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13 January 2015
In JSC Mezhdunarodniy Promyshlenniy Bank v Sergei Pugachev,(1) in relation to an application to discharge a worldwide freezing order, the High Court recently considered:
The case concerned an application brought by Mr Pugachev, the subject of the order, to discharge the order on the grounds that much of the evidence relied on in obtaining it was hearsay, the source(s) of which had not been identified, and that there was insufficient evidence of a risk of dissipation of assets.
The order had been granted on July 29 2014 following a without notice application for a worldwide freezing injunction by a Russian bank and a Russian state organisation (DIA).
The underlying facts giving rise to the without notice application related to court proceedings brought in Russia against Pugachev following the insolvency of the bank which he had founded and in which he was alleged to have had ongoing involvement. The claim made in the Russian proceedings was that Pugachev was liable under Russian law for "causing" the bank's insolvency and consequently for the bank's outstanding debts in the insolvency, or alternatively, the shortfall.
The practice direction to Civil Procedure Rule (CPR) 32 (at paragraph 4.2) provides that an affidavit must indicate which statements contained in it are made from the "deponent's own knowledge and which are matters of information or belief; and (2) the source of such information or belief". These requirements are also contained in the Chancery Guide and CPR 32 Practice Direction 18 (in relation to witness statements).
Section 4 of the Civil Evidence Act 1995 provides guidance as to the weight which is to be given to hearsay evidence and stipulates a number of factors to be considered by the court, including whether:
Pugachev alleged that the evidence supporting the application for a freezing injunction, in the form of witness statements provided by the bank's English solicitors and a Russian lawyer acting for the DIA, contained a large amount of hearsay evidence, the sources of which were not identified; therefore, any such evidence should not be given much weight.
The judge agreed that there were certain technical failings in identifying the sources of information contained in the witness statements. However, he found that these technical failings were immaterial, or that if they were more material, then the "shortcomings in the evidence would be obvious to any tribunal reading the evidence and the effect of it modified accordingly". Further, he concluded that:
"in the light of subsequent evidence, and putting [the technical failings] in their context, they plainly do not invalidate what [the witness] had to say, and any evidential deficiencies can be taken into account in weighing the pieces of evidence in question."
An application for a freezing order must be supported by evidence that there is a risk of dissipation of assets.
However, Pugachev argued that there was insufficient evidence to establish the risk "to the relevant standard". He submitted that it is necessary to demonstrate that the risk of dissipation is high, rather than merely that there is a risk. In support of this, he cited a passage from Laemthong International v ARTIS:(2) "The standard of proof of the risk of dissipation is thus relatively high." However, the judge did not agree that this comment was intended to elevate the standard of proof in all freezing injunction cases.
The evidence of dissipation of assets centred on Pugachev's historic behaviour in relation to his control or ownership of the bank, and on his use of offshore corporate structures to conceal the true ownership of assets.
Pugachev sought to rely on Wade v Wade(3) to support his proposition that the use of corporate structures does not in itself demonstrate that there is evidence of an "unjustified dealing with assets".(4) The judge found that while in Wade v Wade the court concluded that in the particular circumstances of that case the use of corporate structures was insufficient evidence of a risk of dissipation of assets, the case did not establish the general proposition being advanced by Pugachev. Although it was correct that the existence of offshore corporate structures alone was likely to be insufficient evidence to establish a risk of dissipation, in some cases the "quality and nature of the arrangements may be a pointer towards a risk of dissipation". In particular, elaborate structures of the type which Pugachev seems to have set up would, in the judge's view, be evidence of a desire to shield assets from view.
The judge rejected Pugachev's application to discharge the order.
This case is a useful reminder of the need to take care with the use of hearsay evidence. While in this case the deficiencies in the witness evidence were not fatal, this was because the evidence was either immaterial or, if material, the failings were obvious and so the evidence could be weighed accordingly.
The case also clarifies the position in relation to evidence of dissipation of assets. The mere existence of offshore corporate structures is not necessarily sufficient evidence in itself, but may indicate the existence of such a risk.
For further information on this topic please contact Katie Wright or Geraldine Elliott at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1)  EWHC 4336.
(2)  1 Lloyds Rep 110 at para 67.
(3)  EWHC 733 (QB).
(4) L v K  Fam 35.
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