A Russian liquidation – part of “a long and abusive campaign on the part of the Russian Government”

Claims that the reinstated liquidation of a Russian company – DSL – was part of “a long and abusive campaign on the part of the Russian Government to attack” a party which had exposed fraud and corruption in Russian authorities were raised in a recognition application before the High Court in London under the English equivalent of our Model Law on Cross-Border Insolvency.

The party, ‘Hermitage’, was said to have been active in exposing corruption and fraud within prominent Russian companies, with the lawyer for Hermitage being imprisoned without trial and dying in jail. Hermitage itself claimed it was the victim of a $230 million tax fraud carried out by Russian authorities “acting with criminal elements”.

DSL had been through liquidation under a liquidator who failed to identify any assets.  DSL was later reinstated on the application of the Russian tax authority, and a Mr Nogotkov “was (purportedly) appointed” as liquidator.

He obtained recognition under the Model Law from a registrar of the English High Court.  Hermitage challenged the validity of the appointment, on the basis of lack of disclosure of the full facts, and sought security for costs.

See Cherkasov v Olegovich, the Official Receiver of Dalnyaya Step LLC [2017] EWHC 756 (Ch) (10 April 2017).

INSOL Academics Colloquium

Before recounting some further facts and law, this issue was the subject of a paper I gave at INSOL Academics Colloquium on 19 March 2017, with a subtitle of

“what happens when foreign insolvency representatives go rouge?”

I addressed the need for regulatory focus to be given to the conduct of overseas liquidators and trustees pursuing claims and investigations in other than their home countries.

My central point is illustrated by asking – what would an Australian court do if an English liquidator applied for recognition of his English winding up proceedings, where significant evidence of the misconduct and mala fides of the liquidator was presented?

While some judges in other countries might make a phone call to the overseas judge – “who is this guy you have appointed?” – (see Article 25.2 of the Model Law) an Australian judge may prefer to rely on evidence filed in the proceedings.      

The two relevant Model Law articles concern comity and cooperation – giving respect to the decisions of overseas courts (Article 25), balanced against public policy – the need to ensure the integrity of the cross-border insolvency regime (Article 6).

While I had some case law on which to base my thinking – Re OGX Petróleo was one – there was not much on the record.

The facts of this case raise the issue more dramatically that the cases on which I have relied and reported. 

This decision

Mrs Justice Rose opened her judgment by referring to

“Mr Nogotkov who is, or claims to be, the liquidator appointed …”.

Some facts from her judgment were that:

  • Nogotkov was funding his liquidator activities by way of a 10% commission on recoveries. If he made none, he would be paid a nominal amount by the Russian tax authorities.

“This is a common way … for insolvency practitioners to be paid in Russia”.

  • The evidence from Hermitage was that its then lawyer Sergei Magnitsky, who had been involved in exposing fraud and corruption, was imprisoned without trial where he died in custody. His death led to an international outcry, prompting the US Sergei Magnitsky Rule of Law Accountability Act 2012, which prohibits the persons involved – 44 of them – from entering the US.

On Nogotkov being challenged as to his non-disclosure, he filed evidence saying that he was not involved in the fraud but the matters having been raised …

“that the liquidation of the Company is a “manifestation” of the alleged criminal scheme relating to a USD230 million fraud and that I am “controlled” by the perpetrators of that scheme, I consider that it is only proper for this matter to be brought to the attention of the Court which granted the Order at the earliest opportunity and I do so now.”

Other similar interesting facts and issues were also recounted.

Beyond then reporting that, as Justice Rose explains,

“Mr Nogotkov’s version of events is very different”

the remainder of the facts can be read in the judgment.

The law

The grounds of Hermitage’s application to set aside the recognition order were based on Article 6 of the Model Law – public policy; as well as what was alleged to have been serious non-disclosure to the English court hearing the recognition application.

Duty to disclose

It was here that Justice Rose referred to the decision of Mr Justice Snowden in Re OGX Petróleo e Gás SA [2016] EWHC 25 (Ch), referred to in my paper.  The outcome in that case of the serious non-disclosure on a recognition application was that Justice Snowden issued a warning, that

“for the future it must be made clear that foreign representatives and their advisers must ensure that the valuable process for recognition under the Model Law and the CBIR is not misused. When seeking recognition, full and frank disclosure must be made to the court in relation to the consequences that recognition of the foreign proceeding may have on third parties who are not before the court”.

Whether the non-disclosure by Nogotkov will provide grounds to set aside the recognition of his Russian proceedings is now to be determined by the English High Court.

Security for costs

That is subject to an order, sought by Hermitage, for Nogotkov to provide security for costs. Although liquidators are not usually the subject of such orders, and while Justice Rose said she had initial concerns that

“a decision to grant security … might be seen as a green light to creditors of insolvent foreign companies to disrupt what should be the straightforward operation of the UNCITRAL Model Law in this jurisdiction”,

she decided she should in this case. The fact of Nogotkov’s residence in Russia where a costs order would be unenforceable generated the risk that Hermitage would be unable to obtain its costs from him. Justice Rose ordered that £1 million be paid over as security.  

If the £1 million can be found and paid, the case will continue. 

My Russian contacts will keep me informed.

Other law reform points about this circumstance will also be covered, soon.


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