JAC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev

Where the wording of a freezing order expressly includes an interest that may arise through the exercise of a discretion, it can encompass the equitable interest of a discretionary beneficiary, despite that interest being non-proprietary and not itself amenable to execution.

The court may order disclosure to investigate whether ostensibly third-party trust assets are in fact controlled by the respondent. Under Civil Procedure Rules 1998, the applicant need show credible material supporting a reasonable possibility of a future freezing application; it need not first establish good reason to suppose that the assets can be enforced against.

A liquidator has no automatic entitlement to cap a cross-undertaking in damages. Fortification requires evidence of a sufficient, causally connected risk of loss, not an unsupported inference from the breadth of the freezing order.

The Bank and its Russian liquidator, the Deposit Insurance Agency, pursued substantial claims against Mr Pugachev in Russia and England. In aid of the Russian proceedings, Henderson J made a worldwide freezing order. Mr Pugachev disclosed that he was one of a class of discretionary beneficiaries under five New Zealand trusts. Henderson J ordered further disclosure about the trusts, and David Richards J refused the trustees’ application to discharge that order.

Rose J later required the claimants to give an unlimited cross-undertaking in damages and to fortify it by USD 25 million. Mr Pugachev and the trustees appealed the disclosure rulings. The claimants appealed the requirement for an unlimited undertaking and sought permission to appeal the fortification order.

The central issues concerned the scope of the freezing order, the threshold for disclosure about trust assets, and the proper approach to an undertaking and its fortification.

1. The appeals from Henderson J and David Richards J were dismissed. The appeal from Rose J was allowed only as to fortification. The requirement for an unlimited cross-undertaking remained in force.
2. The particular wording of paragraph 7(c) of the freezing order covered Mr Pugachev’s interest as a member of a class of discretionary beneficiaries. It distinguished a present interest dependent on the exercise of a discretion from a distribution already made. Read with paragraph 6, the words were sufficiently clear to include such an interest, although it was not a proprietary interest in the trust assets: Gartside v IRC [1968] AC 553.
3. The court had power to order written disclosure ancillary to a freezing order. The threshold under CPR 25.1(1)(g) was credible material showing a reasonable possibility that a freezing application might be made. It was lower than the “good reason to suppose” threshold required before ostensibly third-party assets could themselves be frozen. The evidence warranted disclosure to test whether Mr Pugachev effectively controlled assets within the trust structures; it did not yet justify treating the trust assets as his.
4. The trustees were not entitled to a further cross-undertaking in respect of disclosure. The existing freezing order already contained the usual protection for third parties. An additional undertaking for disclosure required credible evidence of a realistic risk of loss, which had not been shown.
5. An unlimited cross-undertaking is ordinarily the price of interim injunctive relief. A liquidator’s application for the benefit of creditors may justify a cap in an appropriate case, but does not compel one. Rose J was entitled to take account of the state-backed character of the liquidator, the presence of substantial creditors, and the absence of evidence that indemnities or insurance had been pursued.
6. Fortification required an intelligent estimate of probable loss, sufficient evidence of a risk of loss, and causation by the injunction. Although the order was wide, the evidence did not establish a continuing pattern of business activity from which loss could properly be inferred. Permission to appeal was granted and the fortification order was set aside.

• Court of Appeal (Civil Division) — unanimously dismissed the appeals concerning disclosure and the unlimited cross-undertaking, but allowed the appeal against fortification: [2015] EWCA Civ 139.
• High Court, Chancery Division — Henderson J made the freezing and disclosure orders; David Richards J refused to discharge the disclosure order; Rose J required an unlimited cross-undertaking and USD 25 million fortification.