Sukhoruchkin & Ors v Van Bekestein & Ors

On an application for an interim injunction, the court should not resolve critical factual disputes or difficult legal questions, particularly where the law depends on facts which remain disputed or obscure. The reflective loss principle is highly fact-sensitive. It cannot defeat an interlocutory claim unless the available material establishes the necessary company claim with sufficient clarity.

A court cannot assume without a proper basis that foreign law governing a company's directors and their duties is identical to English law. Whether a shadow director owes fiduciary duties also depends closely on the nature of the directions or instructions given and cannot ordinarily be determined while the underlying facts remain contested.

The appellants alleged that the founders of an investment venture agreed to share its benefits equally. They claimed that two founders, who exercised informal control over offshore companies within the venture, dishonestly diverted fees to a company which they owned. The claims included breach of fiduciary duty, proprietary relief and compensation.

Christopher Clarke J granted proprietary and worldwide freezing injunctions without notice. Morgan J subsequently refused to continue them, holding that the claims concerning two distribution agreements were clearly barred by the reflective loss principle: [2013] EWHC 1993 (Ch).

The central issue was whether Morgan J could reach that conclusion at the interlocutory stage, given the disputed evidence, uncertainty about the fiduciary duties of shadow directors and the possible application of Cayman law.

1. Appeal allowed unanimously. The judge was not entitled at the interlocutory stage to conclude that the claims arising from the distribution agreements were clearly barred by the reflective loss principle. An interim injunction hearing is not the occasion to resolve critical factual disputes or difficult legal questions whose answers depend on disputed or obscure facts: Derby v Weldon [1990] Ch 48.

2. The reflective loss defence depended upon establishing that the relevant company had its own claim for the same loss. The pleadings and evidence did not establish with sufficient clarity that the company would possess such a claim. The appellants had a good arguable case that the individual fiduciaries could be liable to them while the company had no corresponding claim.

3. The judge could not conclude that there was a strong case that the alleged wrongdoers owed fiduciary duties to the company as shadow directors. English authority disclosed differing approaches to such duties. Whether the duties arose was highly fact-dependent, particularly because the parties disputed whether directions or instructions had been given to the company's directors.

4. Nor was there a proper basis for assuming that Cayman law on shadow directors and their duties was the same as English law. The appellants' expert report indicated that the issue was at least open to serious debate under Cayman law. The requirements in Ladd v Marshall [1954] 1 WLR 1489 were satisfied, and admitting the report furthered the overriding objective in rule 1.1 of the Civil Procedure Rules 1998.

5. A claim for breach of fiduciary duty did not require proof of dishonesty or proof that the company's director had been deceived. Liability could arise if fiduciaries knowingly procured the diversion of venture money which should have been shared among all the principals. Dishonesty was separately relevant to the risk of dissipation supporting interim relief.

6. The alternative grounds in the respondents' notice failed. The judge's discretionary conclusion that the alleged omission of the reflective loss point at the without-notice hearing would not justify discharging the injunctions could not be faulted. A disputed counterclaim did not determine whether the appellants had a good arguable case or serious issue to be tried.

7. The court declined to decide a new argument, based on Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, that the diversion could not support proprietary relief. It had not been raised below and concerned a complicated and contentious area requiring fuller analysis. The respondents could seek discharge after clarification of the law in the pending appeal in FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The application to set aside permission to adduce expert evidence of Cayman law was refused: [2014] EWCA Civ 399 .
2. High Court, Chancery Division: Morgan J refused to continue the proprietary and worldwide freezing injunctions, principally because the relevant claims were considered clearly barred by the reflective loss principle: [2013] EWHC 1993 (Ch) .
3. High Court, Chancery Division: Christopher Clarke J had granted proprietary and worldwide freezing injunctions on the appellants' without-notice application.