been able to identify any personal assets of the first defendant, it would by now have distrained upon them in enforcing the existing Russian judgments.  I consider that, if the plaintiff obtained this order, it could be enforced in personam through orders made by the Royal Court against the proceeds of sale of other Russian estate.  Further auctions are anticipated later this year.  I do not know how long the process will be for the calculation of the sum due pursuant to the costs order which has been made, but there is at least a risk that the proceeds of sale of the Russian estate will be received prior to the ascertainment of a final sum by way of indemnity costs in Jersey.  It is possible that the sum received may be sufficient to discharge the outstanding debts in their entirety, and if that were so, then any balance presumably would be paid to the first defendant or to companies within the structure.  In my judgment, it is appropriate to make an immediate order now so that, before any such balance be paid over, at least a payment on account of the costs now ordered can be made or if not made then an appropriate application made to the Royal Court. 

30.      The next question then is what that sum should be.  I am asked to make an order for an interim payment for £350,000 upon the basis that the costs incurred by the plaintiff with its London and local lawyers stand at approximately £950,000.  Advocate Purkis says that there is insufficient detail for her to be able to comment constructively on that claim.  She cannot assess what work has been done, how much might have been attributable to each defendant, and whether arithmetically the figure of £350,000 is or is not reasonable. 

31.      I accept that these criticisms can be made.  Nonetheless, in the round, I am satisfied that the hourly rates charged are not excessive and in those circumstances the argument will be around whether a reasonable amount of time has been taken and whether the work for which the charge was levied is reasonably within the ambit of the costs order.  The plaintiff in that respect has the benefit of the doubt where there is doubt, because this is an indemnity costs order. 

32.      I accept there is a probability that the overall costs claim will be subject to legitimate criticism, and to some reduction.  Even so, in my judgment, the sum of £350,000 is likely to be less than the minimum sum which the plaintiff is entitled to recover. 

33.      I do not think that the objection that we cannot identify whether the costs have been incurred in relation to activity of the first defendant as opposed to the activity of other defendants requires further consideration.  The assets within the structure are held as nominee for him.  Accepting of course the statement from Advocate Purkis that there has been no common interest defence privilege, I nonetheless consider it to be not unfair to the first defendant to treat the responsibility for the plaintiff's costs, on an indemnity basis, as falling upon the assets within the structure of which the second defendant is the head, and which are held as nominee for the first defendant.  Accordingly I do not think there is anything in the point that we do not know to which defendant particular costs should be attributed.  That might have been an important consideration prior to the concession which the first defendant has now made, but it is no longer of consequence. 

34.      For these reasons, I have made the order that the first defendant should pay forthwith the sum of £350,000 to the plaintiff on account of costs. 

35.      Advocate Redgrave asked for the costs of the costs argument on an indemnity basis.  I do not think that is appropriate and I award the plaintiff the costs of and incidental to the costs argument on the standard basis.  The first defendant's opposition to indemnity costs was not unreasonable albeit I have found against him.  It was not based upon a lie.  I think there is no inconsistency, despite what Advocate Redgrave said, in taking that approach. 

Authorities

Leeds United FC Limited-v-Weston [2012] JCA 088.

C-v-P-S [2010] JLR 645.

Prest-v-Petrodel Resources Limited and Others [2013] UKSC 34.

Centre Trustees (CI) Limited-v-Van Rooyen [2009] JRC 133.