England: Extending Mareva injunctions to trustees

Herbert Smith Freehills Disputes Notes has already reported on the litigation between JSC Mezhdunarodniy Promyshlenniy Bank (Mezhprom) and Sergei Viktorovich Pugachev (Mr Pugachev) (see our article of 27 November 2014) . In a new decision, the Court has extended the Mareva injunction against Mr Pugachev.

Background

The dispute arises out of the insolvency of Mezhprom, a bank established by Mr Pugachev. Mezhprom and its liquidator brought proceedings against Mr Pugachev in Moscow and a Mareva injunction (i.e. a Court Order freezing certain assets and asking for disclosure of Mr Pugachev's assets) was granted without notice in London in aid of the Moscow proceedings. While complying with disclosure orders under the English Mareva injunction, Mr Pugachev disclosed he was a discretionary beneficiary of certain trusts.

After Mr Pugachev disclosed he was a discretionary beneficiary of these trusts, the English Court made an Order requiring further disclosure of the details of the trusts. The trustees applied unsuccessfully to set this order aside. Mr Pugachev also unsuccessfully applied to have the Mareva injunction set aside.  An appeal by the trustees and Mr Pugachev was also unsuccessful.

Mr Pugachev was also subject to an Order requiring him to deliver up his passport(s) and remain in the UK. He repeatedly sought to evade this Order and eventually fled to the south of France in breach of the Order.

As part of the disclosure required under the English Mareva, the trustees of Mr Pugachev's trusts, four New Zealand companies, notified the Court that they had been given notice that Mr Pugachev was replacing them as trustees with four newly incorporated New Zealand companies.

Hearing of 30 July 2015

After hearing about the potential change of trustees, the Claimants sought to extend the Mareva injunction to the assets of the four original trustees, the four new trustees, and a company called Luxury Consulting Ltd which had links to Mr Pugachev.

The Claimants sought to have the injunction extended on the grounds that:

• The trust assets were still beneficially owned by Mr Pugachev and the trustees could therefore be subject to freezing orders under SCF Finance v Masri [1985] 1 WLR 976 and TSB International v Chabra [1992] 1 WLR 231; or
• They had a good arguable case under either section 423 (transactions to defraud creditors) or section 339 (transactions at an undervalue) of the English Insolvency Act 1986 that the trustees held the trust assets subject to a Court process to enforce judgment against Mr Pugachev; or
• The trustees held the assets subject to the control of Mr Pugachev and it was appropriate to infer that the assets may be available to satisfy a future judgment against him.

In support of its contention that Mr Pugachev remained in effective control of the trusts, the Claimants were able to draw on the trust deeds, which pointed to this conclusion. Mr Pugachev was the settlor of most of the trust assets, and his son Victor was the settlor of the rest. Mr Pugachev was a beneficiary of the trusts. Moreover, Mr Pugachev had fled the jurisdiction in breach of a Court Order and had made numerous other attempts to be evasive during the proceedings.

Judgment of Rose J

Rose J dismissed the application on five grounds:

• The Claimants had not adopted the correct procedure;
• The Claimants had delayed in making the application;
• There was no evidence of risk of dissipation and nor would the new trust companies be likely to act irresponsibly;
• It was not expedient to grant the relief sought because the original trustees had made an application to a New Zealand Court to deal with the matter; and
• The bank of Luxury Consulting Ltd had agreed to freeze two accounts.

The Court of Appeal disagreed on all five grounds.

Findings of the Court of Appeal

Procedure

The Court started with TSB Private Bank International SA v Chabra [1992] 1 WLR 231.  That case held that an ancillary order to an injunction can be made against a third party where there is a good arguable case that third party is under the Defendant's control (the "Chabra jurisdiction"). In this case, the Court found that the Claimants had a good arguable case that the trust assets were in reality the assets of, or under the control of, Mr Pugachev. The Court also found the Claimants had a good arguable case that Mr Pugachev was "taking every possible step to keep his assets out of the reach of this court". The case was therefore a "classic" situation in which a Chabra order should be made to protect the Claimants.

Delay

The Court found that there was no general rule that delay in applying for a freezing injunction was a bar to obtaining an order. Delay was only relevant if it indicated that there was no real risk of dissipation, and there was evidence that if the Claimant truly thought that there was risk of dissipation would have applied earlier for the injunction. That was not a relevant conclusion in this case, where the changing of trustees clearly supported the inference that Mr Pugachev was trying to appoint more malleable individuals in order to be able to dissipate his assets more effectively.

Risk of dissipation

The Court found that there was a good arguable case for risk of dissipation.

Expediency

The Court disagreed with the findings of Rose J that the existence of New Zealand proceedings made it inexpedient to grant the application. It held that the appropriate method of resolving any conflict between its own decision and that in the New Zealand proceedings would be to give the usual liberty to all parties to apply on notice to vary the Order.

Position of Luxury Consulting Ltd

The Court did not find that it was sufficient that two accounts of Luxury Consulting had been frozen. These were the two accounts disclosed by Mr Pugachev, but his disclosure had been inadequate and evasive and there was nothing to prevent Luxury Consulting (described as Mr Pugachev's "personal wallet") from opening new accounts and receiving money there on his behalf.

Permission was granted and the Order was extended on the terms sought by the Claimants.

Conclusions

The Courts will attempt to prevent "wily operators" (as Beatson LJ put in the Ablyazov case) from hiding funds in complex structures in order to evade Mareva injunctions and will exercise its jurisdiction in a flexible and adaptable manner.

Poor conduct by a Defendant will be considered when looking at risk of dissipation.

Delay will not defeat an application for the grant or extension of a Mareva injunction unless it appears to indicate that the Claimant does not really believe in the risk of dissipation.

If you wish to discuss, please contact Richard Norridge or Joanna Caen of our Private Wealth and Trusts team.