High Court confirms meaning of “good arguable case” test for freezing orders and “risk of dissipation” in context of fraud claims

Anita de Villiers

In PJSC Tatneft v Bogolyubov and others, Mr Justice Picken granted an application for the discharge of a worldwide freezing order previously obtained by the claimant, PJSC Tatneft, against the four defendants.  The application to discharge was brought on the basis that Tatneft’s claim did not amount to a “good arguable case” and/or that there was an insufficient “risk of dissipation”.

In granting the application, Picken J provided a detailed and helpful review of relevant case authorities on the “good arguable case” test as well on “risk of dissipation” in freezing order applications brought in the context of broader fraud claims.

Facts

Underlying the applications was a High Court claim by Tatneft (a state owned Russian oil company and one of the largest oil producers in Russia) against four defendants for alleged misappropriation of substantial sums owed to it in respect of oil delivered to the Kremenchug oil refinery in Ukraine. The claim for US$ 334.1 million plus interest was advanced exclusively under relevant provisions of the Russian Civil Code.

The payment obligation to Tatneft was governed by a complex contractual chain involving a number of intermediary companies.

Proceedings had previously been brought in both the Republic of Tatarstan and in Ukraine.

In March 2016, Tatneft commenced proceedings in the High Court as the purported assignee of one of the parties to the contractual chain. On 15 March 2016, Tatneft issued its application for a worldwide freezing order (“WFO”), which was granted by Teare J at a without notice hearing against the defendants on 22 March 2016.  The effect of the WFO was to prohibit each of the four defendants disposing of or dealing with their assets up to a limit of US$ 380 million.

The following applications were required to be dealt with by the court:

  • An application by Tatneft to amend its particulars of claim.
  • An application by the first and third defendants for summary judgment or an order striking out the claim.
  • An application by the second and fourth defendants to set aside the order for service out of the jurisdiction on the basis that there was no serious issue to be tried on the merits of the claim against them.
  • An application by all four defendants for the discharge of the worldwide freezing order on the basis that the claim did not amount to a “good arguable case” and/or that there was an insufficient “risk of dissipation”.

This blog post is limited to a consideration of the last of the above applications, being the application for discharge of the WFO.

Decision

As to the merits of the claim under Article 1064 of the Russian Civil Code, Picken J considered that the claim had no real prospect of success and that there was no serious issue to be tried in relation to it. Neither the “harm” nor “causation” elements required under Russian law had been sufficiently made out because the defendants could not be said to have caused the relevant intermediary companies to breach their contractual obligations to pay the oil money “upstream” in circumstances where the intermediary companies had already been released from their contractual obligations pursuant to an assignment agreement in 2008.

In light of the above, Picken J it held that it was impossible to find that the “good arguable case” test had been met.

In granting the application to discharge the WFO, Picken J confirmed the following relevant principles derived from case law regarding applications for freezing orders:

  1. The “good arguable case” test (as described by Mustill J in Ninemia Maritime Corp v Trave Schiffahrtsgessellschaft GmbH & Co KG [1984] 1 All ER 398) entails consideration whether the case advanced by the claimant seeking freezing order relief “is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success…“.
  2. However, as recently explained by Nugee J in Holyoake v Candy [2016] EWHC 970 (Ch) (covered on the blog here), the test will be applied somewhat differently depending on the nature of the issue concerned. If, for example, the question is one of construction or one of law (as opposed to a purely factual question), and there is argument on the point, the court may well be able to take a view as to who appears, albeit at the interlocutory stage, to have the better, or much better, of the argument.
  3. It may be perfectly possible and logical to conclude that both sides have a good arguable case on the material presently available and that the court should at the early stage in the litigation discourage any attempt to embroil it in a detailed assessment of the facts or legal argument (Kazakhstan Kagazy Plc v Zhunus [2014] EWCA Civ 381).

While Picken J had found that it was impossible to make a finding that the “good arguable case” test had been met in circumstances where the claim had no real prospect of success, he nevertheless went on to provide a helpful overview of the case authorities as to what is needed to show a sufficient “risk of dissipation” in the context of fraud claims:

  1. The purpose of a freezing order (as recently described by Males J in National Bank Trust v Yurov [2016] EWHC 1913 (Comm)) is “not to provide the claimant with security but to restrain a defendant from evading justice by disposing of asset 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’“.
  2. Not every general allegation of dishonesty will be sufficient to justify an inference that there is a real risk of dissipation. It is appropriate to take into account the underlying allegations made against the defendant.  However, where the dishonesty alleged “is at the heart of the claim against the relevant defendant, the court may well find itself able to draw the inference that the making out, to the necessary standard, of that case against the defendant also establishes sufficiently the risk of dissipation of assets” (as per Lloyd LJ in VTB v Butritek [2012] EWCA Civ 808).
  3. A finding of a “good arguable case” that the defendant had been engaged in a major fraud and that he “operated a complex web of companies in a number of jurisdictions, which enabled him to commit the fraud and would make it difficult for any judgment to be enforced” is capable of providing powerful support for the case of risk of dissipation (as per Lloyd LJ in VTB v Butritek).
  4. The mere fact of delay in bringing an application for a WFO does not, without more, mean that there is no “risk of dissipation” and is instead only a factor to be weighed by the court in the balance in considering whether or not to grant the freezing injunction sought (as was described by Flaux J in Madoff Securities [2011] EWCA 3102 (Comm)).

In light of the above, Picken J considered that had he formed a different view as to the merits of the case (and thus as to satisfaction of the “good arguable case” test), he would have concluded that Tatneft had established a sufficient risk of dissipation in view of the nature and scale of the alleged fraudulent scheme in combination with the way in which Tatneft’s efforts to recover under the judgment obtained in Tatarstan had been thwarted.

In addition to the findings related to the WFO, Picken J granted applications to set aside the order permitting service out of the jurisdiction on the second and fourth defendants and for reverse summary judgment in favour of the first and third defendants against Tatneft. He refused Tatneft’s application to amend its particulars of claim.

Implications

It is now clear that a claimant may sufficiently satisfy a “good arguable case” test in the context of an application for a freezing order even where both sides have a good arguable case on the material available to the court at the time of the application. The claimant does not have to prove a better than 50% chance of success.

Further, a claimant may rely on allegations of dishonesty against the defendant in establishing a sufficient “risk of dissipation” of assets. While general allegations of dishonesty will not always be sufficient to justify such an inference being drawn, the allegations of dishonesty in the context of fraud claims will almost always be at the heart of the claim against the defendant, which may justifying such an inference being drawn in many cases.

The judgment is no doubt a welcome clarification of the case law for claimants bringing freezing order applications against defendants in the context of broader fraud claims.

PJSC Tatneft v Bogolyubov and others [2016] EWHC 2816 (Comm)

Post By Anita de Villiers (1 Posts)

Connect

Leave a Reply

Your email address will not be published. Required fields are marked *