Sukhoruchkin v Van Bekestein

The Court of Appeal allowed an appeal against Mr Justice Morgan's refusal to continue interim proprietary and worldwide freezing injunctions. The principal legal issues were the appropriate approach to interlocutory applications for injunctions, the application of the "no reflective loss" principle to claims by shareholders for losses said to derive from diversion of company income, and whether the appellants had shown a good arguable case that the respondents owed fiduciary duties and had breached them. The court held that a judge at interlocutory stage should not finally resolve highly fact dependent or difficult questions of law, such as whether the alleged breaches give rise to claims by the company (which would engage the no reflective loss rule) or whether the defendants were shadow directors subject to fiduciary duties under Cayman law, where the evidence is in conflict. The Court of Appeal accepted new expert evidence on Cayman law and concluded that the judge erred in deciding at the interlocutory stage that the no reflective loss principle clearly barred the appellants' claims.

Background and parties:

• The appellants (Pavel Sukhoruchkin and others) were founders of a fund-of-funds venture with the first- and second-respondents (Marc and Sanjit) and others. The corporate structure used offshore entities (including HIA and Hadar Fund) with nominee directors. The appellants alleged that the respondents diverted management and performance fees to Blue Pearl pursuant to written distribution agreements and other arrangements, wrongfully depriving the appellants of their one-quarter share of the proceeds.

Nature of the claim and relief sought:

• The appellants sought declarations, equitable compensation, proprietary remedies and an account, damages and other relief. On 15 May 2013 an ex parte order granted proprietary injunctions and a worldwide freezing injunction. On return, the appellants applied to continue those injunctions until judgment or further order, with an expanded scope.

Issues before the Court of Appeal:

• Whether the High Court judge was right to conclude at interlocutory stage that the appellants' claims in relation to the Distribution Agreement and Rio Agreement were "clearly barred" by the no reflective loss principle;
• Whether the appellants had a good arguable case that Marc and Sanjit owed fiduciary duties (including as shadow directors) to HIA or to the appellants;
• Whether the judge erred by resolving difficult factual and legal disputes at interlocutory stage rather than leaving them for trial; and
• Whether the Court of Appeal should admit late expert evidence on Cayman law.

Reasoning and disposition:

• The Court emphasised the established principle that interlocutory applications should not attempt to resolve critical disputed facts or difficult points of law which are fact dependent. The judge had reached a firm conclusion that the no reflective loss rule barred the appellants' claims, effectively resolving complex questions about whether HIA would have alternative causes of action (for example deceit or as against shadow directors) and about the application of Cayman law on shadow directors. The Court held that those questions were highly fact dependent and not appropriate to be resolved finally at interlocutory stage.
• The Court permitted the appellants to adduce a joint expert report on Cayman law, held that the Ladd v Marshall test for admitting late evidence was satisfied, and accepted that existing Cayman authority left the relevant legal questions open to serious debate. That evidence undermined the judge's basis for concluding there was a "strong case" that Marc and Sanjit owed fiduciary duties to HIA as shadow directors.
• Because of the conflicting evidence and the unsettled nature of the legal questions, the Court concluded the judge was not entitled to decide the no reflective loss point at the interlocutory stage and allowed the appeal, restoring the possibility that the injunctions should continue until trial.

The appeal was allowed. The Court of Appeal held that the judge erred in resolving at interlocutory stage that the appellants’ claims were clearly barred by the no reflective loss principle, because that conclusion depended on difficult, fact‑sensitive questions (including whether the respondents were shadow directors under Cayman law and whether HIA would have alternative causes of action) which should not be finally resolved on an interim application. The court also allowed the appellants to adduce expert Cayman law evidence on appeal and concluded that the judge should not have foreclosed the appellants’ claims at that stage.

Appeal from the High Court of Justice, Chancery Division (Morgan J) [2013] EWHC 1993 (Ch); allowed by the Court of Appeal [2014] EWCA Civ 399 (Chancellor Sir Terence Etherton, Lady Justice Macur and Sir Timothy Lloyd).