Full and frank disclosure obligation breached but injunction upheld
31 March 2015
In JSC Mezhdunarodniy Promyshlenniy Bank & anr v Sergei Viktorovich Pugachev  EWHC 4336 (Ch), 19 December 2014, Mann J refused to discharge a GBP 1.2 billion worldwide freezing injunction despite finding, inter alia, that misrepresentation and non-disclosure had occurred during the original without notice application. Whilst there had been material non-disclosure by the claimants it was not sufficiently serious to warrant the discharge of the freezing order. The inadequacies had to be placed in context. The relevant documents were not deliberately excluded, and even if they had been disclosed the injunction would still have been granted due to the weight of other evidence.
The context of this claim is the collapse of a Russian bank (the first claimant), previously controlled by the defendant. The now-insolvent claimant bank aims to recover its losses from the defendant in Russian insolvency litigation under Article 14 of the Federal Law on Insolvency of Credit Institutions. This article holds liable the person who controlled the now-insolvent institution and caused its insolvency. The defendant argues in the Russian proceedings that the collapse of the bank was politically motivated, and exacerbated by security being sold at an undervalue, aided by the second claimant, which is a state-owned Russian company. The defendant relies, inter alia, on independent valuations from BDO of certain shares that it had held. The matter came before the English court because of the claimant bank's application for a worldwide freezing order against the defendant.
The worldwide freezing order was obtained in support of these proceedings by way of a without notice application, supported by a lengthy witness statement from the claimants' English solicitor.
Application for discharge of the Worldwide Freezing Order
The defendant brought an application seeking an order that the freezing injunction be discharged for, inter alia, misrepresentation and non-disclosure during the original without notice application. Other grounds were also pursued, which are not covered in this article.
The complaints raised by the defendant in this respect were that: (i) the lengthy witness statement submitted by the claimants' solicitor contained a lot of hearsay evidence and did not identify the sources of this hearsay evidence; and (ii) the claimants had failed to draw the judge's attention to key documents, such as the BDO Valuation.
The defendant argued that given the draconian nature of a freezing order, particularly one with a high ceiling of GBP 1.2 billion as in this case, its grant should not be based on evidence which relies on hearsay evidence and does not identify the source(s) of that hearsay evidence. The defendant complained that the requirement to identify sources was an important protection as otherwise there is the danger of a generalised impression being given that may smear the defendant. After considering the examples put forward by the defendant, Mann J held that whilst there were indeed technical failings in the witness statement in this respect, the level of research and detail that had gone into the witness statement did not invalidate its contents. Further, Mann J held that deficiencies in the written evidence could be taken into account by the weight placed on that evidence.
The defendant alleged the claimants had failed at the ex parte hearing to disclose, amongst other issues, the BDO Valuation and/or to draw the judge's attention to the merits of the Russian proceedings. The defendant alleged that these were material-non disclosures on their own but that the non-disclosure also meant that the political motivations (as alleged by the defendant) were also not bought to the court's attention.
Mann J held that the claimants should have disclosed these documents and issues at the ex parte hearing. The claimants should have acknowledged that Russian state bodies have a reputation and that, whilst the allegations of political motivation were denied by the claimants, they had to recognise that this reputation exists and could infect these proceedings. The claimants were under an obligation to approach their disclosure obligations with this in mind. Mann J also found that the BDO Valuation ought to have been disclosed as it had a significant relevance to one of the key issues in dispute (an alleged sale at an undervalue of pledged shares).
Mann J emphasised an applicant's obligation to anticipate defences that may be raised and to make full and frank disclosure of those anticipated defences is very important, and "a fundamental requirement, and safeguard". Whilst the disclosure obligation did not require every possible defence to be raised, those which were obvious or arguable had to be.
Having found that there had been material non-disclosure on the part of the claimants, Mann J noted that some were more serious than others and so have to be placed in context. The relevant documents were not deliberately excluded. Even if the documents and information in question had been disclosed, the injunction would still have been granted due to the weight of other evidence. The omission of the documents in question did not leave the court with a false impression. Mann J therefore refused to discharge the freezing order on the grounds of non-disclosure.
This case clearly shows that the obligation to give full and frank disclosure of all relevant documents and information at a without notice application is a fundamental obligation that the courts take seriously. Parties must take a pragmatic approach to the issue of full and frank disclosure, as the courts will not look favourably on purely technical points being raised. The non-disclosure has to be of a material nature such that it would call into question whether the order would have been granted had the obligation been properly adhered to. Further, it is clear that the obligation of full and frank disclosure is not limited to disclosure of documents, but that the applicants must also draw the judge's attention to the anticipated defences that might be raised.