JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev

The Court of Appeal considered three appeals concerning powers exercisable in connection with a freezing (Mareva) order: (i) whether the court can require a member of a class of discretionary beneficiaries to disclose details of the trust and trust assets; (ii) the circumstances in which that power should be exercised; and (iii) whether a claimant acting as liquidator can be required to give an unlimited cross-undertaking in damages and to fortify it. The court held that the non-standard wording of the relevant freezing order (in particular paragraph 7(c)) encompassed the interest of a potential beneficiary under a discretionary trust and therefore that the respondent’s disclosure obligations under the freezing order extended to that interest. The court further held that the court has jurisdiction to order ancillary disclosure to investigate whether trust assets are in reality controlled by the respondent, although such disclosure should be confined to what is justified by credible evidence. On the cross-undertaking point the court held that the judge did not err in requiring the liquidator to give an unlimited cross-undertaking (discretionary decision) but that the fortification requirement (payment of USD 25 million) was not justified on the evidence and was set aside.

Background and parties

The appellants were JSC Mezhdunarodniy Promyshlenniy Bank and the Russian state corporation Deposit Insurance Agency (the DIA), the liquidator of the Bank. The respondent was Mr Pugachev, a former controller of the Bank who resides principally in London. The Russian liquidation was recognised in England. The DIA alleges that Mr Pugachev carried out a scheme to extract bank assets; similar claims were being pursued in Russia and England. The underlying deficiency in the Bank’s assets was substantial.

Procedural posture

• A freezing order was made by Henderson J on 11 July 2014 in aid of Russian proceedings under section 25 of the Civil Jurisdiction and Judgments Act 1982. The order included a non-standard paragraph 7(c) referring to "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" and contained disclosure obligations.
• Mr Pugachev disclosed that he was one of a class of discretionary beneficiaries of five New Zealand trusts but provided no further detail. The claimants applied for an order requiring fuller disclosure; Henderson J made such an order and required production of trust deeds and an affidavit as to trustees, protectors, settlors, beneficiaries and assets as at 14 July 2014. The trustees applied to discharge that part of the order and David Richards J refused to discharge it.
• Separately, Rose J ordered that the claimants provide an unlimited cross-undertaking in damages and that it be fortified by payment of USD 25 million; the claimants appealed those rulings.

Issues framed

• Whether a member of a class of discretionary beneficiaries has an "interest under a trust" caught by paragraph 7(c) of the freezing order and hence a disclosure obligation;
• Whether the court has jurisdiction to order such disclosure and in what circumstances that jurisdiction should be exercised;
• Whether a claimant liquidator must give an unlimited cross-undertaking and whether an order to fortify that undertaking was justified.

Court’s reasoning and conclusions

• Nature of discretionary beneficiary interest: the court acknowledged that a discretionary beneficiary has an equitable interest to be considered by trustees but not a proprietary interest in trust assets. Nevertheless the word "interest" in paragraph 7(c) should be read in context and was apt to include the interest of a member of a class of potential discretionary beneficiaries.
• Jurisdiction to order disclosure: the Mareva jurisdiction carries ancillary powers to make orders necessary to render the freezing order effective. CPR Part 25.1(1)(g) permits orders directing parties to provide information about assets which are or may be the subject of a freezing injunction. The threshold for such disclosure is lower than the threshold for including third-party assets within a freezing order; the court may require credible evidence that a freezing order might be applied for or that there are credible grounds meriting investigation. The court has power to order disclosure to investigate whether apparent third-party structures are shams or are in reality controlled by the respondent.
• Application to the facts: Henderson J and David Richards J did not err in construing paragraph 7(c) so as to include the respondent’s interest and in ordering disclosure given the circumstantial evidence suggesting possible control by Mr Pugachev and the need to investigate. The trustees had not adduced credible evidence to show independence from the respondent.
• Cross-undertaking and fortification: the decision whether to accept a capped cross-undertaking is discretionary. The judge was entitled to require an unlimited cross-undertaking from the DIA in the circumstances, having regard to the size of the Bank’s creditors and the public interest element. However, the judge’s order to fortify the cross-undertaking by payment of USD 25 million was set aside because the evidential foundation for fortification was insufficient; there was little evidence of an ongoing pattern of business activity by Mr Pugachev since 2011 to justify an intelligent estimate of likely loss and a sufficient risk to require fortification.

Wider context: the court emphasised the enforcement principle, the flexibility principle and the strict interpretation principle in freezing order jurisprudence, and the need to balance investigative powers against the penal consequences of freezing orders and disclosure.

The Court of Appeal dismissed the appeals by Mr Pugachev and by the trustees against the disclosure orders, holding that the freezing order’s paragraph 7(c) did cover the interest of a potential discretionary beneficiary and that the court has jurisdiction to order ancillary disclosure to investigate whether trust assets are effectively controlled by the respondent. The court upheld Rose J’s requirement that the claimants (the DIA) give an unlimited cross-undertaking in damages but allowed the claimants’ appeal in part by setting aside the order requiring fortification of that undertaking (payment of USD 25 million) on the ground that the evidential foundation for fortification was insufficient.

This is an appeal to the Court of Appeal from orders of the High Court (Chancery Division) in HC-2014-000262. The underlying freezing order was made by Henderson J on 11 July 2014; David Richards J refused an application by trustees to discharge ancillary disclosure paragraphs (order of 30 October 2014); Rose J on 19 September 2014 required the claimants to provide an unlimited cross-undertaking and to fortify it by payment of USD 25 million. The Court of Appeal heard the appeals and delivered judgment on 27 February 2015 (Neutral Citation [2015] EWCA Civ 139).