Gowling WLG's dedicated insolvency litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.

Disclosure of assets ordered despite risk of criminal prosecution in overseas jurisdictions

The commercial court has ordered disclosure of assets under a worldwide freezing order despite the respondent opposing the application on the grounds that such disclosure might expose him to the risk of criminal prosecution in overseas jurisdictions.

Background

This is another judgment in the long running case of JSC BTA Bank v (1) Ablyazov and (2) Khrapunov (2016). These proceedings arose following the substantial judgments obtained by JSC BTA Bank (the Bank) against the first defendant (Mr Ablyazov), totalling somewhere in the region of US$ 4.5 billion.

The Bank claimed that the second defendant (Mr Khrapunov) had conspired with Mr Ablyazov (his father in law) to injure the bank by unlawful means. The Bank claimed Mr Khrapunov had assisted Mr Ablyazov to conceal various assets in breach of freezing orders and receivership orders made by the courts in England and Wales.

An unlimited worldwide freezing order (WFO) was granted against Mr Khrapunov in July 2015, which required Mr Khrapunov to inform the Bank's solicitors of all of his assets worldwide, where those assets exceed £10,000 in value.

The order included a clause as follows:

"if the provision of any of this information is likely to incriminate the Respondent in any jurisdiction, he may be entitled to refuse to provide it..."

The parties acknowledged that a party does not have an automatic right to the privilege against self-incrimination but that the court has a discretion to allow the privilege to be claimed. The parties also accepted that Mr Khrapunov was entitled to refuse disclosure under the provisions of the order if the effect of doing so would be to incriminate himself in relation to prosecutions overseas.

Privilege against self-incrimination

On 31 October 2015 Mr Khrapunov wrote to the Bank's solicitors confirming he would produce the information and documents required under the terms of the WFO subject to disclosure being limited to specific named members of the Bank's legal team.

A revised order was made by the court on 6 November 2015 which provided that Mr Khrapunov should comply with the disclosure obligations under the WFO by 13 November 2015. The order also provided that the disclosure should only be provided to, and should be kept confidential by, partners and employees of the Bank's solicitors and counsel instructed in the case. As such, the Bank itself would not see the disclosed documents.

Mr Khrapunov subsequently applied for the disclosure obligation to be postponed or stayed until the WFO substantive hearing. The court refused to do this but granted a short extension. On the revised disclosure date Mr Khrapunov's solicitors confirmed that he was not providing the relevant disclosure, following foreign legal advice on the issue having been taken.

The Bank applied for an order for Mr Khrapunov to provide proper particulars of his claim to the privilege against self-incrimination. Further details were provided and it was confirmed that the privilege was not being claimed under English law. The Bank argued that Mr Khrapunov's evidence was not sufficient to amount to a claim for privilege on any basis but, particularly, in light of the confidentiality provisions and protections that would be put in place.

The decision

The court accepted that the evidence in Mr Khrapunov's affidavit was lacking in particulars and was insufficient to support the claim for privilege against self-incrimination.

The court did accept there was evidence which confirmed numerous and serious allegations had been made against Mr Khrapunov in Kazakhstan, New York and Switzerland. From that evidence the court accepted he faced the risk of prosecution in each of those jurisdictions and, given the nature of the allegations, it was "not fanciful that the disclosure of his assets will increase the risk of criminal charges and the likelihood of incrimination in relation to such charges".

Given this, the court addressed the question as to whether the provision requiring the disclosure to be to a 'confidentiality club' would remove the risk of such prosecution to such a degree that it becomes merely fanciful and ceases to be a real risk. The use of a restricted information regime or confidentiality club had been previously recognised in a number of authorities. Furthermore, in earlier proceedings by the Bank against Mr Ablyazov, disclosure by way of a confidentiality club was ordered and there had been no problems with the operation of that confidentiality club and the disclosure given in it.

The WFO also contained a standard provision in the form of an undertaking by the Bank that it would not use the information obtained for the purpose of any other civil or criminal proceedings (in any jurisdiction). Further protection was also provided by the fact that only the legal team directly involved in the case would have access to the documents - the Bank itself would not have access to the materials.

The court did not accept that disclosure in England would affect Mr Khrapunov's risk of incrimination in Switzerland. Mr Khrapunov's argument that Switzerland could seek disclosure by applying for mutual legal assistance was not regarded as a significant risk. The process would require a discretionary decision by the English courts and, further, the Swiss authorities fully recognise the concept of privilege against self-incrimination.

Mr Khrapunov had argued that it was possible the US Government could issue a subpoena to the Bank's solicitors' US firm and obtain documents that way, notwithstanding the confidentiality club. The court held that this was a remote and fanciful possibility, the foreign authorities would not know what information Mr Khrapunov's lawyers had received. The judge therefore concluded that the confidentiality regime already in place would be sufficient to remove any real risk to Mr Khrapunov of prosecution overseas. Provided the documents were disclosed subject to that restriction, the court did not consider that any further protection was necessary, proper or proportionate as a matter of discretion.

Comment

Even if there is a very real possibility that a defendant's disclosure of documents, here, could increase the risk of prosecution in an overseas territory, the court will still order disclosure if the claimant can show steps can and will be taken to reduce that risk so that it would cease to be real.

The case is also interesting as it highlights the risk as regards international law firms with branches in the US, for example, where legislation exists which could compel such law firms to hand documents over to Government authorities, notwithstanding disclosure restrictions in place here.

Mr Khrapunov has appealed the decision.

Trustees in bankruptcy are 'members' from the date company shares are vested in them

In Hamilton & Others v Brown & Others [2016] the Companies Court confirmed that trustees in bankruptcy do not have to be registered as members of a company before they can present a winding up petition. The trustees were regarded as 'members' from the date the shares were vested in them and as such they had standing to present a petition.

Background

The petitioners were appointed as trustees in bankruptcy of Mr Brown on 10 June 2014 and shares (the Shares) previously held by Mr Brown in C & MB Holdings Limited (the Company) vested in them as trustees on that date. Mr Brown's shareholding amounted to 50% of the issued share capital of the Company.

Mr Brown remained registered as, and therefore continued to be, a member of the Company until 26 March 2015, when the petitioners were entered in the Company's register as members in his place.

The petitioners had, prior to that, presented a petition on 11 June 2015 seeking relief pursuant to section 994 of the Companies Act 2006 (CA) (unfair prejudice). They alleged that the first respondent, Mrs Brown (Mr Brown's wife and the other director and shareholder of the Company ), had conducted the affairs of the Company in a manner unfairly prejudicial to their interests as members. Alternatively they sought a winding up order on just and equitable grounds pursuant to section 122(1)(g) of the Insolvency Act 1986 (IA).

The petitioners relied on several grounds of unfair prejudice and a further three grounds were pleaded in support of the alternative claim for just and equitable winding up.

The first respondent raised a number of arguments in her defence, one of which was that the petitioners did not have standing to present a petition to wind up the company. She argued that the petitioners did not satisfy the requirements of section 124(2)(b) IA, which provided that:

"a contributory is not entitled to present a winding up petition unless... the shares in respect of which he is a contributory, or some of them, either were originally allotted to him, or have been held by him, and registered in his name, for at least 6 months during the 18 months before the commencement of the winding up,...".

Mrs Brown argued that the petitioners only became members on 26 March 2015 when their names were entered in the Company's register of members by agreement. The petition was presented on 11 June 2015 and, applying section 129(2) IA, the 'commencement of the winding up' occurred on the same day. On that basis the shares had not been registered in the name of the petitioners for the required period of time.

Decision

The court held that section 79 IA provides (in summary) that the meaning of 'contributory' within the IA is a person liable to contribute to the assets of a company in the event of it being wound up. S74 IA identifies such person as "every past or present member liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories themselves..".

Both parties had proceeded on the basis that a 'member' is a person who has agreed to become a member and whose name is registered in its register of members (applying section 112(2) CA). Mr Brown therefore remained a member and was a contributory until his name was removed from the Company's register of members and replaced by the Petitioner's registration.

The court accepted this interpretation was correct but confirmed this was subject to section 250 IA, which provides:

"For the purpose of any provision in [the First Group of Parts of the IA - Company Insolvency; Companies Winding Up], a person who is not a member of a company but to whom shares in the company have been transferred, or transmitted by operation of law, is to be regarded as a member of the company, and references to a member or members are to be read accordingly".

The definition of member in section 74 IA therefore includes a 'member' in this wider sense. As a consequence the meaning of 'contributory' within section 79 IA also includes such a 'member'. This will be the case even though the name of the qualifying transferee has not yet been entered into the company's register of members and notwithstanding the fact that a member is required to have their name registered in the register of members.

As such, the Shares vested in the petitioners upon their appointment on 10 June 2014. Applying section 250 IA, the petitioners were to be regarded as members and section 124(2)(b) IA must be read accordingly. Furthermore since they are regarded as 'members' they are regarded as 'registered' - because the name of a member must be entered in the Company's share register.

The fact that the word 'contributory' is used and not 'member' does not make a difference - a 'contributory' means a 'member'. The reason for using the word contributory is to limit the members to whom section 124 (2)(b) IA (those who fulfil the requirements of section 74 IA). 'Contributory' is not used to avoid the requirement that any person who qualifies is to be regarded as a 'member'.

The court confirmed that this construction does not offend the purpose of section 124(2)(b) IA, which is to prevent a person buying shares in order to be able to petition. The 6 out of 18 month protective period applied to the petitioners in this case and was effective because the Shares were beneficially owned by them for that period.

The court therefore held that the petitioners satisfied the requirements of section 124(2)(b) IA (being regarded as members for the period from 10 June 2014 until 25 March 2015 inclusive) and they had standing to present the winding up petition on that basis.

Comment

This decision is helpful as it provides clear confirmation that trustees in bankruptcy will have the same standing as the bankrupt from the date of their appointment. There is no need for trustees in bankruptcy to be registered as members of a company - which rarely happens in practice - before a winding up can be presented.

Liquidator deemed not personally liable for solicitor's fees under CFA

The chancery court has held that an insolvency practitioner was not liable for his solicitor's fees under a Conditional Fee Agreement , despite the fact the definition of success had been met.

Background

In Stevensdrake Limited v (1)Stephen Hunt, (2)Stephen Hunt as Liquidator of Sunbow Limited (2016), the claimant (Stevensdrake) commenced proceedings seeking recovery of its outstanding fees due under a Conditional Fee Agreement (the CFA). The CFA had been entered into in respect of proceedings by Stephen Hunt (Mr Hunt) as Liquidator of Sunbow Limited, against the company's former administrators (the Proceedings).

The Proceedings were compromised by way of settlements reached with each of the former administrators. The settlements reached met the definition of success under the CFA.

One of the administrators made payment in the sum of £125,000 in satisfaction of the claim against him. The second administrator agreed to settle the claim against him on payment of £1.9 million, however, no payment from the second administrator was forthcoming.

Mr Hunt argued that he had agreed with Stevensdrake that payment of their fees would take place out of recoveries made from the administrators. Payment in part was made following receipt of the settlement sum from the first administrator, however, some £790,000 of fees (base costs and 100% uplift) remained outstanding under the CFA, in addition to counsel's fees and other disbursements (which totalled just over £144,000).

Stevensdrake obtained an order for summary judgment in respect of counsel's fees incurred in the Sunbow liquidation. Stevensdrake's claim in respect of its own base costs and success fee continued.

The fee agreement

Mr Hunt retained Stevensdrake to act in relation to the Sunbow liquidation in the summer of 2005. A retainer letter was sent to Mr Hunt dated 1 September 2005, and this enclosed Stevensdrake's standard terms of business.

Those standard terms provided for monthly invoices to be paid within 28 days, however, the retainer letter itself modified those terms, confirming that except in relation to out of pocket expenses the terms of business were amended so that payment of Stevensdrake's fees would wait until recovery of assets in the estate.

New files in the Sunbow liquidation were opened in early 2006 and new retainer letters were sent out with the same modifications. By letter dated 27 April 2006 Mr Hunt confirmed return of the signed terms of business and he further confirmed the following:

"...your fees in this matter can only be paid out of realisations. In the event there are no realisations I, as Liquidator, will not be in a position to pay your fees, nor will I accept personal liability for those fees. Notwithstanding anything which may be stated in your terms of business, which may have been, or will be, signed by me, your instructions are given on the basis stated here. If you are not willing to act in this matter on this basis, please return to me all papers currently held by you.."

The partner with responsibility for the matter at Stevensdrake confirmed acceptance of Mr Hunt's conditions. His email to Mr Hunt (dated 26 May 2006) confirmed they were "happy to wait for payment of our costs until you make a recovery...", though he did confirm "I would require disbursements to be paid though".

In January 2008 Stevensdrake wrote to Mr Hunt enclosing a proposed CFA for their services on the Sunbow liquidation going forward. The CFA terms were standard and set out Mr Hunt's liability for the fees and disbursements that would be incurred. It provided:

"if you win your claim, you pay our basic charges, our disbursements and a success fee. You are entitled to seek recovery from your opponent of part or all of our basic charges, our disbursements, a success fee and insurance premiums as set out in the schedules."

The schedules included explanations relating to Mr Hunt's responsibilities under the CFA. The provisions included the following:

  • "You are personally responsible for any payments that you may have to make under this Agreement; those payments are not limited by reference to the funds available in the liquidation."
  • "As with costs in general, you remain ultimately responsibility for paying our success fee."

Stevensdrake argued that the CFA marked a fresh start on new terms and that Mr Hunt was liable to make payment under the CFA in the event the litigation was 'successful' as defined - regardless of whether any recovery was made. Mr Hunt did not accept this was the case. He argued that he was only required to make payment in respect of Stevensdrake's fees once he had made a recovery in the Sunbow estate. No realisations had been made so no payment was due.

The decision

The court held that the terms of the appointment between Stevensdrake and Mr Hunt in relation to the payment of their fees could not be ascertained from the CFA alone. The 27 April 2006 letter from Mr Hunt to Stevensdrake made it clear that Stevensdrake's fees would only be paid out of realisations and that Mr Hunt did not accept any personal liability for those fees.

The 27 April 2006 letter and its acceptance by Stevensdrake had the effect of imparting into any agreement for Stevensdrake to undertake work in relation to the Sunbow litigation that recovery of assets was a precondition to Stevensdrake rendering an invoice to Mr Hunt for work done. The court held that every retainer of Stevensdrake by Mr Hunt in relation to any and all aspects of the Sunbow liquidation was to be made on a recoveries basis only.

The court accepted that terms expressly providing for this were not found in the CFA and indeed an agreement on this basis ran contrary to the CFA. However, the court held that payment of its fees only on a recoveries basis was a stipulation communicated to and accepted by Stevensdrake. It was fundamental to the scope and meaning of Stevensdrake's retainer and was therefore a necessary and implicit term in the agreement between Stevensdrake and Mr Hunt. This overrode or negated any contrary term in the CFA.

Furthermore, an agreement on this basis was supported by the conduct of Stevensdrake and the course of dealing between Stevensdrake and Mr Hunt, at least until the parties fell out. The court held that the "volume, quality and sheer weight of the contemporaneous evidence does not admit any other conclusion".

Comment

This is a good example of the courts supporting officeholders engaged in no asset litigation. However, it is also a useful reminder that scrutiny of CFAs should be given even when the contracting parties believe they have a good working relationship - issues can arise if circumstances change and one party or other seeks to enforce the strict wording of the documentation.

'Ordinarily resident' test for bankruptcy purposes

The court had to determine whether it had the jurisdiction to make a bankruptcy order against a Pakistani citizen under the Insolvency Act 1986 (IA), s265 (s265).

S265 provides that a bankruptcy petition cannot be presented to the court under s264 IA (i.e.by a creditor or by the individual himself) unless a debtor has been ordinarily resident or has had a place of residence in England and Wales at any time in the period of three years immediately prior to the presentation of the petition.

In Reynold Porter Chamberlain LLP V Khan (2016), Khan was a Pakistani citizen and a member of the Pakistan Senate. He had business interests in both Pakistan and the UK and spent time between both countries. He frequently visited England and Wales and owned a number of properties in London where his family resided and where his children were educated. The petitioner obtained a judgment against him and subsequently presented the petition.

The issue was whether Khan passed the 'ordinarily resident' test. Khan disputed jurisdiction and gave evidence that he usually resided in Lahore. The petitioner alleged that Khan was habitually resident in London during the period in which he retained their legal services in 2012.

The court accepted that Khan usually resided in Lahore but held that did not preclude him from being ordinarily resident in England and Wales also. On the balance of probabilities, Khan was ordinarily resident within the jurisdiction during the relevant period. That being so, the court went on to make the bankruptcy order.

And finally... Insolvency Express Trials pilot scheme

A pilot scheme for Insolvency Express Trials (IET) commences on 1 April 2016. The IET is intended to provide litigants in the Bankruptcy and Companies Court of the High Court with a speedy, streamlined procedure, and an early date for trial or disposal of simple applications by the Bankruptcy Registrars. It is also intended that the scheme will limit and save costs for the parties involved.

The IET pilot is designed to deal with simple cases:

  • That can be disposed of in no more than two days.
  • That require limited directions and disclosure of documents.
  • Where the costs of each party will not exceed £75,000 (excluding VAT and court fees but including any uplift on conditional fee agreements).

The IET pilot will not be mandatory, practitioners will be able to decide which cases should proceed under it. The scheme will work within and will be subject to the existing legislation on insolvency proceedings and the Chancery Guide. The pilot will last for two years, will be reviewed after 12 months and six monthly thereafter.