Novoship (UK) LTD & Ors v Vladimir Mikhaylyuk

This is an appeal by the first defendant, Vladamir Mikhaylyuk (“Mr Mikhaylyuk”), against an order of Christopher Clarke J (as he then was) dated 18 January 2013. By that order the judge dismissed an application by Mr Mikhaylyuk to vary a freezing order so as to permit him to re-pay, from his share of the sale proceeds of his former home, 24 Oakland, Bromley (“the property”), the sum of £8,336.23 representing 50% of loans totalling £16,672.46 which he alleged that his daughter, Ekaterina Mikhaylyuk (“Miss Mikhaylyuk”) had previously made to him and his wife in order to pay sums outstanding in respect of a mortgage on the property in favour of Barclays Bank PLC (“the bank”). By the same order, the judge also granted the claimants, Novoship (UK) Limited (“NOUK”) and others (collectively “the Respondents”), a final third party debt order in respect of the sum of £211,519.06 held by Royal Bank of Scotland (“RBS”), in respect of Mr Mikhaylyuk’s share of the net proceeds of sale of the property after discharge of the mortgage.

The judge refused Mr Mikhaylyuk permission to appeal. I subsequently granted Mr Mikhaylyuk permission to appeal on paper. The Respondents’ case is that, for the reasons which he gave, the judge was right to refuse to vary the freezing order to allow Mr Mikhaylyuk to repay his daughter the sum of £8,336.23, and was right to make the third party debt order final in respect of the full amount of £211,519.06, without making provision for repayment of the said sum to Miss Mikhaylyuk.

NOUK was at all relevant times a ship management company, principally managing ships owned by its parent company the Novorossiysk Shipping Company (“NSC”) and its subsidiaries, including Intrigue Shipping Inc (“Intrigue”). The Second to Fifteenth Respondents are single ship owning companies, which are wholly-owned subsidiaries of Intrigue.

Mr Mikhaylyuk was the former General Manager of NOUK.

On 4 December 2006 the Respondents issued proceedings in the Commercial Court against Mr Mikhaylyuk and others claiming inter alia as against Mr Mikhaylyuk an account of bribes, secret commissions, and secret profits which the Respondents alleged that he had received in breach of his fiduciary duties and his contract of employment. On the same date, I granted NOUK a freezing order against Mr Mikhaylyuk which was continued by further order of Morison J on 15 December 2006 and subsequently varied. The freezing order, as varied by consent on 20 February 2007, permitted Mr Mikhaylyuk to spend the sum of £1,350 per week towards his basic living expenses.

On 14 December 2012, following an 8 week trial that took place between 16 May and 5 July 2012, the judge handed down judgment in the action; see [2012] EWHC 3586 (Comm). He found that Mr Mikhaylyuk had dishonestly conspired with other defendants, and acted in breach of fiduciary duty and breach of contract, by inter alia accepting bribes in the course of his employment, causing the Respondents significant loss. Mr Mikhaylyuk, who had previously attended all hearings, did not attend the trial. He claimed that he was ill as a result of the pressure of trying to conduct his own defence. However, although invited to do so by the judge, he did not provide any medical evidence supporting his condition.

Pursuant to the judgment, Mr Mikhaylyuk was ordered to pay the Respondents more than US$ (“$”) 82million, which comprised over $59,000,000 in respect of the principal and over $23,000,000 in respect of interest. Mr Mikhaylyuk has not sought to appeal the main judgment.

Mr Mikhaylyuk’s case is that, due to the lengthy nature of the proceedings, his savings became exhausted; that he made several attempts to obtain access to money held by a company called Pulley Shipping Limited to fund his living expenses, but that these attempts were repeatedly blocked by NOUK in court proceedings heard before the Commercial Court and courts in Guernsey and Nevis. Mr Mikhaylyuk claims that, as a result of being unable to obtain access to funds to defray his living expenses, Mr Mikhaylyuk and his wife fell into arrears with their mortgage, and were forced to borrow monies from their daughter, who was also living in the property. He claims that the first series of loans by Miss Mikhaylyuk were made in the period November 2007 to March 2009 and that the second series were made in the period September 2011 to December 2011. He claims that in relation to both series it was orally agreed that they would be repaid on or before 31 December 2014 or out of the sale proceeds at the property (whichever first occurred) and that both loans were subsequently recorded in written agreements dated 23 October 2012 and 25 January 2012 respectively.

Mr and Mrs Mikhaylyuk had an offset mortgage with the bank. That meant that interest earned on funds kept in “linked” accounts, and which would normally be payable to the account holder, was offset against the interest that would otherwise be payable on the mortgage debt.

According to Mr Mikhaylyuk, between November 2007 and March 2009, Miss Mikhaylyuk lent Mr and Mrs Mikhaylyuk a total of £17,250 which was paid into Mrs Mikhaylyuk’s account in order to keep down the level of interest payable on Mr and Mrs Mikhaylyuk’s offset mortgage.

By February 2010, Mr Mikhaylyuk had become unable to service the mortgage instalments. On 10 February 2010 the bank notified him that, as the mortgage was in arrears, it had taken £8,230 from his wife’s account to discharge the (then) mortgage arrears on the property. According to Mr Mikhaylyuk, that sum derived from the loan monies paid by Miss Mikhaylyuk to the credit of his wife’s account. The balance of approximately £9000 which Miss Mikhaylyuk had advanced was repaid to her.

It was not in dispute that in late 2010 the bank issued repossession proceedings in the Bromley County Court in respect of the property. In January 2011 the County Court judge adjourned the proceedings in order to enable Mr and Mrs Mikhaylyuk to take steps to re-pay the mortgage arrears and to sell the house as a family home at its open market value, so as to avoid the consequences of the property being sold by the bank on a forced sale basis.

Mr Mikhaylyuk’s case was that, in order to enable the mortgage to be paid pending the sale of the property, Miss Mikhaylyuk agreed to lend him and his wife £40,000 from her own savings, which she had intended to use towards a deposit for a home of her own, subject to her parents granting her a second charge over the property. It is clear from the correspondence that, after a number of exchanges with the Respondents' solicitors, Ince & Co (“Inces"), the Respondents agreed to this proposal. The freezing order was accordingly varied by a consent order of Blair J dated 7 June 2011 to permit Mr Mikhaylyuk to borrow that sum from Miss Mikhaylyuk, to apply the proceeds in payment of any mortgage arrears on the property, and to execute a second charge over the property in her favour. The order also provided that Mr Mikhaylyuk should sell the property and, from the net proceeds of sale after discharge of the bank's mortgage, repay the £40,000 loan to his daughter.

However the bank did not agree to the grant of a second charge in favour of Miss Mikhaylyuk. As a result, the freezing order was further varied by a consent order dated 17 August 2011 which removed the requirement that Miss Mikhaylyuk's loan should be secured by a second charge, but provided that her loan could still be repaid out of the proceeds of any sale of the property, after discharge of the bank's mortgage.

In August 2011 the mortgage arrears of £52,030 were paid off by the use of the proceeds of the £40,000 loan from Miss Mikhaylyuk and funds provided by Mr Mikhaylyuk from his savings.

According to Mr Mikhaylyuk, between October and December 2011, Miss Mikhaylyuk lent both her parents further sums totalling £8,441.63, on an unsecured basis, in order to enable Mr Mikhaylyuk and his wife to pay the monthly instalments on their mortgage with the bank.

By e-mail dated 13 October 2011 to Inces, Mr Mikhaylyuk informed them that he and his wife would need to borrow further funds from their daughter to pay the mortgage instalments until such time as the Respondents had consented to the sale of his motorcar in England and a garage owned by him in Russia, and to the application of the proceeds of such sales in discharge of mortgage arrears. He asked for the Respondents ' consent that:

“ in addition to the loan she has already made, my daughter can also be reimbursed for all future payments that she makes towards the mortgage from the proceeds of any sale of the Property and/or the car and/or the garage (upon her showing evidence of payments from her account into mine and my wife's mortgage account). ”

The Respondents did not agree to that proposal. In a further e-mail dated 19 October 2011 Mr Mikhaylyuk reiterated his request that the Respondents should agree that any loans made by Miss Mikhaylyuk to discharge mortgage arrears should be entitled to be repaid from the proceeds of sale of the property. He wrote:

“As your clients are already well aware, my wife and I are in very severe financial difficulties as a result of the proceedings that they have brought against me and there is not sufficient time for me to seek your client’s agreement and to wait for their response each and every time a mortgage payment falls due. For example, it took your clients 44 days to consent to the sale of the car which is unacceptable. My daughter has agreed to make some payments towards the mortgage until we can release funds from the sale of the garage in Russia and the car in England and it is only right that she be allowed to recover those payments from the proceeds of the sale of the property or the garage or the car - as your clients have previously acknowledged when she loaned my wife and I £40,000 to pay off the mortgage arrears. There is no reason why your clients should treat any other mortgage payments made by my daughter any differently. Please provide your client’s agreement by return.”

In an e-mail dated 24 October 2011 Inces replied as follows:

“our clients are willing to provide their consent to the sale of the garage. They are further willing to provide their consent for you to repay any loan made to you by your daughter in order to satisfy your mortgage repayments out of the proceeds of the sale of the car and garage subject to the conditions set out below.

Our clients' consent is conditional on you (and to some extent your daughter) satisfying the following three conditions:

“a)

following the sale of the garage (and car), you disclose all sale and purchase documents;

b)

your daughter provides documentary evidence of the source of her funds;

c)

you provide proof that the loan provided to you by your daughter is used to satisfy your mortgage repayments.

Please confirm that you will comply with the above conditions before you seek to sell the garage and take a loan from your daughter".

In response Mr Mikhaylyuk wrote in an e-mail dated 27 October 2011 as follows:

“Please would [your clients] also confirm they also consent to my daughter being repaid out of the proceeds of sale of the Property…

b)

As I have already explained in previous e-mails, my daughter's funds come from savings that she has accumulated from her salary. My daughter is not a defendant to these proceedings and she [sic] entitled for her personal finances to be kept private. Neither I nor your clients are entitled to ask her to provide such information and she does not agree to such a request.

c)

My daughter has paid and will pay the mortgage instalments straight into the mortgage account. I agree to provide your clients with a copy of the mortgage statement showing the payment coming from my daughter's account.”

In their response dated 28 October 2011 (which was not in the evidence before us but merely quoted in Mr Mikhaylyuk's 10th witness statement), Inces refused his request on the basis that:

“Since the loan provided by your daughter only two months have passed. The proceeds from the sale of your car and garage should therefore adequately cover any mortgage contributions your daughter has made to date and provide sufficient funds to cover any contributions that may be made until such time as the assets may be sold".

However, whilst this reply appeared to be a recognition on the part of the Respondents that Miss Mikhaylyuk should indeed be repaid any contributions which she had made to the mortgage payments, as Mr Mikhaylyuk pointed out in his witness statement, it nonetheless appeared to be based on the mistaken belief that he had already managed to sell the car and the garage, which he had not. Moreover, even once he had managed to do so, the sale proceeds would not have been sufficient to discharge weekly living expenses and the regular mortgage payments.

Mr Mikhaylyuk did not reply to Inces e-mail dated 28 October 2011 until an e-mail 12 January 2012. He claims that this was because during that time he had been preoccupied with disclosure and preparing his witness statement. In that e-mail he explained that he had sold the garage on 26 December 2011 and that, because of his lack of funds, his daughter had paid £160 towards their September mortgage payment and had then paid the instalments of approximately £2760 per month for October, November and December 2011 on the basis that he and his wife had agreed that they would repay her out of the sale proceeds of the property, once it was sold. He asked for the Respondents' consent to the proposal that the various payments which had been made by Miss Mikhaylyuk (totalling some £8441.63) should be repaid out of the net proceeds of sale of the property after discharge of the bank's mortgage. He enclosed bank statements from his own and his wife's mortgage accounts, as well as bank statements relating to his daughter's account with the bank, showing that she had indeed made the various payments referred to in his letter to the credit of Mr Mikhaylyuk and Mrs Mikhaylyuk's mortgage account to discharge mortgage outgoings and arrears.

The Respondents did not agree to this proposal. In an e-mail dated 24 January 2012 Inces wrote:

“Reimbursement of your daughter’s mortgage contribution

We have previously raised concerns over the source of your daughter’s mortgage contributions given the previous statements you have given regarding your daughter’s financial situation. Notwithstanding this, our clients do not object, in principle, to your daughter being reimbursed for any contribution she has made to your mortgage on the following basis:

1)

such contributions must be supported by documentary evidence;

2)

each contribution must have been necessary in the circumstance, i.e. made as a loan to you and/or your wife owing to a shortfall in your weekly allowance, rather than as a voluntary payment to the mortgage bank;

3)

any such reimbursement must be made from your wife’s share of the capital in your property. Our clients maintain that any sale proceeds attributable to your interest in the property shall be paid into an account subject to the terms of the freezing order.

In relation to point 2 above, please confirm why your daughter was continuing to contribute to your mortgage arrears when you were able to save funds of £12,029.88 from your weekly allowance.”

In other words, the Respondents were not accepting that any part of the loans made by Miss Mikhaylyuk should be discharged out of Mr Mikhaylyuk's share of the proceeds of the property.

In his e-mail in reply dated 25 January 2012 Mr Mikhaylyuk pointed out that he had already provided the Respondents with evidence of his daughter's contributions to the mortgage. He explained in detail how he and his wife had, of necessity, had to rely on their daughter's contributions to their mortgage liabilities in order to prevent the bank from resuming their repossession proceedings. He stated that his wife and he did not agree to the new condition imposed by the Respondents that any repayment should come out of his wife's share of the net proceeds of sale of the property. He pointed out that the loans made by their daughter had been made to both him and his wife and that it was not fair to insist that only his wife repaid the loans from her share of the net proceeds of sale.

Mr Mikhaylyuk contends that, in a loan agreement bearing the date 25 January 2012 he, his wife and his daughter formalised the loans which the latter had made totalling £8,441.63 in the period September to December 2011 in order to enable the mortgage instalments on the property to be met. That agreement provided for the repayment of the loan in full on or before 31 December 2014 or upon completion of the sale of the property. The loan was on an unsecured basis.

On 29 or 30 March 2012, Mr Mikhaylyuk made an application to court for an order that he be permitted to re-pay the two loans in the combined amount of £16,672 to Miss Mikhaylyuk from the future net proceeds of any sale of the property and that the order of Blair J should be varied accordingly. The Respondents opposed the application on grounds: a) that the application was premature until a sale of the property was imminent; b) that there was no justification for the loans to be repaid in priority to any claim by the claimant's in circumstances where the loans were expressly provided on a non-secured basis; and c) where in any event Miss Mikhaylyuk could recover the loan from Mrs Mikhaylyuk's share of the proceeds of sale of the property. The Respondents also questioned whether the loans had genuinely been made by Miss Mikhaylyuk and the source of the loan monies.

The application was heard by Teare J on 30 March 2012, together with other applications. He dismissed it on the basis that the application was premature until there were any sale proceeds in existence or until a sale was about to take place, which would generate proceeds. The judge held that the issue only arose when the property was sold. In dismissing the application he said:

“It depends when the sale of the house takes place in relation to the trial of this action. If the sale occurred before the trial was completed, and Mr Mikhaylyuk wished at that stage to repay friends or relatives who had lent him money out of the proceeds of sale, he would, it seems to me, have a reasonable argument that he should be entitled to do so, on the grounds that they fall within the The Angel Bell exception; that they are ordinary trade debts and he should be entitled to pay them. If it means that there is then less left for you from the proceeds, then that is the consequence of you not having security.

However, it the proceeds only come into being some time after the trial, then it may be different.”

Following the conclusion of the trial before Christopher Clarke J, but before judgment was delivered, Mr and Mrs Mikhaylyuk agreed a sale of the property. On 18 October 2012 contracts for the sale at a price of £695,000 were exchanged.

Mr Mikhaylyuk contends that on 23 October 2012 a second loan agreement was entered into between himself, his wife and his daughter formalising the loan of £8,230 made by Miss Mikhaylyuk in the period November 2007 to March 2009. The loan agreement recited Miss Mikhaylyuk’s total payments of £17,250, but recorded as the loan amount merely the sum of £8230 taken by the bank from the account to discharge the mortgage arrears on the property, the balance having been repaid to Miss Mikhaylyuk.

On 24 October 2012, Mr Mikhaylyuk sent an email to Inces reiterating his request that the Respondents should consent to the sum of £16,672 being repaid to Miss Mikhaylyuk from the net proceeds of the sale of the property before the proceeds were divided equally between Mr and Mrs Mikhaylyuk and paid into their separate accounts. He informed them that completion of the sale of the property was due to take place on 16 November 2012.

By e-mail dated 30 October 2012 Inces refused this request. They wrote:

“Please be reminded that your application to vary the freezing order which was heard before Teare J on 30 March 2011 was dismissed in its entirety (save to the extent that the variation in respect of the sale of your car and garage had been agreed). At this hearing, it was made clear by the judge that should you wish to take out any further loans, you must seek Novoships’ consent under the terms of the freezing order. It was further made clear to you that if you wished for such loans to be secured against your property, you must provide clear evidence as to:

a)

The terms of the loan;

b)

Why the loan must be given on a secured based; and

c)

That this is the only terms on which you can obtain the funding.

Whilst you have provided us with a copy of the terms of the loan, you have not satisfied points (b) and (c) above. Please provide this information, together with evidence that your daughter has transferred the sums into your bank account - previously you provided copies of bank statements to evidence the payments and our clients again require this evidence. Once this information is received, our clients will then be in a position to consider whether they are willing to consent to the requested reimbursement from the sale proceeds. As set out by Teare J, should Novoship not consent to your request, it will be necessary for you to make an application to the Court.

In respect of the sale of the property, please provide evidence of the agreed sale price and advise to whom the property is being sold. Please also note that Novoship placed a ‘restriction’ on the Land Registry in 2006 which provides that no disposition by the proprietor of the registered estate is to be registered except under a further order of the Court. This means that you cannot sell the property without obtaining an order from the Court.

For the avoidance of doubt, we wish to make clear that our clients have not and do not consent to any further variation of the freezing order and will consider their position once the above information has been provided.”

The first paragraph quoted above was an inaccurate and misleading description of what Teare J had actually decided. First, the judge had made it clear that the only basis upon which he had dismissed Mr Mikhaylyuk's application for permission to repay his daughter's loans out of the anticipated net proceeds of the proposed sale of the property was the fact that he regarded it as premature until such time as a sale had been agreed or completed; see page 11 of the transcript dated 30 March 2012. The judge was clearly not preventing Mr Mikhaylyuk from making a renewed application in respect of past loans made by his daughter once the property had been sold or agreed to be sold. Second, so far as the past loans made by Miss Mikhaylyuk were concerned, the judge did not "make clear" that the Respondents' consent had to be obtained. Third, nor did the judge require that Mr Mikhaylyuk should have to "provide clear evidence as to" why loans from his daughter had to be given on a secured basis or that that was the only terms upon which he could obtain funding. That so-called requirement was merely one mentioned by Mr Dougherty, which was not taken up in any way by the judge; see page 23 of the transcript. Fourth (although it is irrelevant for present purposes) the letter was also incorrect to state that Mr Mikhaylyuk required a further order of the court to sell the property; he had already obtained express permission to do so pursuant to the order of Blair J. I am left with the impression that the Respondents were seeking to put every obstacle in Mr Mikhaylyuk's path in an attempt to dissuade him from seeking the court's sanction to the repayment of loans made by his daughter out of the proceeds of sale of the property. When a defendant is acting in person it is of particular importance that solicitors for the opposing party ensure that all correspondence fairly and accurately reflects, and does not overstate or misrepresent, the effect of judgments and orders of the court.

On 8 November 2012 Mr Mikhaylyuk sent a further e-mail to Inces repeating his request for the Respondents' consent to a variation to the freezing order so that Miss Mikhaylyuk’s loans could be repaid out of the proceeds of sale of the property. He enclosed a draft of a proposed consent order intended to vary the order of Blair J.

In an email dated 9 November 2012 Inces once again refused the request; they complained that Mr Mikhaylyuk had failed to provide "clear evidence" as to:

“i)

Why the loan must be given on a secured basis; and

ii)

That this is the only terms on which you can obtain the funding.”

As I have already pointed out, that was not a requirement imposed by Teare J. They also complained that Mr Mikhaylyuk had not provided the evidence previously requested that Miss Mikhaylyuk had transferred the sums into Mr Mikhaylyuk's bank account. Again this was wrong. Mr Mikhaylyuk had already, some time previously, provided the Respondents with the relevant bank statements in relation to the transfers from Miss Mikhaylyuk's account to Mrs Mikhaylyuk’s account in respect of the series of loans made in the period November 2007 to March 2009 showing that £8230 had been applied in payment of the mortgage arrears; indeed these had been exhibited to Mr Mikhaylyuk's eighth witness statement in support of his application made in March 2012. Likewise, he had, as I have mentioned above, under cover of his e-mail dated 12 January 2012 already provided the Respondents with copies of the relevant mortgage and bank statements from himself, his wife and his daughter, showing that sums totalling £8442 had indeed been transferred by Miss Mikhaylyuk to her parents' mortgage account to service the monthly mortgage instalments in the period September to December 2011.

Completion of the sale of the property in the sum of £695,000 took place on 16 November 2012. The sale proceeds were distributed in compliance with the terms of the Order made by Mr Justice Blair on 7 June 2011 (as varied on 16 August 2011) and the net proceeds of sale of approximately £438,000 were divided equally between Mr and Mrs Mikhaylyuk. £219,000 was paid into an account in the name of the Mrs Mikhaylyuk and £219,000 was paid to Mr Mikhaylyuk’s account at RBS which was subject to the freezing order.

The Respondents continued to refuse to give their consent to the repayment of Miss Mikhaylyuk's loans totalling £16,672 from the net proceeds of the sale of the property. They maintained that the sum should be deducted exclusively from Mrs Mikhaylyuk’s 50% share of the net proceeds of sale, since she was jointly and severally liable to repay the full loan, leaving Mr Mikhaylyuk’s 50% share intact and subject to the freezing order in their favour.

On 15 November 2012 the judge indicated that he was proposing to circulate his draft judgment in the action shortly, with a view to formal hand down on 7 or 14 December 2012. In the event 14 December 2012 was fixed for a full day's hearing to deal with formal hand down of the judgment and consequential matters following the judgment.

On 18 November Miss Mikhaylyuk purchased another property, 170b Woodside Green, London SE25 (subsequently known as 18 Cleaverhome Close), for £307,500. The evidence showed that the sum of £219,000, which Mrs Mikhaylyuk had received from the sale proceeds of the property, was paid to Miss Mikhaylyuk to enable her to purchase the new property where both Mr and Mrs Mikhaylyuk and their daughter reside.

Having repeatedly sought, and failed to obtain, the Respondents’ consent in correspondence to the repayment to Miss Mikhaylyuk, on 21 November 2012 Mr Mikhaylyuk applied to the court for an order that the freezing order be varied so as to permit him to repay 50% of Miss Mikhaylyuk’s loans (i.e. the sum of £8,336) from his share of the net proceeds of sale of the property and for the application to be listed to be heard as a matter of urgency.

On the previous day, 20 November 2012, the Respondents, having had notice of Mr Mikhaylyuk's intention to apply urgently to the court, wrote to the court objecting to an expedited hearing of the application on grounds that:

Perhaps not surprisingly, given that the formal handing down of judgment was imminent, the judge directed that the application be heard at the hearing on 14 December 2012 together with the other consequential matters.

At the hearing on 14 December 2012 the judge acceded to the Respondents’ submission that it would be more appropriate for the court to make an interim third-party debt order in relation to the funds standing to the credit of Mr Mikhaylyuk's account with RBS and thereafter, at a subsequent hearing in January 2013, determine the question as to whether Miss Mikhaylyuk should be entitled to be repaid 50% of her loans (i.e. £8,336.23) from the sums standing to the credit of Mr Mikhaylyuk's account (the judge being informed by Mr Mikhaylyuk that his wife had already repaid their daughter an amount equal to 50% of the loans). Accordingly the judge again adjourned the hearing of Mr Mikhaylyuk's application until 18 January 2013. He duly made an interim third-party debt order in respect of the sums standing to the credit of Mr Mikhaylyuk's RBS account in favour of the Respondents. He required the Respondents to serve their application for a final third-party debt order on both RBS and Miss Mikhaylyuk. He also indicated to Mr Mikhaylyuk that Miss Mikhaylyuk should attend the January hearing so that she could give oral evidence if necessary, and file evidence stating why she objected to RBS paying the sums in the account to the Respondents without making provision for repayment to her of the sum of £8336 (representing 50% of her loans). He indicated that she should explain what was the source of the monies that she had lent to her parents and produce any evidence which supported her case.

On 18 January 2013 the judge proceeded to hear the Respondents’ application to make the third-party debt order final and Mr Mikhaylyuk's application that the freezing order should be varied to permit him to repay 50% of the loans made by Miss Mikhaylyuk. Miss Mikhaylyuk filed a witness statement in support of her position in accordance with the judge's directions and Mr Mikhaylyuk also filed a further witness statement. Miss Mikhaylyuk attended the hearing and was available for cross-examination, if required. Miss Michelle Linderman, a solicitor at Inces, also filed a further witness statement questioning the source of the loan monies provided by Miss Mikhaylyuk.

The Respondents' position at the hearing before the judge was, in summary, as follows:

The Respondents’ argument at the hearing was focussed on whether any debt had been discharged by payment from Mrs Mikhaylyuk and that in any event, even if the debt was outstanding, it was appropriate to dismiss Mr Mikhaylyuk’s application and to grant the final third party debt order which was sought. Accordingly the position of Mr Dominic Dowley QC, leading counsel appearing on that occasion with Mr Dougherty, was that only if these arguments failed, would it be necessary to cross-examine Miss Mikhaylyuk and Mr Mikhaylyuk (who were both present in court) as to whether there had been any genuine loan. Accordingly Mr Dowley did not seek cross-examination of either Miss Mikhaylyuk or Mr Mikhaylyuk. He argued that, on the basis, Mr Mikhaylyuk’s application should be dismissed and the third party debt order made final in the full amount sought.

Despite the Respondents’ arguments, the judge was prepared to assume in Mr Mikhaylyuk's and Miss Mikhaylyuk's favour that the loans had indeed been made by Miss Mikhaylyuk in the circumstances described and that they were repayable as stated; see paragraph 4 of the judgment.

He also did not accept the Respondents’ contention that the entire debt due to Miss Mikhaylyuk had been discharged by the payment by Mrs Mikhaylyuk to her daughter. At paragraphs 12 -14 of the judgment he said:

“12.

In those circumstances, the claimants contend that the loan due to Miss Mikhaylyuk has been paid by Mrs Mikhaylyuk. That is, they submit, because it is plain from the agreements that are relied upon that both Mr and Mrs Mikhaylyuk are liable, and the obvious inference, they submit, is that when sums exceeding £16,000, the product of the two loan agreements, were paid by Mrs Mikhaylyuk to Miss Mikhaylyuk, she must have been repaying the whole amount that was due by both Mr and Mrs Mikhaylyuk to their daughter. That, it is submitted, is the natural inference when somebody who owes the whole of the debt pays to the creditor a sum which exceeds the debt.

13.

I entertain some doubts as to the accuracy of this analysis. Whatever may be the position as between businessmen, it seems to me that it may be the case that as between Mrs Mikhaylyuk and Miss Mikhaylyuk, the sum that was paid to Miss Mikhaylyuk out of the proceeds of 24 Oakland Road, Bromley, was treated as being as to some £8,000 a repayment of a portion of the joint debt of Mr and Mrs Mikhaylyuk, and as to the balance was a gift. Whether that is the correct inference is not presently clear to me, and I decline to reach an inference adverse to Mr and Miss Mikhaylyuk without hearing from Miss Mikhaylyuk, who is available to give evidence.”

The judge dealt with the issue of discretion at paragraphs 14 to 19 of the judgment. He said:

“15.

There is, however, another problem that arises so far as Mr and Miss Mikhaylyuk are concerned, and that is this. A judgment creditor is ordinarily able to obtain a third party debt order, even if there are other creditors.

16.

The court has, however, a discretion as to whether or not it will make an interim third party debt order final. It is likely to decline to make an order final if there is an issue as to the ownership of the monies that are the subject of the interim order, or if the debtor has been made bankrupt or is in administration or liquidation, for in those circumstances a statutory scheme for the sharing of assets will have come into being and the making of a third party debt order, which is final, will or may be inconsistent with that scheme.

17.

That is, however, not the case here. Mr Mikhaylyuk is not a bankrupt. Miss Mikhaylyuk has no proprietary claim to the monies in the Royal Bank of Scotland. It seems to me that in those circumstances the claimants are entitled to have their interim third party debt order made final, and that, if I were to order that it was to be made final but not as to the £8,000 which should be paid to Miss Mikhaylyuk, I would in effect be preferring her as a creditor, and a creditor without judgment, over the claimants who are judgment creditors.

18.

In addition, the figures are stark. Mr Mikhaylyuk, in the light of my judgment, owes the claimants something like US$80 million. Even if the sum held by the Royal Bank of Scotland was divided up pro rata as between the claimants and Miss Mikhaylyuk, the upshot would be that that which she would receive would be negligible.

19.

For those reasons, and not without sympathy towards Miss Mikhaylyuk, I propose to make the interim order final, and I do not propose to vary the freezing order so as to permit a payment by Mr Mikhaylyuk out of RBS bank account of £8,000 to Miss Mikhaylyuk. The difficulties in which Mr Mikhaylyuk and Miss Mikhaylyuk find themselves, and indeed Mrs Mikhaylyuk, arise as one of the consequences of the very large sum, which in the light of my judgment, Mr Mikhaylyuk has been held liable to pay to the claimants. ”

Mr Mikhaylyuk's appeal was based on three principal grounds which he further developed during the course of submissions at the hearing by reference to a helpful speaking note.

First he submitted that the judge had misdirected himself as to the exercise of his discretion by ignoring the fact that the Respondents had obtained judgment and issued an application for a third-party debt order after they were aware that Mr Mikhaylyuk had applied to court for a variation of the freezing order to enable him to re-pay the loan to his daughter as an ordinary trade debt. The judge had wrongly declined to hear Mr Mikhaylyuk's application prior to the handing down of the judgment, at a time when Miss Mikhaylyuk was entitled to be repaid her loans, since the sale of the property had taken place. In doing so, the judge failed to take into account the rights of Miss Mikhaylyuk as a creditor to enforce the loan agreement. Had the judge heard Mr Mikhaylyuk’s application in advance of the handing down of the judgment, the loans would have been repaid to Miss Mikhaylyuk under the principle articulated in Iraqi Ministry of Defence v Arcepey ("the Angel Bell") [1981] 1QB 65. At that time, no judgment had been made in favour of the Respondents (or even circulated in draft).

Second, the judge was wrong in principle to hold that, because by 18 January 2013 Miss Mikhaylyuk had not obtained a judgment in her favour for the debt, whereas the Respondents had obtained a judgment, he was obliged to exercise his discretion in their favour. It was well established that a final third-party debt order would not be made if the money was due to the judgment debtor as trustee for another. In this case, under the loan agreements dated January and October 2012, £8,336.23 was to be re-paid out of Mr Mikhaylyuk’s share of the net proceeds from the sale of the property. Accordingly, once the sale of the property completed and the loans fell to be re-paid, Mr Mikhaylyuk held the sum of £8,336.23 on trust for Miss Mikhaylyuk pending repayment of the loans. In those circumstances, a final order should not have been made that included payment of that sum to the Respondents.

Third, the judge erred in principle in failing to consider, or adequately to consider the position of Miss Mikhaylyuk. In all the circumstances, it was inequitable for the final third-party debt order to be made without a proviso that the loan by Miss Mikhaylyuk of £8,336.23 first be repaid. Under this head, Mr Mikhaylyuk put forward the following arguments:

Mr Dougherty QC, leading counsel appearing on behalf of the Respondents, submitted that the judge was correct to dismiss Mr Mikhaylyuk's application and to make a final third-party debt order without making any provision for repayment of the sum of £8336 to Miss Mikhaylyuk. He submitted that two principal questions arose on the appeal:

In summary, in relation to the first question, namely whether the exercise of the judge's discretion was wrong in principle, Mr Dougherty submitted as follows:

In relation to the second question, namely, if the exercise of the judge's discretion was flawed, what order should this court make Mr Dougherty alternatively submitted as follows:

In my judgment, and with respect to the judge, the exercise of his discretion was flawed because he failed to take into account relevant circumstances arising both before and after the making of the interim third party debt order, and, in particular, failed to have sufficient regard to what was an equitable outcome in the light of the previous history, as between Miss Mikhaylyuk, on the one hand, and the Respondents, on the other hand.

His mistake was to focus merely on the limited matters referred to in paragraphs 17 and 18 of his judgment; namely:

Like the judge, whose approach in this particular respect cannot be faulted, I approach the matter on the factual assumption that Miss Mikhaylyuk indeed made the relevant loans to her parents, from her own savings, on the terms subsequently formalised in the written loan agreements, for the purpose of enabling her parents to service their mortgage obligations to the bank and to discharge the arrears which had arisen. In the absence of any cross-examination of Mr Mikhaylyuk and Miss Mikhaylyuk, for which the Respondents did not press, that was the only approach that could have been taken, given the witness statements and the contemporaneous documentation.

The general principles governing the exercise of discretion to make any third party debt order or a charging order were summarised by the Court of Appeal in Roberts Petroleum v Bernard Kenny Ltd [1982] All ER 685, a charging order case. Lord Brandon (with whom Cumming-Bruce and Lane LJJ agreed) said (so far as is presently material) at paragraph 25:

“I do not propose to examine individually these various authorities cited to us, the outcome of which necessarily depended in the end on the particular facts of each particular case. I shall rather try to distil from those authorities the principles of law which they appear to me collectively to establish. In cases where a charging order being made absolute is not precluded by a winding up order, those principles can, in my view, be summarised as follows:-

“(1)

The question whether a charging order nisi should be made absolute is one for the discretion of the court..

(2)

…….[this proposition relating to the burden of proof was subsequently disapproved in a later case]

(3)

For the purpose of the exercise of the court's discretion there is, in general at any rate, no material difference between the making absolute of a charging order nisi on the one hand and a garnishee order nisi on the other.

(4)

In exercising its discretion the court has both the right and the duty to take into account all the circumstances of any particular case, whether such circumstances arose before or after the making of the order nisi.

(5)

The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, that is to say the judgment creditor, the judgment debtor, and all other unsecured creditors.

(6)

The following combination of circumstances, if proved to the satisfaction of the court, will generally justify the court in exercising its discretion by refusing to make the order absolute:-

(i)

the fact that the judgment debtor is insolvent; and

(ii)

the fact that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.

(7)

In the absence of the combination of circumstances referred to in (6) above, the court will generally be justified in exercising its discretion by making the order absolute.”

As the White Book points out at the notes to CPR Rules 73.4.5, the above principles were not affected by the reversal of the case by the House of Lords at [1983] AC 192. But it is also important to emphasise that necessarily the exercise of the discretion will be heavily dependent on the facts of any particular case.

In my judgment, in the present case the judge failed to take into account, or give adequate consideration to, all the relevant circumstances of the past history in relation to the attempts by Mr and Mrs Mikhaylyuk to service their mortgage so as to realise the optimum price on the sale of the property, and their dependency on the loans from their daughter to achieve that result.

In particular the judge failed, in my view, to give any, or any appropriate, consideration to the following facts:

The Respondents had quite properly agreed that Miss Mikhaylyuk’s loan of £40,000 to discharge mortgage arrears should be payable out of the net proceeds of the property once it was sold, with the result that Mr Mikhaylyuk's and Mrs Mikhaylyuk's respective share of the equity should each bear 50% of the burden of such loans. In principle, there was no difference in character, save in amount, between that loan of £40,000 and the earlier and later loans made by Miss Mikhaylyuk to enable the mortgage arrears and other liabilities to be serviced.

Perhaps contrary to the view taken by Teare J, I have little doubt that, if Mr Mikhaylyuk and Miss Mikhaylyuk had been represented, and had made an appropriate application to the court before Miss Mikhaylyuk had lent funds to service the mortgages, pointing out that the financial interests of all parties lay in the mortgage continuing to be serviced, in the avoidance of a forced sale and in the marketing and realisation of the property at full market value, the court would have been very likely to have approved a solution similar to the £40,000 loan, whereby Miss Mikhaylyuk advanced funds against the assurance that she would be repaid in full out of the net proceeds of the property prior to distribution to Mr and Mrs Mikhaylyuk of their respective 50% shares. If the court had not approved such a solution, the alternatives would have been either that the bank would have sold the property at a forced sale undervalue as mortgagee in possession; or, if it considered it expedient to do so, to achieve the sale at market value on the basis that it continued to be a family home, the bank would have rolled up the arrears of principal and interest and added them to the outstanding capital. In either event, any outstanding arrears would have been deducted from the proceeds of sale pursuant to the bank's charge. Similarly, if the bank, under its charge, had appointed a Law of Property Act receiver to sell the property, it would have likewise rolled up the arrears and added them to capital, or notionally lent funds to the receiver to discharge the arrears.

None of these matters were reviewed by the judge in the exercise of his discretion. Nor did he take account of the fact that, during the course of his long correspondence with Inces, Mr Mikhaylyuk had been patently transparent in informing them of his daughter's contributions and had repeatedly requested the Respondents' consent to the loans being repaid out of the proceeds of sale of the property. Moreover, as recited above, the Respondents had indeed agreed that Miss Mikhaylyuk could be repaid out of the proceeds of the car and the garage. In principle, once it had been accepted that hers was a debt which was entitled to be repaid out of Mr Mikhaylyuk’s assets, notwithstanding the freezing order regime, I see no reason why half of the outstanding debt should not have been paid out of the proceeds of Mr Mikhaylyuk’s share of the proceeds of sale.

Furthermore, whilst the judge necessarily must have been aware of the fact that Mr Mikhaylyuk had originally made his application at a time when there was no judgment against him, and accordingly the Respondents were not judgment creditors; at a time when Miss Mikhaylyuk was, as a creditor, contractually entitled to be paid her debts out of the proceeds of sale, irrespective of the freezing order; and when, theoretically at least, the Angel Bell principle might have operated in her favour to permit payment; none of these factors featured as relevant matters for consideration in the exercise of his discretion.

Finally the judge gave no consideration to the respective economic positions of Miss Mikhaylyuk and the Respondents. In the context of the latter’s judgment for $80 million, inability to recover in a sum of £8000 was economically immaterial. On the contrary, so far as Miss Mikhaylyuk was concerned, the evidence demonstrated that loss of a sum of £8000 was of considerable financial significance for her. I see no reason, in the particular circumstances of this case, why the fact that the Respondents had managed to secure a judgment before the hearing of Mr Mikhaylyuk’s application to vary the terms of the freezing order, should weight the dice so heavily in the favour of the former.

Accordingly, the judge’s exercise of his discretion was in my view flawed. In those circumstances this court is entitled to exercise the relevant discretion afresh.

I have no doubt that all the above factors which I have enumerated above, and which the judge failed to take into account, and those which I additionally enumerate below, require this court, in the exercise of its discretion, to allow the appeal and to permit Miss Mikhaylyuk to recover her outstanding debt of £8,336.23 from Mr Mikhaylyuk’s share of the proceeds of sale of the property.

The additional points which I take into account are the following:

Thus, in the particular circumstances of this case, the court was not justified in exercising its discretion by making the order absolute.

For the above reasons, in my judgment, a proper exercise of the judicial discretion under CPR 72, in order to achieve an equitable outcome as between the Respondents and Miss Mikhaylyuk, requires any third party debt order in favour of the Respondents in respect of the monies standing to the credit of Mr Mikhaylyuk’s account with RBS, to be subject to a proviso which requires repayment of the debt of £8,336.23 owed to Miss Mikhaylyuk prior to any order becoming final. Accordingly, I would allow this appeal.

I agree.