North Shore Ventures Ltd v Anstead Holdings Inc

North Shore is owed a sum in the region of US$35 million by the appellants, Mr Fomichev and Mr Peganov, under a judgment debt. The appeal is against an order of Floyd J requiring the appellants to produce documents to North Shore pursuant to CPR 71.2(6). The documents in dispute relate to trusts which the appellants established and under which they were discretionary beneficiaries. They say that they have no such documents in their possession or control.

Under CPR 71.2 the court may order a judgment debtor to attend court to provide information about his means or any other matter about which information is needed to enforce a judgment. CPR 71.2(6) provides:

“A person served with an order issued under this Rule must –

(a)

attend court at the time and place specified in the order;

(b)

when he does so, produce at court documents in his control which are described in the order; and

(c)

answer on oath such questions as the court may require.”

There is no definition of “control” in CPR 71.2, but the same term is used in CPR 31, which deals more generally with disclosure and inspection of documents. CPR 31.8 provides:

“(1)

A party’s duty to disclose documents is limited to documents which are or have been in his control.

(2)

For this purpose a party has or has had a document in his control if –

(a)

it is or was in his physical possession;

(b)

he has or has had a right to possession of it; or

(c)

he has or has had a right to inspect or take copies of it.”

In March 2003 North Shore entered into a written agreement with the first defendant, Anstead, for a loan of $50 million, which was guaranteed by the appellants. Anstead was a BVI company owned and controlled by the appellants. Its base of operations was subsequently moved to Nevis, its assets were transferred to the trusts to which I have referred and it was put into liquidation.

On 8 February 2008 solicitors for North Shore sent to Mr Fomichev spread sheets showing that Anstead then owed North Shore a sum in excess of US $20 million. It was shortly after this event that the transfer of assets began.

On 28 May 2008 solicitors for North Shore wrote a formal letter to Anstead demanding repayment of the amount owed under the loan agreement. Two days later they wrote to the appellants claiming the same amount under the guarantees.

No payments were made and on 20 August 2008 North Shore issued a claim against Anstead and the appellants. On 25 March 2009 North Shore obtained worldwide freezing orders against the appellants.

The action came to trial before Newey J in March 2010. In a written judgment handed down on 21 June 2010 he gave judgment against the appellants for the amount claimed, which by then was over $50 million.

On 9 March 2011 the Court of Appeal allowed an appeal in part and reduced the amount of the judgment by approximately $20 million. Only a small fraction of the judgment sum has been paid.

In response to the usual requirement of the freezing orders for disclosure of assets, the appellants each swore affidavits on 15 April 2009, according to which they had no assets worth mentioning. Both said that they had disposed of virtually all their property to the relevant trusts at the end of March 2008. The trustees were in each case the same (Jirehouse Resettlement Foundation or some other Jirehouse entity operating in Nevis.) Mr Fomichev’s affidavit stated:

“I am also a discretionary beneficiary of a discretionary family trust established on or about 31 March 2008. Details of my interest in the trust can be obtained from the trust fiduciary agents, Jirehouse Luxembourg SA…From time to time, I receive capital distributions from this trust. I am asked by the trust to provide advisory and executory services from time to time for the trust with respect to the administration and management of its assets and investments.”

Mr Peganov’s affidavit was in similar terms.

On 25 June 2010 Newey J made an order for the questioning of the appellants under CPR 71.2. On 20 July 2010 Mr Fomichev was cross examined. In answer to many questions he said that documents were not in his possession, but that he was willing for the trustees of the family trust to be asked to produce them. North Shore’s counsel was hampered in the extent of the questions which he felt that he could ask because, shortly before the cross examination, the trustees had obtained injunctions against the appellants (which were later discharged) prohibiting them from answering questions about the trusts. The cross examination of Mr Fomichev was adjourned. Mr Peganov did not attend court, because he said that he had visa problems, and so his cross examination was also adjourned. The adjourned hearing was fixed for 25 October 2010.

After the first cross examination, North Shore’s solicitors attempted by correspondence to obtain documents showing, in particular, what had happened to the assets which the appellants had put into the trusts, but the attempts failed.

On 7 October 2010 Floyd J made the order under appeal. The production order against each appellant was split into two parts. The documents required to be produced by Mr Fomichev were listed in schedules 1A and 1B. The documents required to be produced by Mr Peganov were listed in schedules 2A and 2B.

There is no appeal in relation to the documents listed in schedules 1B and 2B. These comprised a variety of documents which the appellants were ordered to produce in so far as they were within their knowledge, possession, custody or control. The appeal relates to schedules 1A and 2A. These related to trust documents and were not limited by the words “in so far as they are within his knowledge, possession, custody or control”.

Schedules 1A and 2A were in identical form, except for the names of the trusts. The documents listed in schedule 1A were:

“1.

The following documentation in respect of each of (1) the Fomichev Family Settlement and (2) the Wolston Capital Trust Foundation:

a.

The trust deeds and/or declaration of trust

b.

Any letters of wishes

c.

All documents relating to the settlement of assets on the trust including any deeds of transfer or equivalent documents

d.

All documents identifying the assets settled on or held by the trusts from time to time

e.

All consultancy agreements between Mr Fomichev and Mr Peganov relating to the trusts

f.

Minutes of meetings of the trustees of the trusts

g.

Documentation relating to the addition or exclusion of beneficiaries

h.

Documentation relating to any change of the trustees

i.

Documentation relating to any amendment to the terms of the trusts

j.

Documentation relating to any power of revocation of the trusts if separate from the trust deeds”

North Shore’s application for disclosure orders was issued and served on 5 October 2010, i.e. one clear day before the hearing. In his oral argument on behalf of North Shore, Mr Sinclair went through the history of what he described as evasive conduct by the appellants. He submitted that Mr Fomichev had not suggested in his cross examination that there would be any difficulty in the trustees providing the trust documents but that, unless he was ordered to provide them, they would not be provided. He argued that the matter had dragged on too long.

Mr Machell, on behalf of the appellants, said on instructions that the appellants were no longer beneficiaries under the trusts. They were merely the original settlors and did not have the relevant documents in their possession. He argued that any order for their production should be qualified by the words “in so far as they are within his knowledge, possession, custody or control”.

In response, Mr Sinclair argued that this would be unsatisfactory in a case where the appellants had attempted to make themselves judgment proof by settling their assets on trustees but were in reality in a position to produce the documents if they chose to do so. He submitted:

“In real life they will have access to these documents. They can ask their wives, their children, they can ask the trustees, in real life, and, my Lord, I would ask that they shall provide those trust documents. If they do not and they breach the order then they will have to explain what exactly has happened.”

In his ex tempore judgment Floyd J said:

“19.

…Mr Sinclair submits that the defendants will, as he puts it, “in real life”, be able to get their hands on documents relating to the trusts which they have set up and [of] which they were at one time (but are no longer) beneficiaries. He points to the fact that the setting up of these trusts was substantially contemporaneous with the intimation of the claim and, to the claimants’ view or suspicion, that the purpose of setting up the trust (or at least of removing Mr Fomichev and Mr Peganov as beneficiaries) was to render themselves judgment-proof and to make it harder for the claimants to enforce their judgment exactly in the way that is being suggested on this application.

…

22.

It seems to me (and it is not submitted to the contrary) that the court can in certain circumstances simply require a party to produce a document. It is of course the case that it would not do so as a matter of course. But I think Mr Sinclair is right that in practice if such an order is made it is reasonable to suppose that Mr Fomichev and Mr Peganov will be able to comply with it. I am told that the beneficiaries of the trust are their wives and their children. If that is the position then it seems to me to be wholly unrealistic to suppose that if Mr Fomichev does not keep copies of these documents himself then there is no way in which he would be able to obtain copies.

23.

So the order that I would propose to make in broad terms is that, other than in relation to the trusts, the order should require the giving of information or the production of documents that are in the possession, custody or control of the defendants. But in relation to the trusts, I consider that the defendants should produce the documents.”

The appellants both made further witness statements for the purposes of the appeal. In those statements they each denied having copies in their possession of any of the documents set out in schedules 1A and 2A, except that each had a copy of the letter of settlement under which he settled his assets on the trustees and a copy of his consultancy agreement with the trustees. They said that the arrangements for the transfer of their assets to the trustees had been dealt with by their Russian lawyers, and that they had sought copies from them of any documents that they might have relating to the settlement of the assets but had not received any. They further stated that their English lawyers had requested copies of the documents referred to in the schedules from the trustees but that their attempts had been unsuccessful. Both stated that they had been informed that they had been removed as beneficiaries under the relevant trusts on 1 September 2010. Mr Fomichev said that the source of his information was the trustees. Mr Peganov did not identify the source of his information. Neither indicated that he was given any explanation for his removal as a beneficiary or the circumstances in which he was removed. Both denied having any control over the trustees.

Mr Machell submitted that the judge erred in law because either:

1.

he wrongly took the view that an order could properly be made in respect of documents that were outside the appellants’ control, provided that they were in a position to obtain them; or

2.

he misdirected himself as to the meaning of control, wrongly equating the ability to obtain documents with having the documents in their control.

As to the meaning of “control”, Mr Machell submitted that a document which is not in the physical possession of a party is not within his control unless he has a currently enforceable legal right to its possession (or to take copies of it). He relied on the words of CPR 31.8, the decision of the House of Lords in Lonrho v Shell [1980] 1 WLR 627 and the judgments of Tomlinson J and the Court of Appeal in Three Rivers DC v Bank of England [2002] EWHC 1118 (Comm) and [2003] 1 WLR 210. He further argued that a beneficiary under a discretionary trust has no immediately enforceable right to possession or to take copies of trust documents. He has a right to ask the court to order the trustees to allow him to take copies of trust documents but that is a matter for the discretion of the court: Schmidt v Rosewood Trust Limited [2003] AC 709.

Mr Tregear QC submitted that:

1.

the judge was entitled to conclude that the appellants were in fact in control of the relevant documents and that the trustees had not acted as independent trustees but rather to fulfil the appellants’ wishes (the de facto argument), and

2.

as beneficiaries or former beneficiaries under the trusts the appellants had sufficient legal rights to give the court jurisdiction to make the order which it did.

In support of the de facto argument Mr Tregear relied by analogy on the decision of Floyd J in Schlumberger Holdings Limited v Electromagnetic Geoservices AS [2008] EWHC 56 (Pat). Mr Machell argued that Schlumberger turned on special facts distinguishable from the present case and that it did not provide authority for any general principle.

In Lonrho v Shell the issue was whether documents in the possession of a company’s foreign subsidiary were within the “power” of the parent company for the purposes of order 24, rule 2(1) of the Rules of the Supreme Court. That rule provided that each party to an action must,

“…make and serve on [the] other party a list of the documents which are or have been in his possession, custody or power relating to any matter in question between them in the action.”

Disclosure of documents was sought for the purposes of an arbitration in which Lonrho alleged that Shell and BP had conspired with others to cause loss to Lonrho by supplying oil to Zimbabwe (then Southern Rhodesia) in breach of the Southern Rhodesian (Petroleum) Order 1965. The documents in question were in the possession of companies in which Shell and BP each had a 50% interest through intermediate subsidiaries. The articles of association of all the subsidiaries vested the management of the company in its board of directors. Those subsidiaries that were resident in South Africa or Zimbabwe would have required under local law to obtain a ministerial licence before being lawfully permitted to disclose the documents to Shell or BP. It was argued by Lonrho that the documents were within the “power” of Shell and BP because those companies were in a position to obtain possession of the documents by taking a series of steps. The steps would have involved Shell and BP exercising their powers to procure alteration of the articles of association of the relevant subsidiaries so as to entitle Shell and BP to inspect and take copies of the subsidiaries’ or sub-subsidiaries’ documents and, where necessary, to procure application for ministerial licences permitting the disclosure.

The House of Lords rejected Lonrho’s argument. Lord Diplock (with whom the other members of the Judicial Committee agreed) said at 635:

“…in the context of the phrase “possession, custody or power” the expression “power” must, in my view, mean a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else.”

In argument in the Court of Appeal and the House of Lords there was some discussion about what the position would be in the case of a “one-man company”. In the Court of Appeal [1980] 1 QB 358 Lord Denning MR said at 371:

“I would like to say at once that, to my mind, a great deal depends on the facts of each individual case. For instance, take the case of a one-man company, where one man is the shareholder – perhaps holding 99% of the shares, and his wife holding 1% - where perhaps he is the sole director. In those circumstances, his control over that company may be so complete – his “power” over it so complete – that it is his alter ego. …But in the case of multi-national companies, it is important to realise that their position with regard to their subsidiaries is very different from the position of one-man companies.”

Shaw LJ said at 375-376:

“In the end I have come to view that a document can be said to be in the power of a party for the purposes of disclosure only if, at the time and in the situation which obtains at the date of discovery, that party is, on the factual realities of the case virtually in possession (as with a one-man company in relation to documents of the company) or otherwise has a present indefeasible legal right to demand possession from the person in whose possession or control it is at that time.

…

There are no doubt situations, such as existed in B v B (Matrimonial Proceedings: Discovery) [1978] Fam 181, where on the established facts a company is so utterly subservient or subordinated to the will and the wishes of some other person (whether an individual or a parent company) that compliance with that other person’s demands can be regarded as assured. Each case must depend upon its own facts and also upon the nature, degree and context of the control it is sought to exercise.”

In the House of Lords Lord Diplock said at 631-632:

“The circumstances which have given rise to the disputes about discovery are quite exceptional; they are unlikely to recur in any other case and, for that reason, they do not in my view provide a suitable opportunity for any general disquisition by this House upon the principles of law applicable to the discovery of documents.”

and at 636-637:

“In dismissing the subsidiaries appeal on its own special facts, I expressly decline any invitation to roam any further into the general law of discovery. In particular, I say nothing about one-man companies in which a natural person and/or his nominees are the sole shareholders and directors. It may be that, depending upon their own particular facts, different considerations may apply to these.”

In Three Rivers the question was whether the Bank of England had within its “control” documents which were held by the Public Records Office relating to an inquiry conducted by Bingham LJ into the supervision by the Bank of England of a bank which collapsed. It was accepted on all sides that this depended on whether the Bank of England had a present right to possession or to take copies of the documents. Tomlinson J at first instance said that he took the word “right” in CPR 31.8 to be used in the sense explained by Lord Diplock in Lonrho v Shell. There was no argument to the contrary in the Court of Appeal.

In Schlumberger the claimant was a holding company. The defendant applied for a disclosure order which would require the claimant to search the records of companies within the group who were not parties to the action. The context of the application was that the claimant had already carried out searches of files held within the group. Floyd J made the order sought. He explained his reasoning in this way:

“I accept that the mere fact that a party to litigation may be able to obtain documents by seeking the consent of a third party will not of its own be sufficient to make that party’s documents discloseable by the party to the litigation. They are not within his present or past control precisely because it is conceivable that the third party may refuse to give consent. But what happens where the evidence reveals that the party has already enjoyed, and continues to enjoy, the co-operation and consent of the third party to inspect his documents and take copies and has already produced a list of documents based on the consent that has been given and where there is no reason to suppose that that position may change? Because that is the factual situation with which I am confronted here. In my judgment, the evidence in this case sufficiently establishes that relevant documents are and have been within the control of the claimant.”

There is some tension between the different passages which I have quoted from the speech of Lord Diplock in Lonrho v Shell. On the one hand he gave a definition of the expression “power” in the phrase “possession, custody or power”; on the other hand he indicated that he regarded the facts of the case as so exceptional that it was not an appropriate occasion for “a general disquisition”, and he expressly declined to say anything about one-man companies beyond commenting that “depending upon their own particular facts, different considerations may apply to these”.

If one asks the question what “different considerations” may apply in the case of the one-man company, the answer lies in the fact that a person with such domination over a company has or is likely to have the real say whether to produce the document. To obtain the “consent” of the company requires obtaining the consent of himself and no one else.

We do not have to decide whether in such a case the documents would have been within the power of the owner/controller of the company for the purposes of RSC Order 24, rule 2(1), although Lord Denning and Shaw LJ would have given an affirmative answer, for we are concerned with CPR 71.2 and 31.8. The word “control” was not used in RSC Order 24 rule 2(1), but as a matter of ordinary English it would be apt to describe the type of case which Lord Denning and Shaw LJ had in mind.

Whether Floyd J had jurisdiction to make the order which he did in this case depends on what conclusion he was properly entitled to draw on the material before him as to the true nature of the relationship between the appellants and the trustees. In paragraph 22 of his judgment he referred to the relationship between the appellants and the beneficiaries of the trust, i.e. their wives and their children, but the way in which North Shore put its application was wider than that. North Shore’s submission was in effect that the setting up and the administration of the trusts were entirely orchestrated by the appellants for the protection of their funds for their benefit, using their wives and children for the purpose. I think it is implicit in the judge’s acceptance of Mr Sinclair’s submissions (and his finding that in practice the appellants would be able to comply with the order) that he took that view, and Mr Tregear argued that he was right to do so.

The circumstances surrounding the appointment and behaviour of the trustees were undoubtedly suspicious. For a wealthy man (or in this case two wealthy men acting simultaneously) to make himself a pauper, with the genuine intention of disposing of his money down to his last dollar irrevocably and with no ability to control what was to happen to it, is an unlikely scenario. Family trusts are a well known possible device for trying to place assets ostensibly beyond the reach of creditors, and the timing of the simultaneous creation of the trusts fits such a pattern. Suspicion that these were not entirely arm’s length arrangements is heightened by the later steps taken by the trustees, for example, in seeking to prevent cross examination of the appellants in the English proceedings and in apparently removing the appellants from even being discretionary beneficiaries for reasons and in circumstances which are unexplained. The circumstantial evidence gave reasonable ground to infer that there was in truth some understanding or arrangement between the appellants and the trustees by which they were to shelter the appellants’ assets, consistent with the appellants’ real aim, and that the nature of that understanding and arrangement was such that the trustees would take whatever steps the appellants wished in the administration of the trusts.

In the particular circumstances of this case, Floyd J was in my judgment entitled to deduce that such was the true nature of the relationship between the appellants and the trustees on the material then before the court. He did not express himself in those words, but that appears to me to be the thrust of his conclusion. Mr Machell submitted that it was wrong for the judge to reach such a conclusion on an application made at short notice. North Shore ought, he submitted, to have set out its assertions sufficiently in advance for the appellants to have had a proper opportunity to answer them by evidence. I will return to that question when considering the exercise of the judge’s discretion. At the moment I am considering the question whether he had jurisdiction to make the order under appeal.

If that was the true relationship between the appellants and the trustees, the judge was entitled in my view to regard documents in the physical possession of the trustees relating to the administration of the trust as documents in the appellants’ control within the meaning of CPR 31.8. In determining whether documents in the physical possession of a third party are in a litigant’s control for the purposes of CPR 31.8, the court must have regard to the true nature of the relationship between the third party and the litigant. The concept of “right to possession” in CPR 31.8(2)(b) covers a situation where a third party is in possession of documents as agent for a litigant. The same would apply in my view if the true nature of the relationship was that the litigant was to be the puppet master in the handling of money entrusted to him for the specific purpose of defeating the claim of a creditor. The situation would be akin to agency. But even if there were on a strict legal view no “right to possession”, for example, because the parties to the arrangement caused the documents to be held in a jurisdiction whose laws would preclude the physical possessor from handing them over to the party at whose behest he was truly acting, it would be open to the English court in such circumstances to find that as a matter of fact the documents were nevertheless within the control of that party within the meaning of CPR 31.8(1). CPR 31.8(2) states that for the purpose of CPR 31.8(1) a party has or has had a document in his control if the case falls within paragraphs (a) to (c). It does not state that a party has or has had a document in his control if but only if the case falls within one of those paragraphs.

For those reasons I reject the argument that the judge had no jurisdiction to make the order under appeal. I come back to the question whether it was right for him to do so on an application of which such short notice had been given. Mr Machell made it clear to the judge that his clients’ instructions were that they were no longer beneficiaries, and that they denied that they had personal possession of trust documents or any control over the trustees, but there was no indication that they wanted to produce more specific evidence about the nature of their relationship with the trustees. Their position was essentially one of denial.

Disclosure under the Civil Procedure Rules is a continuing process. It is part of case management. It is always open to a court to revisit an earlier procedural order. If the judge’s order is upheld and the appellants fail to comply with it, it would be open to them to put evidence before the court to explain their reasons for non-compliance. In particular, it would be open to them to produce further evidence in order to cast a different light on their relationship with the trustees. A judge’s discretion in the exercise of case management powers is wide and it was well within the proper exercise of the judge’s discretion to make the order which and when he did.

I turn shortly to Mr Tregear’s alternative submission that as beneficiaries or former beneficiaries under the trusts the appellants had sufficient legal rights to give the court jurisdiction to make the order which it did. The subject of the rights of beneficiaries to disclosure of trust documents was considered by the Privy Council in Schmidt v Rosewood Trust Limited in a judgment delivered by Lord Walker. He held, in summary, that a beneficiary’s right to seek disclosure of trust documents is best approached as one aspect of the court’s inherent jurisdiction to supervise the administration of trusts, rather than as a proprietary right. A proprietary right may be sufficient but is not necessary. No beneficiary has an automatic right to disclosure of anything which can be described as a trust document. In deciding whether to order disclosure, a court may have to balance competing interests of different beneficiaries, the trustees and third parties. Disclosure may have to be limited and safeguards may have to be put in place.

Both sides relied on the judgment. Mr Tregear argued that beneficiaries have a legal right to the proper administration of the trust and that this may in an appropriate case require disclosure of trust documents, such right being enforceable by the court. Mr Machell argued that the judgment shows that no beneficiary has an immediately enforceable right of disclosure of trust documents; it depends on the exercise of the court’s discretion.

I do not think that it is either necessary or possible to give a cut and dried answer to the question whether and when a court may make an order under CPR 31.8 against a beneficiary in relation to a trust document not in the beneficiary’s physical possession. In many, perhaps most, cases such an order would not be proper, because it would be contrary to the proper interpretation and purpose of the rule to order disclosure of a document whose production depends upon the exercise of a consent by a party over whom the litigant has no control or on the exercise of a discretion by the court; but I would not go as far as to say that an order might never be made under CPR 31.8 against a beneficiary in respect of a trust document which was not in his physical possession. It would depend on the nature of the document and the terms of the trust. It is possible to envisage circumstances in which a trustee would have no ground on which to oppose production of a document and the beneficiary would have a right to an order compelling its production. In summary, I do not accept Mr Tregear’s broad argument that the status of the appellants as former beneficiaries of itself provided sufficient foundation for an order under CPR 31.8 or, in this case, under CPR 71.2, and I do not understand that to have been the basis on which the judge made the order.

I would uphold the judgment and dismiss the appeal on the basis that in the particular circumstances of this case the judge was entitled to regard the documents as being in the control of the appellants for the reasons which I have given.

I agree.

I also agree.