Fiona Trust & Holding Corporation and Others v Privalov and Others (No 2)

JurisdictionEngland & Wales
JudgeMr Justice Males
Judgment Date26 August 2016
Neutral Citation[2016] EWHC 2163 (Comm)
Docket NumberCase No: CL-2005-000491
CourtQueen's Bench Division (Commercial Court)
Date26 August 2016
Fiona Trust & Holding Corporation
Claimant
and
Yuri Privalov & Others
Defendant

[2016] EWHC 2163 (Comm)

Before:

Mr Justice Males

Case No: CL-2005-000491

Case No: CL-2016-000110

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr David Allen QC, Mr Dominic Dowley QC, Mr Justin Higgo & Mr Daniel McCourt Fritz (instructed by Ince & Co LLP) for the Claimant

Mr Steven Berry QC, Mr Nathan Pillow QC & Mr Adam Board (instructed by Lax & Co LLP) for the Defendant

Hearing dates: 4 th–7 th & 11 th–14 th July 2016

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Males Mr Justice Males

Introduction

1

A freezing order improperly obtained which ties up several hundred million dollars for five years is likely, at least in normal circumstances, to cause significant losses to a defendant whose assets are frozen in this way, especially if the defendant is a businessman with undoubted entrepreneurial flair and a successful track record. The fact that he has been found to be dishonest in at least some of his business dealings and untruthful in his evidence in this court means that his evidence of losses suffered may command little or no weight, but need not affect the likelihood that some such losses will have been caused.

2

The circumstances prevailing while the freezing orders in this case were in place were hardly normal. They included, from 2005 to mid 2008, the last few years of a remarkable and sustained boom in the shipping market when it would have been difficult for those engaged in the market not to make profits, followed in late 2008 by a crash of unprecedented severity. That complicates the assessment of losses in this case and underlines the need to avoid hindsight in considering what the businessman whose assets were frozen would have done with his money if unconstrained by any order, but does not affect the principle that, if losses can be proved to a sufficient standard, he is entitled to be compensated.

3

The businessman in question is Mr Yuri Nikitin. He and companies controlled by him faced claims in this action for damages in excess of US $577 million. Those claims involved wide ranging allegations of bribery, corruption and diversion of assets. They succeeded only to a very limited extent after a trial lasting six months, with judgment being given in December 2010 for some US $16 million plus interest, but otherwise they failed (see the judgment of Andrew Smith J at [2010] EWHC 3199 (Comm), which I shall call the "liability judgment"). Despite dismissing most of the claims against Mr Nikitin, Andrew Smith J made damning findings about his honesty and credibility. So too did Christopher Clarke J in another case in this court, Novoship (UK) Ltd v Nikitin [2012] EWHC 3586 (Comm). In fairness, however, I should add that Andrew Smith J had some equally harsh things to say about the conduct of the claimants (the Russian state owned shipping company OAO Sovcomflot which is the largest Russian owner of tankers and other commercial vessels, together with a number of its subsidiaries) and the honesty and credibility of their witnesses, including Mr Sergei Frank who was the Russian Minister of Transport between 1998 and February 2004 and since October 2004 has been the Director-General of Sovcomflot.

4

At the outset of the litigation, on 31 August 2005, the claimants obtained a worldwide freezing order in respect of assets up to the value of US $225 million, which was shortly afterwards discharged on security of US $208.5 million being paid into an account held by the defendants' then solicitors, Lawrence Graham LLP, with the balance being provided by a charge over Mr Nikitin's house. The money remained in the account, where it earned interest of US $33.5 million, until hand down of the liability judgment in December 2010.

5

In May 2007 the claimants obtained a further order, this time freezing assets to the total value of US $377 million. The effect of this order was to freeze US $262 million in bank accounts of Mr Nikitin's company Standard Maritime Holding Corp, the BVI company through which he conducted his shipping business, and a total of US $16 million held by certain of its subsidiaries. These accounts were held with the private Swiss bank Wegelin & Co and (until Credit Suisse terminated the relationship) with Credit Suisse. Wegelin did not pay interest itself but instead invested funds in the account with other banks or financial institutions. Until about November 2008 the funds were placed with other banks on fiduciary deposits from which they earned interest at modest rates. Thereafter a new strategy was adopted in response to the 2008 financial crisis, whereby investments were made in bonds, gold, foreign exchange transactions and other money market instruments. This was perceived by Wegelin as a strategy of diversification, adopted as a result of concerns about the solvency of some banks which had required bailouts during the crisis. The total return earned from the sums held in the accounts during the period when the 2007 order was in place was US $29.7 million.

6

Thus the orders obtained by the claimants had the effect of freezing assets far in excess of the sums for which Mr Nikitin and his companies were ultimately held liable. Moreover, when they applied for the orders, the claimants committed serious and culpable breaches of their duty of full and frank disclosure, both in 2005 and in 2007. In brief, they failed to disclose in 2005 that (1) many of the transactions of which they complained had been considered by and were carried out with the approval of the Executive Board of Sovcomflot and (2) Sovcomflot had had the wrongdoing of which it complained investigated by investigators who had, to Sovcomflot's knowledge, used unlawful methods to obtain information. In 2007 the claimants misled the court regarding both these matters.

7

In order to obtain the freezing orders the claimants were required to give the usual undertakings in damages, namely that "If the court later finds that this order has caused loss to the respondent, and decides that the respondent should be compensated for that loss, the applicants will comply with any order the court may make". As this and other cases demonstrate, the giving of such an undertaking is not a mere formality. It may represent a significant liability for a claimant. Failure to honour the undertaking is a contempt of court.

8

Following the conclusion of the claimants' unsuccessful appeal from the liability judgment (see [2013] EWCA Civ 275), Mr Nikitin and his companies sought an order for the enforcement of these undertakings, together with an order for an inquiry as to the damages suffered by them as a result of the orders. I shall refer to Mr Nikitin and his companies as "the defendants" without distinguishing between them: strictly most of the losses claimed are alleged to have been suffered by Standard Maritime; all the companies are beneficially owned and controlled by Mr Nikitin. There were other defendants in the action, but they have played no part in the proceedings before me.

9

Enforcement of the undertakings was resisted by the claimants on the grounds that (1) the court should exercise its discretion not to enforce the undertakings because of conduct of or attributable to the defendants, and (2) the defendants had not shown a sufficient case that they had suffered loss that should be compensated. Andrew Smith J rejected those arguments and ordered an inquiry (see his judgment at [2014] EWHC 3102 (Comm), which I shall call the "enforcement judgment"). He held in summary that although Mr Nikitin was indeed guilty of misconduct relevant to the obtaining and continuation of both the freezing orders, the court should not readily refuse an inquiry as to damage when freezing orders had been improperly obtained, and that the impropriety of the claimants in obtaining the orders outweighed the misconduct of Mr Nikitin on which the claimants relied. He held also that it was no more than common sense that a businessman such as Mr Nikitin would have made profits from the shipping sector had he been free to deploy his funds and those of his companies unconstrained by the freezing orders, just as he had done in the past. There was no appeal from the decision to enforce the undertakings.

10

The claimants say that the order for an inquiry should nevertheless be set aside, either because it was obtained by fraud on the part of the defendants or because the court retains a discretion to withhold an equitable remedy. That application has been heard before me together with the inquiry itself.

11

Accordingly it is now necessary to determine (1) whether the order for an inquiry should be set aside, and (2) if not, what loss the defendants have suffered as a consequence of the freezing orders. In some ways this is the logical order in which to consider these issues. If the order for an inquiry is set aside as having been obtained by fraud, it is unnecessary to determine what loss the defendants have suffered. However, it was directed that the two issues should be tried together, as they have been, and there was no appeal from that direction. I propose to consider the issues in reverse order, which is also the way the parties addressed them at the trial. This also has its own logic. If the defendants have suffered no loss as the claimants contend, the question of setting aside the order for an inquiry or withholding a remedy becomes moot. Conversely, knowledge of the nature and amount of any loss which the defendants have suffered may inform the approach to any discretion which falls to be exercised. Accordingly I consider first the issues arising on...

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