[Printable RTF version]
||Neutral Citation Number:  EWHC 3263 (Ch)
IN THE HIGH COURT OF JUSTICE
Royal Courts of Justice
||Friday, 6th November 2015
B e f o r e :
MR. JUSTICE NUGEE
||(1) JSC MEZHDUNARODNIY PROMYSHLENNIY BANK
||(2) STATE CORPORATION "DEPOSIT INSURANCE AGENCY"
||- and -
||(1) SERGEI VIKTOROVICH PUGACHEV
||(2) KEA TRUST COMPANY LIMITED
||(3) FINETREE COMPANY LIMITED
||(4) BRAMERTON COMPANY LIMITED
||(5) BLUERING COMPANY LIMITED
||(6) MARU LIMITED
||(7) HAPORI LIMITED
||(8) MIHARO LIMITED
||(9) AROTAU LIMITED
||(10) LUXURY CONSULTING LIMITED
||(11) VICTOR SERGEYEVITCH PUGACHEV
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A P P E A R A N C E S
MR. S. SMITH QC and MR. P. HARTY (instructed by Hogan Lovells International LLP) appeared on behalf of the Claimants/Respondents.
MR. S. AULD QC and MS. R. OAKESHOTT (instructed by Mishcon de Reya LLP) appeared on behalf of the Sixth to Ninth Defendants/Applicants.
THE FIRST TO FIFTH AND TENTH AND ELEVENTH DEFENDANTS did not attend and were not represented.
HTML VERSION OF JUDGMENT
Crown Copyright ©
MR. JUSTICE NUGEE:
- I have before me an application or applications by the sixth to ninth defendants, ("the current trustees") in relation to the freezing order to which they are currently subject ("WFO2"). WFO2 was initially made ex parte by the Court of Appeal on 11th August 2015 and was continued on an inter partes basis by Snowden J on 27th August 2015. That was merely an interim continuation pending an anticipated application by the current trustees to discharge the injunctions. That application has now been issued but is not before me. I am told that it is due to be heard early next year.
- In the meantime, the current trustees, who are trustees of five discretionary trusts governed by the law of New Zealand, wish to have the ability to use the funds under their control for the benefit of discretionary beneficiaries for payment of legal costs and living expenses. Their application to be permitted to do so was initially put largely on the basis that WFO2 on its true construction already permitted them to do that, but in a brief judgment which I gave at the close of argument yesterday I ruled against those contentions and in those circumstances Mr. Stephen Auld QC, who appears for the current trustees, seeks variations of WFO2 to permit the relevant payments to be made.
- Although the applications are formally brought by all four current trustees, in fact the relief sought specifically concerns two of them, the sixth defendant, Maru Ltd, in its capacity as trustee of the Wiltshire Residence Trust, and the ninth defendant, Arotau Ltd, in its capacity as trustee of the London Residence Trust. Mr. Auld presented this as a very straightforward application to be decided on uncontroversial principles, but I agree with Mr. Stephen Smith QC, who appeared for the claimants, that it is necessary to view the application in the context of the proceedings as a whole and, therefore, I will have to give some account of the history.
- I will divide this into four sections. Firstly, the underlying claims between the claimants and Mr. Pugachev, the first defendant, who is the effective defendant to the substantive claims. Secondly, some account of the developments in relation to the freezing order against Mr. Pugachev. Thirdly, some account of the position of the trusts and the freezing order made against the trustees, and, fourthly, the legal expenses and living expenses regimes which have been in place.
- As to the underlying claims, it is not necessary to say very much. The first claimant is a Russian bank ("the Bank") of which Mr. Pugachev was one of the founders in 1992. Mr. Pugachev rose to prominence as what is called an oligarch, becoming very wealthy and a Senator in Russia's Upper House. In 2010 the Bank was declared insolvent by a court in Moscow and the second claimant, an emanation of the Russian State, was appointed liquidator. In 2013 the claimants (that is, the Bank and the liquidator) commenced proceedings in Russia against Mr. Pugachev. It is asserted by Mr. Smith on behalf of the claimants that between late 2008 and mid 2011 Mr. Pugachev extracted at least US $800 million from the Bank.
- In April 2015 judgment was entered for the claimants against Mr. Pugachev in proceedings brought in the Moscow Arbitrazh Court for 75.6 billion roubles. Mr. Pugachev appealed to the Court of Appeal, but his appeal was dismissed in June 2015 and a further appeal to the Court of Cassation was dismissed on 1st October. On 19th October the claimants issued proceedings in England suing on this judgment.
- Mr. Pugachev, as I understand it, is proposing to defend those proceedings on the basis that the judgment was obtained by fraud. He in turn has issued arbitration proceedings against the Russian State under a bilateral investment treaty between France and Russia, Mr. Pugachev claiming to be a citizen of France. Like many other matters, that appears to be in dispute. In those proceedings he accuses the Russian Government, in effect, of conducting a campaign in order to expropriate his assets at a considerable undervalue and bring about his downfall.
- Secondly, these proceedings. These proceedings started as an application for a freezing order under s.25 of the CJJA 1982 in support of the Russian proceedings. A worldwide freezing order was granted by Henderson J initially ex parte on 11th July 2014 and then continued by him inter partes on 29th July, ("WFO1"). The sum restrained was just over £1.17 billion. An application was made by Mr. Pugachev to set aside WFO1 but in due course it was dismissed by Mann J on 15th January 2015 and it is still in force against him.
- WFO1 in the normal way required disclosure of Mr. Pugachev's assets. Mr. Pugachev purported to comply with that but on 11th March 2015 Arnold J ordered him to attend for cross-examination in relation to his assets and that disclosure. That cross-examination took place over six days before Hildyard J in March and April 2015, at the end of which Hildyard J delivered a judgment in which he referred, among many other things, to the:
"real and unsettling mystery of the case, which is how it is that the Defendant has managed to service his living expenses, as he has presented them to be, and how and in what amount they are to be paid hereafter".
That was para.123 of his judgment of 12th June 2015  EWHC 1694 (Ch).
- In the light of that and other matters, he ordered Mr. Pugachev to swear a further affidavit. He also continued an order which had previously been made for Mr. Pugachev to surrender his passport and not leave England and Wales. Mr. Pugachev had already applied unsuccessfully to appeal this passport order and twice to be allowed to go to France during its currency, but it does not appear to be in dispute that at some time around the end of June 2015, without the permission of the court, he left the UK and is now living in France.
- On 27th July 2015 Rose J made an order requiring Mr. Pugachev to provide a further affidavit in relation to his assets. That included, in particular, a requirement that he set out:
"to the best of his ability and having made all reasonable enquiries …
(b) what happened to the sums totalling approximately $712,978,000 which were transferred by JSC Sanara and Plescheevo CJSC to an account in the name of Safelight Enterprises Ltd at Société Générale Private Bank in Switzerland between about 29 December 2008 and 8 April 2009, including where those sums of money and any assets which have been acquired with all or part of those sums of money currently are".
- There was purported compliance with that on 21st August 2015. I have, however, been shown a note prepared by Hogan Lovells, the claimant's solicitors, dated 26th August 2015 which analyses that purported compliance and describes Mr. Pugachev's affidavit as "manifestly inadequate to discharge Mr. Pugachev's obligations pursuant to the order". The note includes a flow chart which is said to demonstrate that there is no information given by Mr. Pugachev as to what has happened to several hundred million dollars of the moneys originally paid to Safelight.
- Thirdly, so far as the trusts are concerned, WFO1 contained a reference to one trust company, Kea Trust Company Ltd, as one of a number of bodies corporate in relation to which Mr. Pugachev was restrained from procuring or permitting them to deal with their assets. The existence of the trusts themselves appears to have first been disclosed in a schedule of assets served by Mr. Pugachev's then solicitors, Stephenson Harwood, in a letter dated 23rd July 2014. Among other assets, that said that Mr. Pugachev is "one of a class of discretionary beneficiaries under the following New Zealand based trusts" and it then sets out the names of the five trusts in question. That led to Henderson J making an order inter partes on 25th July 2014 requiring Mr. Pugachev to give disclosure of details of trusts. The then trustees ("the original trustees") applied to set aside that order but that application was refused by David Richards J on 30th October 2014 and on 27th February 2015 the Court of Appeal dismissed appeals by Mr. Pugachev and the original trustees.
- Mr. Smith drew my attention to the fact that the original trustees' application was supported by a witness statement of Mr. Patterson, a director of all the original trustee companies, dated 9th September 2014, in which he said as follows at para.2.4:
"The Claimants have also, I understand, asserted that the Defendant is probably the settlor of each of the Trusts. That is also incorrect. Each trust was constituted by a declaration of trust by the trustee. Assets were placed into the Trusts".
That was amplified by a second witness statement of Mr. Patterson dated 3rd October 2014 in which at para.45 he said this:
"Mr. Roberts states (at paragraph 50 of his statement) that the Claimants do not accept my explanation of why the suggestion that Mr. Pugachev is probably the settlor of each of the Trusts is incorrect, and further states that it is the Claimants' position that, if the Trustees made declarations of trust following which assets were gifted into the Trusts, the Trusts Disclosure must identify who gifted the assets to the Trusts, i.e. the source of the assets subject to the Trusts. It may assist if I make clear that, when I was stating that Mr. Pugachev is not the settlor of each of the Trusts, my reference to the settlor was intended to refer not only to the person or persons who declared the Trusts, but also those who placed assets into the Trusts".
- Mr. Pugachev purported to comply with the trust disclosure order. On 6th March 2015 Peter Smith J held that he was in breach of Henderson J's order and also in breach of the passport order (which he himself had made on 7th March) and at that point the claimants sought and obtained an order from Rose J on 10th March 2015 directed at Ms. Dozortseva, a director of three of the original trustee companies and a Russian lawyer who describes herself at para. 8 in an affidavit sworn by her on 17 March 2015 as having been offered in 2011 "a position of a lawyer working more or less closely with Mr. Pugachev and for his family" and at para.13 as "one of Mr. Pugachev's legal team". She swore two affidavits with considerable further information about the trusts, including information which revealed that the settlors, not in the sense of the original parties who made the declarations of trust, which in each case were the trustees, as Mr. Patterson had said, but in the sense of those who had transferred assets into the trusts, were in I think every case Mr. Pugachev himself and his son Victor Pugachev, thereby suggesting that Mr. Patterson's evidence had not been as forthcoming as it might have been.
- Subsequently, Mr Patterson and Ms. Hopkins became concerned apparently that Ms. Dozortseva was not acting in the best interests of the beneficiaries. I take this from a judgment I have been shown of Heath J sitting in the High Court in New Zealand made on 2nd October of this year in which he said this at para.:
"On the basis of their conclusion that Ms. Dozortseva 'had ceased to act properly as a director [of the original trustees] and that she was acting' in the interests of Mr. Sergei Pugachev 'to the potential detriment of the [New Zealand Trust's] beneficiaries as a whole' Mr. Patterson and Ms. Hopkins resolved, on 14 July 2015 to exercise powers as shareholders of the original trustees to remove Ms. Dozortseva as a director of each. That left Mr. Patterson and Ms. Hopkins in control of the original trustees."
- That was on 14th July. Ten days later on 24th July, which was a Friday, Mr. Pugachev and his son Victor exercised their powers as protector, it being the case that either Mr. Pugachev or, failing him, his son Victor was protector of each of the trusts, to remove the original trustees as trustees and replace them with the current trustees, according to Heath J, on the basis, as it was put by Mr. Pugachev himself, that Ms. Dozortseva's removal as director was seen as "an unwarranted and impulsive course of action by Mr. Patterson" as a result of which he had "lost confidence in Mr. Patterson and his ability to act appropriately as a director" of the original trustees: see his judgment at .
- I should add that in his judgment on 2nd October Heath J concluded at para.:
"Based on the uncontested evidence of Messrs. Sergei and Victor Pugachev, there is no reason to suggest that the Protector's power to remove the original trustees was exercised improperly"
but that should be read with his earlier comments at para. 44 as follows:
"I must accept the affidavit evidence of the witnesses to whom I have referred. They have not been cross-examined on their affidavits and there is nothing to suggest that there is anything inherently implausible about their evidence. Whether or not a different conclusion might have been reached if their evidence had been tested by cross-examination, I cannot say".
- That formed the background to an application by the claimants initially to Rose J, and then, when she did not grant the application, on appeal to the Court of Appeal, for a freezing order against the trustees which led to the order being made as I have already indicated on 11th August 2015, initially on an ex parte basis, and continued in the form of WFO2 by Snowden J on 27th August. In the Court of Appeal the only reasoned judgment was given by Bean LJ and he said this  EWCA Civ 906 at :
"I accept Mr. Griffiths' submissions that there is a good arguable case that the assets held by the trusts are in reality assets of, or under the control of, Mr. Pugachev. As even the above condensed history of this litigation shows (and I have omitted a number of hearings, none of which shows Mr. Pugachev in a favourable light) there is at least a good arguable case that he is taking every possible step to keep his assets out of the reach of this court. The terms of the Trust Deeds and the change of trustees on 24th July 2015 reinforce that conclusion. The case appears to me to be a classic one for a Chabra order, made in the first instance without notice to either the defendant or the third party said to be acting on his behalf."
- He also said at para. :
"I accept the submissions on behalf of the claimants that the timings in the change of the trustees, coming shortly after Mr. Pugachev's flight from this jurisdiction and other apparent breaches of the worldwide freezing order clearly supports the inferences that the change was intended to ensure that the trustees complied with his wishes and that therefore there is an increased risk of dissipation of the assets. No explanation is available to the claimants or to us of why the original trustees have been removed or replaced by newly incorporated bodies. As to their directors: one of the directors of the original trustee companies was a Mr. Patterson, who is accepted to be a leading New Zealand trusts lawyer. Mr. Lenihan does not appear to be a solicitor of the same standing as Mr. Patterson. Ms. Dozortseva is a close business associate of Mr. Pugachev and has herself been party to placing misleading evidence before the court."
- Fourthly, as to the provision for legal and living expenses, in WFO1 there was in conventional form a proviso to the freezing order under which in para.6(1) it was provided as follows:
"Pending agreement between the parties or further order of the court, this order does not prohibit the Respondent"
(the only respondent at that stage being Mr. Pugachev himself)
"from spending £40,000 (or any equivalent sum in a foreign currency) a week towards his ordinary living expenses and also a reasonable sum on legal advice and representation. But before spending any money the Respondent must tell the Applicant's legal representatives where the money is to come from".
- There was also para.6(2) which is not a standard form providing for liberty to pay tax in the following terms:
"In addition to any sum under paragraph (1) above, this order does not prohibit the Respondent from paying any sum to the tax authorities in any jurisdiction in respect of proper payments of tax due and payable by the Respondent. But before spending any money the Respondent must tell the Applicant's legal representatives where the money is to come from".
As I say, that does not form part of a standard freezing order but it is obvious good sense.
- Those rather general provisions in WFO1 were replaced on 14th August 2014 by an order made by Peter Smith J which has been referred to as the legal and living expenses order. Paragraph 3 of that deleted para.6(1) and 6(2) of WFO1. Paragraph 4 said that nothing in the Injunction Order, which is a reference to WFO1, should prohibit the Respondent from
"(a) spending an average of £50,000 (or any equivalent sum in a foreign currency) a week towards his ordinary living expenses, such amounts to be averaged over a period of two months, and also a reasonable sum on legal advice and representation ("legal expenses"), in each case in accordance with the terms of this Order; and (b) paying any sum to the tax authorities in any jurisdiction in respect of proper payments of tax due and payable by the Respondent ("tax liabilities"). But before spending any money pursuant to paragraph (a) or (b) the Respondent must tell the Applicant's solicitors where the money is to come from".
- Paragraph 5 provided that Mr. Pugachev should monthly send a witness statement containing what can be summarised as a budget of forecast expenditure for the month ahead. Paragraph 7 provided as follows:
"As regards the Respondent's ordinary living expenses and tax liabilities, nothing in the Injunction Order shall prohibit the Respondent from, after 4 p.m. on 22nd August 2014, (a) requesting that Kea Trust Company Ltd, as trustee of the Trust"
(I interpose to say the Trust there is defined as the London Residence Trust)
"make a distribution or loan to him, and/or receiving from Kea Trust Company Ltd as trustee of the Trust a distribution or loan, of a sum equal to the total amount set out in the Respondent's Schedule of Unpaid Expenditure; (b) not more than once every period of two months requesting that Kea Trust Company Ltd as trustee of the Trust make a distribution or loan to him, and/or receiving from Kea Trust Company Ltd as trustee of the Trust a distribution or loan, of a sum equal to the total amount of his prospective expenditure by way of ordinary living expenses and tax liabilities for the following period of two months and (c) spending any sum received pursuant to para.(a) or (b) above towards his ordinary living expenses and tax liabilities in accordance with para.4 above".
Then there are provisos as to notification by the Respondent to the Applicant's solicitors of the proposals.
- Paragraphs 8 and 9 have similar provisions in relation to legal expenses payable to Mr. Pugachev's then solicitors, Stephenson Harwood, and legal expenses payable to other lawyers, in each case providing that nothing in the Injunction Order should prohibit Mr. Pugachev from requesting that Kea Trust Company Ltd make a distribution or loan for his benefit and receiving the benefit of those. There were also provisions enabling the claimants to challenge any proposed payment under those paragraphs.
- So far as the requirement in para.5 for monthly prospective budgets was concerned, it appears, so far as I have been told, that that has been operated satisfactorily and there was put before me the most recent monthly witness statement, the 17th witness statement of Mr. Pugachev dated 28th October of this year, as an example.
- So far as para.7, 8 and 9 are concerned, I have been shown schedules of payments by Kea Trustee Company in its capacity as trustee of the London Residence Trust. That shows that between the middle of September 2014 and the end of November 2014 a series of payments, all described as loans, were made to Mr. Pugachev and in a letter of 19th August 2015 Mr. Patterson who, as I have said, was a director of each of the trust companies who were the original trustees, set out the purpose of those loans. The first one was to meet certain living expenses and tax liabilities and the others were to meet legal expenses. I have been shown a calculation which calculates the total of those disbursements as being some £3.8 million.
- That regime which Mr. Auld referred to as "the Peter Smith regime" seems to have been in place until the Court of Appeal ex parte order. As now set out in WFO2, para. 8 contains the exceptions to the order which in general restrains the trustees from disposing of any assets of the trusts and, as I referred to in my judgment yesterday, it contains five substantive paragraphs. Para.8(1) enables the trustees to spend a reasonable sum on legal advice and representation, but, as explained yesterday, that is confined to legal advice and representation provided to the trustees themselves. Para.8(2) enables the trustees to pay sums to tax authorities, but again that is confined to tax due and payable by the trustees themselves. Para.8(3) deals with dealing with or disposing of assets in the ordinary and proper course of any trading business and para.8(4) deals with day to day expenditure. Each of those contains an express proviso that no sums may be paid or assets transferred to the defendant or to any company which is directly or indirectly owned and/or controlled by the defendant.
- Paragraph 8(5) reads as follows:
"This order does not prohibit the Tenth Respondent"
(which is a reference to a company called Luxury Consulting Ltd)
"from spending a reasonable sum on legal advice and representation for the Defendant or towards the Defendant's tax or ordinary living expenses, provided always that (i) before so spending any money, the Tenth Respondent must tell the Applicant's legal representatives where the money is to come from, (ii) the Tenth Respondent may not spend any sums which, together with any other sums paid by the Defendant, exceed the limit set out in paragraph 4 of the Order of Peter Smith J dated 14 August 2014 and (iii) the Defendant must treat any such sums paid to or to be paid by the Tenth Respondent as if paid or to be paid by him directly for the purposes of the Order of Peter Smith J dated 14 August 2014".
- The current trustees in this application apply for a number of different heads of relief and I will take them one by one, taking first para.1 to 4 of the draft order together. Paragraphs 1 to 4 are all directed to making the assets of the Wiltshire Residence Trust available to Mr. Pugachev himself for living expenses, tax liabilities and legal expenses, both of his current solicitors, King & Spalding, and of other lawyers. The way in which that is sought to be done is to take para.7, 8 and 9 of Peter Smith J's order and replace the reference to Kea Trust Company Ltd and the London Residence Trust by references to the sixth defendant, Maru Ltd and Wiltshire Residence Trust, and replace references to Stephenson Harwood with references to King & Spalding.
- Mr. Auld put this forward as merely a continuation of the regime imposed by Peter Smith J with the substitution of the Wiltshire Residence Trust, which still has some money in it, for the London Residence Trust which largely does not. Mr. Auld suggested that there was some lack of clarity as to the current status of the Peter Smith regime, if I can describe it that way. He pointed out that WFO2 did not expressly discharge his order. I do not think that any real difficulty arises over this. Peter Smith J's order is still in force. Paragraphs 4 and 5 continue and, as already referred to, are apparently still operated. They are clearly intended to still continue because they are expressly referred to, as Mr. Auld pointed out, in para.8(5) of WFO2. Paragraphs 7, 8 and 9 as originally drafted provided that nothing in WFO1 should prohibit certain things. As far as I can see, these have not been expressly discharged, but they have in effect been superseded by WFO2. WFO2 does directly prohibit any disposal of assets and that includes to Mr. Pugachev as much as to anyone else. There are limited exceptions to that in para.8(1) to 8(4) but none of them would justify payments to Mr. Pugachev. Para.8(1) and para.8(2) would not do so because they are limited to legal advice and tax payments for the trustees themselves, and payments to Mr. Pugachev are expressly prohibited under para.8(3) and 8(4).
- Instead the regime put in place by para.8(5) was that the Tenth Defendant, Luxury Consulting, was enabled to provide funds to Mr. Pugachev to meet his tax and living expenses and legal expenses, so I do not think there is really any doubt that the current position is that whereas Mr. Pugachev is entitled under para.4 of Peter Smith J's order to £50,000 a week for living expenses and a reasonable sum for legal expenses, he cannot consistently with WFO2 currently draw on the trust funds and the trustees cannot currently pay him. That is why, indeed, a variation is required.
- In considering whether such a variation should be granted, I propose first to consider whether the court would make such a variation if Mr. Pugachev applied for it himself. For these purposes I leave out of account entirely the fact that the claimants say that he is in contempt of court, indeed is a serial contemnor, and the undoubted principle that a contemnor should not be heard by a court until he has purged his contempt. Mr. Smith did not ask me to find that Mr. Pugachev is in contempt and given that the claimants have issued an application to commit him for numerous alleged contempts, which is due to be heard in December this year over five days, I believe, I certainly do not want to say anything which prejudges that application. So although I accept that on the face of it there do appear to have been a number of breaches by Mr. Pugachev of court orders, as indeed a number of the judges of this Division have said, I am not going to deal with this application by proceeding on the basis that that is something that has been established or that I am satisfied of. Rather, I will proceed on the basis that if Mr. Pugachev himself were applying for a variation of WFO2 to permit the trust funds to be spent on living expenses and legal expenses, he would have to satisfy the court that it was appropriate to vary the existing order.
- It is, of course, well established that a freezing order is not intended to prevent a defendant from continuing to be able to meet his ordinary living expenses or his reasonable legal expenses, not least those of defending himself. I was shown in this connection by Mr. Auld the decision of the Court of Appeal in Halifax plc v Chandler  EWCA Civ 1715 where Clarke LJ, as he then was, said at para.:
"It is well settled that a freezing injunction is not granted in order to provide the claimant with security for its claim. It is, at least in part, for that reason that the standard form of order permits the defendant to spend monies on legal expenses and indeed on ordinary and proper business expenses. The order ordinarily either includes a specific weekly sum for legal or business expenses or permits a reasonable sum for such expenses".
- But having said the principles were not in dispute and he was going to give some examples, at para.17(3) he said:
"In the Mareva case, in order to be allowed to spend frozen monies, the defendant must show that he has no other assets which he can use".
- Mr. Smith showed me three more recent authorities on that point, namely Serious Fraud Office v X  EWCA Civ 1564, a decision of the Court of Appeal, Compagnie Noga d'Importation et d'Exportation SA v Australian and New Zealand Banking Group  EWHC 602 (Comm), a decision of Christopher Clarke J; and Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Ltd  EWHC 2748, a recent decision of Males J.
- It is not necessary to refer to the facts of those cases. Mr. Smith extracted from them a number of principles which were set out in his skeleton as follows:
(1) "The starting point is that a freezing order has been made against the defendant. Otherwise the question of use of frozen funds to pay legal expenses could not arise. This means that the court has already concluded that, even before the claimant's claim has been established, justice requires that the defendant's freedom to dispose of its own assets as it sees fit should be restrained."
(Tidewater at ).
(2) "A freezing order is not intended to provide a claimant with security for its claim, but only to prevent the dissipation of assets outside of the ordinary course of business in a way which would render any future judgment unenforceable".
(3) "In order to be allowed to spend frozen moneys, the defendant must show that he has no other assets which he can use".
That is a reference to the statement in Halifax plc v Chandler which I have already referred to.
(4) The ordinary rule is that subject to the defendant demonstrating that he has no other assets he will be allowed to resort to the frozen funds in order to finance his defence, but this may be outweighed by other considerations in an appropriate case.
(Tidewater at  to ).
(5) The burden of demonstrating that the absence of other assets lies on the defendant.
(SFO v X at  to ).
(6) "Because the court has already been satisfied of a risk of dissipation judges are entitled, on an application to vary, to have a healthy scepticism about assertions made by the applicant, particularly when the applicant, or those to whom his evidence or contentions relate, have been less than frank in dealing with the court or the claimant".
(Noga at [9(vi)]).
(7) "The ultimate test is what is just and convenient in accordance with s.37(1) of the Senior Courts Act 1981".
- Mr. Auld did not suggest that this was not an accurate summary of the principles drawn from those cases and they do seem to me to be borne out by the judgments in those cases.
- Those being the principles, I think it is inevitable that if Mr. Pugachev himself had applied to vary the order to permit para.1 to 4 of Mr. Auld's draft order, the court would dismiss the application. There are a number of aspects to this. The regime set up by WFO2 was obviously intended to keep the trusts intact, save for the specific exceptions allowed in para.8(1) to 8(4), none of which, as I have already referred to, permitted payments to Mr. Pugachev. The source of the funds that WFO2 contemplated for Mr. Pugachev's legal and living expenses was that referred to in para.8(5), namely Luxury Consulting. There is before the court very scanty evidence as to the availability of funds in Luxury Consulting. So far as the trustees' evidence in support of the application is concerned, Mr. Smit's first witness statement was largely premised on the basis that the application was designed to clarify the existing orders. As I have said before, the application was then primarily put on questions of construction.
- In para.42 of that witness statement dated 21st September he said:
"Previously, a regime was put in place by the Court (under the Legal and Living Expenses Order)"
(which is a reference to Peter Smith J's order)
"to allow the Trusts to be administered so that loans could be made to the First Defendant in his capacity as a discretionary beneficiary. The Current Trustees are seeking the continuation of that regime. Roughly two weeks ago, the First Defendant indicated to the Sixth Defendant that he was considering asking for a loan to meet his ordinary living expenses, as had previously been the case. These include a number of expenses for the benefit of other discretionary beneficiaries of the Trusts (such as his minor children and wife). As matters stand the Current Trustees consider that such a loan would be permitted but are unwilling to act without the clarification of the Court in this regard".
There was nothing said in that witness statement about the state of funding of Luxury Consulting.
- In a second witness statement dated 22nd October 2015 he did say this at para.41:
"We also note that WFO2 expressly provided for Luxury Consulting Ltd (the Tenth Defendant) to pay ordinary living expenses on behalf of Mr. Pugachev (see 8(5) of WFO2). Our legal representatives have been informed by King & Spalding LLP that Luxury Consulting Ltd is unlikely to be able to continue to pay Mr. Pugachev's ordinary living expenses in future. I understand this was the context in which, towards the beginning of September, Mr. Pugachev indicated to the directors of Maru Ltd that he was considering asking for a further loan of the type previously provided by Kea, to meet his ongoing ordinary living expenses."
That is not very firm evidence as to the financial state of Luxury Consulting.
- Shortly before the hearing that was supplemented by a letter from King & Spalding, Mr. Pugachev's solicitors, dated 3rd November which said, among other things:
"Subsequently Mr. Pugachev has had the benefit of loans from Kea Trust and later funds from Luxury Consulting Ltd in order to fund his legal representation. However, we understand Luxury Consulting Ltd no longer has the financial resources to assist Mr. Pugachev further. To the best of our knowledge, other than further potential loans or distributions from a trust under the regime put in place by the Smith Order or funding from some other third party, Mr. Pugachev does not have recourse to funds to pay for his lawyers".
That is not formal evidence and, as Mr. Smith submitted, does seem to me to be couched in rather vague terms.
- I was also shown in the course of the hearing an affidavit sworn by Margarita Kristof, a director of Luxury Consulting, for other purposes. That exhibited various bank statements and appears to indicate that the assets in which Luxury Consulting had an interest included a sterling bank account with a balance of some £77,000 in it, and a euro account with a balance of some €176,000, and she also said this at para.9.5:
"Since my first affidavit, it has come to my attention that the Tenth Respondent is paid a fee of £125,000 per quarter by Luxury Investments SA. The Tenth Respondent has been accruing this fee and will reconcile the moneys still due and owed by Luxury Investments SA when preparing its end of year accounts (the Tenth Respondent's financial year runs to 30 June). Given that the accounts have not been prepared, I am currently unable to quantify the moneys accrued and due, but believe that it should be considered as an asset of the Tenth Respondent".
- In the light of that evidence, it cannot be said that Luxury Consulting has no funds and whatever the basis for the £125,000 per quarter, which is left obscure and has not been explained before me, it is also entirely uncertain how many quarters are outstanding that, as Ms. Kristof says, have been accrued. The court, therefore, does not have good evidence as to the financial state of Luxury Consulting Ltd. That seems to me to be an absolute prerequisite before replacing the regime set up by the Court of Appeal under which it was envisaged that Luxury Consulting would be the source of funds for Mr. Pugachev, not the trusts, with one under which the trusts should be the source of funds.
- Secondly, there is no real evidence at all before me as to what other funds may or may not be available to Mr. Pugachev. It is quite clear from the authorities that I have referred to that the onus in that respect is on the applicant. So were Mr. Pugachev to be making this application, it would be on him to demonstrate that there are no other assets available to him. Not only has this not been demonstrated, but in the light of the history which I recounted earlier, including, in particular, what Hildyard J referred to as "the unsettling mystery" as to what Mr. Pugachev was living on, and the question of what had happened to the $700,000,000 and the apparent deficiencies in Mr. Pugachev's purported compliance with Rose J's order, where I am told that Snowden J commented in August,
"It does seem to me, at least at first glance, that there is much force in the point made by Mr. Smith that what has been provided by Mr. Pugachev is inadequate",
it does seem to me that the court can have no confidence that Mr. Pugachev is willing to be forthcoming about his actual assets.
- Mr. Smith provided a list of other assets which he suggested were available to Mr. Pugachev. I do not intend to go through the list in any detail, but I am satisfied that they demonstrate a real question about what other assets are currently available to Mr. Pugachev. That is quite apart from the fact that what I accept are an apparent series of breaches would lead the court, even if Mr. Pugachev did assert that he had no other assets available to him to meet expenses, to have a "healthy scepticism" about the position. Again, it is not necessary to go into any detail, but Mr. Smith showed me one example where Mr. Pugachev appears to have told Hildyard J on 2nd April 2015 that the only funds he had recourse to were in France, whereas on the face of the documents that appears to have been untrue.
- For all these reasons, I have no real doubt that if the application had been brought by Mr. Pugachev himself the court would not on the material before it have granted the application, and no reason to suppose that Mr. Pugachev would be able or willing to provide evidence of the quality that would satisfy the burden of persuasion which would lie upon him so as to induce the court to make such a variation. The fact is that faced with a history of apparent defaults by Mr. Pugachev, the court could not have any confidence that Mr. Pugachev really needs to have recourse to the trust funds to fund either his living expenses or his legal expenses or whether the true position, as Mr. Smith suggested that it was, is that he simply wished to run down the assets that have been disclosed and which the claimants know about while keeping quiet about other assets which have not been disclosed and which the claimants do not know about.
- That being the position if Mr. Pugachev had made this application himself, the next question, it seems to me, is whether it makes a significant difference that this application (and at the moment I am still confining myself to para.1 to 4 of the draft order) is not made by Mr. Pugachev but by the current trustees. I will say at once that I do not see that it does. Mr. Auld protested that it was wrong to characterise his clients, the current trustees, as being in cahoots with Mr. Pugachev or acting at his behest or on his instructions. I confess to having my doubts about that. The circumstances in which the current trustees came to be incorporated and appointed on Friday 24th July, shortly after the loss of confidence by Mr. Pugachev in the original trustees, because they had removed Ms. Dozortseva, and the fact that the current trustees apparently were happy to enter into the funding arrangements on Monday 27th July on the basis that they represented a good investment for the beneficiaries, both raise very real question marks, to my mind, over whether the current trustees are truly acting independently of Mr. Pugachev in the interests of the beneficiaries as a whole. But it is not necessary for me to reach any views on that and I do not do so.
- The Court of Appeal order is premised on the basis that it was appropriate to freeze the assets of the trusts under the Chabra jurisdiction. The purpose of that order was to preserve the assets. It is no hardship to trustees to have to preserve assets intact. It simply means that they fulfil their duties by administering the trusts without making any distributions. The person who benefits from a distribution is the beneficiary, not the trustee, and in circumstances where the court would not vary an order to permit the payment to the beneficiary at the instance of the beneficiary, I do not see that it has any business doing so at the instance of the trustee. This application, although brought by the current trustees, is undeniably brought for the benefit of Mr. Pugachev, not for the benefit of the trustees, and it is in that sense that I agree with Mr. Smith, without having to go any further than this, that it should have been brought by Mr. Pugachev and that the court should not be willing to grant an application for the benefit of Mr. Pugachev at the instance of the trustees where it would not be willing to grant an application if brought by Mr. Pugachev himself.
- There is, as he suggested, a faint analogy, although it is not directly comparable, with the comments of Christopher Clarke J in Noga where at  he said this:
"Secondly, I regard it as inappropriate to allow payment of the sum needed for bail in the absence of full and direct information as to what are the assets of Abba, his wife, and Mohammed, and without any attempt having been made to obtain a variation of any order that prevents them from using the frozen assets in order to put up the bail money, and without it being apparent that any such attempt is doomed to failure. It is Abba and his family who should be securing, if they can, Abba's release, and, to the extent necessary, seeking a variation of any court order".
That, as I say, is not directly comparable, but it is another example of a case where the court takes the view that it is inappropriate for B to be seeking a variation when it should really be A who is seeking a variation.
- For those reasons, I am not persuaded that it is appropriate to vary WFO2 as sought in para.1 to 4 of the draft order.
- The next paragraph I intend to look at is para.6 of the draft order. That reads as follows:
"K&S were entitled to receive a payment of USD 800,000 from the Sixth Defendant notified to the Claimants on 13 August 2015 for the purpose of paying the First Defendant's legal expenses and K&S is now entitled to use the USD 800,000 for such purpose".
This is another payment for the benefit of Mr. Pugachev and much the same applies. I have already rejected the submission yesterday that WFO2 as a matter of construction permitted this payment, so this too requires a variation.
- Mr. Auld suggested that this payment could be re-characterised as a loan if I were in favour of his submissions that loans were permissible, but that way of putting it must now fail in the light of my conclusions on para.1 to 4. The only other separate argument put forward in relation to this payment was that the current trustees were contractually obliged to make this payment, having entered into the funding arrangements before WFO2 was made. There are, I think, two answers to that. First, the current trustees, for good or bad reasons, have chosen not to put the funding arrangements before the court. In those circumstances, it is very difficult for the court to assess the assertion that they were contractually obliged to make those payments. Secondly, in any event, for reasons given in my judgment on construction, I am not satisfied that the payment would be a proper payment. Mr. Smit's description in his witness statement where he says:
"The Funding Arrangement appealed to the Current Trustees because it offered a potential upside to the discretionary beneficiaries, as opposed to straight distributions of Trust funds or loans which had been made previously. Specifically, in return for the payment of the legal costs and expenses associated with the claims, the Funding Arrangement provided for the assignment to Maru Ltd of a share of the proceeds of any recoveries"
(it left unspecified what share)
"up to a maximum of $20 million plus return of funds invested"
appears on its face to have involved a breach by Mr. Pugachev of WFO1. I accept Mr. Smith's submission that the court will be unwilling to vary a freezing order to permit payment of a debt where the debt itself arose under a contract which had been entered into in breach of the freezing order. For those reasons, I am not persuaded that it is appropriate to make the variation sought by para.6 either.
- I will take next para.5 of the draft order. That reads as follows:
"As regards any legal expenses of any discretionary beneficiaries of the Wiltshire Residence Trust other than the First Defendant, nothing in WFO2 shall prohibit the Sixth Defendant, as trustee of the Wiltshire Residence Trust, from making any distributions or loans to them or for their benefit for the purpose of paying their legal expenses, provided that at least 24 hours before making the distribution or loan the Sixth Defendant shall notify the Claimant's solicitors in writing the amounts of any distribution or loan which it proposes to make".
- This can, I think, be disposed of very shortly. No evidence has been put before me of any legal expenses which any beneficiaries, other than Mr. Pugachev, either have been put to or are likely to be put to. Mr. Auld suggested in argument that there might have been some need for discretionary beneficiaries to be represented in front of the New Zealand court. In fact it appears from Heath J's judgment that the only discretionary beneficiaries who were parties to those proceedings were Ms. Tolstoy and Victor Pugachev who were jointly represented with Mr. Pugachev. I am very doubtful in those circumstances if they incurred any separate costs and I am certainly not going to infer that they have incurred such costs without being told that that is the case.
- In any event, as it happens, para.5 refers to the Wiltshire Residence Trust and on the information provided to the court by Ms. Dozortseva it seems that neither Ms. Tolstoy nor Victor Pugachev are beneficiaries of the Wiltshire Trust. Mr. Auld confirmed that this paragraph is really being put forward not in relation to any specific expenses, but as a general power to pay. I do not think it appropriate to grant a general liberty to trustees who are subject to a freezing order to allow them to spend assets when those assets have been frozen by the Court of Appeal on the basis of the Chabra jurisdiction, on an as yet unidentified possible future need for possible future legal expenses. In those circumstances, I am not persuaded to make the variation at para.5.
- I will take next para.8 and 9. They read as follows:
"8. Nothing in WFO2 shall prohibit the Ninth Defendant ("Arotau"), which is the trustee of the London Residence Trust, from making the following payments from"
(and then there is a bank account referred to).
"(a) Payment of £40,000 on or after the date of this Order to Alexandra Tolstoy towards her and her children's living expenses for the months of October 2015 and November 2015;
(b) Payment of £20,000 on or after 1 December 2015 to Alexandra Tolstoy towards her and her children's living expenses for the month of December 2015.
9. As regards any ordinary living expenses of any discretionary beneficiaries of the London Residence Trust other than the First Defendant, nothing in WFO2 shall prohibit the Ninth Defendant from making any distributions or loans to them or for their benefit for the purpose of paying their ordinary living expenses after the month of December 2015, provided that at least 24 hours before making the distribution or loan the Ninth Defendant shall notify the Claimants' solicitors in writing of the amounts of any distribution or loan which it proposes to make".
- Here Mr. Auld made an eloquent plea for the plight of Ms. Tolstoy and her very young children who are undoubtedly discretionary beneficiaries of the London Residence Trust and who have asked for sums that in the context of this litigation are comparatively modest. He has made the point that they are not even defendants to this action and no allegations of wrongdoing have been made against them.
- Again, it seems to me that it is not the trustees who are prejudiced by an inability to make such payments, but the beneficiaries themselves. I have no doubt that the court has power to permit such payments in appropriate cases, but what would induce it to do so is the requirements of the beneficiaries not, as somewhat suggested by Mr. Smit's evidence, the desire of the trustees to seek to discharge their duties in the administration of the trust. As I have already said, it seems to me to be no prejudice to the trustees and no hardship to them to be unable to make distributions and merely to administer the trusts in terms of managing the investments.
- So the question is how the court should balance the competing aims of preserving the assets which WFO2 was intended to protect and the requirements of the beneficiaries. The answer, I think, is that here too the court would need to be satisfied that the beneficiaries did indeed require access to the trust moneys. That requires showing not only how much is needed and what for, but that there are no alternative sources of funds.
- At this point it becomes very relevant that there is no history, so far as the evidence before me discloses, of payments from the trusts to Ms. Tolstoy or the children; rather, as is common ground, the position up until now has been that the living expenses claimed by Mr. Pugachev have included payments for Ms. Tolstoy and the children. I was shown a list of monthly expenditure which Mr. Pugachev put forward and that includes such items as nannies, school payments, children's clothes, food for the family, travel for the family, flights for the family and clothes for Ms. Tolstoy. There is no suggestion that hitherto Miss Tolstoy has been expected to pay any costs for herself or the children at all and the figure for living expenses in the order of Peter Smith J appears to be intended to cover all such items.
- Mr. Auld did say there was some suggestion of a shortfall in what Mr. Pugachev is now paying, but it can be seen that this leads straight back into the question whether the court can be satisfied that Mr. Pugachev does not have other assets to meet these payments. If he does have other sources of funds to meet these expenses, then for the reasons already given when considering para.1 to 4 of the draft order I have no real doubt that the court would not vary the order on his application to allow him to draw on the trust funds for these living expenses and I do not see why the court should permit it on her application or, which comes to much the same thing, on the application of the trustees for her benefit. The reality is that permitting the trustees to spend money on Ms. Tolstoy and the children is the equivalent of allowing Mr. Pugachev to use the trust money, which, as I have pointed out, has been disclosed and is known to the claimants, to meet his living expenses rather than other assets which have not been disclosed and which are not known to the claimants.
- In circumstances where, as I have already explained, the court can have no confidence at all that Mr. Pugachev does not have access to other funds for that purpose, I do not consider that this would be appropriate or consistent with principle. The position might no doubt be rather different if there had been a pattern of expenditure by the trusts on supporting beneficiaries which WFO2 had cut off for the first time, but that, as I have explained, does not appear on the material before me to have been the case.
- That leaves para.7 which reads as follows:
"The amount frozen by the Claimants pursuant to WFO1 (as varied) and WFO2 be varied so that the figure of GBP 1,171,490,852 be deleted where it appears in those orders and any other applicable court orders and be replaced with GBP 654,195,544."
This raises a discrete point. I have not I think been shown the precise calculation of the figure of £1.17 billion, but it has obviously been carefully calculated, no doubt by reference to the rouble/sterling exchange rate shortly before the first application for the ex parte order made by Henderson J in July 2014. I have been shown a graph which indicates that the exchange rate on 1st July 2014 was that one rouble was worth £0.017 or, as I find it easier to express it, that 100 roubles was worth £1.70, which suggests that the £1.17 billion figure was based on a claim of about 68 billion roubles, which is indeed what I am told was the amount claimed in the Moscow proceedings.
- Since then the value of the rouble has fluctuated markedly, falling quite rapidly to as low as 100 roubles being worth 87p in mid-December 2014, rallying to about 100 roubles to £1.34 in April of this year, falling again to 100 roubles being worth about 90p in late August and rising again in early October to being worth just over £1. At first blush there would seem to be considerable force in the suggestion that if WFO2 as made by the Court of Appeal on 11th August 2015 had been the first freezing order made in these proceedings, the figure of 1.17 billion would have been too high and would not have been inserted into the order. It is true that by then the Moscow court had given judgment and the judgment was rather higher than the amount claimed of 68 billion roubles. It was about 10 per cent higher at about 75.6 billion roubles. But even allowing for this, at the exchange rate then in force of about £1 to 100 roubles, the figure would have been more like £750 million. In fact when the claimants issued their proceedings to enforce the judgment on 19th October, they stated the sterling equivalent of the judgment of 75.6 billion roubles to be £797 million. It is obviously good practice when a freezing order is brought in support of a claim in a foreign currency that a current rate of exchange be used rather than a rate which by then is purely historic, so, as I say, at first blush the figure of £1.17 billion now looks rather too high.
- But it is not quite as simple as that. First, where, as appears to be the case with the rouble, the foreign currency is one where the exchange rate fluctuates rapidly and widely, there is something artificial about just taking the rate on the day of the order and putting a precise figure in the order which has a spurious air of accuracy. I see no reason why the court should not build in an allowance for possible exchange rate fluctuations. That would mean in the present case not necessarily taking the rate on 11th August of about £1 to 100 roubles, but looking at the average over the previous few months, which would appear from the graph to be more like £1.10 than £1; and I can also see an argument for taking a slightly higher figure than the average to allow for the possibility of the rate recovering. So it might be more appropriate to adopt a rate of £1.10 or £1.20 to 100 roubles, which would produce a figure somewhere between £830 or £900 billion.
- Secondly, the figure of 75.6 billion roubles was the amount of the judgment which was given on 30th April of this year. It appears, however, from the claim form issued by the claimants that they claim in addition interest at the rate of 16.33 per cent per annum. That seems to English eyes a surprisingly generous rate, but it is said in the Particulars of Claim to be supported by an average of interest rates published by the Central Bank of Russia and I assume that there is some properly arguable basis for it. On that footing, the judgment debt would have increased by some 4 billion roubles by the date of issue in October and if one allows, which does not seem at all unreasonable, a further two years for trial, this being a case in which, as I say, the defence, as I understand it, to be run by Mr. Pugachev will be wide-ranging allegations of fraud and impropriety by the Russian State, it would increase the amount claimed by almost a third. That would take the rouble sum claimed to more like 100 or 105 billion roubles. At that point the figure of £1.17 billion does not seem so out of line after all.
- The upshot of that is that if the freezing order had first been made in August I think there would have been considerable room for argument as to the appropriate figure. (I have left out of account entirely the suggestion that the claimants may have other claims against Mr. Pugachev, something which I know very little about).
- But in any event the freezing order was not first made by the Court of Appeal in August. The first freezing order was made by Henderson J in July 2014. As appears from para. 7 of the draft order, the current trustees do seek to vary that order as well, but I do not see that they have any real basis for doing so. It imposes a restraint on Mr. Pugachev and I think it is for him and not for the current trustees, who were not parties to the order, indeed not even in existence at the time the order was made, to seek a variation of that order. In my judgment, it cannot be right to vary WFO1 to reduce the amount at the instance of the current trustees in the absence of the party against whom it is primarily directed and I decline to do so.
- I do not think that that means of itself that the trustees cannot apply to vary WFO2 which does apply to them. If the amount in WFO2 was manifestly too high and if this was giving rise to practical problems for the trustees, that would, I think, be something that the court not only could, but should do something about, even without the variation of WFO1. But it is not suggested that the figure inserted in WFO2 either currently has, or is ever likely to have, any practical consequences for the trustees at all. Although I have not been given any exact figures, it appears to be common ground that the total value of the five trusts is not more than about £100 million. In those circumstances, whether the figure inserted in WFO2 is £1.17 billion or £797 million or somewhere in between makes absolutely no difference to the trustees at all.
- In circumstances where WFO1, for the reasons I have given, is not going to be varied, where WFO2 is ancillary and supplementary to WFO1, and where the variation of WFO2 would have no practical benefit for the trustees, I do not see that it would be just and convenient or in accordance with the overriding objective to vary WFO2. In fact it seems to me to be likely to be of very great inconvenience to have two different figures, one in WFO1 and one in WFO2, quite apart from the risk of repeated applications by one side or the other to vary the figure up or down as either the exchange rate or the expected trial date moved one way or the other.
- In those circumstances, I decline to grant this relief either.
- That means I have now dealt with all the suggested paragraphs in the draft order and it follows that I dismiss the applications of the sixth to ninth defendants.
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