B e f o r e :
MR JUSTICE MALES
|| NATIONAL BANK TRUST
||- and -
||(1) MR ILYA YUROV
(2) MR SERGEY BELYAEV
(3) MR NIKOLAY FETISOV
(4) MRS NATALIYA YUROVA
(5) MRS IRINA BELYAEVA
(6) MRS ELENA PISCHULINA
Mr Nathan Pillow QC, Mr David Davies, Mr Anton Dudnikov and Ms Catherine Jung (instructed by Steptoe & Johnson LLP) for the Claimant
Mr Patrick Goodall QC, Mr Simon Atrill and Mr Nick Daly (instructed by Mishcon de Reya LLP) for the First and Fourth Defendants
Hearing dates: 19-21 July 2016
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Mr Justice Males :
- This is an application by the first and fourth defendants, Mr Ilya Yurov and his wife Nataliya, to set aside a freezing order made by Leggatt J on 11 February 2016 in the sum of US $830 million. The grounds of the application are that (1) there were serious and multiple breaches by the claimant, National Trust Bank, a Russian bank, of its duty of full and frank disclosure when applying for the freezing order and (2) there is no real risk of dissipation of the first and fourth defendants' assets. The freezing order was made also against the second and third defendants, business associates of the first defendant, and their wives, the fifth and sixth defendants, but these other defendants have not challenged the freezing order and have played no part in this application.
The case in outline
- The first three defendants are former directors and shareholders of the claimant bank. Together they held 98% of the bank's shares until December 2014 when the bank had to be rescued by a US $1 billion bailout from the Russian Deposit Insurance Agency ("the DIA"). I shall refer to them collectively as "the shareholders". At about the same time the shareholders left (the bank would say fled from) Russia and the first defendant is now resident in this country.
- In outline, it is the bank's case that over a long period the shareholders were using the bank's money, which originated in large part from deposits by retail customers in Russia, to fund business ventures on the basis that they would take the profits if the ventures were successful, but would leave the bank to carry any losses when they were not. The bank contends that there was no disclosure of the shareholders' interest in these transactions, which was deliberately concealed by the use of a complex and opaque network of offshore companies administered by Mr Benedict Worsley. Mr Worsley is now assisting the bank pursuant to a Settlement Agreement dated 17 November 2015. His evidence is that his activities were closely supervised by the shareholders, particularly the first defendant, on whose instructions he acted, that the network of offshore companies which he put in place was held for the shareholders personally and not for the bank, that the shareholders' instructions were that the beneficial ownership of these companies should not be traceable to either the bank or the shareholders, and that although the majority of the loaned funds were used as described above, there were also transfers of substantial sums of money to the shareholders personally.
- In this action the bank seeks to recover the amounts outstanding on these non-performing loans which it says were concluded in breach of duties owed to the bank by the shareholders in their capacity as directors under provisions of Russian law. The sum claimed is some US $830 million. The bank does not make a claim in this action in respect of loans to business ventures of the shareholders which have proved profitable where the loans are being repaid. These profitable ventures which are not the subject of claims in this case include loans to companies called Willow River and RCP which own a substantial property portfolio in Moscow said to be worth some US $100 million. The shares in the Willow River and RCP companies were held by a Cypriot company called Dianthi whose shares are held by Mr Worsley, but it is common ground that the Willow River and RCP companies were beneficially owned by the shareholders.
- The shareholders' wives are not alleged to have played any part in the bank's operations, but are joined as defendants because it is the bank's case that assets held in their names are amenable to execution of any judgment against the shareholders in accordance with the Chabra jurisdiction (TSB Private Bank International SA v Chabra  1 WLR 231).
- Henceforth in this the judgment I shall refer to the first defendant simply as "the defendant" and to the first and fourth defendants together as "the defendants".
- The bank's allegations are denied by the defendant who maintains that there was a clear division between offshore companies held for the shareholders personally (including the Willow River and RCP companies) and those held for the bank. He says that it was common practice for Russian banks to operate through a network of offshore companies and that the position was known to and accepted by the bank.
- A further aspect of the bank's case is that following the financial crisis of 2008 many loans held by the bank defaulted, so that its solvency was in question. These included loans made to offshore companies beneficially owned by the shareholders where the proposed business venture had failed. The bank says that as a result the shareholders embarked upon a scheme to disguise the bank's toxic debts by recycling money, largely by way of sham loans to further offshore companies under their control. Instead of using the loan funds for legitimate business purposes, these offshore companies would use them to service the bad debts owed to the bank by other companies in the offshore network, paying interest in order to avoid a default but not reducing (to any great extent or perhaps at all) the outstanding principal. This was a self-perpetuating process since the borrowers could only pay back these loans with money recycled through further sham loans and the overall result was to increase the amount owed to the bank. The bank says that the object and the result of this circular flow of funds was to deceive the outside world, including the Central Bank of Russia and the ordinary Russian savers who deposited their savings in the bank, over many years, by falsifying the bank's accounts and concealing its insolvency. Eventually, as was bound to happen sooner or later, it was discovered that the bank was owed more than US $800 million by worthless shell companies in offshore jurisdictions, with little or no collateral available.
- It was at this point, in December 2014, that the DIA took control of the bank as a temporary administrator. The DIA is a Russian state entity whose essential functions are to insure Russian bank deposits and to manage banks that run into financial difficulty. The DIA appointed Otkritie FC Bank to assist with the rehabilitation of the bank. Mr Dmitriy Popkov, who swore much of the evidence on which the bank relied for its application for the freezing order, is a member of the management board of Otkritie and its deputy CEO. He is also, since June 2015, a member of the supervisory board of the bank which is now wholly owned by Otkritie.
- As I understand it, the defendant accepts that funds were recycled in the way described above, although he maintains that the companies in question were the bank's own offshore companies and that the process was known to the bank. He describes it as "balance sheet management" and claims that it was common practice for Russian banks. He says in his second affidavit that:
"All of these problems placed the Bank in a very precarious financial position. …
As a result, there was considerable concern that if those losses had all been recorded on the Bank's balance sheet, it would have had its licence revoked by the Central Bank of Russia and consequently been declared bankrupt. For obvious reasons, the Bank's management wished to do everything possible to prevent this from happening, and took steps to manage its balance sheet using its pre-existing offshore structure (as I will describe in more detail below). …
The vast majority of the transactions involving 'Bank companies' (i.e. those which were held on behalf of and for the benefit of the Bank) were a means of managing the Bank's balance sheet. As I explained above, the Bank was in financial difficulties as a result of the losses it had made or was anticipated to make on its loan book. Therefore, it was decided to use the Bank's developing offshore network to effectively defer the point at which the Bank's bad debt would be recorded on its balance sheet. This was done by advancing loans to Bank companies, with repayment dates a few years later, which were then used to service other loans owed to the Bank by other companies. …
Revocation of the Bank's licence would of course have been a disaster for the Bank and its customers, and so I believe that this action was justified as an attempt to avoid this disaster. Of course, I accept that the transactions were somewhat artificial in that they were circular. However, they were not intended to cause any harm to the Bank. In fact, they were intended to save the Bank from collapse, and to avert the consequences of the harm that the Bank had already suffered through earlier bad loans. …
This kind of solution, i.e. circular transactions intended to defer bad debt ruining the balance sheet, was very common in Russia at the time … It may be that this was not strictly in accordance with Russian banking regulations, but it was common practice in Russia and was seen as a valid way of dealing with an otherwise near-impossible situation that the whole Russian banking industry was encountering."
- It is unnecessary and would not be appropriate to reach any final decision about this conduct on this application. I do not do so. On the other hand, I am not obliged to close my eyes to what is obvious. For the purpose of this application and subject to any matters which may emerge hereafter, I will merely say that at present it seems to me to be obvious that the "balance sheet management" described by the defendant was dishonest. It was just a Ponzi scheme with a fancy name. The defendant's own evidence is that the Russian Central Bank would have revoked the bank's licence if the true position had been recorded in its accounts, that he took active steps to ensure that it was not, and that he knew these steps to be unlawful under Russian banking regulations. Such evidence seems difficult to reconcile with the assertion (backed by a statement of truth) in the defendants' Defence, that the Central Bank did know the true position. The defendant's explanation that the Central Bank knew of the true position (i.e. that the bank was in fact insolvent) but was content because this was not recorded on its balance sheet seems at first sight to be somewhat thin, but will no doubt have to be tested at trial.
- It is noteworthy – and as I understand it, is not disputed – that during the period when the defendant admits that the shareholders were recycling funds in order to disguise the bank's insolvency (1) the defendant was paid over US $12 million in salary and bonuses, (2) the shareholders had the benefit of a loan to Willow River and RCP which those companies used to acquire assets which are now worth some US $100 million, (3) the shareholders had the benefit of other loans of some US $70 million to companies whose ownership they admit which have not been repaid, and (4) the shareholders came close to selling their shares in the bank (which were in fact worthless) to a third party for US $100 million. During this same period the bank, under the shareholders' management, was actively encouraging deposits by new customers. On any view, therefore, the shareholders have benefited handsomely from what appears to be their dishonest stewardship of an insolvent bank. Indeed, it appears that the Willow River and RCP shares were the subject of a pledge to the bank which the shareholders caused the bank to release for no consideration on 17 December 2014, only a few days before the bank's collapse, thus further enriching themselves. All this was at the expense of the bank's retail customers and ultimately, through the bailout, the Russian taxpayer.
- It is unnecessary for the purpose of this application to say more about the merits of the bank's claims because (while disputing liability and denying dishonesty) the defendants realistically accept that the bank is able to demonstrate a good arguable case. I consider that I am entitled to approach this application for discharge of the freezing order (without prejudice to whatever may emerge hereafter on a fuller consideration of the case) on the basis that (1) the bank has a good arguable case on the merits, and (2) the defendant's own account involves the acceptance of what appears to be dishonest conduct on his part involving concealment of the bank's true financial position through a network of offshore companies. I emphasise that this latter point does not involve the determination of any disputed issue of fact. It is simply the consequence of what the defendant himself says.
The failures of disclosure relied upon
- The defendants' application notice dated 20 May 2016 did not set out the grounds of the application, but merely indicated that these would be explained in evidence. That may sometimes be acceptable, but if that course is followed it is essential that the evidence sets out clearly and prominently a succinct statement of the grounds relied upon so that evidence and submissions can be properly focused. That did not occur in this case. Instead the defendants served 130 pages of written evidence with a liberal scattering throughout of allegations of failures of disclosure by the bank. As a result identification of the matters relied on by the defendants was far from straightforward and the bank's advisers were left to aim at what proved to be a moving and in some respects ephemeral target. This is not an acceptable way to proceed.
- Accordingly I directed that the defendants should identify on a single page the six principal failures of disclosure on which they relied. I selected that number because there appeared from the defendants' skeleton argument to be six main areas of complaint and because that ought to be sufficient (probably more than sufficient) to determine whether a case of non-disclosure should succeed. A defendant who is unable to make good such a case by reference to his six best points is unlikely to do better by piling up a longer list, while a defendant who succeeds on one or more of these points does not need to accumulate more.
- The defendants identified the following matters, helpfully cross-referenced to paragraphs of their skeleton argument:
a. The bank failed to disclose important aspects of Russian law, which governs the bank's claims, along with the existence and terms of the defendant's employment contract with the bank which included a provision limiting his liability.
b. The bank failed to provide any adequate disclosure of related proceedings in Russia and Switzerland and its involvement in them, including that: (i) in the Russian criminal proceedings, a freezing order had been obtained against the defendant (on an inter partes basis), and the bank had submitted a civil claim against him; and (ii) in the Swiss criminal complaint, the bank had sought a criminal seizure of the defendant's bank accounts.
c. The bank failed to provide proper disclosure in relation to the Settlement Agreement it had entered into with Mr Ben Worsley.
d. The bank failed to disclose that the defendant's case would be that the companies that were involved in balance sheet management were owned and operated for the benefit of the bank (i.e. bank companies) and that the funds advanced to them were not misappropriated to his personal use (and consistent with that position, the defendant had, inter alia, instructed accountants to undertake a "tracing" exercise at great expense, which was provided to the bank, and which Mr Worsley said would "save" the shareholders).
e. The bank failed to disclose the existence of resolutions passed at the annual general meetings of the bank approving transactions (on an annual, general basis) with the shareholders, plus a number of corporate vehicles in which they had an interest.
f. The bank failed to provide proper disclosure in relation to the purpose and terms of the DIA Report.
Full and frank disclosure – the law
- The importance of full and frank disclosure by a claimant when applying without notice for a freezing order has been emphasised many times. The leading statements of principle are to be found in the well-known case of Brink's Mat Ltd v Elcombe  1 WLR 1350. I was referred also to a number of cases in which judges have reviewed the authorities and set out (if I may say so) useful summaries of the applicable principles. I would refer to three of these cases: Congentra AG v Sixteen Thirteen Marine SA  EWHC 1615 (Comm),  2 Lloyd's Rep 602 at  to  (Flaux J); In re OJSC ANK Yugraneft; Millhouse Capital UK Ltd v Sibir Energy Plc  EWHC 2614 (Ch) at  to  (Christopher Clarke J); and JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev  EWHC 4336 (Ch) at  to  (Mann J).
- Without attempting a comprehensive restatement which would serve no useful purpose, I consider that the following points are particularly relevant in the present case:
a. A fact is material if it is one which the judge would need (or wish) to take into account when deciding whether to make the freezing order.
b. Failure to disclose a material fact will sometimes require immediate discharge of the order. This is likely to be the court's starting point, at least when the failure is substantial or deliberate.
c. Nevertheless the court has a discretion to continue the injunction (or to impose a fresh injunction) despite a failure of disclosure; although it has been said that this discretion should be exercised sparingly, the overriding consideration will always be the interests of justice.
d. In considering where the interests of justice lie, it is necessary to take account of all the circumstances of the case including (without attempting an exhaustive list) (i) the importance of the fact not disclosed to the issues which the judge making the freezing order had to decide; (ii) the need to encourage proper compliance with the need for full and frank disclosure and to deter non-compliance; (iii) whether or to what extent the failure to disclose was culpable; and (iv) the injustice to a claimant which may occur if an order is discharged leaving a defendant free to dissipate assets, although a strong case on the merits will never be a good excuse for a failure to disclose material facts.
e. The interests of justice may sometimes require that a freezing order be continued, but that a failure of disclosure be marked in some other way, for example by a suitable order as to costs.
The approach to applications to discharge for failures of disclosure
- It is important also not to allow a dispute about full and frank disclosure to turn into what is sometimes euphemistically described as a "mini" trial of the merits. That danger has not been avoided in this case, where the defendants' evidence ran to some 130 pages of written evidence and over 1,500 pages of exhibited documents and the bank responded in kind, in addition to the substantial volume of material on which it had initially relied. In a case where the defendants accept that the bank has a good arguable case and where it is impossible for disputed allegations to be resolved on an application of this nature, much of this material was unnecessary. It is understandable that a defendant accused of misconduct will wish to give his account, not least to avoid any suggestion that he has failed to answer the accusations against him. However, unless both parties exercise restraint, there is a danger that applications for the grant or discharge of freezing orders may become unmanageable. Thus the claimant must disclose material facts, which will include making the court aware at the without notice stage of the issues which are likely to arise and the possible difficulties in its case, but need not extend to a detailed analysis of every possible point which may arise; and the defendant must identify with clarity (and if necessary restraint) the failures of which it complains, rather than adopting a scatter gun approach.
- The correct approach to such an application, at any rate in a case of any magnitude and complexity, was described by Toulson J in Crown Resources AG v Vinogradsky (15 June 2001) and was adopted by the Court of Appeal in Kazakhstan Kagazy Plc v Arip  EWCA Civ 381,  1 CLC 451 at :
"… issues of non-disclosure or abuse of process in relation to the operation of a freezing order ought to be capable of being dealt with quite concisely. Speaking in general terms, it is inappropriate to seek to set aside a freezing order for non-disclosure where proof of non-disclosure depends on proof of facts which are themselves in issue in the action, unless the facts are truly so plain that they can be readily and summarily established, otherwise the application to set aside the freezing order is liable to become a form of preliminary trial in which the judge is asked to make findings (albeit provisionally) on issues which should be more properly reserved for the trial itself. …
Secondly, where facts are material in the broad sense in which that expression is used, there are degrees of relevance and it is important to preserve a due sense of proportion. The overriding objectives apply here as in any matter in which the Court is required to exercise its discretion. …
I would add that the more complex the case, the more fertile is the ground for raising arguments about non-disclosure and the more important it is, in my view, that the judge should not lose sight of the wood for the trees. …
In applying the broad test of materiality, sensible limits have to be drawn. Otherwise there would be no limit to the points of prejudice which could be advanced under the guise of discretion."
- Those observations apply equally here. I have endeavoured to keep my eyes fixed on the wood and only on those trees which are of particular importance.
- Inevitably there will be some cases in which a freezing order is granted where it can only be seen with hindsight after judgment in the action that it should not have been and that there were serious and culpable failures of disclosure by the claimant. Fiona Trust Holding Corporation v Privalov  EWHC 3199 (Comm) was such a case. That, however, is not a consequence of adopting the disciplined approach proposed by Toulson J and adopted by the Court of Appeal. Rather it is a necessary consequence of a system where hotly contested issues of fact can only be fairly and finally resolved at the trial. Throwing paper at an application to discharge does not render disputed issues any easier to determine at an interlocutory stage. The remedy for a defendant who suffers an injustice as a result of a freezing order remaining in position until the trial when in fact it should not have been granted in the first place is to enforce the claimant's undertaking in damages which, when appropriate, will need to be properly secured to protect a defendant against foreseeable loss.
- Adopting the approach and applying the principles set out above, I turn to the alleged failures of disclosure on which the defendants rely.
(1) Russian employment law and the defendant's employment contract
- The bank's claims are advanced under Russian law. At the stage of the application for the freezing order the bank's only claims were claims arising under Articles of the Russian law of Joint Stock Companies (which deal with the duties of directors and with directors' undisclosed conflicts of interest) and under the general law of obligations in Article 1064 of the Russian Civil Code. These claims were identified in the bank's skeleton argument and in a report by Professor Peter Maggs.
- Professor Maggs' report set out the factual basis of his opinion, which included that prior to the bank's collapse 98% of the shares in the bank were in the ultimate beneficial control of the shareholders, each of whom was a member of the bank's board of directors and was paid an official salary in that capacity. This was said to be his understanding from the documents provided to him which he identified. He then opined that on these facts the bank had a valid claim under the provisions of the Joint Stock Companies Law and the Russian Civil Code and that the applicable limitation period would be three years which began no earlier than 22 December 2014, the date when the bank was taken over by the DIA.
- Professor Maggs' report made no mention of the possibility that the defendant had an employment contract with the bank or of the legal consequences that would or might follow if he did. Nor was that possibility mentioned anywhere in the bank's evidence or submissions.
- In fact the defendant did have a contract of employment. The defendants say that as a matter of Russian law, this means that (1) no claim can be made under the provisions of the Joint Stock Companies Law or the Civil Code, as claims against an employee can only be made under the Russian Labour Code, (2) a one year limitation period applies to claims under the Labour Code, with time running from the date of the bank's knowledge that it had suffered a loss, (3) under the Labour Code any liability of the defendant to the bank is capped at one month's earnings, at any rate unless intentional wrongdoing can be proved, and (4) there is in addition a contractual limit on liability whereby liability is capped at the total amount of salary and bonuses paid during the term of the contract.
- In fact precisely this issue, namely the relationship between the Russian Labour Code and the provisions of the Joint Stock Companies Law and the Civil Code, arose in the Fiona Trust case where Professor Maggs gave evidence on behalf of some of the defendants. Andrew Smith J accepted his evidence in that case to the effect that where there is a contract of employment the only claims which can be brought are claims made on the basis of the contract of employment and under the Labour Code (see  EWHC 3199 (Comm) at  to ), a finding which has the status of a rebuttable presumption under section 4 of the Civil Evidence Act 1972. It appears that Professor Maggs has given the same evidence in other cases too. He was therefore well aware of the significance of the factual question whether the defendant had a contract of employment.
- If Russian law is to the effect found in the Fiona Trust case, it would appear that the bank's case as formulated at the time of its application for a freezing order was bound to fail as it made no claim under the Labour Code or the contract of employment. It has since requested the defendants to consent to an amendment adding such claims and in case of need has also issued fresh proceedings, but the question of amendment had not been resolved. For present purposes I can ignore these claims.
- The defendants rely also on the one year limitation period and on the limits of liability contained in the Russian Labour Code and in the defendant's employment contract. However, these points are only relevant to claims under the Labour Code. It is therefore unnecessary to address the bank's responses to such points. If the bank has valid claims under the Labour Code, clearly that will strengthen its position but, as indicated above, I will assume that it does not. That is in my judgment the appropriate course here in circumstances where, if such claims had been included at the outset, the bank would have been duty bound to draw attention to any factual difficulties in the way of such claims. As there were no such claims at that stage, it did not attempt to do so.
- The bank accepts that the existence of the employment contract and its potential legal consequences ought to have been disclosed. Plainly these were material facts which could have had some bearing on the freezing order relief which was sought, not least in circumstances where the bank was not then advancing any case under the Labour Code. As it was, none of this was disclosed.
- The return date for the freezing order was 4 March 2016. The defendant's skeleton argument for that hearing drew attention to this issue, including the evidence which Professor Maggs had given in the Fiona Trust case and other cases. However, it was not until 28 April 2016 that the bank's solicitors provided a copy of the defendant's employment contract. The explanation given for the failure to mention this was that although the partner at Steptoe & Johnson, the bank's solicitors, was aware of the existence of the contract at the time when Professor Maggs was preparing his report, the associate who had been assisting in relation to the preparation of that report had gone on holiday on 22 January 2016 and nobody at the firm had obtained a copy of the contract or reviewed it; work on the report was apparently put on hold in order to deal with an urgent application in related proceedings concerning the Willow River and RCP companies; and, when it was resumed, the existence of the employment contract was overlooked. It was only in early April that copies of the shareholders' contracts were obtained by the solicitors and, when they were obtained, there were a number of such documents which needed to be reviewed. It was said, therefore, that Professor Maggs had no knowledge of the contract when he prepared his report. An explanation to the same effect was given in an affidavit by the partner concerned, Mr Neil Dooley, sworn on 4 July 2016, which also included an apology for the failure to mention this point.
- There has been no statement from Professor Maggs himself to elucidate his state of mind when preparing his report but the bank has served a further report dated 27 April 2016 in which he asserts that there have been significant developments in Russian law since he gave evidence in the Fiona Trust case. The result is said to be that directors with an employment contract can no longer rely on the Labour Code to restrict and limit their liability for breaches of their statutory duties as directors. This new evidence is disputed by the defendants' Russian law expert who makes what appear at first sight to be some powerful points by reference to Russian case law. Inevitably, however, and as the defendants recognise, I cannot determine on this application which of the experts is right. Accordingly I must proceed on the basis that it is at least arguable that despite the existence of the employment contract, the bank is entitled to make claims under the Joint Stock Companies Law, to which a three year limitation period applies and not the one year period applicable to claims under the Labour Code.
- I accept that the existence of the employment contract was overlooked by the bank's solicitors when instructing Professor Maggs. It is surprising, bearing in mind the evidence which he had given in other cases, that Professor Maggs did not ask the question whether the defendant had a contract of employment, but it appears that he did not. Surprising as it is that he did not inquire, it is even more inconceivable that a reputable professor and experienced expert witness aware of his duties to the court would deliberately have suppressed the point in circumstances where the defendant would obviously know whether he had an employment contract, so that the point would inevitably come out before long. Moreover, since Professor Maggs' view now is that Russian law has changed materially since he gave evidence in other cases, he would have had no reason to do so. He would simply have explained his current view that as a result of developments in Russian law in 2013, the bank is entitled to make claims under the Joint Stock Companies Law.
- For much the same reasons I accept that there was nobody on the bank's legal team owing professional duties to the court who was aware of the existence of an employment contract and appreciated its significance. It is inconceivable that any such person would have deliberately decided to suppress this information which would inevitably come out in due course. Quite apart from the integrity of those concerned (which I accept) such a decision would have been professionally fatal. Further, while there may well have been individuals at the bank who were aware of the existence of the employment contract, there is no reason to suppose that such individuals appreciated the potential legal significance of that contract.
- All this said, although the possible existence and significance of an employment contract was not appreciated, it should have been.
- I will consider whether the bank's admitted failure to disclose the existence and significance of the defendant's employment contract means that the freezing order must be discharged after I have dealt with the defendants' other allegations of failure to disclose.
(2) The Russian and Swiss criminal proceedings
- The existence of criminal proceedings against the shareholders in Russia and Switzerland was disclosed in the bank's evidence. The defendants' case, however, is that the bank should have disclosed the facts that (1) in the Russian criminal proceedings the bank had (a) submitted a civil claim against the defendant and (b) obtained a freezing order against him, and (2) in the Swiss criminal complaint, the bank had sought a criminal seizure of the defendant's bank accounts.
- These points were not clearly identified as failures of disclosure in the defendants' evidence seeking the discharge of the freezing order or in their skeleton argument, although they were mentioned in the context of an argument that there is no risk of dissipation and that the bank had failed to make this clear. They were first identified as one of the principal failures of disclosure relied upon in the document which I ordered to be served the day before the hearing of the application began. It is not surprising, therefore, that these points were not addressed as non-disclosure points in the bank's evidence in response or in its skeleton argument.
- The bank accepts that the existence of the Russian civil claim should have been mentioned, so that the court had a full picture of the proceedings in other jurisdictions and that, to this extent, there was a failure to disclose. However, reference was made in the bank's evidence to the Russian criminal proceedings and it is obvious that there was no intention to suppress or conceal the existence of a civil claim which was ancillary to those proceedings and over which the bank had only limited control. It is obvious too that disclosure of the existence of this claim would have made no difference to the grant or otherwise of the freezing order.
- Disclosure of the existence of foreign proceedings relating to the same subject matter as the action here may sometimes be of critical importance. The defendants rely upon the decision of the Court of Appeal in Behbehani v Salem  1 WLR 723 to illustrate this point. But there are degrees of materiality. It may be, for example, that foreign proceedings will demonstrate the existence of issues or defences which are not otherwise apparent; or there may be cases where the court needs to know that a claimant is making contradictory claims here and abroad; or where it is or may be oppressive for a defendant to face multiple proceedings in different jurisdictions. In such cases proper disclosure will be essential. However, none of those considerations apply here. While the existence of the Russian civil claim should have been disclosed for the sake of completeness, that in my judgment is as high as the point can be put.
- As for the freezing order which the bank had obtained in the Russian criminal proceedings, the bank's evidence is that it was not aware of this despite having made an inquiry. While that may seem surprising, the whole concept of a civil claim forming part of criminal proceedings is an unfamiliar one in English law. There is no evidence to contradict the bank's evidence that it did not know that the order had been made. If that is so, it could not have disclosed it. The bank could perhaps have made more inquiries than it did, but I do not think that it is to be criticised on this point. It could reasonably expect that it would have been told if an order had been made. The defendants submit in response to this evidence that the bank should at least have disclosed the fact that it had requested the making of a freezing order. However, a line must be drawn somewhere. In the circumstances of this case that would have been to take the requirements of full and frank disclosure to the extreme lengths which were deprecated by Slade LJ in the Brink's Mat case  1 WLR 1350 at 1359D. The same observation applies to the defendants' complaint that the bank should have disclosed that it had requested a seizure of the defendants' bank accounts in the Swiss proceedings. The bank did disclose the fact that the Swiss bank accounts of the shareholders and their wives had been frozen in those proceedings. To have said that the bank itself had also made such a request would have added nothing.
(3) The Settlement Agreement with Mr Worsley
- The evidence of Mr Worsley featured prominently in the bank's application for the freezing order. It was described in the bank's skeleton argument for the application as "particularly striking":
"54. In relation to the alleged conduct of [the shareholders], evidence has been gathered from the DIA's, and now Otkritie's, on-going investigations (as explained by Mr Popkov) and from Mr Worsley, whose evidence is particularly striking because he had first-hand, contemporaneous interaction with [the shareholders] and was involved in setting up their network of secret companies. The claims are based in large part on documentary evidence of the terms and (non-)performance of the loans, and the connections between the borrowers and [the shareholders] exposed by Mr Worsley (and supported at least in part by the documents he has provided, including the various trustees and shareholding documents, and of course the Dianthi/Willow River/RCP transaction documents).
55. This has provided a very solid and credible basis for the factual allegations described above. …"
- The bank acknowledged that Mr Worsley was being paid for his assistance. Mr Popkov dealt with this point in his evidence as follows:
"In relation to the offshore companies and their assets, Mr Worsley is co-operating with Trust Bank as many of those assets are held by companies that he controls. In return, Trust Bank has agreed to pay a monthly retainer to Mr Worsley of US $32,500 and to indemnify him against any claims that may be made against him by third parties (including [the shareholders]) in relation to any new instructions (but not for acts that happened in the past). Mr Worsley also agreed to provide a witness statement setting out truthfully his dealings with [the shareholders] and Trust Bank. Of course, Mr Worsley may have his own agenda, although it appears to me that he is telling the truth based on the reviews conducted by new management into the various loans."
- The challenge which the defendants were likely to make to Mr Worsley's credibility as a result was also highlighted in the bank's skeleton argument:
"… [the shareholders] appear to contend that Mr Worsley's evidence and loyalty has been 'bought' by the Bank's agreement to pay Mr Worsley a retainer and to offer him an indemnity in respect of his acts since he has agreed to cooperate (but not his earlier acts). It is a fact that Mr Worsley is being paid for his cooperation, but there is no good reason to consider that his evidence is not in fact truthful. … It is in fact consistent with the facts emerging from the documents."
- Reference was also made to this in the course of the hearing as follows:
"Mr. Justice Leggatt: … Well, obviously he is in a position where his evidence may be challenged in various respects.
Mr. Pillow: Of course, and you have seen the financial side of ---
Mr. Justice Leggatt: Those are fairly obvious ---
Mr. Pillow: Quite.
Mr Justice Leggatt: --- including the fact that he had been paid $2,000 a month or whatever it is.
Mr. Pillow: Exactly, my Lord. That is what it is. You have seen the material now.
Mr. Justice Leggatt: Yes."
- In my view the reference here to payment of US $2,000 a month must be a transcription error. There was no mention of any figure of US $2,000 anywhere in the evidence and Leggatt J must have said and been understood by the bank's lawyers to say "US $32,000 or whatever it is", as they would otherwise inevitably have corrected his error. He was, therefore, fully alive to the fact that there was serious reason to doubt Mr Worsley's credibility, not only because he was being paid by the bank but also because his evidence acknowledged his own complicity in dishonest conduct. Nevertheless Leggatt J was given to understand that there had been full disclosure of the financial arrangements made with Mr Worsley.
- In fact the arrangements between the bank and Mr Worsley were set out in a "Settlement Agreement" dated 17 November 2015 which was drafted by the bank's solicitors and signed on behalf of the bank by Mr Popkov. This was only disclosed on 1 March 2016 and was disclosed reluctantly, after an initial refusal and in response to an application. Disclosure of the agreement revealed that what had been said about it in the bank's evidence and submissions was incomplete and in some respects misleading. Thus:
a. The payments due to Mr Worsley were not merely by way of monthly retainer but included substantial sums (running to several hundred thousand dollars) for the provision of various services as well as a percentage of between 1.5% and 4% of the net value of certain assets recovered.
b. While the bank's evidence referred to an indemnity in relation to claims arising out of his future acts for the bank and to the absence of any indemnity in respect of past conduct, the agreement also includes (i) a release of any claims by the bank, (ii) a promise by the bank to provide support and assistance in any proceedings against Mr Worsley relating to his past conduct and to consider providing an indemnity, and (iii) a promise to tell any prosecutor or other authority that any claims which the bank may have against Mr Worsley have been amicably resolved and that the bank does not wish to pursue any prosecution or complaint against him.
- Mr Worsley's entitlement to a percentage of the value of assets recovered is of some potential importance. Although the drafting is not as clear as it might be, I accept that the better view of the relevant provisions is that they do not entitle him to a percentage of any recoveries in this action and, more importantly for present purposes, that this is the understanding of the bank and its solicitors. Had it been otherwise, the need for disclosure of such a lucrative incentive to give false evidence in favour of the bank would have been unanswerable. Even so, I have no doubt that the Settlement Agreement should have been disclosed. It was clearly necessary, as the bank recognised, to disclose that Mr Worsley was being paid for his services including his evidence and to give a fair and complete account of the arrangements concluded with him. It was not sufficient merely to say that Mr Worsley was being paid substantial sums in return for his assistance and that this might affect his credibility.
- The decision not to disclose the Settlement Agreement was clearly deliberate. The existence and terms of the agreement were known to the bank and its solicitors and the question of disclosure must have been considered. That said, I accept that (1) it was made clear, as was in any event obvious, that there were powerful points to be made by the defendants as to Mr Worsley's credibility including the fact that he was being paid, (2) although not disclosed, some of the provisions contained in the agreement (for example, a release of past claims) were what might have been expected in order to induce Mr Worsley to cooperate, (3) there was a genuine belief on the part of the bank's solicitors that disclosure of the agreement was not necessary, and (4) there were good reasons why the bank would have wished not to disclose the Settlement Agreement if it could properly take that course, not least the litigation and threats of litigation which had very recently been made against him by the defendant's solicitors in connection with the Willow River and RCP shares.
- Moreover, although Mr Worsley's evidence (and therefore his credibility) may prove to be important, I doubt whether it will be critical, not least as the defendant admits knowledge and active encouragement of the "balance sheet management" exercise. Mr Worsley's primary importance to the bank is likely to be as a source of documents, including documents signed by the shareholders themselves which appear to confirm their ultimate beneficial ownership of the offshore companies which the defendant now says were in fact beneficially owned by the bank. The "very solid and credible basis" for the bank's factual allegations referred to in its skeleton argument quoted above was not merely or even mainly Mr Worsley's evidence but the documentary material which he had provided.
(4) The defendant's case and the tracing exercise
- The defendants' fourth complaint of non-disclosure is that the bank failed to disclose that the defendant's case would be that the companies involved in the "balance sheet management" were owned by and operated for the benefit of the bank, that the funds advanced to them were not misappropriated to the defendant's personal use, and that the defendant had instructed accountants to undertake an expensive "tracing" exercise which had been provided to the bank, and which Mr Worsley had said would "save" the shareholders. This complaint began life in the defendants' evidence as a complaint that the bank failed to disclose the fact that the companies in question were owned by and operated for the benefit of the bank, but such a complaint was obviously misconceived. The bank's case (which is accepted by the defendants to be a good arguable case) is that the companies were beneficially owned by the shareholders. The bank can hardly have been required to disclose that its admittedly good arguable case was wrong. Accordingly, as formulated in the defendants' list of principal points, the complaint is limited to a failure to disclose what the defendants' case would be.
- The bank accepts that it was under a duty to indicate any defences which were known to it or which could reasonably be anticipated (see Siporex Trade S.A. v Comdel Commodities Ltd  2 Lloyd's Rep 428 at 437), but maintains that it did not know and could not reasonably have anticipated that the defendant's defence would be that the offshore companies operated by Mr Worsley were divided into two categories, namely bank companies and personal companies. The defendant claims that he told Mr Popkov this in conversations during 2015 but that account is disputed. So far as the bank's actual knowledge that this would be the defendants' defence is concerned, the comments of Toulson J in the Crown Resources case apply. Proof of non-disclosure depends on proof of facts which are themselves in issue, which must be reserved to the trial.
- In my judgment a defence that "balance sheet management" had been undertaken by making loans to offshore companies owned by and operated for the benefit of the bank, which loans had then been recycled in the manner described by the defendant, could not reasonably have been anticipated. It was not to be expected that the defendant would own up to, indeed positively assert, his complicity in dishonest conduct of this nature. There was nothing in any contemporary document or in Mr Worsley's evidence to indicate any clear division between bank companies and personal companies. Documents obtained from Mr Worsley include documents signed by the shareholders personally which state their ultimate beneficial ownership of companies which are now said to have been beneficially owned by the bank. Documents submitted to the bank's Credit Committee in order to obtain approval for loans to offshore companies (which loans were in fact part of the recycling exercise) go to considerable lengths to tell an elaborate story about the legitimate business investment for which the loan was required. An example is a 2014 loan to a company called Erinskay. The document submitted to the Credit Committee refers to the interest of the company's shareholders and management in opportunities offered by the sovereign debt market of developing countries' economies. It could hardly have been anticipated that the defendant's case would be that the beneficial owner of this company was the bank itself and that everybody knew that this was all a charade. Moreover, it is notable that during 2015 the defendant discussed on several occasions the possibility of transferring to the bank the companies in the offshore network which he now says were already the bank's companies. As such discussions took place after the defendant's relationship with the bank had been terminated, it is difficult to see how he could have offered to do this unless he had control of the companies in question. At all events, such discussions would not have alerted the bank to a case that the companies were beneficially owned by the bank all along.
- I do not overlook that there is language in the bank's Settlement Agreement with Mr Worsley which refers to companies beneficially owned or controlled by the bank, but this in my judgment is no more than a straw in the wind which could not reasonably have been expected to alert the bank to the defence which the defendant is advancing. In any event there is nothing in the Settlement Agreement to suggest a division of the offshore companies between bank and personal companies.
- It appears that the defendant did commission accountants to undertake a "tracing" exercise, but the result of this exercise (at least so far as was shown to me) provided him with little or no assistance for the purpose of this application. On the contrary it appears to show transactions of immense complexity which give rise to what appears to be a strong inference of money laundering and the siphoning off of at least some funds to the shareholders' personal accounts. Nevertheless, the bank did make clear when applying for the freezing order that its case was that although some substantial sums had been misappropriated to the shareholders' personal use, this did not apply to all or even most of the funds which were the subject of improper loans. Thus Mr Popkov said that:
"It is not Trust Bank's case that the entire US $830 million lost by Trust Bank was stolen by [the shareholders] or their personal benefit. The losses were caused by a combination of [the shareholders] misappropriating money by channelling into their own projects; their paying off other bad loans, including to their companies; and misconduct by [the shareholders] over many years. It is also likely that the losses have been exacerbated by the deterioration of the Russian real estate market and the contraction of the Russian economy due to international sanctions and the drop in oil prices, coupled with the dramatic devaluation of the rouble."
- The bank's skeleton argument did seek to indicate the defendants' likely defences, based on evidence sworn by their solicitor in other proceedings. This included the prediction that the shareholders would say that their holding of offshore companies was legitimate, that they did not have or exercise power and control at the bank sufficient to have caused or procured the relevant transactions, that the Dianthi transaction (referred to below) was not designed to dissipate assets but was a genuine albeit unusual commercial deal, and that the claims against them were maliciously motivated. I consider that this was a reasonable assessment in the light of the knowledge available to the bank and that nothing further was required.
(5) Resolutions passed at the bank's annual general meeting
- Shareholder resolutions were passed at the bank's annual general meeting which approved in general terms, and without reference to specific transactions, transactions between the bank and the shareholders, including companies in which they had an interest. The defendants say that these resolutions should have been disclosed on the application for a freezing order and that they give rise to a causation point, showing that loans to offshore companies beneficially owned by the shareholders would have been approved in any event.
- In my judgment there is nothing in this complaint. The resolutions passed at the annual general meetings do not begin to constitute approval of the grant of unsecured loans for "balance sheet management" purposes, let alone of the siphoning off of part of the loan funds for the shareholders' personal use. In any event it is hard to see how transactions of this nature could validly have been approved by the shareholders as they appear to have amounted to a fraud on depositors. Disclosure of the resolutions was unnecessary and would have added nothing.
(6) The DIA report
- Although the defendants' complaints in their evidence regarding the DIA report ranged more widely, the failure to disclose identified in their skeleton argument focused on four points.
- The first was that the DIA Report was not admissible in these proceedings because it sets out factual findings in relation to the financial standing of the bank's corporate borrowers based on an evaluation of primary evidence which is not exhibited: cf. Three Rivers District Council v Governor and Company of the Bank of England (No. 3)  2 AC 1. It is not apparent to me that this is a complaint of failure to disclose at all, but in any event (and whatever the position may be trial) I see no reason why in applying for a freezing order the bank should not have referred to the fact of an investigation having been carried out and to the findings which had been reached, so long as these matters were fairly presented.
- Second, the defendants complain that the bank only provided the DIA Report in Russian, with no English translation. Once again, this is not a complaint of failure to disclose. Whether provided in English or in Russian, there is no likelihood that a judge dealing with a without notice application supported by a substantial volume of affidavit evidence would have the time to read through the entirety of a lengthy and detailed report of this nature. Not surprisingly Leggatt J made clear that although he had read the skeleton argument and affidavits which he had been asked to read, he had not read any of the exhibits and was relying on the assumption that they were referred to accurately in the affidavits. This is, as it has to be, standard practice. Accordingly, and regardless of the language of the exhibit, what matters for the purpose of any issue of non-disclosure is whether there was a fair presentation of the report in the skeleton argument and affidavits and whether any material adverse to the bank's case in the report was fairly drawn to the judge's attention. Whether an English translation should have been provided for the benefit of the defendants' solicitors (clearly it should have been and eventually, but only after an order was made by Burton J, it was) is a separate matter.
- Third, it is said that the bank failed to make clear that (1) the DIA report was examining the position of the various companies as at, or after, 22 December 2014 (i.e. after the Russian financial crisis) and not at the time of the loans being made some years before, and (2) the DIA report did not conclude that at the time when loans were made, they were not made for a real business purpose of the borrowing companies. I do not agree. Mr Popkov's evidence concerning the report stated that it was an assessment of the bank's balance sheet as at 22 December 2014, the date when the DIA took control of the bank. His evidence made clear also, for example in the passage quoted above, that the losses suffered by the bank had been exacerbated by conditions in the Russian economy. The bank's skeleton argument stated in terms that some loans were indeed made to finance genuine commercial ventures, while others were not but were merely made for the purpose of servicing non-performing loans. The loan to Erinskay referred to above which was dressed up as a loan to a company interested in investing in sovereign debt is an example. As the defendants accept that many loans were indeed made for "balance sheet management" purposes, there is no valid ground of complaint here.
- Finally, the defendants complain that the DIA Report was presented as being an independent and unbiased report on the bank's financial position, when in fact it was no such thing, but was prepared under the supervision of Ms Dolenko (who, although technically working for the DIA at the time, was a former Chief Financial Officer of Otkritie) by a working group which included Mr Popkov, the bank's principal witness. In fact what happened was that the DIA appointed Otkritie to assist with the rehabilitation of the bank, this being (according to Mr Popkov's evidence) normal practice. Mr Popkov referred in his evidence to a DIA press release issued on 26 December 2014 which set out the bailout funding which the DIA would provide and stated that "Otkritie FC Bank and the DIA will undertake an in-depth analysis of the Bank's assets and liabilities to develop a rehabilitation action plan". There was, therefore, some indication that the analysis of the bank's balance sheet would be undertaken jointly by Otkritie and the DIA, although this was not spelt out in detail. It appears that the working group which was then established consisted of four DIA personnel (including Ms Dolenko) and two representatives of Otkritie, one of whom was Mr Popkov.
- The position is further explained in the bank's reply evidence, in a witness statement of Mr Vadim Belyaev (not related to the second defendant but the chairman of the board of Otkritie's holding company, Otkritie being according to his evidence among the top five financial institutions in Russia with total assets of more than US $60 billion). Mr Belyaev's evidence is that during the temporary administration of distressed banks by the DIA, only DIA employees can be appointed to manage the bank concerned, and that it is usual practice for an employee of the institution assisting with the rehabilitation (in this case Otkritie) to second an employee to the DIA to be appointed as a manager of the distressed bank; and that Ms Dolenko's secondment to the DIA for this purpose was in accordance with this normal practice. He confirms also that the investigation which resulted in the DIA report was carried out by a team comprising both DIA and Otkritie staff. There is no reason to doubt this evidence.
- In the circumstances, while it would have been possible for the relationship between Otkritie and the DIA to have been explained in greater detail than it was, I do not consider that there was a failure to disclose a material fact. There is in any event no reason to doubt the essential substance of the DIA report to the effect that there was a major hole (whatever its precise size) in the bank's balance sheet as a result of the making of unsecured loans to worthless offshore companies. This is precisely what the "balance sheet management" exercise had been designed to conceal.
Conclusion on failure to disclose
- I conclude, therefore, that there were three failures of disclosure by the bank when applying for the freezing order, namely (1) the existence and significance of the defendant's employment contract, (2) the fact that the bank had made a civil claim ancillary to the criminal proceedings in Russia, and (3) the full terms of the Settlement Agreement with Mr Worsley, but that there is no substance in the defendants' remaining complaints of non-disclosure. They illustrate that although (as Toulson J observed in Crown Resources AG v Vinogradsky) a complex case may provide fertile ground for raising arguments about non-disclosure, those arguments (however well watered) will not necessarily bear fruit.
- It is necessary to consider whether as a result of the failures which have been established the freezing order should be discharged. Before doing so, however, I must deal with a distinct issue, whether there is a risk of dissipation of the defendants' assets, as that may have a bearing on how the court's discretion should be exercised. If there is no such risk, of course, that is itself a ground for discharging the order. However, while the existence of a risk of dissipation is a necessary condition for a freezing order, so that in a sense the question of discharge for non-disclosure can only arise if there is such a risk, evidence as to the nature and extent of the risk may be relevant to the question whether the bank would suffer a disproportionate injustice if the freezing order is discharged.
Risk of dissipation of assets
- As has been said many times, the purpose of a freezing order is not to provide the claimant with security but to restrain a defendant from evading justice by disposing of assets otherwise than in the ordinary course of business in a way which will have the effect of making itself judgment proof. It is that concept which is referred to by the label "risk of dissipation". I was referred to a number of statements of principle to this effect, including Thane Investments Ltd v Tomlinson  EWCA Civ 1272 at  and ; TTMI Ltd v ASM Shipping Ltd  EWHC 2666 (Comm),  1 Lloyd's Rep 401 at  to ; and Congentra AG v Sixteen Thirteen Marine SA  EWHC 1615 (Comm),  2 Lloyd's Rep 602 at .
- Based on these authorities, the defendants advance seven propositions which the bank does not dispute and which I accept. They were as follows:
a. The claimant must demonstrate a real risk that a judgment against the defendant may not be satisfied as a result of unjustified dealing with the defendant's assets.
b. That risk can only be demonstrated with solid evidence; mere inference or generalised assertion is not sufficient.
c. It is not enough to rely solely on allegations that a defendant has been dishonest; rather it is necessary to scrutinise the evidence to see whether the dishonesty in question does justify a conclusion that assets are likely to be dissipated.
d. The relevant inquiry is whether there is a current risk of dissipation; past events may be evidentially relevant, but only if they serve to demonstrate a current risk of dissipation of the assets now held.
e. The nature, location and liquidity of the defendant's assets are important considerations.
f. Whether or to what extent the assets are already secured or incapable of being dealt with is also relevant.
g. So too is the defendant's behaviour in response to the claim or anticipated claim.
- The thrust of the defendants' submissions based on these propositions was to the effect that there is no solid evidence of a risk of dissipation as (1) any dishonesty alleged against the defendant was in the past and says nothing about any current risk, (2) whatever the position regarding the network of offshore companies may have been, that network is no longer available to the defendant as it is controlled by Mr Worsley who is assisting the bank and is therefore of no significance, (3) the defendants have made disclosure of their assets pursuant to the freezing order, (4) those assets consist of houses in the United Kingdom, Russia and Cyprus together with bank accounts in those countries and in Switzerland, which are already frozen, as well as other conventional assets, and (5) the defendants had ample warning of this litigation but, far from attempting to dissipate assets, cooperated with the bank, for example in commissioning the tracing exercise referred to above.
- To my mind there is an air of unreality about these submissions. Although this is disputed, there is reason to believe that the shareholders, including the defendant, have personally siphoned off tens of millions of dollars of the bank's funds. Much of that money is unaccounted for. The defendants have disclosed assets which have already been frozen, for example their bank accounts in Switzerland, or assets of which the bank is aware such as their residence in Kent. However, the bank does not accept, and nor would I, that full disclosure of the defendants' assets has necessarily been given. (Although the bank has not previously challenged the defendants' disclosure, this does not mean that it has accepted that the disclosure is complete). The fact that the defendant no longer has access to the network of offshore companies established by Mr Worsley is neither here nor there. Mr Worsley is not unique in being able to establish and operate such companies. The significance of this network is that it demonstrates that the defendant is ready and able to use such structures dishonestly in order to conceal the true beneficial ownership of assets. That is precisely what he asserts that he did, albeit he says for the bank's benefit, in the "balance sheet management" exercise.
- There are many cases where the use of and familiarity with a network of offshore companies has been regarded as a factor tending to support the existence of a risk of dissipation, albeit that the weight to be given to such a factor has to be assessed in all the circumstances of each individual case (see Elektromotive Group Ltd v Pan  EWHC 2742 (QB) at [84(b)]; A.H. Baldwin & Sons Ltd v Al-Thani  EWHC 3156 (QB); and Holyoake v Candy  EWHC 970 (Ch) at ). As the Court of Appeal said in VTB Capital Plc v Nutritek International Corporation  EWCA Civ 808,  2 Lloyd's Rep 313 at  and , "the factor of a good arguable case as to fraud against the person in question, and the use of a web of offshore companies in connection with the fraud, could properly provide a basis for taking this into account in favour of the grant of an injunction … We would regard such factors as capable of providing powerful support for the case of a risk of dissipation." In my judgment that is also the position here.
- However, there is also what is in my view solid evidence of an actual attempt by the shareholders to put significant assets out of reach. This is what has been referred to as the Dianthi transaction. It will be recalled that the shares in the valuable Willow River and RCP companies are beneficially owned by the shareholders, but are held by a Cypriot company called Dianthi which is controlled by Mr Worsley. The Dianthi transaction was an attempt by the shareholders to transfer the Willow River and RCP shares to two offshore companies associated with the PhosAgro group which is owned by a Russian businessman called Mr Andrei Guriev. The consideration for the purchase of the shares was said to be US $50 million (approximately half their true value), but none of this was payable for four years. There were other unusual and apparently uncommercial features of the transaction. These were, as the bank submits, suggestive of an intention to "park" valuable assets with a friendly third-party out of harm's way, so that the shares would not be available to satisfy any judgment against the shareholders. The transaction was preceded, as already noted, by the release for no consideration of a pledge over the shares in favour of the bank on 17 December 2014, only a few days before the bank's collapse.
- The Dianthi transaction is the subject of separate litigation here and elsewhere. However, the fact that there is no claim concerning this transaction in the present action does not mean that it is irrelevant. It is highly relevant to the issue of risk of dissipation. Without reaching any final conclusion concerning the merits of a transaction which is being litigated elsewhere, it is sufficient to say that it constitutes strong evidence of a risk that, if left unrestrained, the defendants will seek to dissipate their assets with a view to avoiding enforcement of any judgment against them.
- It follows that the freezing order should not be discharged on this ground.
- In the light of this finding I return to the question whether the freezing order should be discharged as a result of the failures of disclosure which I have found to be proved. There are three possible courses of action available, namely (1) to discharge the freezing order, (2) to discharge the order but grant a new order to the same effect, and (3) to continue the freezing order despite the failures of disclosure. The effect of the second and third of these possible courses would be broadly the same in that the restraint on the defendants' dealing with their assets would continue, although there might be different consequences, for example as to costs or as to the scope for enforcement of the bank's undertaking in damages. However, these possible differences were not fully explored in argument and in any event both costs and enforcement of an undertaking in damages are subject to the exercise of the court's discretion. Other sanctions are also available to mark a failure of disclosure when it is appropriate to do so, whether or not the freezing order continues, for example an order in relation to costs.
- As indicated in the cases cited above, the overriding consideration in deciding whether to continue the injunction (or to impose a fresh injunction) despite a failure of disclosure must be the interests of justice. Indeed, although it has been said that the discretion to continue the injunction must be "exercised sparingly", it is necessary to keep well in mind the full sentence from Balcombe LJ's judgment in the Brink's Mat case  1 WLR 1350 at 1358F from which those words are taken:
"Whilst, having regard to the purpose of the rule, the discretion is one to be exercised sparingly, I would not wish to define or limit the circumstances in which it may be exercised."
- I must therefore consider the factors which bear on the interests of justice in this case.
- The first such factor is the importance of the fact not disclosed to the issues which the judge making the freezing order had to decide. Recognition of this factor goes all the way back to Ralph Gibson LJ's statement of principles in Brink's Mat (see his proposition (6) at 1357D). This emphatically does not mean that just because the injunction would have been granted anyway, a failure of disclosure will be overlooked. It will, however, be a relevant consideration. As Woolf LJ put it in Behbehani v Salem  1 WLR 723 at 729E-F, whether the injunction would have been granted anyway is not "the acid test", but is nevertheless "a relevant matter".
- In the present case the matters not disclosed were of varying significance. The failure to disclose the existence of a civil claim advanced in the Russian criminal proceedings was very close to what Slade LJ described in Brink's Mat at 1359C-D as the uncertain borderline between material facts and non-material facts – albeit that, as the bank accepts, it fell on the wrong side of that border. The failures to disclose the existence and significance of the defendant's contract of employment and the Settlement Agreement with Mr Worsley were more substantial failures, but I have no doubt that, even if they had been disclosed, the freezing order would and should still have been granted. If the bank's advisers and Professor Maggs had been alive to the former issue, there can be no real doubt that Professor Maggs would have advanced the same opinion as he does now that despite the employment contract, a claim can be made under the Joint Stock Companies Law. Thus the process of reasoning leading to the conclusion that the bank has a good arguable case would have been different, but the result would have been the same. If the Settlement Agreement had been disclosed, the court would have been given the full picture of the arrangements made with Mr Worsley, but that would not have affected the conclusions that (1) the bank has a good arguable case on the merits, as is admitted and (2) there exists a risk of dissipation of assets.
- Accordingly while all three were failures to disclose material facts, I consider that the failure to disclose the employment contract was a substantial but not decisive failure, the failure to disclose the Settlement Agreement was also important but somewhat less so, and the failure to disclose the existence of a civil claim in the Russian criminal proceedings was relatively trivial.
- The next factor is the need to encourage proper compliance with the requirements of full and frank disclosure and to deter non-compliance. This will always be an important consideration but it is closely connected to the next factor, which is whether or to what extent the failure to disclose was culpable. If the failure was "innocent" (in the sense described below) the question of punishment will not arise, while even in a case involving various and numerous failures, the requirement of deterrence can sometimes be met by an appropriate order as to costs, as Teare J pointed out in U&M Mining Zambia Ltd v Konkola Copper Mines Plc  EWHC 3250 (Comm) at  and .
- In this context a failure may be regarded as "innocent" if the fact in question was not known to the applicant or its relevance was not perceived. That was the sense in which the word was used by Ralph Gibson LJ in Brink's Mat at 1357D and the judgments of Balcombe LJ at 1358G and 1360H were to the same effect. Moreover in Behbehani v Salem  1 WLR 723 Woolf LJ expressly rejected at 728F-G a submission that a failure could not be regarded as innocent if the fact in question was not recognised as material but ought to have been, while Nourse LJ observed at 736F that "in the Brink's Mat case all three members of the court defined an innocent non-disclosure as one where there was no intention to omit or withhold information which was thought to be material". This formulation would rightly include as culpable blind eye knowledge, that is to say a decision not to investigate for fear of discovering facts which would have to be disclosed, but that is not this case. I am satisfied that all three failures in this case were innocent in the sense described.
- Finally it is necessary to consider the injustice to a claimant which may occur if an order is discharged leaving a defendant free to dissipate assets. In my judgment this injustice is a particularly powerful factor in the present case. This is a case where, as at present advised (I emphasise this qualification), and subject only to the issue of Russian law identified above, the bank appears to have a very strong case on the merits; it appears to have been the victim of a massive fraud from which the defendant has benefited to the tune of tens of millions of dollars and perhaps more; the defendant's conduct even on his own account has been dishonest; even on his account the conduct in question involved the movement of funds through a network of offshore companies with a view to disguising from the regulator the origin of the funds in question and the beneficial ownership of the companies concerned; the defendant appears to have received personally substantial funds which have not been accounted for in his disclosure of assets; and there is solid evidence of what appears to be an attempt to dissipate assets. It is hard to think of a stronger case for a freezing order.
- I should add that in OJSC TNK-BP Holding v Beppler & Jacobson Ltd  EWHC 3286 (Ch) at  to  Mr Andrew Sutcliffe QC sitting as a Deputy Judge of the Chancery Division took the view that failure to disclose the existence of an employment contract and its significance under Russian law was a material non-disclosure. That is the same conclusion as I have reached and which in any event the bank concedes. On the facts of that case the deputy judge decided that the injunction should be discharged. That decision required consideration of the various factors which were relevant in that case, including the fact that there were other failures of disclosure. However, each case is different and the way in which a discretion is exercised in one case cannot determine (and will often be completely irrelevant to) the way in which it should be exercised in another.
- In all the circumstances of this case I have no doubt that the application to discharge should be dismissed and the freezing order continued. Any other course would involve a major loss of perspective.
- I invite submissions as to whether, and if so how, the bank's failures of disclosure should be marked by an order as to costs.
- Finally I record my appreciation of the high quality of the oral submissions on both sides.