Wragge Lawrence Graham & Co's dedicated insolvency litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.
In this update they look at:
Cost penalties for failing to engage in good faith with the disclosure process under a Norwich Pharmacal Order
The costs of a Norwich Pharmacal disclosure order will normally be met by the party seeking that order; it is generally accepted that the respondent's costs incurred in providing disclosure under the terms of the order will be met by the applicant. There may be circumstances when the normal rules should not apply and the case of JSC BTA Bank v Mukhtar Ablyazov & others provides such an example.
In this long-running litigation, which we covered for a different reason last month, JSC BTA Bank (the Bank) is claiming against its former chairman, Mr Ablyazov, to seek recovery of vast sums of money they allege he has stolen, as well as seeking to enforce a number of earlier judgments obtained against him for in excess of US$3.7 billion. The Bank sought third party disclosure against Mr Tyschenko, who they believed had helped Mr Ablyazov to breach the worldwide freezing order secured against him and put assets beyond the reach of the bank.
The Bank obtained a Norwich Pharmacal Order against Mr Tyschenko. He was ordered to file and serve affidavits setting out "to the best of his ability all Relevant Information...within his own knowledge (without being under any obligation to make inquiries)...", and to exhibit to the affidavits such documents evidencing the matters set out "as he may reasonably be able to collate in the available time...". The order also provided that the Bank should pay Mr Tyschenko's reasonable costs of compliance with its terms, subject to further order of the court.
Two affidavits were subsequently filed and served on behalf of Mr Tyschenko, the first relating to 'identified' assets and the second relating to other assets with a value of over US$5million. The Bank contended that the affidavits were deficient and sought cross examination of Mr Tyschenko, which he subsequently attended voluntarily.
Following the disclosure given by Mr Tyschenko, the Bank applied to set aside the original costs order on two grounds:
- That Mr Tyschenko did not engage in good faith in the disclosure process and gave "dissembling and evasive evidence" under cross examination; and/or
- That the information he did give showed that he was closely mixed up with Mr Ablyazov's wrongdoing, intermeddling with his assets and assisting him to move assets around in breach of the freezing order.
The Commercial Court found in the Bank's favour. Mr Tyschenko's failure to engage in good faith with the disclosure process and the extent to which he had actively assisted Mr Ablyazov to move his assets around amounted to a material change in circumstances since the Norwich Pharmacal Order was originally made. As a result, his recoverable costs were limited to 25% of the costs of preparing his affidavits - he was not entitled to his costs of the cross examination that was required and furthermore he was to pay the Bank's costs of this exercise.
Things to consider
The authorities make it clear that there will only be limited circumstances when a respondent would fail to recover its costs of complying with a Norwich Pharmacal Order.
However, such circumstances can arise and should be borne in mind by an applicant if a respondent does not engage in good faith with the disclosure process. In circumstances where funds in an insolvent estate will often be limited, insolvency practitioners should always consider whether there are any grounds for arguing that the respondent should actually be responsible for at least most, if not all, of the costs.
Court of Appeal guidance on the tests for establishing whether a person was a de facto or shadow director
A director of a company will have a number of duties arising as a result of that appointment, however, persons not formally appointed may in certain circumstances also assume the role of a director and consequently owe the duties which attach to that role as a result.
In the case of Smithton Limited v Guy Naggar & others the Court of Appeal has provided some practical guidance to help establish when someone might properly be categorised as a de facto director or a shadow director.
Smithton (formerly Hobart) alleged they had incurred losses by entering into transactions with clients introduced by Mr Naggar and they claimed damages in the region of £4 million against him; either in his capacity as a de facto director of Hobart, or as a director of Hobart's holding company with the arrangements giving rise to the claim infringing section 190 of the Companies Act 2006.
The Chancery Court rejected the claims and held that (i) Mr Naggar was not a de facto director and (ii) that the transactions did not fall within section 190. Smithton appealed to the Court of Appeal.
The appeal was dismissed. On the issue of establishing whether someone was a de facto or shadow director the Court of Appeal held that it was a question of fact and degree and provided the following 'practical points' for consideration:-
- There is no one definitive test for a de facto director - the question is whether the person was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were a director.
- The concepts of shadow director and de facto are different but there is some overlap.
- The question is whether the person has assumed responsibility to act as a director and, in relation to the company's business, whether the defendant's acts were directorial in nature.
- The court is required to look at what the director actually did and not any job title given to him.
- A defendant does not avoid liability if he shows that he in good faith thought he was not acting as a director. The question of whether or not he acted as a director is to be determined objectively.
- The court must look at the cumulative effect of the activities relied on. The court should look at all the circumstances “in the round”.
- It is also important to look at acts in their context. A single act might lead to liability in an exceptional case and relevant factors will include:
- whether the company considered him to be a director and held him out as such;
- whether third parties considered that he was a director.
- The fact that a person is consulted about directorial decisions or for his approval does not in general make him a director because he is not making the decision.
- Acts outside the period when a person is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.
Things to consider
Whether a person is a de facto or shadow director is fact sensitive and will depend upon the facts of each individual case where the issue is raised. The practical guidance issued by the Court of Appeal is not really new, though it does provide a helpful summary of issues to consider where the question of the existence of a de facto or shadow director arises.
A new test for obtaining relief from sanctions - new guidance issued
The Mitchell v News Group Newspapers Ltd case made it clear that the courts will not tolerate litigating parties who breach court procedure rules, even if those breaches are trivial. That has led to numerous cases where parties to litigation seek to rescue themselves from minor breaches (e.g. missed deadlines) and the other party seeks to take advantage of that breach to get a claim struck out or otherwise dismissed.
New guidance has now been issued by the Court of Appeal to be applied in all future applications for relief from sanction under CPR 3.9. The guidance, if applied correctly by the courts, should soften the perceived undue harshness and disproportionate penalties imposed on litigants pursuant to the court's earlier decision in Mitchell.
The court has also taken the opportunity to forewarn litigants that failure to co-operate with each other, the opportunistic taking advantage of minor inadvertent breaches and unreasonable refusals to agree to applications for relief from sanctions are likely to lead to heavy costs penalties in the future.
Further guidance has been given by the Court of Appeal in the conjoined appeals in Denton v TH White Ltd and other cases, on how relief from sanctions applications under CPR 3.9 should be dealt with following that previously given in the Mitchell decision.
The Court of Appeal held that an application for relief should be addressed in three stages. Judges should:
- Identify and assess the seriousness and significance of the "failure to comply with any rule, practice direction or court order" which engages CPR 3.9(1);
The focus is no longer on whether the breach is trivial but whether it is serious or significant. If it is not, relief will usually be granted;
- Consider why the default occurred;
The court declined to give an encyclopaedia of good and bad reasons for failure to comply and referred back to the examples given in Mitchell, confirming that they were no more than examples. Where there is good reason for a serious or significant breach, relief is likely to be granted;
- Evaluate "all the circumstances of the case to enable the court to deal justly with the application" including the need (a) for litigation to be conducted efficiently and at proportionate cost (CPR 3.9(1)(a)); and (b) to enforce compliance with rules, practice directions and orders (CPR 3.9(1)(b));
Even if the breach is serious or significant and there is no good reason for it, the application will not automatically fail. The court has to consider all the circumstances of the case to enable it to deal justly with the application. This was the element of CPR 3.9 that many of the decisions post Mitchell seemed to have simply ignored.
Things to consider
The key message from the judgment is that although a culture of non-compliance will not be tolerated, relief should not be automatically denied where there has been a serious or significant breach without good reason; all the circumstances of the case should be considered.
The test of "triviality" has gone, but as little guidance was given as to what "serious and significant" means, further satellite litigation is likely to follow, certainly in the short term, in borderline cases as parties and the judges grapple with those concepts. That said, overall the position is that those guilty of minor breaches should now fare better but serious breaches of process that do have an impact in terms of delay and costs are still at risk of being severely punished.
For a more detailed analysis of the judgment see New guidance on applications for relief from sanctions.