Costs

Practice - Pre-trial or post-judgment relief - Freezing order

JSC BTA Bank v Solodchenko and others: Court of Appeal, Civil Division (Lord Neuberger, Lords Justice Carnwath and Jackson): 28 October 2011

The claimant bank (the bank) was incorporated in the Republic of Kazakhstan. The first defendant, S, was chairman of the bank's management board and the eighteenth defendant, A, was chairman of the bank's board of directors. The second defendant, K, was a British citizen who lived in Cyprus.

He provided corporate nominee services through two limited companies. K administered the affairs of five companies registered in the British Virgin Islands (the BVI companies). The BVI companies purported to sell certain securities to another company, Alfa (the June transactions). The bank, which had been in financial difficulties, became publicly owned with the Kazakh Government acquiring 75% of its shares. S and A were both dismissed from their positions.

The bank commenced investigations into what it believed had been the substantial and fraudulent depredation of its assets. It then commenced proceedings in order to recover its losses. In the instant proceedings, the bank alleged that S had arranged for certain bonds belonging to the bank to be used to fulfil the obligations of the BVI companies under the June transactions.

Consequently, the payments received by the BVI companies represented money that had belonged to the bank. The money was then transferred to further recipients. The bank alleged, inter alia, that K had implemented many of those transactions with full knowledge of the fraud, that he had been a director of some of the receiving companies and that he had backdated documents in order to conceal the true beneficial ownership of the BVI companies.

It alleged that A had been the ultimate undisclosed beneficial owner of both the BVI companies and the further recipients and that, having used his senior position within the bank, he had facilitated the transfer of valuable assets from the bank to the BVI companies. The bank, without notice, applied for and obtained a worldwide freezing order, a proprietary injunction and related relief against K. The order was sealed and served on K. Pursuant to the disclosure provisions in the order, he was required to provide certain details of his assets and to answer a series of questions (the schedule D questions).

The schedule D questions sought pertinent information about the transfer of money/securities from the bank to the BVI companies and beyond regarding, specifically, the June transactions, the payment of money by Alfa to the BVI companies, the payment by the BVI companies to the further companies, the transfer of securities from the bank to the BVI companies and from the BVI companies to Alfa.

K was required to provide written answers, with supporting evidence, within seven working days and to verify the information by affidavit within ten working days (the disclosure obligations). K did not comply with the disclosure obligations by the due dates. The bank applied to commit him for contempt.

The day before the hearing, K served a draft affidavit on the bank which admitted his failure to comply with the disclosure obligations and that he would comply with those obligations. The committal proceedings came on for hearing the following day. K admitted through counsel that he had acted intentionally in disregard of the order and was consequently in contempt of court. He asked for time to purge his contempt. The judge made a finding that K was in contempt but adjourned the question of sentence in order to see whether K would fulfil his promise to make disclosure.

The day before the adjourned hearing, K served his second affidavit with supporting documents. The hearing was adjourned to allow time to consider the new material and to allow K to disclose further material as ordered by the judge. K served a third affidavit the day before the next adjourned hearing. It corrected errors in his second affidavit, explained that the proceedings had had a damaging effect on his business and he apologised to the court for his initial non-compliance with the court order. The hearing took place the following day, with K submitting that he had made full disclosure and so had purged his contempt.

The judge held that she should sentence K on the basis that the contempt had been purged, without making any finding as to whether there had been full and proper compliance with the disclosure obligations. She noted that the bank had not proved any specific prejudice caused by the delay, although it had been set back in its enquiries. Further, the contempt had been deliberate, but that K had subsequently co-operated by answering the schedule D questions and providing a huge amount of disclosure at very substantial expense.

The judge concluded that the costs incurred by K, coupled with his liability for the costs of the committal proceedings, were punishment enough. Accordingly, no sentence for contempt was imposed upon K, beyond ordering him to pay costs on an indemnity basis. The bank appealed against the judge's failure to impose any substantive sentence for contempt of court. The bank introduced new material which, it contended, proved that K had presented false evidence to the judge and so had not purged his contempt.

In particular, it demonstrated that K had backdated documents in order to conceal the true beneficial ownership of the BVI companies. K subsequently admitted that his earlier evidence had been false and alleged that he had been subject to threats, surveillance and intimidation by other defendants and that there was a substantial quantity of evidence which he had not disclosed.

At a directions hearing, K was ordered to give disclosure in accordance with the terms of the original order. Some material was disclosed, but K asserted that he was having difficulty in funding the disclosure exercise. The bank contended that that recent disclosure had been false in important respects. An adjournment of the appeal hearing was granted at K's request. During the adjournment, K did not make any further disclosure or submit a skeleton argument.

The bank, concentrating on the fresh evidence that was before the court, submitted that, contrary to the judge's finding, it was clear that K had not purged his contempt at the time of the previous hearing and, consequently, she had dealt with the case on a false basis. The appeal would be allowed.

In the consideration of sentencing for civil contempt, when such contempt consisted of non-compliance with the disclosure provisions of a freezing order, the following propositions applied: (i) freezing orders were made for good reason and in order to prevent the dissipation or spiriting away of assets. Any substantial breach of such an order was a serious matter which merited condign punishment; (ii) condign punishment for such contempt normally meant a prison sentence, however, there might be circumstances in which a substantial fine was sufficient, for example where the contempt had been purged and the relevant assets recovered; and (iii) where there was a continuing failure to disclose relevant information, the court had to consider imposing a long sentence, possibly even the maximum of two years, in order to encourage future co-operation by the contemnor.

In the case of continuing breach, out of fairness to the contemnor, the court might see fit to indicate, first, what portion of the sentence should be served in any event as punishment for past breaches and, second, what portion of the sentence the court might consider remitting in the event of prompt and full compliance thereafter. Any such indication would be persuasive, but not binding, upon a future court (see [55]-[56] of the judgment).

The judge's sentencing decision had been based upon the assumption that, by the time of her judgment, K had purged his contempt. On the evidence before the court in the instant proceedings, it was clear that that assumption had been incorrect. In those circumstances, the judge's decision could not stand.

The court in the instant case had to determine the proper sentence for contempt as at the time of the judgment on the basis of the true facts as opposed to the false evidence that K had presented to the judge. On the evidence, it was plain that although K had been driven to disclose further evidence, he had not provided proper answers to the schedule D questions nor had he disclosed all relevant documents as required by the order of the court.

Therefore, there had been continuing non-compliance, further, K's contempt had been aggravated by his deliberately placing false evidence before the court at the sentencing hearing and misleading the judge (see [59]-[60], [64], [68] of the judgment).

The proper sentence was 21 months' imprisonment. The punitive portion of the sentence in respect of K's past non-compliance would be nine months' imprisonment. In the event of prompt and full compliance by K with the provisions of the freezing order, it was open to him to apply to the court to vary the sentence of 21 months, however, any variation should not, in the opinion of the instant court, reduce the sentence to less than nine months (see [65], [69]-[70] of the judgment).

Lightfoot v Lightfoot [1989] FCR 305 considered; Taylor Made Golf Company Inc v Rata & Rata (a firm) (1996) IP & T Digest 23 considered; Daltel Europe Ltd v Makki [2006] All ER (D) 398 (Feb) considered.

Decision of Proudman J [2010] EWHC 2843 (Ch) reversed.

Stephen Smith QC and Emily Gillett (instructed by Hogan Lovells International LLP) for the claimant; The second defendant did not appear and was not represented.