Art of evasion

An inherent risk of litigation is that defendants may dishonestly seek to hinder the enforcement of adverse judgments by rendering their assets judgment-proof. Defendants often use mechanisms like the dissipation or moving of assets abroad, using the legal structure of trusts and registered companies to shield, or put their assets beyond the reach of a judgment creditor.

In addition to these steps, when defendants possess the necessary resources, they could deploy a plethora of tactical legal challenges to make it exceedingly difficult, if not costly, for a judgment creditor to reach their assets. The English Court of Appeal was confronted with one such scenario in the recent case of JSC VTB Bank v Skurikhin and others [2020] EWCA Civ 1337.

VTB, a Russian bank, acted as lender to a group of companies for which Mr Skurikhin (Skurikhin) was chairman. The group defaulted on its loans, which were guaranteed by Skurikhin. VTB brought Russian proceedings on the personal guarantees and obtained a number of judgments against Skurikhin.

VTB obtained summary judgment in England on the basis of its Russian claims. VTB also obtained a worldwide freezing order against Skurikhin’s assets, which included a membership interest in Pikeville, an English LLP. This interest was held via a byzantine layer of trusts and registered companies for Skurikhin’s benefit, including a Liechtenstein foundation, Berenger. Pikeville in turn owned three properties acquired for approximately €18 million. A Nevis trust, Olympic was established and a company named Accreda was appointed as trustee.

VTB obtained the appointment of receivers over Skurikhin’s interest in Pikeville. The receivers then used their powers to cause Pikeville to enter administration, and arranged to be appointed as administrators. They then brought proceedings for possession of the properties, used by Skurikhin, with a view to their eventual sale.

Skurikhin sought to misuse the court process and the structures of various entities to render his assets judgment proof once it seemed inevitable that the receivers would gain control of his underlying assets. Receivers were appointed in July 2015 and by June 2017 Skurikhin obtained a Russian bankruptcy order discharging his liabilities to creditors. VTB succeeded on appeal in setting aside Skurikhin’s discharge from liability. Skurikhin prolonged litigation with an unsuccessful Supreme Court of the Russian Federation appeal.

In June 2017 the boards of Berenger and Accreda passed resolutions seeking to retrospectively exclude Skurikhin from the class of discretionary beneficiaries of both Berenger and Olympic. These resolutions were allegedly due to Berenger’s undischarged bankruptcy in Russia. Berenger stood on the side lines of the receivership application, then sought to discharge the receivership order on the basis that Skurikhin’s exclusion from the class of beneficiaries was a material change in circumstances as a result of which the receivership order was no longer appropriate and should be discharged. The court rejected the application to discharge the receivership and held that it was an abuse of process for a party to seek to reopen an interlocutory order on the basis of a purported change of circumstances, which was wholly within the party’s control.

The court examined Berenger’s motive in assessing whether there was a genuine material change of circumstances. It stated that while motive by itself might be irrelevant, combined with other factors it can render an action of abuse of process. It found that the stated motive for passing the resolutions was “false” and the true aim was securing a discharge of the receivership and freezing orders. The court noted that Skurikhin was subject to significant judgments and was declared bankrupt more than a year before Berenger and the trust sought to exclude him. It was open to them to take action then, or earlier when VTB first sought to enforce their judgments, yet they did not act until almost three years later in taking action aimed at frustrating the enforcement process. The test of what amounts to an abuse of process is flexible and looks at all the facts of the case. The aim is to prevent actions which, though not inconsistent with its own rules and procedures, are unfair or bring the administration of justice into disrepute. The court found that the false motive, combined with other findings of fact, were sufficient to bring Berenger’s challenge to the receivership order within one or more of the recognised categories of abuse of process.

In reality, Berenger was established by Meier who served as its director acting on Skurikhin’s instructions, Skurikhin was both the economic settlor and beneficiary for Berenger. Olympic was a Nevis company established by Meier on Skurikhin’s instructions. Accreda was a company controlled by Skurikhin’s (nominee) Meier, it was the trustee of Olympic and Skurikhin was one of thirteen nominated discretionary beneficiaries. Similarly, Pikeville was an English LLP initially owned by Meier but held on trust for Skurikhin. However, by an oral 2005 declaration Skurikhin attempted to distance himself by declaring that his interests were held on trust for Berenger, but the court rejected the effectiveness of that declaration.

The court saw through this stratagem. Ultimately, the court held that his exclusion from the class of beneficiaries of the various trusts was a mere device instigated by him to disguise his ownership and control of his assets and to frustrate the enforcement of judgments against him, as those efforts neared fruition. The court held that Meier was and continued to be Skurikhin’s right hand man, who controlled Berenger’s actions in the interest of and at the behest of Skurikhin.

Whether proceedings can be said to amount to an abuse of process is an exercise of judgment for the court, which requires a close examination of the facts of each case. The approach is necessarily flexible rather than dogmatic. The flexibility inherent in this approach gives the court a wide latitude to police the administration of judgments. The approach in Skurikhin’s case does not break new ground, but is a firm application of long standing and well known principles to prevent a defendant’s attempt to hide assets and abuse the court’s process in doing so.

This article was originally published by The Law Society Gazette on 29 April 2021.