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NICK GOODFELLOW ON ASSET DISCLOSURE ORDERS IN THE BVIS

In October 2018, the Eastern Caribbean Supreme Court handed down judgment in Emmerson International Corporation v Vekselberg and others BVIHCM 2013/060 which is the first case in the British Virgin Islands (‘BVIs’) to rule in detail on the Court’s jurisdiction to grant an order requiring a party to provide information about relevant property or assets which may be the subject of a freezing order (asset disclosure order or ‘ADO’).

Background

The case concerns a joint venture entered into between two successful Russian businessman, Mr Mikhail Abyzov and Mr Viktor Vekselberg, relating to assets in the Russian and CIS energy sector.  A company was incorporated in Belize, under the name ‘IES Belize’, to act as a holding company for the joint venture.

Emmerson International Company, the Applicant company, is an entity controlled by Mr Abyazov. Mr Vekselberg and three companies associated with him were respondents to the application.

Mr Abyzov and entities associated with him (‘APs’), contributed approximately US$500 million to the joint venture.  Mr Abyzov believed that Mr Vekselberg and entities associated with him (‘VPs’) had contributed approximately US$800million respectively into the joint venture.  Mr Abyazov alleges that this was not in fact the case and that he was deceived as to the nature and extent of contributions made.

Disputes arose between the parties.  APs claim their money back through proceedings that were commenced in 2013.  The APs bring a contractual claim, claims in deceit and proprietary claims.

In support of their application for an ADO, the APs relied upon a wide variety of transactions, including the following:

  • Asset transfers carried out in May 2011, whereby the VPs caused the assets of IES Belize to be transferred to an entity connected with Mr Vekselberg called Starlex, without informing the APs [17]-[18].
  • More recent transactions that followed the imposition by the US of sanctions in April 2018 upon certain Russian individuals, including Mr Vekselberg, that had the effect of restricting the ability of companies or entities with a presence in the US to do any business with Mr Vekselberg.  These transactions included [30]-[40]:
  • (steps that were taken to reduce shareholdings in businesses below levels prohibited by sanctions;
  • transferring of assets to Russia;
  • transfer of approximately 55% of the beneficial ownership of Liwet Holding AG, an indirect subsidiary of the fourth respondent to the application Renova Holding Limited (‘Renova Holding’), to ‘partners’ of Mr Vekselberg and senior managers in the Renova group of companies (‘Liwet Transfers’).   

In evidence, the APs were able to point to emails that referred to a ‘clean up’ operation relating to IES Belize which the APs interpreted as an asset stripping plan.  Wallbank J (the ‘Judge’) held that whilst the interpretation of such emails would be a matter for trial, they did suggest that the VPs intended to remove assets from IES Belize to frustrate legal action by the APs [18].


Legal principles

Rule 17.1(e) of the CPR in the BVIs is materially identical to rule 25.1(1)(g) of the English CPR and gives the Court jurisdiction to an ADO about assets which may be the subject of an application for a freezing order.

The Judge observed that whilst the BVI courts had not ruled in detail on the operation of the provision, there was no difference between the BVI court’s power and that of the English Court.  Accordingly, the Judge adopted the two-stage test applied under English law [61]-[62]:
  • First, a jurisdictional threshold must be satisfied by the applicant.  This is whether there is some credible material on which an application for a freezing order might be based;
  • Secondly, the Court has a general discretion to consider whether it is just and convenient, in all the circumstances, to make the order sought.     
 (JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139)

 

Analysis

The Judge first considered the scope and purpose of CPR r. 17.1(1)(e) and held that:
  • As to its scope, this did not extend to ordering the provision of information relating to assets that had already been disposed of [82].
  •  As to its purpose, whereas wide-ranging disclosures orders are made as part of freezing orders to police the same, it does not follow that an application who seeks such information before applying for a freezing order should be granted a similarly wide order [86].  A ‘fairly fine dividing line’ is to be drawn as at what does and does not amount to ‘fishing’ [88].


The Judge accepted the applicant’s submission that enforcing a BVI judgment in Russia is likely to entail substantial obstacles and extra burdens (relying on earlier BVI authority to the same effect) and that there is considerable uncertainty as to whether a future BVI judgment would be enforced in the BVIs [99].  The application was viewed through that prism.


2011 transfer

As to the 2011 transfer of assets out of IES Belize (together with a later transfer in 2015), the Judge did not consider that this alone amounted to a risk of dissipation, but viewed together with the ‘clean up’ emails (see above), this suggested this was being done intentionally to frustrate legal action (see above), did accept this pointed towards an intention to move assets out of the APs reach.

On this issue, however, delay was decisive.  The Judge accepted that delay was not necessarily fatal to a freezing order application but does significantly reduce the prospects of one being obtained.  In the Judge’s view, the delay in applying for a freezing order relating to IES Belize would have enabled the VPs to clean up the company long ago, and that there was no current real risk of dissipation.       

 
Post-sanctions transactions

In relation to the transactions by the VPs, following the imposition of sanctions, the Judge observed that he did not find it unnatural that the VPs would want to move assets to Russia, and that reacting to the sanctions by reducing shareholdings in western companies was also natural [114]-[115].  Therefore, whilst the circumstances giving rise to the transfers were not ordinary, the transactions themselves were in the ordinary course of business [115] (applying the test set out in Countrywide Banking Corporation Ltd v Dean [1998] AC 338). 

By contrast, the Liwet Transfers were ‘one off’ transactions that were not in the ordinary course of business, and the circumstances surrounding them raised questions [119].  Considering the “totality of the circumstances”, including the apparent plan to ‘clean up’ IES Belize, there were objective facts from which a risk of dissipation could be inferred [120].


Discretion   

The Judge considered that the balance of prejudice was in favour of the applicant (and noted its submission that in the English reported cases the courts have always favoured disclosure if the second stage is reached [129]).

The Judge considered that some disclosure was just and convenient, but limited its scope to an order against Mr Vekselberg and Renova Holding relating to investigating the Liwet Transfers.  The disclosure ordered was targeted and limited, compared with the broad range of information sought as part of the wider application.  


Discussion

Three points can be drawn from this case:

  • Even where past conduct may no longer given rise to a present risk of dissipation, the surrounding circumstances from such conduct may cast light on whether such a risk exists at a later date.
  • Where the first stage in an application for an ADO is satisfied, the balance will typically weigh heavily in favour of an ADO being made.
  • The Court will be astute to ensure that the breadth of the ADO is suitably confined, and is unlikely to be willing to make wide ranging orders that might otherwise be characterised as ‘fishing’ for information that might enable a freezing order application to be launched.

Nick Goodfellow (2009 call) has considerable experience of civil fraud claims, and cases involving urgent applications for commercial injunctions, including freezing order relief.  Nick is a member of Littleton’s Offshore Group.
Posted: 05.02.2019 at 09:26
Tags:  Comments  International & Offshore
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