Freezing orders, discretionary trusts and unlimited cross-undertakings

Sarah Speller

In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev, the Court of Appeal considered a number of issues arising out from a freezing order which had been granted in support of Russian proceedings. Most notably, the court confirmed that:

  • it had jurisdiction under the disclosure provisions in the freezing order to order the member of a class of beneficiaries under a discretionary trust to disclose details of the trust and the trust assets; and
  • where the applicant for a freezing order was the liquidator of an insolvent corporation, the court had power to order the applicant to give an unlimited cross-undertaking in damages.

The court also allowed an appeal against an order that the claimants provide fortification of the cross-undertaking.

Facts

The defendant founded JSC Mezhdunarodniy Promyshlenniy Bank (the “Bank”) in Russia in the 1990s. In 2010, the Bank’s licence was withdrawn by the Russian Central Bank and it was later declared to be insolvent. The Bank’s court-appointed liquidator brought proceedings against the defendant in Russia, claiming that he had extracted over $2 billion from the Bank’s funds for his benefit and that of companies in his control. Similar proceedings were begun in England.

In July 2014, the Bank and its liquidator (the “claimants”) applied to the English High Court for a freezing order in support of the Russian proceedings under section 25 of the Civil Jurisdiction and Judgments Act 1982. Paragraph 7(c) of the freezing order defined the defendant’s assets as including “any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of any power of appointment, discretion or otherwise howsoever”. Paragraph 9(1) of the order required the defendant to inform the claimants of “his assets worldwide exceeding £10,000 in value as at the time this order is served whether in his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets”.

The defendant disclosed that he was “one of a class of discretionary beneficiaries” under a list of named trusts, but provided no further details. Henderson J ordered the defendant to swear an affidavit setting out details of the trusts and their assets and to supply copies of the trust deeds relating to the trusts which were under his control or which he had a right to inspect or copy.

The original freezing order was granted on the applicants giving a cross-undertaking in damages of $25 million. Rose J subsequently ordered that the continuation of the order should be conditional on the claimants providing a cross-undertaking which was unlimited in amount, and on fortification of the cross-undertaking by way of a payment into court of $25 million.

The appeal related to the disclosure order granted by Henderson J and Rose J’s order requiring an unlimited cross-undertaking and fortification.

Issues for the court

The questions for the Court of Appeal were:

1. Whether the court had jurisdiction to order a member of a class of beneficiaries under a discretionary trust to disclose details of the trust and the trust assets and, if it did, the circumstances in which the jurisdiction should be exercised;

2. Where the applicant for a freezing order was the liquidator of an insolvent corporation, whether the court could order the applicant to give an unlimited cross-undertaking in damages; and

3. Whether Rose J had been correct in this case to require fortification of the cross-undertaking.

Judgment

Question 1: Was there jurisdiction to order the beneficiary of a discretionary trust to disclose details of the trust and its assets?

This was a question of interpreting the scope of the freezing order, which had to be considered in the light of the nature of the interest of a member of a class of potential beneficiaries under a discretionary trust, and the purpose of making freezing orders. The purpose of a freezing order was to prevent a defendant from putting his assets beyond the reach of judgment creditors in the event that judgment was entered against him; and because of this, the scope of the order was usually restricted to assets which would be amenable to execution in aid of a judgment (see for example JSC BTA Bank v Solodchenko [2010] EWCA Civ 1436). On the face of it, assets held by the trustees of a discretionary trust would not be amenable to execution if judgment was entered against one of the class of potential beneficiaries at the suit of a third party.

However, the freezing order granted in this case contained non-standard wording, and the court held it could be construed as covering the interests of a potential beneficiary under a discretionary trust. Lewison LJ referred in particular to paragraph 6 of the order, which provided that it covered all the defendant’s assets whether he was interested in them “legally, beneficially or otherwise”. In his view, for the purposes of the definition of “assets” in paragraph 7(c) of the order, the words “or otherwise” extended the scope of that definition beyond assets in which the defendant had a “proprietary interest properly so-called”. Henderson J had therefore been correct in concluding that the defendant’s interests under the discretionary trusts were caught by the freezing order, including the requirement to disclose his assets exceeding £10,000 in value.

The court also confirmed that Henderson J had jurisdiction to make the subsequent order requiring the defendant to provide further details of the trusts and copies of the trust deeds. The jurisdiction to grant a freezing order carried with it the power to make whatever ancillary orders as were necessary to make the freezing order effective (AJ Bekhor & Co v Bilton [1981] 1 QB 923). The court had not been shown any authority which placed explicit limits on that power.

The court also drew attention to the fact that the claimants were only asking for information in relation to the trusts and their assets, which was far less intrusive than the restriction on dealing with assets contained in a freezing order. In addition, the information was only sought from the defendant, who was subject to the freezing order; the trustees were not being asked to do or say anything.

Question 2: Did the court have power to order a liquidator to give an unlimited cross-undertaking in damages?

The answer to this question was “yes”. The mere fact that litigation was being brought by a liquidator did not automatically lead to the conclusion that the undertaking had to be capped. A liquidator would seek to recover assets for the benefit of creditors, and in many cases a major creditor (for example HMRC) would be prepared to undertake to indemnify the liquidator against his liability on the cross-undertaking. In that situation, there was no reason to accept a limited cross-undertaking, and the burden would be on the applicant to demonstrate why he should not be required to give an unlimited cross-undertaking as the price of the injunction.

Lewison LJ also commented that he did not wish to cast doubt on the “many” cases in which judges have been prepared to accept limited cross-undertakings from liquidators and other office holders. This was an entirely proper exercise of the judges’ discretion in the relevant circumstances.

Question 3: Had Rose J been correct to require fortification of the cross-undertaking in this case?

Rose J had taken the following into account in ordering the claimants to provide fortification:

  • neither of the claimants had any assets in England;
  • there was no formal mechanism for enforcing orders of the English court in Russia;
  • the Bank was in insolvent liquidation and it was not clear what assets would be left in the event that the cross-undertaking had to be honoured; and
  • there was a sufficient risk of the defendant suffering loss as a result of the freezing order.

The final of these factors was the principal issue on the appeal.

In ordering fortification, the judge had adopted the approach taken in Bloomsbury International Ltd v Holyoake [2010] EWHC 1150 (Ch). She had reasoned that an international businessman on the scale of the defendant was likely to suffer loss if prevented from conducting his ordinary business activities, as he would be by the grant of the freezing order. The Court of Appeal considered the judge had been correct in the principles of law she had applied, but found there was insufficient evidence to support her conclusion that the defendant’s business interests would be interfered with by the freezing order and thereby cause him loss. In particular, the evidence provided by the defendant was “too slender a foundation upon which to build a picture of an established pattern of business activity from which it can be inferred (without more evidence) that the freezing order will cause loss”. The court accordingly allowed the claimants’ appeal against the fortification order.

Comment

This case confirms that it may be possible for a carefully-worded freezing order to cover the interests of a potential beneficiary under a discretionary trust, and that the court does in appropriate cases have jurisdiction to order a member of a class of beneficiaries under such a trust to disclose details of the trust and its assets.

In addition, the respondents to applications for freezing orders made by liquidators or other office holders will be interested in the Court of Appeal’s comments on the extent of the cross-undertaking that the applicant can be required to give “as the price for the injunction”.  Although the court accepted the usual position is to require a limited cross-undertaking, there are situations where it will be possible to obtain an undertaking which is unlimited in amount, particularly where there is evidence that the liquidator will be indemnified against such liability by major creditors.  The burden will be on the liquidator to show why he should not be required to give the unlimited undertaking.

JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139

Post By Sarah Speller (10 Posts)

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