In Re Dalnyaya Step LLC (In Liquidation) [2017] EWHC 3153 (Ch)

It has been held that full and frank disclosure was not provided to the Court by a Russian Liquidator in granting a Recognition Order in the UK, which resulted in the Recognition Order being set aside. The issue was determined despite the parties being in agreement that the Liquidator's claims should be withdrawn.  

Further to our previous article, in which the Liquidator of Dalnyaya Step LLC ("DSL"), Mr Nogotkov, was ordered to provide security for costs of £1million, there has been a further development in the long-running, high profile and very public dispute between representatives of the Russian State and three parties known as Hermitage.  

DSL originally went into Liquidation in Russia in 2006, which was terminated in 2007.

Hermitage were the victim of a $230million tax fraud which they allege was carried out with the approval and assistance of Russian authorities. Criminal proceedings were opened in Russia against members of Hermitage and their lawyer, with the lawyer dying in custody and a member of Hermitage being convicted without being present. The Russian authorities had made multiple requests to the UK authorities for assistance with the criminal proceedings and extraditing the Hermitage Parties.

In 2015, DSL was reinstated at the request of the investigator in the criminal proceedings against the Hermitage Parties and Mr Nogotkov was appointed as Liquidator. In 2016 Mr Nogotkov obtained a Recognition Order in the UK recognising the Russian Liquidation, claiming that he was investigating asset stripping of DSL. 

The Hearing was originally listed in relation to three applications:

  • The first by Mr Nogotkov under section 236 of the Insolvency Act 1986 for an order that the Hermitage Parties should provide documents and information in relation to the tax affairs of DSL.
  • The second by Hermitage for an order setting aside the Recognition Order on grounds including that Mr Nogotkov had failed to make full and frank disclosure to the court.
  • The third was made by Mr Nogotkov for an order terminating the Recognition Order on the ground that he had obtained a judgment in Russia against HSBC which made the estate whole, so that further proceedings in England & Wales were unnecessary.

Mr Nogotkov had obtained judgment in Russia against HSBC for causing DSL's insolvency by transferring monies out of DSL's accounts in breach of Russian banking regulations. This judgment was enough to repay DSL's debts in full and to pay Mr Nogotkov's costs. HSBC are appealing this judgment.

Prior to the hearing it was agreed that Mr Nogotkov would withdraw his s.236 application and that he would pay Hermitage's indemnity costs. Despite that offer, Hermitage insisted that the second application be dealt with, submitting that the Recognition Order and s.236 application were part of the campaign by the Russian State against Hermitage. They argued that it would therefore be in the public interest for the issue of full and frank disclosure to be determined, and to expose Mr Nogotkov's wrongdoing and prevent abuse of English court's procedures in the future.

Hermitage claimed that, in the Recognition Order application, Mr Nogotkov should have made the Court aware of criminal proceedings in Russia against two of the Hermitage parties, his intention to make a s.236 application, and that Hermitage would be likely to argue the public policy exception in article 6 schedule 1 of the Cross-Border Insolvency Regulations 2006 was engaged, as the UK Home Office had refused repeated requested from Russian authorities for assistance in the criminal proceedings.

There were arguments put forward as to whether the issue of full and frank disclosure should be determined given the parties' agreement, however it was ultimately decided that it would be in the public interest to determine the point.

It was held that Mr Nogotkov's failure to alert the court to the public policy issues and the political background was inexcusable. Mr Nogotkov was in clear breach of his duty of full and frank disclosure when he applied for and was granted the Recognition Order through his failure to inform the court of the highly political nature of the case that he intended to pursue against the Hermitage Parties, and of the UK public policy issues that it was likely to raise (of which he was or ought to have been aware), given that he had copies of the criminal files.

The Court therefore set aside the Recognition Order ab initio as opposed to simply terminating the Recognition Order from the date of this Order.

This article was written by Alan Bennett and Olivia Reader.

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