Russians in the British courts: Banker Pugachev’s precedent

British court awards in proceedings involving our fellow-countrymen (most often, former ones) always attract interest in Russia.

These awards are no less interesting from a professional point of view, since they let one compare the mechanisms and the power of Russian and English law.

In this regard, a recent award of the High Court of London, upheld by the Court of Appeals, in the proceedings against Sergey Pugachev, a former member of the Senate and a former banker, JSC Mezhdunarodniy Promyshlenniy Bank and Another v Pugachev [2015] EWCA Civ 139, is noteworthy indeed.

In a way, this matter is a revealing one, as it demonstrates the power of the British justice system in relation to property well hidden behind the hedge of offshore companies and discretionary trusts. The indifference exhibited by the British court as it found the suspect guilty of a crime and passed a sentence upon an individual who had many times tried the patience of the English justice system is noteworthy too.

What conclusions may be made out of this award?

Firstly, British courts may impose interim charging orders over property in aid of proceedings held abroad (Section 25 of the Civil Jurisdiction and Judgments Act 1982). This was the right exercised by the High Court of London as it resolved to freeze assets worth £1.17 billion in aid of proceedings held in Moscow Court of Arbitration.

The freezing injunction issued by the High Court ordered to freeze assets which Mr Pugachev could directly or indirectly control, including third-party-owned assets. The freezing injunction applied to “any beneficiary interest in a trust or a similar arrangement, including the power of appointment, the power of discretion or otherwise, whose value is over £10 000”.

Moreover, as one speaks about the power of British courts one ought to recall another precedent case heard by the Court of Appeals of England and Wales (JSC BTA Bank v Solodchenko and others [2011] EWCA Civ 1241). In accordance with that award, interim charging orders apply even to assets not owned by but actually controlled by the respondent.

Secondly, it became crystal clear that a British court will easily and swiftly penetrate any labyrinth of offshore companies and discretionary trusts. The High Court’s resolution to apply the freezing injunction made Mr Pugachev to disclose information about all trusts whose beneficiary he was, including discretionary ones.

Generally, disclosure is a thoroughly designed tool used by the British justice system in accordance with the Civil Procedure Rules. Before a matter is actually heard the parties must provide each other with all documents that are relevant to the case, i.e. to “lay cards on the table”

(Davies v Eli Lilly [1987] 1 WLR 428). Moreover, your own solicitor will insist that you disclose any and all such documents. There are strict rules that order disclosure of electronic documents and prohibit against document destruction.

Thirdly, failure to follow the orders imposed by a British court is a crime (contempt of court) that carries severe punishment, up to imprisonment (Contempt of Court Act 1981). In Sergey Pugachev’s case the court found as many as twelve instances of contempt of court which manifested in concealment of documents, provision of inaccurate information, using the assets frozen by the court. It is not surprising that the High Court passed a maximum sentence that exists in the UK (section 14(1) of the Contempt of Court Act 1981): a two-year imprisonment (JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2016] EWHC 258 (Ch)).
English lawyers have already noted this resolution as a precedent in relation to application of additional remedies (namely: issuing an order to disclose discretionary trusts) in order to enhance the efficiency of such a remedy as freezing injunction.

Two aspects may be of interest for a practising Russian lawyer:

1. Russian authorities are ready to prosecute the offenders even in foreign courts (we shall recall that the Deposit Insurance Agency initiated proceedings both in Moscow Court of Arbitration and in the High Court of London), and such actions do seem to have effect.

2. Even though there is no international treaty between the United Kingdom and the Russian Federation, English courts are willing to apply remedies such as freezing injunction in aid of proceedings held in a Russian court of arbitration.