The 2008 financial crisis peak had hardly faded away, when another breaking news was brought to the surface in CIS countries: a significant part of the funds advanced during the pre-crisis period by banks and other financial institutions to support various businesses and commercial initiatives, flew beyond national frontiers to be found in Panama, BVI, Seychelles, Jersey, Cyprus and other offshore and onshore jurisdictions in the pockets of numerous private persons, mostly CIS nationals. No surprise this fact led to a tsunami of disputes, one way or the other related to repayment of loans and funds advanced under other types of finance arrangements. Many of those disputes are still pending, thus, keeping finance arrangements among the top-litigated issues within CIS borders.
In a typical finance arrangement dispute (FAD), the subject matter of the dispute is narrowed down to recovery of the debt and interest under the finance agreement, its amendment or termination, invalidation of the finance agreement as accompanied by invalidation of guarantees, collateral and mortgage agreements entered into in order to secure fulfillment of obligations undertaken by the debtor under the agreement. Simple, as may seem, and straightforward contractual claims, with not much room for complicated legal questions or fact finding… Why then discuss the issue in detail?
To cut a long story short: those are sophisticated corporate structures employed by debtors and complex transaction schemes that greatly escalate the FADs.
For illustrative purposes, we would mention a well-known scheme, when huge amounts of money are laundered from banks by way of involvement of affiliated, usually shallow, companies established in offshore jurisdictions (also called SPVs). Such SPVs are established as holdings controlling and operating Ukrainian — or other CIS-based assets through local fully owned subsidiaries. Upon the approval of shareholders a subsidiary enters into various finance arrangements. Receipt of the corresponding funds by the subsidiary is then followed by claims for invalidation of the share-holders’ resolutions approving the transaction and provision of security. Considering that these are, in fact, corporate disputes, creditors receive a very limited, if any, real access to them, thus turning what was supposed to be a mutually beneficial finance transaction into a very creditor unfriendly one. The schemes may also include claims dealing with legality of appointment of directors or authorized representatives, as well as non-corporate claims, such as invalidation of agreements on purchase of collateral provided as a security for the loan, and others.
Despite the fact that schemes similar to the one mentioned above have already become a classic of the genre, national justice is still unable to suggest enough remedy for creditors. In their pursuit of adequate protection, the latter have lately been found attempting to shift the jurisdiction of FADs from national dispute resolution forums to alternative ones, and very often specifically to English courts. This phenomenon owes a lot to the reliability of English justice which, unfortunately, CIS national court systems do not offer at the moment. Another important reason for such a strategy by creditors is that English law and justice are much more flexible compared with local laws and quite formalistic approaches of national courts. English law does arm creditors with panoply of legal remedies not yet known to, or not that widely used in CIS countries and, specifically, in Ukraine.
In particular, in order to cure the above discussed fraudulent schemes involving affiliated shallow companies, creditors have actively been seeking to enforce the common law doctrine of “piercing the corporate veil” (in a number of jurisdictions, including England, also known as “lifting the corporate veil”). The doctrine allows disregarding corporate form in cases where defendants’ hiding behind the black letter of the law may result in some kind of injustice.
For example, in a widely reported VTB Capital plc v. Nutritek International Corp and others case, the Bank insisted that the defendants’ corporate veil should be lifted and Mr. Konstantin Malofeev, a Russian businessman resident in Moscow, who was said to be the ultimate owner and controller of the offshore companies allegedly involved in the finance transaction, be held jointly and severally liable for the damages possibly suffered by the creditor. And, though, in VTB the UK Supreme Court refused application of the doctrine, in a number of other cases it was successfully applied for the benefit of an aggrieved party.
Save, perhaps, one to two very limited exceptions, the veil-piercing doctrine does not have its equivalent in Ukrainian laws.
Another remedy offered by English law, and not found in Ukraine, is a very strong interim measures protection. Here, we would specifically note the worldwide freezing injunction (also known as Mareva injunction or worldwide freezing order), which can be granted, even ex parte, in support of future or pending creditors’ claims. The order restrains defendants from disposing, dealing with or diminishing the value of their assets wherever they are, thus making it possible for creditors to secure enforcement of future judgments as well as arbitral awards, as the case may be, against debtors.
The worldwide freezing injunction, by the way, has recently been granted by the High Court of London in another widely reported VAB Bank dispute against Ukrainian businessman Sergey Maksimov. The effect of this injunction is still to be tested in Ukraine since it, first, has to be recognized by the respective national court. However, we assume that at least within the jurisdiction of English courts the assets of Mr. Maksimov must already be closely watched.
Creditors’ applications for a freezing injunction are often accompanied by applications for disclosure and search orders.
The disclosure order requires that respondents disclose all their assets worldwide whether in their own names or not and whether solely or jointly owned. Creditors may request the court to order debtors produce all documents related to the transaction even if such documents are detrimental to the debtors’ interests.
According to the search order the respondent must permit the search party to enter its premises and any vehicles under the respondent’s control so that it can search for, inspect, photo-graph or photocopy and deliver into the safekeeping of the applicant’s solicitors all the documents and articles found. The respondent is also required to give the search party effective access to the computers on the premises, with all necessary passwords, to enable the computers to be searched.
It should be mentioned that non-compliance with any of court order may be regarded as contempt of court, for which contempt a person may be imprisoned, fined or have his or her assets seized. It is worth noting that not only the respondent, against whom the order was granted, but also any other person who knows of the corresponding order and does anything which helps or permits the respondent to breach the terms of such order may also be held to be in contempt of court with the same con-sequences.
All of this definitely does not work that way in Ukraine; therefore, shifting the jurisdiction is becoming more and more popular among creditors under finance arrangement disputes.
Where a contract does not contain any arbitration clause or agreement on jurisdiction of English courts, the creditor is recommended to consider claims in tort, say, on the ground of fraud committed by the debtor. The abovementioned VTB case can be of a particular interest in this relation, since it contains some guidance as to whether the claim in tort can be brought in England against a party which is neither resident, nor otherwise found, within the jurisdiction.
A number of factors, among which governing law, place of commission of alleged tort, the factual focus, witnesses, the aim of the alleged torts and a fair trial, must be considered in order to define the appropriate forum in which to bring the claim. In VTB, the UKSC found that law governing the dispute and non-exclusive jurisdiction clauses was not decisive for the purposes of the case, since the “centre of gravity” of the dispute was clearly found in Russia. Indeed, almost all disputing parties originated from Russia, were managed from there, the alleged fraud was orchestrated primarily through a Russian company, the events constituting the alleged tort took place mainly in Russia and most of the witnesses would be Russian. Such a strong connection played a crucial role in VTB, which made Justices refer the case to Russian courts for further consideration.
To sum up the above, it is recommended that a fine tooth strategy be always built early in the dispute. Every factor, both supporting the case and defeating it, has to be carefully examined and taken into account by competent lawyers. We believe that only such an approach can lead to a maximum result at the exit.