By 23 February, 2018 0 Comments Read More →

London High Court fails to recognize Russian insolvency proceedings

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In December 2017, the London High Court set aside the recognition of the Russian insolvency proceedings in the United Kingdom in a case concerning Hermitage Capital Management dispute. The London High Court established that the Russian liquidator of Dalnyaya Step LLC (“Dalnyaya Step”) should have disclosed that the company had been previously prosecuted in the Russian Federation.

Dalnyaya Step is a former subsidiary of Hermitage Capital Management Ltd., an investment fund founded by William Browder. The fund was in 2000′s one of the largest foreign portfolio investors in Russian Federation.

Hermitage Capital Management v. the Russian liquidator of Dalnyaya Step

The decision of the London High Court concerns the dispute between the three applicants from Hermitage Capital Management Ltd. and the Russian liquidator of Dalnyaya Step. The applicants included Ivan Cherkasov, William Browder, and Paul Wrench (the “Hermitage Parties“). Kiril Nogotkov (the “Liquidator”) acted as the official Russian liquidator of Dalnyaya Step. In July 2016, the Liquidator received an order from a lower-level British court, which recognized the Russian bankruptcy of Dalnyaya Step (the “Recognition Order”)

The court ordered the Hermitage Parties to disclose certain tax liabilities of Dalnyaya Step. Eventually, Dalnyaya Step’s bankruptcy was recognized in the United Kingdom in accordance with the Cross-Border Insolvency Regulations 2006. Those Regulations apply when a foreign court or a foreign representative (for instance, the Liquidator) seeks a recognition of foreign insolvency proceedings in the United Kingdom.

In response, the Hermitage Parties applied to the London High Court to set aside the Recognition Order in August 2016. They claimed that the Liquidator failed to make a full and frank disclosure of the criminal proceedings commenced by the Russian authorities against Dalnyaya Step.

In September 2017, the Liquidator applied to terminate the Recognition Order. The Liquidator maintained that he had already obtained the Russian court’s judgment against HSBC Holdings, which allegedly sent dividends from Dalnyaya Step to Hermitage Capital Management. Therefore, in the Liquidator’s view, further proceedings in the United Kingdom became unnecessary. 

When the Hermitage Parties applied for continuing the set-aside proceedings, the Liquidator offered to pay their indemnity costs in exchange for a withdrawal of the claim. Despite that offer, the Hermitage Parties insisted that it would be in the public interest to decide whether the Liquidator breached his duty of full and frank disclosure and to expose Nogotkov’s wrongdoing and prevent abuse of English court’s procedures in the future.

The Recognition Order: to set aside or to terminate?

The Hermitage Parties invoked that the triggered insolvency proceedings were part of a retaliatory campaign by the Russian state against them, which involved 230 million US dollars fraud allegations. They submitted that the UK Home Office had refused the repeated assistance requests from the Russian authorities in criminal proceedings against them on the grounds of public order.

Therefore, the Recognition Order imposing the Hermitage Parties to disclose certain documents to the Liquidator would contravene the United Kingdom’s public policy. Apart from that, they maintained that the Liquidator sought those documents to send over to the interested Russian authorities instead of using them for the liquidation purposes.

Consequently, the Hermitage Parties asked the High Court to decide whether the Liquidator breached his disclosure obligation, and consequently the Recognition Order should be set aside ab initio

On the other hand, the Liquidator submitted that the Recognition Order should be simply terminated following to his termination application. He rejected the Hermitage Parties’ allegations and claimed that he was not aware of any mutual legal assistance requests by the Russian authorities at the time of the application for the Recognition Order. Apart from that, the Liquidator maintained that the investigated assets were separate from those under the fraud allegations against the Hermitage Parties in the Russian Federation.

The London High Court’s verdict

The London High Court confirmed by its judgment that it was a material difference between setting aside the Recognition Order ab initio and terminating it at the Liquidator’s request. The agreed facts were sufficient to demonstrate that the public policy exception under Article 6 of Cross-Border Insolvency Regulations 2006 should be triggered. Nogotkov, acting as a Liquidator, knew or ought to have known that public policy issues would be raised as a result of his application for the Recognition Order. 

Nogotkov’s inquiries about the Russian criminal proceedings on Dalnyaya Step suggested that he was aware of the UK Government’s negative responses to the previous legal assistance requests in relation to the company’s tax liabilities.

Therefore, the fact that the Liquidator agreed to pay the indemnity costs to the Hermitage Parties presumed that he was not acting as an independent insolvency practitioner. The history of the Russian state’s actions against the Hermitage Parties was a material fact, which had to be fully disclosed to the British courts in order for them to decide whether the public policy exception had to be applied.

The approach taken by the London High Court can be summarised as follows. The disclosure duty not only covers the material facts known to the Liquidator, but also any additional facts the Liquidator would have known had he made proper inquiries prior to the application. The Liquidator fully realized that his steps were politically charged and had to inform the British courts about the possibility of touching upon certain political issues. Thus, the court found Liquidator’s failure to alert the court to the public policy issues and the political background inexcusable.

Finally, the London High Court’s concluded that the Recognition Order represented another attempt by the Russian authorities to obtain a legal assistance from the UK in criminal proceedings against the Hermitage Parties. The Russian state attempted to obtain sensitive information about the companies related to the Hermitage Parties, which were under investigation in the Russian Federation. Hence, Nogotkov was in clear breach of his duty of full and frank disclosure when he applied for the Recognition Order. The Court, therefore, set aside the Recognition Order ab initio.

Conclusion

The Judgment is important because it shows why a recognition order of cross-border insolvency might be refused in the light of public policy exception. The Judgment also demonstrates how relevant criminal matters may be for recognition of cross-border insolvency. Prior to setting aside the Recognition Order, the London High Court conducted a thorough assessment of the complex relationship between the Russian Federation and the Hermitage Parties.

The assessment included reviewing the legal proceedings against the owners of Hermitage Capital Management Ltd. in Russia, and against Sergei Magnitsky, the Hermitage’s former lawyer. Hence, the London High Court’s Judgement determined that the issue of public policy shall be assessed in a broader picture, not limited to the insolvency matters of a case.

About the Author:

Sorin Dolea is a Moldovan lawyer, who obtained Geneva LLM in International Dispute Settlement-MIDS. He graduated with a bachelor degree and LLM in International Law from Moldova State University, Arbitration Academy in Paris and the Hague Academy of International Law (course on the international private law). He specializes in international commercial and investment arbitration and has experience working in a major Austrian law firm for two years.

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