Cherkasov v Olegovich [2017] EWHC 3153 (Ch): recognition orders and public policy

Judgment on BAILII at: http://www.bailii.org/ew/cases/EWHC/Ch/2017/3153.html

The Respondent was the official receiver (i.e. liquidator) of a Russian company called Dalnyaya Step LLC (“DSL”). The English court had granted him a recognition order pursuant to the Cross-Border Insolvency Regulations 2006 (“CBIR 2006”).

The Applicants were individuals connected to the Hermitage Group, a group which had previously invested in Russian companies so as to (apparently) shed light on alleged corruption in order to drive up the share price. This had been strongly opposed by the Russian state. The Applicants had been expelled from Russia and their lawyer, Sergei Magnitsky, imprisoned. He subsequently died in custody. This led to the US Congress implementing specific prohibitions against those connected to Mr Magnitsky’s death (the so-called “Magnitsky Act”).

It did not end there. The Russian state alleged that the Applicants had been guilty of criminal activity and sought assistance in the form of information and documents from the UK authorities. The UK government declined to provide assistance on public policy grounds. The Russian courts sentenced the Applicants (or at least one of them) to significant prison sentences in their absence.

Upon the granting of the recognition order, the Respondent brought an application pursuant to section 236 of the Insolvency Act 1986 against the Applicants for the provision of documents and information (essentially the same information previously sought by the Russian state and declined by the UK).

There was a fair amount of procedural wrangling. The Applicants sought to set aside the recognition order of the basis of the Respondent’s alleged breach of his duty of full and frank disclosure (for failing to disclose the broader political context). The Respondent agreed to withdraw the section 236 application, terminate the recognition order (though not on the basis of a failure to disclose) and pay the Applicants’ costs on the indemnity basis.

Given the unusual background, and the fact that the parties had agreed the substantive outcome (namely, that the recognition order was to terminate and the Respondent was to pay the Applicants’ costs) the court had to answer two questions: (i) whether it should even entertain a hearing to decide whether the Respondent breached his duty of full and frank disclosure ; and (ii) if so, whether the Respondent did in fact breach his duty of full and frank disclosure.

The Chancellor held as follows.

It was appropriate to entertain the hearing because it was in the public interest to do so. It would not be appropriate to simply terminate the recognition order if in reality the Respondent had been in breach of his duty of full and frank disclosure. It appeared that the Russian state was not prepared to accept “no” for an answer regarding requests for assistance and the recognition order was related to that. There were serious allegations of wrongdoing, the UK government had already made clear its view about connected aspects of the case and in those circumstances the court simply could not stand by: at [76] – [81].

As to the merits of the alleged (non) full and frank disclosure. It was wrong to say, as the Respondent did, that full and frank disclosure was only necessary in relation to the consequences that automatically flow from the recognition order itself (as opposed to what might or might not happen thereafter, such as the section 236 application): at [86].

In this case, the Respondent always intended to make the section 236 application. He knew the Applicants would say that it was political. He “knew or ought to have known that UK public policy issues would be raised by his request for the recognition order and the steps that he intended to take in consequence of it. He ought to have given the court the opportunity to consider [public policy matters]”: at [87]. Even if the Respondent had not sought termination of the recognition order, the court would have set it aside: at [90].

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