National Bank Trust v Mr Ilya Yurov and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Males |
| Judgment Date | 28 July 2016 |
| Neutral Citation | [2016] EWHC 1913 (Comm) |
| Docket Number | Case No: CL-2016-000095 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 28 July 2016 |
[2016] EWHC 1913 (Comm)
Mr Justice Males
Case No: CL-2016-000095
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Nathan Pillow QC, Mr David Davies, Mr Anton DudnikovandMs Catherine Jung (instructed by Steptoe & Johnson LLP) for the Claimant
Mr Patrick Goodall QC, Mr Simon AtrillandMr Nick Daly (instructed by Mishcon de Reya LLP) for the First and Fourth Defendants
Hearing dates: 19–21 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.
This application
This is an application by the first and fourth defendants, Mr Ilya Yurov and his wife Nataliya, to set aside a freezing order made by Leggatt J on 11 February 2016 in the sum of US $830 million. The grounds of the application are that (1) there were serious and multiple breaches by the claimant, National Trust Bank, a Russian bank, of its duty of full and frank disclosure when applying for the freezing order and (2) there is no real risk of dissipation of the first and fourth defendants' assets. The freezing order was made also against the second and third defendants, business associates of the first defendant, and their wives, the fifth and sixth defendants, but these other defendants have not challenged the freezing order and have played no part in this application.
The case in outline
The first three defendants are former directors and shareholders of the claimant bank. Together they held 98% of the bank's shares until December 2014 when the bank had to be rescued by a US $1 billion bailout from the Russian Deposit Insurance Agency ("the DIA"). I shall refer to them collectively as "the shareholders". At about the same time the shareholders left (the bank would say fled from) Russia and the first defendant is now resident in this country.
In outline, it is the bank's case that over a long period the shareholders were using the bank's money, which originated in large part from deposits by retail customers in Russia, to fund business ventures on the basis that they would take the profits if the ventures were successful, but would leave the bank to carry any losses when they were not. The bank contends that there was no disclosure of the shareholders' interest in these transactions, which was deliberately concealed by the use of a complex and opaque network of offshore companies administered by Mr Benedict Worsley. Mr Worsley is now assisting the bank pursuant to a Settlement Agreement dated 17 November 2015. His evidence is that his activities were closely supervised by the shareholders, particularly the first defendant, on whose instructions he acted, that the network of offshore companies which he put in place was held for the shareholders personally and not for the bank, that the shareholders' instructions were that the beneficial ownership of these companies should not be traceable to either the bank or the shareholders, and that although the majority of the loaned funds were used as described above, there were also transfers of substantial sums of money to the shareholders personally.
In this action the bank seeks to recover the amounts outstanding on these non-performing loans which it says were concluded in breach of duties owed to the bank by the shareholders in their capacity as directors under provisions of Russian law. The sum claimed is some US $830 million. The bank does not make a claim in this action in respect of loans to business ventures of the shareholders which have proved profitable where the loans are being repaid. These profitable ventures which are not the subject of claims in this case include loans to companies called Willow River and RCP which own a substantial property portfolio in Moscow said to be worth some US $100 million. The shares in the Willow River and RCP companies were held by a Cypriot company called Dianthi whose shares are held by Mr Worsley, but it is common ground that the Willow River and RCP companies were beneficially owned by the shareholders.
The shareholders' wives are not alleged to have played any part in the bank's operations, but are joined as defendants because it is the bank's case that assets held in their names are amenable to execution of any judgment against the shareholders in accordance with the Chabra jurisdiction ( TSB Private Bank International SA v Chabra [1992] 1 WLR 231).
Henceforth in this the judgment I shall refer to the first defendant simply as "the defendant" and to the first and fourth defendants together as "the defendants".
The bank's allegations are denied by the defendant who maintains that there was a clear division between offshore companies held for the shareholders personally (including the Willow River and RCP companies) and those held for the bank. He says that it was common practice for Russian banks to operate through a network of offshore companies and that the position was known to and accepted by the bank.
A further aspect of the bank's case is that following the financial crisis of 2008 many loans held by the bank defaulted, so that its solvency was in question. These included loans made to offshore companies beneficially owned by the shareholders where the proposed business venture had failed. The bank says that as a result the shareholders embarked upon a scheme to disguise the bank's toxic debts by recycling money, largely by way of sham loans to further offshore companies under their control. Instead of using the loan funds for legitimate business purposes, these offshore companies would use them to service the bad debts owed to the bank by other companies in the offshore network, paying interest in order to avoid a default but not reducing (to any great extent or perhaps at all) the outstanding principal. This was a self-perpetuating process since the borrowers could only pay back these loans with money recycled through further sham loans and the overall result was to increase the amount owed to the bank. The bank says that the object and the result of this circular flow of funds was to deceive the outside world, including the Central Bank of Russia and the ordinary Russian savers who deposited their savings in the bank, over many years, by falsifying the bank's accounts and concealing its insolvency. Eventually, as was bound to happen sooner or later, it was discovered that the bank was owed more than US $800 million by worthless shell companies in offshore jurisdictions, with little or no collateral available.
It was at this point, in December 2014, that the DIA took control of the bank as a temporary administrator. The DIA is a Russian state entity whose essential functions are to insure Russian bank deposits and to manage banks that run into financial difficulty. The DIA appointed Otkritie FC Bank to assist with the rehabilitation of the bank. Mr Dmitriy Popkov, who swore much of the evidence on which the bank relied for its application for the freezing order, is a member of the management board of Otkritie and its deputy CEO. He is also, since June 2015, a member of the supervisory board of the bank which is now wholly owned by Otkritie.
As I understand it, the defendant accepts that funds were recycled in the way described above, although he maintains that the companies in question were the bank's own offshore companies and that the process was known to the bank. He describes it as "balance sheet management" and claims that it was common practice for Russian banks. He says in his second affidavit that:
"All of these problems placed the Bank in a very precarious financial position. …
As a result, there was considerable concern that if those losses had all been recorded on the Bank's balance sheet, it would have had its licence revoked by the Central Bank of Russia and consequently been declared bankrupt. For obvious reasons, the Bank's management wished to do everything possible to prevent this from happening, and took steps to manage its balance sheet using its pre-existing offshore structure (as I will describe in more detail below). …
The vast majority of the transactions involving 'Bank companies' (i.e. those which were held on behalf of and for the benefit of the Bank) were a means of managing the Bank's balance sheet. As I explained above, the Bank was in financial difficulties as a result of the losses it had made or was anticipated to make on its loan book. Therefore, it was decided to use the Bank's developing offshore network to effectively defer the point at which the Bank's bad debt would be recorded on its balance sheet. This was done by advancing loans to Bank companies, with repayment dates a few years later, which were then used to service other loans owed to the Bank by other companies. …
Revocation of the Bank's licence would of course have been a disaster for the Bank and its customers, and so I believe that this action was justified as an attempt to avoid this disaster. Of course, I accept that the transactions were somewhat artificial in that they were circular. However, they were not intended to cause any harm to the Bank. In fact, they were intended to save the Bank from collapse, and to avert the consequences of the harm that the Bank had already suffered through earlier bad loans. …
This kind of solution, i.e. circular transactions intended to defer bad debt ruining the balance sheet, was very common in Russia at the time … It may be that this was not strictly in accordance with Russian banking regulations, but it was common practice in Russia...
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Table of Cases
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