Re Dalnyaya Step LLC [2017] EWHC 756 (Ch)

This case involved an application for security for costs against Mr Nogotkov who is, or claims to be, the Liquidator appointed by a Russian court of Dalnyaya Step LLC ("DSL"). The claim was brought by parties known as Hermitage, seeking security for their costs for a hearing listed to take place over five days in November 2017, considering two applications: (1) Hermitage's application to set aside a Recognition Order obtained by Mr Nogotkov on 8 July 2016, recognising the Liquidation of DSL as foreign main proceedings in accordance with the UNCITRAL Model Law, on the grounds that the making of the order was manifestly contrary to public policy; and (2) Mr Nogotkov's s.236 Insolvency Act 1986 application, seeking the production of DSL's documents from Hermitage and a summons for each of the parties to attend for questioning. Hermitage resist this application on the basis that it relies on the recognition order which should itself be set aside. 

The costs of the hearing were estimated to be substantial; £400,000 according to Mr Nogotkov's estimate and over £1.8 million according to Hermitage.

The key agreed facts are -

  • DSL was a Russian subsidiary of the Hermitage Fund, a Guernsey unit trust investing in Russian capital markets through Russian subsidiaries.
  • In 2006, DSL was placed into an insolvency process by the tax authority in Russia.
  • The Liquidator at the time, Mr Dolzhenko, had failed to identify any property or funds of the company and was unable to discharge the company's alleged debts.
  • The company was dissolved in October 2007.
  • In 2015, DSL was reinstated when the Russian Federal tax authority applied to court to reverse the 2007 order and Mr Nogotkov was (purportedly) appointed.
  • Mr Nogotkov is funding his activities as Liquidator personally, on the basis he will have his out of pocket expenses reimbursed by recoveries, and compensation of 10% of any recoveries.

Hermitage claimed the second liquidation is unlawful and ineffective and serves no legitimate purpose, arguing that it is part of a long and abusive campaign by the Russian government to attack Hermitage.

Mr Nogotkov instead said that the second liquidation was due to extensive asset stripping of DSL by its former officers, including Hermitage, coming to light as newly discovered facts not available in 2007. Mr Nogotkov sought to recover these assets or claim compensation for the company.

There were arguments relating to whether the s.236 application was a 'proceeding' or 'claim' for the purposes of CPR 25.12 and as such if a security for costs order could be made. Referring to Bancredit [2009] UKPC39, the court stated that one must refer to the substance and not the form of the proceedings. In relation to the November hearing, Mr Nogotkov was seeking to keep the recognition order in force and obtain relief against Hermitage under s.236. Hermitage opposed the recognition order and resisted the s.236 application. As such, when looking at the hearing as a whole, it was clear that Hermitage would be the defendants and are entitled to claim security for costs against Mr Nogotkov as claimant.

Mr Nogotkov's Counsel argued that the recognition application was not a claim at all but a unique application with no respondent. The court rejected this argument and found it to be a proceeding within the meaning of CPR 25.12, and that Hermitage could be described as defendants to the proceedings. The court stated that the Model Law and Schedule 2 clearly contemplate a number of circumstances in which a party will oppose a Recognition Order, such as when it is contrary to public policy of the jurisdiction in which the order is sought.

There was criticism that when Mr Nogotkov obtained the Recognition Order (on a without notice basis), full and frank disclosure was not given the court about the longstanding issues with Hermitage and that if the background had been provided, it was unlikely that Registrar Barber would have made the order. In Re OGX Petroleo e Gas SA [2016] EWHC 25 (CH), Mr Justice Snowden emphasised the need for full and frank disclosure to the court by an applicant for recognition of foreign insolvency proceedings and the effect on third parties who are not before the court.

It was held that Hermitage should not be deprived of the status of defendants for the purposes of the security for costs jurisdiction by the fact that Mr Nogotkov failed to mention the background at the hearing, as if the Registrar was aware she would have likely adjourned the hearing so that the recognition application could have been heard on an inter parties basis. As such, the court had jurisdiction to order security for costs against Mr Nogotkov.

Mr Nogotkov had no assets in the UK against which the order for costs could be enforced if Hermitage are successful at the November hearing and it would practically be impossible to enforce any costs order in Russia. He had substantial funds, of approximately $4.2 million, to pay any security.

Mr Nogotkov argued the court should be cautious before requiring security from a foreign office holder on the basis of foreign residence, otherwise impeding the orderly and fair conduct of cross border insolvencies. It was argued that this would increase the costs and delays by generating satellite litigation, contrary to CBIR.

In exercising its discretion, the court was satisfied that the facts of this case were exceptional and granting security would not open the floodgates to many similar applications. It was held that the court should exercise its discretion in ordering Mr Nogotkov to provide security for Hermitage's costs of the November hearing.

Hermitage sought security of £1,477,432, being 80% of their expected costs. It was argued that this was extraordinary and the maximum order should be for £400,000. The court held that Mr Nogotkov would suffer little prejudice from the order being made, as the funds would be in a court account accruing interest and would be returned to him if he successful: however Hermitage would likely be unable to recover their costs if no order was made. The court ordered Mr Nogotkov to provide security for costs in the sum of £1 million in respect of both applications.  

This article was written by Alan Bennett and Olivia Reader.

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