ABC & Ors v CDE & Ors

On 3 November 2009 Teare J held in a reserved judgment that the first defendant, to whom I will refer simply as “the defendant”, had committed five breaches alleged against him of a freezing order made originally by Cranston J and then continued by King J on 9 October 2008, and was therefore in contempt of court. Following submissions made to him in the light of that judgment, and having read a further affidavit of the defendant which had been made with the benefit of sight of the draft judgment before it was handed down, he imposed a sentence of imprisonment for 12 months on the defendant but suspended it until the conclusion of the substantive proceedings between the parties or further order of the court. He also ordered the defendant to notify the claimant's solicitors by 1 December 2009, and again by 29 December 2009, of any steps, or, as the case may be, further steps, taken by then to purge his contempt.

Before us there are two appeals; the first in point of time made, with permission granted by my Lord Ward LJ, by the claimant on the basis that the sentence was wrong in principle and unduly lenient; and the second without the requirement of permission to appeal by the defendant against the finding that he was in contempt.

The freezing order prohibited the defendant from disposing or dealing with, or diminishing the value of, any of his assets on a worldwide basis up to a value of $4 million, and in particular from selling, charging, using as collateral or dealing with a named property in Riga in Latvia without the permission of the court or the prior written agreement of the claimant. The essence of the breaches alleged in the committal application, which led to Teare J's order, was that the defendant had alienated his ownership rights in respect of the property in Riga to a third party, who I will refer to as “H”. In detail, five allegations were made following an amendment of the application notice.

The first was as follows: after 9 October 2008 devising a sham agreement purportedly entered into on 29 August 2008 with H, under which H purportedly lent the defendant €750,000 due for repayment on 19 September 2008, referred to as the “sham loan”. On the basis of the sham loan, H brought proceedings in Latvia against the defendant, which led on 20 October 2008 to the grant of a pledge note in favour of H over the Riga property.

The second was: entering into a settlement agreement, dated 2 December 2008, with H to transfer one half of the defendant's ownership rights in the Riga property to H in return for the settlement of part of the sham loan and/or authorising or permitting a third party to sign and file such an agreement at the court in Riga.

The third was: on 18 December 2008 authorising or permitting a Mr Kovalis to agree or acquiesce to H's application to approve an order as regards the first settlement agreement and to transfer one half of the defendant's interest in the Riga property to H.

The fourth was: entering into a second settlement agreement, dated 20 January 2009, with H as regards the balance of the sham loan and the other half of the defendant's ownership rights in respect of the Riga property.

The fifth was: authorising or permitting Mr Kovalis to apply to the court in Riga to transfer the other half of the property to H, or failing to revoke a power of attorney in favour of Mr Kovalis, dated 3 November 2008, thereby permitting the application to take place.

In the case of the second half of the defendant's ownership rights in respect of the property, it seems that the transfer to H had not been, and has not been, completed, so one half of the ownership rights was transferred into the name of H, and the other half remains in the name of the defendant but subject to an encumbrance in favour of H in the form of the pledge note pursuant to the court order. The settlement agreements were on the court file in Riga, as the claimants discovered when having taken proceedings themselves in Latvia to enforce their rights under the freezing order, and indeed their substantive rights generally, they found that, although they were awarded a similar remedy, it was registered one day after that in favour of H.

An oddity of the case is that the defendant, having denied signing the two settlement agreements, eventually found common ground that his signature on them was indeed forged, in the sense of not having been written by him. The defendant contended, however, that he did owe money to H and that the loan was not a sham but was a genuine loan agreement under which he had borrowed €750,000 from H and had not repaid him. He accepted that H had brought proceedings against him on the loan, the loan having not been repaid; but he contended that he did nothing in those proceedings, and did not authorise anyone else to do anything in those proceedings on his behalf either. Thus it appeared to be the case that since the date of the freezing order the property in Riga had, as to one half, ceased to belong to the defendant and had become the property of H; and as to the other half was subject to a security in favour of H and liable to be transferred to him; but the defendant said that this had happened without his having done anything at all to make it happen, and in consequence he said that he had not broken the order in any sense.

The claimant's case was supported by the evidence of a Latvian lawyer, Mr Salims, who had inspected the court file and the Land Registry entries in Riga. The court documents showed that the defendant had been represented in H's proceedings by Mr Kovalis under a power of attorney. Mr Kovalis was a lawyer who also acted for H, although I am not sure that he acted for H in the same proceedings. It was therefore, other than in the interests of convenience, not the most obvious choice of lawyer to act for the defendant.

On the face of the documents a breach of the order had taken place, at least by the defendant's entry into the two settlement agreements and by his agreeing to H's requests that these be given effect by the transfer of property interests from the defendant to H. The defendant gave evidence as to the loan from H, which he said had been made under a written loan agreement, of which initially he said he did not have a copy. He gave evidence of H's proceedings and of giving to Mr Kovalis what he said was a strictly limited power of attorney. He said he had come to know of the settlement agreements, and although he had not signed them he accepted that he had not taken any steps to protest or to object or to point out that they were forgeries. The judge had witness statements from H and from Mr Kovalis, both of whom referred to a written loan agreement, but at that stage neither produced a copy. The judge recognised that the allegation against the defendant was an extremely serious one (see paragraph 42 of his judgment). He directed himself correctly that it had to be proved to the criminal standard and that the burden of proof lay on the claimant (paragraph 43). He considered the reliability of the defendant's evidence (paragraphs 45 to 50 of his judgment). He concluded that the defendant's evidence was not reliable. Firstly, he rejected it as to what he said was the supposed loan from H (paragraph 46, subparagraphs (1) to (3)). Then he rejected the defendant's story that he had lost €450,000 of the loan gambling at a casino in Riga on the very night on which the loan had been made (paragraph 46, subparagraphs (4) to (6)).

Then he said he could not rely on the defendant's evidence as to what the defendant said that he had been told by H about a letter signed by the defendant, dated 24 November 2008, in the conrtext of the proceedings in Latvia (paragraph 47).

Fourthly, he found his evidence unreliable as regards the defendant's lack of response on seeing an English translation of the order made by the court in Riga on 18 December 2008 as regards the transfer of the first half-share, which he had seen in early 2009. On the defendant's own case this had been a fraud on him but he did nothing in response (paragraphs 48 and 49 of the judgment).

Fifthly, he found unreliable the defendant's evidence’s attempt to explain his failure to obtain from the court in Riga copies of the settlement agreements before the first stage of the hearing before the judge himself. I should say that that hearing took place in two stages with two days in April and then an adjournment at the moment when the judge would otherwise have handed down his reserved judgment. An adjournment was granted on the defendant's application for him to make a further attempt to get documents from the court in Riga. The hearing resumed in October 2009.

All of those points made by the judge appear to be valid and fair and are not criticised as such. The judge then considered whether there had been a loan by H to the defendant, and he held that he could not accept the defendant's evidence as to that, and said at paragraph 56 that he was sure that there was no such loan for the reasons there given. As regards the defendant's participation or otherwise in the Latvian proceedings, the judge set out at paragraph 58 what the defendant had admitted to having done in that respect. He said that the admission strongly supported the claimant's case that the defendant had participated actively in the Riga proceedings by agreeing to the transfer of the property to H. The defendant's case was that the power of attorney in favour of Mr Kovalis was, or was understood to be, strictly limited, and did not authorise what Mr Kovalis had purported to do no his behalf under it. But he had not made any complaint about what Mr Kovalis had done, nor did he say that he had been misled as to the effect of the power by a notary in whose office the power had been drawn and before whom the power had been executed by the defendant, she having first explained its effect to the defendant in Russian, since he does not understand Latvian, the language in which the power was drawn. The judge did not accept the defendant's evidence as to his understanding of the scope of the power of attorney (see paragraphs 60 to 63).

The judge also considered the letter dated 24 November 2008, which did not in terms refer to the transfer of the Riga property (paragraph 65 to 67). He rejected the defendant's case that he was purely passive as regards the proceedings in Riga in the light of his admission of discussions with H that this transfer of the property was the intended result. He held that the defendant had conferred authority on Mr Kovalis to represent him, which was not limited as he had said it was and which allowed Mr Kovalis to agree on his behalf to the transfer of the property to H.

Further, having become aware of the order of 18 December 2008, he said and did nothing to object to this on the basis that he had not agreed to it and had not authorised anyone to agree on his behalf (paragraph 68). On the basis of these findings the judge held that the breaches had been proved.

On behalf of the defendant Mr Walford argued, in clear and well formulated submissions, both in writing and in his oral submissions to us today, that the judge adopted the wrong approach; that there was no evidence in support of the claimant's allegations and that the judge's approach amounted to requiring the defendant to disprove the case made against him. Next it was said that the judge was wrong to base his findings on the defendant having stood by and not objected to what was happening in the Latvian proceedings. Lastly it was said that the judge was wrong to find that there was no loan by H to the defendant. I am strongly tempted to say no more than that the judge was right to find the contempt proved for the reasons he gave. These were findings largely of primary fact based on the judge's view of the defendant as a witness and of the probabilities based on a correct direction as to the burden and standard of proof.

The first ground of appeal, as it seems to me, misses the point that the documents in Latvia on their face showed an alienation of the property to which the defendant appeared to be a party in two stages, which would have been a breach of the order on his part. He had to give evidence because he had to explain away what the documents appeared to show and why he said he was not implicated by them. He was able to show that whoever did sign the settlement agreements in his name it was not him, but he could not otherwise distance himself adequately from the sequence of events. He had to seek to disprove the loan at least sufficiently to cast doubt on the claimant's case, since that was the start of the whole sequence of events. He also had to show, at least to the same standard, that he had not participated actively in the court proceedings. He failed in both respects. The judge did not hold that standing by passively was enough to constitute a breach of the order. Rather he held that the defendant had participated actively in the respects that I have mentioned and that he explained at greater length, and that his failure to object or protest, when he had knowledge of what had happened, which, on the defendant's own case, would have been the result of fraud and forgery, was revealing in showing that he had in fact agreed to it.

Mr Walford argued that, despite a correct direction as regards the burden and standard of proof and despite saying in finding each contempt proved that he was sure of the position, the judge had not proceeded correctly because he had proceeded from inference to inference and had not tested each inference separately to the necessary standard of proof. In my judgment, that criticism is not justified. The defendant's answer to the prima facie case of alienation in breach of the order was to give evidence of the loan agreement, the loan, his inability to repay it because of having gambled away more than half of it, the enforcement proceedings and their result, and to distance himself from the latter despite the authority that he had conferred, apparently in general terms, on Mr Kovalis to represent him in the proceedings. The judge had to consider the evidence on each aspect separately of course, but he had to come to a conclusion on the whole as well as on the separate points. It was not wrong for him to proceed as he did; indeed it was right. It does not seem to me that I need say anything more, despite Mr Walford's submissions, than that in my judgment the judge was right to find contempt for the reasons he gave. I would therefore dismiss the defendant's challenge to the finding of contempt by his respondent's notice.

Having found that the defendant was in contempt of court, the judge then had to consider what sanction to impose. He said it was a serious contempt in itself, and all the more so because it involved at least one other person and the unwitting assistance of the Latvian court. He said that it was so serious that only a sentence of imprisonment was appropriate and that the least period commensurate with the seriousness of the offence was 12 months.

He then turned to the then latest evidence, the defendant's ninth affidavit. In that affidavit the defendant offered an apology but only on a limited basis, because he contended that the loan had been genuine, despite the judge's contrary finding. He also said that he intended to restore the position as it had been before by endeavouring to secure the retransfer of the Riga property into his own name, unencumbered by any pledge. In the light of that, the judge decided that it would be right to suspend the sentence:

The suspension was to be until the conclusion of the substantive proceedings between the parties or further order of the court. The claimant argued that this sentence was wrong in law, being unduly lenient, and was the product of a misdirection in law. Three points were taken. First, it was said to have been wrong in principle even to contemplate, and certainly actually to suspend the sentence so as to permit the contempt to be purged by the purported repayment of a loan which the judge had held was a sham. Secondly, it was said to be wrong in principle to suspend a custodial sentence when the contempt, as in this case, was so serious that there must be a punitive element to the sentence. Thirdly, it was argued that the sentence was wrong in the light of the decision of the Court of Appeal in Lightfoot v Lightfoot [1989] 1 FLR 414: in summary, that the sentence should have been made immediately effective, allowing the defendant to purge his contempt, if he wished and could, from inside prison and so as to procure his release from prison once he had served enough of the sentence to satisfy the punitive element in the sanction.

Ward LJ gave permission to appeal on all of these grounds and observed that, arguably, the suspension should have been conditional on defined steps being taken within a defined period for the restoration of the property to the defendant's ownership free from any encumbrance. I must refer also to some more recent developments, although of course whether the judge was right or wrong in the sentence that he imposed depends on what he said and what the circumstances were at the time.

In January of this year the defendant applied for a declaration that for him to enter into a proposed settlement agreement with H would not be a breach of the freezing order. The agreement appears to have provided for the Riga property to be freed from the pledge in favour of H over one half and for the other half to be transferred back to the defendant. It also provided for payment to H by instalments to be made by the defendant if he was allowed to do so (that is to say, when he is not subject to a freezing order) but otherwise by his wife. On 16 May 2010 Teare J granted a declaration that the withdrawal of the pledge and the retransfer of the property would not be a breach -- matters which hardly required a court order. He declined to declare that entry into the settlement agreement would not be a breach, and that therefore failed to secure for the defendant what he may have hoped from that application.

The very latest development is that the defendant says, in two very recent affidavits supported by one from his mother, that he has negotiated a new agreement with H under which he buys back the half share which is already in H's name for €375,000 which has been paid by his mother, and he agrees that H will be repaid a further €375,000 from his own or a third party's resources, in practice from his mother, by 1 June 2010, which will result in the other half share being freed from the incumbrance of the pledge note.

On behalf of the claimant Mr Smith reminded us that the sanction for contempt may have both a punitive and a coercive element. His submission was that, whether or not it has a coercive element, it ought to have a punitive element at any rate in a case which is serious enough to warrant it. In Lightfoot v Lightfoot Lord Donaldson, Master of the Rolls, drew the distinction between punishment for a breach of an order which had occurred and which did not involve any continuing effect on the one hand, and coercion where the breach had occurred but was still continuing on the other. That was a case in which a husband in breach of an injunction had basically taken the money due to him and hidden it instead of crediting it to a joint account with his wife. In that case the judge had passed an immediate sentence of imprisonment of 18 months, and the Court of Appeal pointed out that the contemnor had the remedy in his own hands for securing early release by complying with the order and thereby purging his contempt.

As I say, the first element in the claimant's appeal is that the court should not contemplate the contemnor purging a contempt if and insofar it would involve payment to H in respect of what has been held to be a sham loan. That may well have been why Teare J limited the effect of a declaration that he gave in March of this year.

On that point for the defendant Mr Walford argued that what matters is, first, that the assets should be restored to the defendant's name free from any encumbrance, so that the position under the freezing order should again be as it was; and, secondly, that this should not happen at the expense of the defendant so as to reduce his funds currently caught by the freezing order. He submitted that this is what had always been intended to happen and what will happen on the latest evidence if the transaction there described goes through.

As I say, Mr Smith's second ground of appeal was that the contempt was too serious for it to be proper to consider suspension of the sentence at all and, as it seems to me, his third ground, by reference to Lightfoot v Lightfoot, was substantially to the same effect, ie that there really must be a punitive element in a case of this kind. Mr Walford, on the other hand, argued on these points that it was open to the judge to regard the coercive element as the matter to which he should give primary importance, and that it was not in principle wrong to impose a sanction for contempt which was and which might, in effect, be only coercive apart of course from such effect as indemnity costs orders may have.

For my part, it does seem to me that the judge was wrong in suspending the sentence in so open-ended a way as he did. The contempt was extremely serious for reasons expressed by the judge, and it certainly required a custodial sentence. It was however, I would accept, legitimate to reflect a coercive element in the sanction and, as it seems to me, serious as the contempt was for reasons described by the judge, I do not regard it as beyond the bounds of the reasonable exercise of the judge's discretion to consider that the coercive element was that which should be regarded as most important. On the other hand, to link the suspension with the outcome of the substantive proceedings between the parties appears to me to be illogical, unjustified and wrong. I know little, if anything at all, of the main proceedings other than that they are due for trial in some three weeks time; but, as it seems to me, even if the claimant's claim in the main proceedings falls to the ground, and even if, therefore, the freezing order were to come to an end, the effect of the defendant's contempt is something that does not simply disappear as a result of the outcome of the substantive proceedings. Conversely, if the claimant's claim succeeds so that the claimant was entitled to the freezing order, the freezing order will come to an end at the conclusion of the main proceedings because that is how it is expressed, but will, no doubt, be replaced by a fresh post-judgment freezing order. That order will only be able to take effect in respect of the assets of the defendant as they then stand; and accordingly, all the more so in that case, the effect of the prior contempt will continue and the effect of the court's order in respect of the contempt ought to continue in that case as well as in the converse case that I have mentioned.

For that reason it seems to me that linking the suspension to the determination of the proceedings was incorrect, and in that respect I consider that the judge's exercise of his discretion was incorrect and was outside the ambit of proper and legitimate orders that could have been made, and it is therefore open to this court, and it falls to this court, to consider what order should be made.

In respect of that, Mr Smith submitted to us that the appropriate order was one of immediate imprisonment rather than of suspension, that the defendant's so-called apology in his ninth affidavit was in reality no apology at all and that the court was wrong to have any regard to it. He also submitted that failing to impose an immediate sentence of imprisonment in relation to so serious, determined and elaborate a breach of the order as the judge found to have been committed in this case would give altogether the wrong message, both to defendants, who are subjected to freezing orders, and to claimants, who might seek them, and would give entirely the wrong impression of the court's view of the seriousness of such an order and of any breach of it. So far as the latter point is concerned, while it might be the case that one could envisage that the defendant, if he does manage to procure the reversal of the situation under which H owns half of the property and has a pledge over the other half, and if by that means he manages to preserve in one form or another the suspension of the sentence of imprisonment so that he does not see the inside of an English prison, one might say he has emerged scot-free; but whether that is the right view may be a matter of opinion. In any event, as I said a little while ago, it seems to me that it was open to the judge in the proper exercise of his discretion, and it would therefore be open to this court, to take the view that the coercive element was more important than the punitive element.

I would also say, as regards the judge's errors of approach, that he did of course require the defendant to report to the claimant as to the steps he had taken by way of remedying the situation, and the judge appears to have envisaged that it would be open to the claimant to apply back to the court if not content with the steps taken. So far as that is concerned, while it would no doubt be open to the claimant to apply back to the court, it seems to me that that aspect of the matter also he really got the thing the wrong way round. It should be up to the defendant to take the steps required of him by the court by virtue of the order, and although, if a question arises as to whether the defendant has done that which is required, it is then open to the claimant to apply, it does seem to me that in the present case it was wrong to leave the matter so open ended as not to define the conditions of the suspension and to leave it in a rather open way for the claimant to take the initiative if it thought that the matter was not being properly dealt with.

As it seems to me, the right course for the judge, if he was minded to give primacy to the coercive element, as he was, would have been to suspend the sentence for a stated period, during which the effect of the breach on the defendant's assets might be remedied, and thereafter to suspend it for a further fixed period, but only if at the end of the first period the breach had been remedied. I will come on, before I conclude this judgment, to what, as it seems to me, the judge should have said in that respect in more detail, but therefore, for those reasons, I would not agree that it was wrong in principle to suspend the sentence, but I do accept the claimant's submission, and in that respect I consider that the appeal is fully made out, that the terms of the suspension were inappropriate.

It is an important feature of a case of this kind that, if a sentence is suspended on terms and it is said that those terms have not been complied with, the sentence does not become automatically and immediately effective; there has to be another application to the court, and on that application to the court it is for the court to consider all the circumstances as they then stand, so that the court can then take a view, on the merits in the round, as to what course should be taken as to whether the sentence should be further suspended or whether it should be made immediately effective or what other order should be made. Thus, if the claimant contends that what is required by the suspension has not happened, it will be open, and indeed necessary, for it to apply back to the court to activate the committal as a whole as things then stand.

For my part, therefore, I would allow the claimant's appeal, but I would substitute a different and more elaborate provision as to suspension. I would give the defendant further time in which to complete the efforts that he appears to have been making already to remedy the breach, and I would do that in two stages. I do so for this reason: we are told that the latest agreement provides, as I have mentioned, for the retransfer of the half share which is in H's name already, and Mr Walford has told us that all the necessary steps in that respect have already been taken other than the formal completion of that process at the Land Registry in Latvia. Accordingly, he says that it should be reasonable to expect that all stages have been completed by the end of this week, and I would therefore specify a date, giving a reasonable margin, of Friday 14 May as the first date to be specified in the order as the date by which the half share of the property, which was transferred into the name of H, is to be retransferred into the name of the defendant.

Secondly, there is the question of the pledge note which is an encumbrance on the other half share. So far as that is concerned, the second aspect of the agreement is due apparently for completion as between the parties no later than Tuesday 1 June, but there will have to then be an order of the Latvian court since the pledge note was imposed by virtue of an order of that court. But we are told that obtaining that order, since by then H and the defendant will be in agreement as to the matter, should be straightforward and relatively quick. I would therefore specify a further date in June by which that is to be complete, and the date that appears to me to be appropriate, with a reasonable margin, is Friday 18 June. I would therefore, in place of the order that the judge imposed, impose a 12-month sentence of imprisonment, suspended first of all until 14 May 2010 in any event, and suspended after that date if the first aspect of the matter has been completed so that the half share has been retransferred from H to the defendant's name. If that hurdle is overcome, the order is to be suspended further until 18 June 2010 in any event, and its continued suspension thereafter will depend on the pledge note having been removed from the other half of the property so that that half of the property is not subject to any further encumbrance or other interest in favour of H. If that hurdle is overcome the order will be suspended for a further 12-month period.

I understand that the trial is due to start on 17 May. If the claimant does not make out its claim at trial the freezing order will no doubt fall to the ground but the committal order would stand. In that event, quite what view the court would take, if the question has to be considered whether the condition of suspension has been complied with and whether the order should be made immediately effective, the court's view would no doubt be affected by what has happened to the underlying proceedings. If, on the other hand, the claimant has by then been successful at trial, the court will no doubt take a different view more favourable to the claimant.

At all events, I would therefore dismiss the cross-appeal and I would allow the appeal, but only to the extent of substituting that more precise and rather more complex term of the suspension. I will give both parties permission to apply and all further applications should be to the commercial court, not to the Court of Appeal.

I agree. There is nothing that I wish to add.

I also agree.