Alexei Dudko

Russian Insolvency Law: Cross-Border Aspects

Mezhprombank & DIA v. Pugachev

Exporting Russian insolvency judgments overseas

Hogan Lovells | 3

• Mezhprombank's licence revoked by Central Bank on 4 October 2010: decline despite US 1.15 bln from Central Bank of Russia

• DIA appointed liquidator on 30 November 2010: preliminary findings

• Pugachev fled Russia in January 2011 after criminal investigation opened

• From 2011 onwards, Pugachev primarily based in London

• Article 14 claim issued in December 2013

Russia

Hogan Lovells | 4

Offshore investments

Hogan Lovells | 5

London

Parallel proceedings in Russia and England

Choosing the court

Hogan Lovells | 7

• Claim to hold Pugachev subsidiarily liable for the Bank’s debts

• Pugachev is served at his last known address in Russia

• Pugachev does not take active part in Russian proceedings

• Few assets located within jurisdiction of Russian courts

• What’s next?

Russian proceedings: the beginning

Hogan Lovells | 8

• Pugachev located in England and has assets within jurisdiction

• Enforceability of the Russian judgment

• English court’s ability to issue robust interim measures

Pugachev has to chose between Russian and English courts…

Why bring proceedings in England?

Hogan Lovells | 9

• The DIA to be recognized as a “foreign liquidator”

– First ever Russian liquidator to be recognized

– Ability to bring English law insolvency claims

• World-wide freezing order up to £1.17 bln / asset disclosure

• Russian law claims:

– General claims: tort, unjustified enrichment

– Insolvency claims: Article 14 and others

– Corporate claims: related party transactions

• English law claims:

– Prejudicial transactions

– Fraudulent / wrongful trading

English Proceedings: the beginning

Hogan Lovells | 10

English Claims and Freezing Order

• UNCITRAL Model Law and Cross Border Insolvency Regulations 2006

• Section 25 CJJA 1982 – allows English Court to grant freezing order in support of foreign proceedings

• WFO appropriate; "sufficient connection"; not "inexpedient"

• Fortification; undertaking in damages

Hogan Lovells | 11

• Pugachev brings challenge to WFO

– Allegations of expropriation

– Supposed lack of “clean hands” by the DIA

• Pugachev argues that Russian courts are “clearly the more appropriate forum” to try the case:

– Pugachev agreed to submit to jurisdiction of Russian courts

– Litigate in Russia after supposed expropriation? Difficult to explain.

• Result:

– Challenge to WFO dismissed after 1.5-week hearing;

– Matter goes back to Russia

Fork in the road

Claim to hold Mr Pugachev & others subsidiarily liable for the Bank's debts

Russian Proceedings

Hogan Lovells | 13

• DIA's in-depth investigation

• Proceedings in Russian courts:

– 475 claims for RUR 453 bln (~USD 7 bln)

– Almost all claims upheld

– … but 362 debtors have no assets…

• Criminal investigation by the Investigative Committee

Before the claim was filed…

Hogan Lovells | 14

• Core Elements: – Insolvency of a bank…

– caused by…

– wrongful actions (or inaction) of…

– a “controlling person”.

• Sanction: subsidiary liability for the bank's debts – …unless the courts rules otherwise.

What is a claim under Article 14 of Bank's Insolvency Law?

Hogan Lovells | 15

• Bank's Insolvency Law:

"Persons having a right to give mandatory instructions or

having ability to determine its actions otherwise"

• Pugachev does not hold any official positions at the Bank.

• Does insolvency legislation capture de facto / shadow directors?

Who is a controlling person?

Hogan Lovells | 16

• Multi-layer corporate structure with a New Zealand trust at the top

• Pugachev procured the trust back in 2003 due to his becoming of member of the Federation Council

• Pugachev becomes a “protector” of the trust:

– Pugachev: a "protector" does not have rights to issue mandatory instructions

Control: de jure

Hogan Lovells | 17

• Pugachev established a system of control where no decision could be taken without his approval:

– "Approved" seal and letters to "PSD"

– Evidence given by the Bank’s top management

– Position of the other co-defendants

• Moscow City Commercial Court:

"Pugachev de facto carried out direct management of the Bank's affairs by using the system of taking major

decisions which the Bank's management bodies complied with."

Control: de facto

The seal…

Hogan Lovells | 19

• What is a "technical borrower"?

– company which does not carry out genuine commercial activities;

– controlled by the bank or its UBOs;

– used to operate schemes (syphoning off assets, financing the UBOs projects).

• In Mezhprombank:

– At very least, 114 borrowers, 226 loans, RUR 125 bln (~ USD 2 bln)

– Centrally controlled from the Bank: all of the seals are stored by the same person

– Directors: the Bank's security staff, cleaners and unexpecting individuals (pizza delivery boy)

– Some of them secured with Mr Pugachev's assets

Grounds: (1) Granting loans to technical borrowers

Hogan Lovells | 20

• DIA's analysis of the technical borrowers

• Directors of technical borrowers interrogated by the Investigative Committee

• DIA brought proceedings against each of the technical borrowers

• Court bailiffs found no assets

• Moscow City Commercial Court:

– Loans to the technical borrowers could not have been extended without Pugachev's involvement

– Pugachev controlled each of 114 technical borrowers

– "Conflict of interest": interests of the Bank vs. Pugachev's own interests

Grounds: (1) Granting loans to technical borrowers

Hogan Lovells | 21

• EPK: coal mine business of substantial value

• Technical loans worth RUR 68 bln secured by EPK pledges

• Pugachev orders the Bank’s CEO (Ms Illarionova) to release the share pledges

• DIA: Had the pledges not been released, the Bank would have been in a position to enforce against the pledged assets and recover up to 80% of creditor's claims

Grounds: (2) Release of EPK share pledges

Hogan Lovells | 22

• Deny everything

• Resist calling of witnesses and document requests

• Resist direct questions posed during the hearing

• Distancing himself from what has been said by his own English lawyers in the English proceedings

• Abuse of rights

Pugachev’s approach to Russian proceedings

Hogan Lovells | 23

• Mr Pugachev held liable for the full deficit in the estate:

Creditors' claims (minus) assets (equals) RUR 75 bln

• Upheld by court of appeal and cassation court

• Supreme Court denied leave for appeal

• Judgment to be enforced world-wide

The Judgment

Hogan Lovells | 24

Enforcement of Russian Judgment

England

Isle of Man

Luxembourg

France Switzerland Monac

o

Panama

Cayman Islands

BVI

St. Vincent & the Grenadines

Russia

Nevada

New Zealand

Importing foreign insolvency judgments in Russia: issues

Hogan Lovells | 26

• Forum shopping: Kekhman matter and denial to recognize English personal insolvency in Russia

- breach of public policy

- lack of due notification of other interested parties

- lack of proof of reciprocity

• Upheld by cassation court

Recognition of foreign insolvency judgments in Russia

Hogan Lovells | 27

• Kalinka Trade matter (2007): Danish insolvency recognized in Russia, Russian claim filed outside of the insolvency not considered

• Iceberg matter (2016): Kazakh insolvency not yet recognized in Russia upheld, Russian claim filed outside of the insolvency not considered

• VK Family Private Foundation matter (2016): Curacao insolvency judgment recognized based on reciprocity

Recognition of foreign insolvency judgments in Russia

Hogan Lovells | 28

• Snoras Bank matter (2013) and Aksai matter (2014): recognition of the effect of the foreign insolvency on challenging transactions in Russian court proceedings

Recognition of foreign insolvency judgments in Russia