JSC BTA Bank v Solodchenko and Others

JurisdictionEngland & Wales
JudgePatten L JJ,Longmore,Aikens
Judgment Date14 December 2010
Neutral Citation[2011] EWCA Civ 1241,[2010] EWCA Civ 1436
CourtCourt of Appeal (Civil Division)
Docket NumberCase No: A3/2010/2337
Date14 December 2010
Between
JSC BTA Bank
Appellant
and
Kythreotis & Others
Respondent

[2010] EWCA Civ 1436

Mrs Justice Proudman

Before: The Right Honourable Lord Justice Longmore

The Right Honourable Lord Justice Aikens

and

The Right Honourable Lord Justice Patten

Case No: A3/2010/2337

HC10C0262

IN THE HIGH COURT OF JUSTICE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT

CHANCERY DIVISION

Mr Paul Stanley QC (instructed by Byrne and Partners LLP) for the Appellant

Mr Stephen Smith QC and Ms Emily Gillett (instructed by Hogan Lovells International LLP) for the Respondents

Hearing date: 18 th November 2010

Lord Justice Patten

Lord Justice Patten:

Introduction

1

This appeal raises a short but important point of construction about the meaning of the words “his assets” as they appear in the standard form of freezing order set out in Appendix 5 to the current edition of the Commercial Court Guide. In short, that issue is whether those words include assets which the respondent to the order holds as a trustee or nominee for a third party. If that is the correct construction of the order it means that subsequent amendments to the published forms of freezing order have considerably enlarged the scope of the injunction following the decision of this court in Federal Bank of the Middle East v Hadkinson [2000] 1 WLR 1695 that the expression “his assets and/or funds” in the standard form of freezing order appended to CPR 25 PD did not include assets which, though held in the name of the respondent, were owned beneficially by someone else.

The background to the order

2

JSC BTA Bank (“the Bank”) is a joint stock company incorporated under the laws of Kazakhstan. In February 2009 it was effectively nationalised by the Kazakh government when a national wealth fund acquired some 75.1% of the Bank's share capital. The acquisition of the Bank is said to have been necessitated by the actions of the Bank's former directors and shareholders who are alleged to have defrauded the Bank of significant assets leaving it in a precarious financial state.

3

The first defendant, Mr Solodchenko, was until dismissed the chairman of the Bank's management board and a member of its board of directors. He is currently residing in London. In these proceedings the Bank claims that Mr Solodchenko engineered a fraud under which AAA-rated investments (“the investments”) with a value of some US$300m were misappropriated from the Bank and transferred on Mr Solodchenko's instructions to five BVI companies who are the fourth to eighth defendants. The investments were transferred ostensibly to provide some form of security for the payment by a third party (Alfa Equity Investments Limited (“Alfa”)) to the BVI defendants in the abovementioned sum. What then seems to have happened is that in January 2009 they were used by the BVI defendants to satisfy their obligations to Alfa under a futures contract entered into in June 2008 under which the BVI defendants were paid US$300m for the sale of AAA-rated investments identical to those transferred from the Bank. The US$300m received by the BVI defendants was, in large part, paid to the ninth to twelfth defendants shortly afterwards.

4

The Bank claims that neither the security nor the January 2009 transfer were of any commercial benefit to the Bank and amounted to the unlawful misappropriation of its assets by Mr Solodchenko. The second defendant, Mr Kythreotis, was a director of the fourth and the eleventh defendants. The third defendant, Mr Hercules, was a director of the eighth defendant. The claim against the second and third defendants is that they dishonestly assisted Mr Solodchenko to carry out the fraud on the Bank and are accordingly liable for its loss.

5

It is not necessary for the purposes of this appeal to analyse the claim against the second and third defendants in any more detail. But it is relevant to refer to what took place prior to the application for a freezing order which was made to Henderson J on 26 th July 2010. On 15 th February 2010 the Bank obtained a Norwich Pharmacal order from Bannister J in the BVI against Alfa and Totalserve Trust Company Limited (“Totalserve”) which acts as the registered agent for each of the BVI defendants. Amongst the documentation obtained pursuant to the order was a declaration of trust in the name of Valen Limited, executed by Mr Kythreotis as a director, under which the shares in the fourth defendant and all rights attaching to them were held on trust and as a nominee for a Mr Vladimir Kovalenko. The declaration of trust includes an appointment of the beneficiary as Valen's attorney with power to transfer or charge the shares on its behalf.

6

There is a similar declaration of trust made in favour of Mr Kovalenko by Mr Hercules in respect of the shares in the eighth defendant.

7

Mr Smith QC said that the Bank's solicitors had contacted Mr Kovalenko who told them that he has no beneficial interest in or association with the fourth or the eighth defendant and had not given instructions in respect of the declarations of trust.

8

Mr Kythreotis is a British citizen who resides in Cyprus. He owns and operates the Starport group of companies which provide nominee and other corporate services. Mr Hercules works with him and is the company secretary of Starport Secretaries Limited, a company within the Starport group. Mr Kythreotis has made an affidavit in which he describes the nature of his business. He says that Starport acts for hundreds of companies (later verified as 902). It acts under instructions and does not initiate the transactions it is asked to carry out or even necessarily understand their commercial purpose. He and Mr Hercules act as nominee service providers including as nominee directors and simply execute the documents provided to them. His evidence is that the instructions in respect of the corporate defendants came from Eastbridge Capital Limited (“Eastbridge”), an English company with offices in the City of London, Cyprus and Moscow, which drafted the documents disclosed under the Norwich Pharmacal orders. The information about Mr Kovalenko came from them. He had no contact with Mr Kovalenko and did not attempt to verify either his signature or his passport details.

9

The position which the Bank took at the hearing before Henderson J (which Mr Smith says is not altered by Mr Kythreotis's subsequent evidence) is that the question of the beneficial ownership of the BVI companies was extremely uncertain and that the judge was therefore asked to make an order which was sufficiently widely drawn as to extend to all of the possible arrangements disclosed in the declarations of trust. To this end, the Bank's solicitors and counsel chose to ask for an order in the form appended to the Commercial Court Guide rather than the specimen form of freezing order referred to (but no longer contained) in the Practice Direction to CPR 25: see 25 APD 6.1.

The order under appeal

10

Henderson J granted a freezing order against Mr Kythreotis, Mr Hercules and the corporate defendants in this form which, so far as material, is in these terms:—

“5. Until after the Return Date or further order of the court, the Freezing Respondent must not, except with the prior written consent of the Applicant's solicitors:

(a) remove from England and Wales any of its assets which are in England and Wales up to the following values:

or

(b) in any way dispose of, deal with or diminish the value of any of its assets, whether they are in or outside England and Wales, up to the same value.

6. Paragraph 5 applies to all the Freezing Respondent's assets whether or not they are in its own name and whether they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise. For the purpose of this order the Freezing Respondent's assets include any asset which it has the power, directly or indirectly, to dispose of or deal with as if it were its own. The Freezing Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with its direct or indirect instructions.

12. (1) Unless sub-paragraph (2) applies, the Freezing Respondent must within 7 working days of service of this order and to the best of its ability after making all reasonable enquiries:

(a) inform the Applicant's solicitors in writing of all of its assets worldwide exceeding in value £10,000, whether in its own name or not and whether solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise, giving the value, location and details of all such assets. For the purpose of this order the Freezing Respondent's assets include any asset which it has the power, directly or indirectly, to dispose of or deal with as if it were its own. The Freezing Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with its direct or indirect instructions; ….”

Respondent

Amount

(2) Kythreotis

US$68,286,517.36

(3) Hercules

US$50 million

(4) Bubris (Celina)

US$68,286,517.36

(5) Granta (Shoreline)

US$70 million

(6) Nafazko

US$58,963,708.33

(7) Olofu

US$50 million

(8) Kyma (Mymana)

US$50 million

11

The asset values in the order against Mr Kythreotis and Mr Hercules correspond to those in relation to the fourth and eighth defendants. On 6 th August 2010 Newey J continued the injunctions until trial or further order without any material variations.

12

Mr Kythreotis failed to comply with the disclosure obligations contained in paragraph 12(1)...

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