Failure to comply with freezing orders leads to prison

In JSC Mezhdunarodniy Promyshlenniy Bank and Another v Pugachev, [2016] EWHC 248 & 258 Ch (sentence) and [2016] EWHC 192 (Ch) (liability), the English High Court sentenced Russian businessman Sergei Pugachev to two years in prison for contempt of court.  The Court found Mr Pugachev had breached several worldwide freezing orders made by the English High Court relating to money he allegedly stole from JSC Mezhdunarodniy Promyshlenniy Bank. He also refused to surrender all his passports, and in further defiance of court orders, left England for France in June of last year. This decision demonstrates the seriousness of the consequence for breaching an English worldwide freezing order.  For related earlier judgments, please see our earlier articles of 27 November 2014 and 22 September 2015.

Background

The Bank went into liquidation in 2010 and the Bank's liquidator sued Mr Pugachev for allegedly extracting money from the Bank for his own benefit. To support the Russian proceedings, the liquidator sought, and the English High Court, made several orders against Mr Pugachev in July 2014, August 2014, and March 2015. Those orders (i) froze Mr Pugachev's assets up to the value of £1.1b (over HK$14b), (ii) required Mr Pugachev to disclose his assets, and (iii) required Mr Pugachev to deliver up his travel documents. While complying with the disclosure orders under the English freezing orders, Mr. Pugachev disclosed that he was a discretionary beneficiary of certain trusts. The English Court subsequently made an additional order in July 2015, requiring further disclosure of the details of the trusts (all together, the "Orders").

In December 2015, the Bank and the Bank's liquidator (the "Applicants"), issued two applications to commit Mr Pugachev to prison for contempt of court due to his alleged failure to comply with the Orders. The Court found that he had committed 12 out of the 17 alleged breaches. The Court then considered the sentence for the 12 breaches. Mr Pugachev attended the hearing by videolink from France. He was not represented.

Judgment

After considering the totality of the evidence, the Court decided that Mr Pugachev's breaches warranted the maximum sentence of two years because of the seriousness of Mr Pugachev's contempt.

In reaching the sentencing decision, the Court considered: (1) whether the Applicants had been prejudiced by virtue of the contempt and whether that prejudice was capable of remedy; (2) the extent to which Mr Pugachev had acted under pressure, e.g. fears for his safety if he remained in the UK; (3) whether Mr Pugachev's breaches of the Orders were deliberate or unintentional; (4) Mr Pugachev's degree of culpability; (5) whether Mr Pugachev has been placed in breach of the Orders by reason of the conduct of others; (6) whether Mr Pugachev appreciated the seriousness of any deliberate breaches; and (7) whether he had cooperated in any way in the court proceedings.  For example, the Court considered that Mr Pugachev had sufficiently completed his cross-examination except for a few matters and he continued to participate in the proceedings after he left for France. The Court bore in mind that imprisonment is always a punishment of last resort, and the Court confirmed that it has always been careful to impose the minimum term commensurate with the seriousness of the contempt.

(1) Failure to deliver up travel documents and leaving the jurisdiction

Mr Pugachev was found in serious breach of the Orders because he failed to deliver up his French passport and other travel documents, and because he left the UK for France. The Court deemed these breaches deliberate and imposed two concurrent sentences of eight months imprisonment, as well as a consecutive sentence of 21 days imprisonment.

(2) Disposal of assets in breach of the freezing orders

There were four serious and deliberate breaches by Mr Pugachev of his obligations not to dispose of his assets frozen by the Orders.

Among other things, the Court found that Mr Pugachev had been involved in the replacement of the trustees of the Wiltshire Residence Trust ("WRT") in July 2015. WRT is one of the trusts in respect of which Mr Pugachev had disclosed he was a discretionary beneficiary.

The Court found that Mr Pugachev and his son replaced the trustee of the WRT to make sure that the trustee was an entity willing to enter into a funding agreement. Mr Pugachev brought proceedings under the Bilateral Investment Treaty ("BIT Claim") alleging unlawful expropriation of his assets by the Russian State. Mr Pugachev retained King & Spalding to represent him in the BIT Claim. The funding agreement stated that WRT would make an immediate payment of $800,000 to King & Spalding and promised that firm would receive future recovery (if any) from the fruits of the BIT Claim.

The Court found that both the replacement of the trustee and the funding agreement were in breach of the Orders. However, the Court deemed these breaches less serious than Mr Pugachev’s other deliberate breaches (sale and dealings with the proceeds of sale of various assets). Mr Pugachev alleged that the funding agreement was entered into in as a desperate attempt to fund his lawyers, King & Spalding, in the BIT Claim. Although the Applicants initially regarded this as a very serious infringement, the Court found that (1) King & Spalding had repaid the $800,000 into a bank account held by the WRT where it was then frozen by the Court; (2) it appeared that legal advisers were involved in the drawing up of the funding agreement and Mr Pugachev may have been relying on them to alert him as to whether the agreement was permissible; and (3) it also appears that the money was all intended to be used to pay his legitimate legal expenses in pursuing the BIT Claim.

However, the Court found Mr Pugachev was responsible for the breaches and could not blame others (his legal representatives, family, and children) for them. The Court thus imposed 4 sentences of imprisonment of Mr Pugachev for the breaches, to be served concurrently for a total of 24 months.

(3) Failure to comply with the search and seizure orders.

Mr Pugachev was in deliberate breach of the Orders because he failed to deliver up his iPad and mobile phone. He was also in breach because he delayed delivery up of the passwords to his email accounts. The Court imposed, respectively, 4 months and 3 weeks imprisonment for these breaches, to run concurrently with Mr Pugachev's other sentences.

(4) Failures in disclosure relating to the EPK/Basterre monies

The Court found that Mr Pugachev was in deliberate breach of the Orders by failing to provide information about EPK/Basterre monies and by providing false information about the EPK/Basterre monies. The Court imposed imprisonment of 20 months in respect to each breach, to run concurrently with the other sentences.

(5) False evidence as to lack of funds

The Court found that Mr Pugachev knowingly and deliberately gave false evidence before the Court, by stating that he lacked funds. The Court considered a sentence of 10 months of imprisonment to be appropriate.

Overall, the Court applied the totality principle to Mr Pugachev's conduct and decided to impose the statutory maximum of two years.

Conclusion

Dissipation of assets, including dissipation of assets held by a trustee, in deliberate breach of a freezing order, is a contempt of court. Removing a trustee to facilitate the dissipation of assets, even if it is for the purpose of paying legal fees, is contempt of court. The contemnor may be subject to imprisonment for up to two years.

When receiving funds from the client under a freezing order, solicitors should make sure that the client does not breach any court order by making payments through trust arrangements. Otherwise, the solicitors may either be parties to that breach and/or have to repay any funds they receive.

If you wish to discuss, please contact Richard Norridge or your usual Herbert Smith Freehills contact.