A Russian tycoon has failed in his efforts to have a £1bn worldwide freeze on his assets lifted in a case which has implications for freezing injunctions. Sergei Pugachev, who is being sued by Russia’s state liquidator over allegations that he took hundreds of millions of dollars of Russian taxpayers’ money when the government bailed out the bank he ran, denies the allegations, claiming they are politically motivated and part of a state conspiracy. 

Loans granted by Russian Central Bank

In the case of JSC Mezhdunarodniy Promyshlenniy Bank and State Corporation "Deposit Insurance Agency" (DIA) against Mr Pugachev, the Court of Appeal recently handed down judgment on three appeals. One of the appeals which the court considered was whether it was permissible on the facts of the case to require cross undertakings to be fortified. The supported proceedings were issued by the bank and DIA against Mr Pugachev in Russia. It is alleged by the claimants that the defendant, who has in the past been referred to as “Putin’s Banker", caused the Bank's insolvency. Under Russian Federal Law "managers, board members (oversight board), founders (participants) of a credit organisation" may be held subsidiarily liable for a banks debts if its’ insolvency was caused by their culpable actions or omissions.

Financial support

Pugachev founded the Bank in the 1990's. In 2008 during the global financial crisis, the Bank needed financial support, and received large loans from the Central Bank of Russia (“CBR”). In 2010 the Bank was placed in to temporary administration and the Russian Court appointed the DIA as the liquidator. The DIA has been described as a “state corporation that is established for the benefit of the public welfare”.

Unlimited

The claimants alleged that following receipt of help from the CBR, Mr Pugachev carried out schemes to extract money from the bank for the benefit of himself and companies under his control, which they allege led to the Bank’s fall. On the 11th of July 2014 Henderson J granted a freezing order and the bank and DIA gave limited cross undertaking in damages. In September 2014, on Mr Pugachev’s application, Rose J ordered that the cross undertakings given by the claimants should be unlimited and that it should be fortified by the payment of $25 million. The Bank and the DIA challenged Rose J's decision and sought permission to appeal.

Fortification of Cross undertakings

Although this was not available at the time when Rose J gave her judgement, the Court of Appeal recently gave guidance on the requirements for an order for fortification in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd. The requirements are as follows:

(1) That the Court has made an intelligent estimation of the likely amount of loss which might result to a defendant by reason of the injunction

(2) That the applicant for fortification has shown a sufficient level of risk of loss to require fortification

(3) That the contemplated loss would be caused by the grant of the injunction

Rose J was referred to and cited in her judgement to earlier authorities which were not as distilled in the principles of the law relating to an order for fortification. Rose J relied on the judgement of Floyd J in the case of Holyoake, which was in relation to an individual with an extensive portfolio. Rose J concluded that there was sufficient risk of Mr Pugachev suffering significant loss of the kind referred to by Floyd J. She concluded that “a person who generally conducts business on a very large scale does not usually rely on reservoirs of cash sitting in bank accounts in his personal name. But that does not mean that he has no intention of continuing his business activities or that he does not have the where-with-all to do so. He is prevented by the injunction from operating his funds to conduct his business and that injunction attaches to funds once thy come into his hands”.

The Court of Appeal

The Court of Appeal did not find that the judge had erred in the principles of law. However it questioned whether there was “evidential foundation for the general conclusions that the judge stated.” The Court said it was “necessary in such a case to establish by evidence a continuing pattern of business activity.” It looked at the evidence of Pugachev’s business activity since he left Russia in 2011 and found that since that time there was ”virtually none” apart from a few real estate abortive transactions and interests in France and Switzerland Furthermore, Mr Pugachev  did not identify prospective ventures or evidence on how he spent his time since he left Russia.The Court was therefore not persuaded that Mr Pugachev had an established pattern of business activity from which it could be inferred the injunction would cause him loss. It found that the decision of the judge was “unsustainable on the evidence”, and granted leave to appeal. An oral hearing of the appeal will now take place in due course.

Noteworthy

The decision is noteworthy as it shows that a court should only make an order for fortification if there was evidence before the court to show that there was a real and significant level of risk of loss that would be caused by the injunction. It also provides useful guidance on the evidence that the court will expect to see on an application for fortification of a cross undertaking for damages in a case such as this.The case is likely to have an impact on freezing injunctions, which appear to be a common feature in other Russian and CIS cases before courts in England and Wales

Andrew Pena is Managing Director and Kerem Alev a Solicitor at London based law firm Cubism Law.