The Rolls Building
7, Rolls Buildings, Fetter Lane,
London, EC4A 1NL
Before :
HIS HONOUR JUDGE DAVIS-WHITE QC
(SITTING AS A JUDGE OF THE CHANCERY DIVISION)
Between :
NEW MEDIA DISTRIBUTION COMPANY SEZC LIMITED (formerly known as New Media Distribution Company Limited) | Claimant |
- and - | |
KONSTANTIN GRIGORYEVICH KAGALOVSKY | Defendant |
Ms Barbara Dohmann QC and Mr Ajay Ratan (instructed by GSC Solicitors LLP) for the Claimant
Mr James Ramsden QC, Mr Adrian Briggs QC (Hon) and Mr James Potts (instructed by Bird & Bird LLP) for the Defendant
Hearing dates: 25, 26 May 2017
Judgment
His Honour Judge Davis-White QC :
Introduction
I have before me a preliminary issue as to whether the defendant is estopped from making various allegations in his defence or whether the same amount to an abuse of process (and should accordingly be struck out). A direction for the hearing of a preliminary issue was sought by application notice dated 28 November 2016. By consent order dated 5 December 2016 the determination of the preliminary issue was directed to be heard.
I also have before me an application by the defendant to amend his defence, dated 15 May 2017. In large part the proposed amendments are not opposed. They largely concede the case on issue estoppel and effectively abandon large parts of the defendant’s case. However, there is one aspect in which they are opposed. As regards that, the main submission is that the proposed amendments relating to that aspect should not be permitted because they too are matters that the defendant is estopped from asserting or which would amount to an abuse of the court’s process were they to proceed and/or which, in light of matters upon which the defendant is estopped, are matters that there is no real prospect of him establishing at trial.
The basis of the asserted estoppel/abuse of process is that relevant issues are said to have already been determined by, and as a result of, proceedings in New York. Those proceedings took place, at first instance, in the Commercial Division of the Supreme Court of the State of New York, County of New York. There were in fact two sets of proceedings. The presiding Judge was, in each case, the Hon. Charles Edward Ramos, JSC (“Justice Ramos”). By order of Justice Ramos the two sets of proceedings were consolidated for discovery and trial (the “NY Proceedings”).
Justice Ramos set out his conclusions of fact and of law in a decision in writing dated 10 August 2012. For convenience, I shall refer to these conclusions and the reasoning contained therein as the “Ramos Judgment” or “RJ”. Technically the decision in writing was given effect to by two judgments (or as they might be described in this jurisdiction, orders) in the NY Proceedings. One judgment was given in each set of proceedings. Each judgment was dated 29 August 2012.
I also have the benefit of a judgment dated 6 September 2016 in these proceedings of Mr Clive Freedman QC sitting as a Deputy Judge of the Chancery Division, [2016] EWHC 2221 (Ch) (the “Freedman Judgment” or “FJ”)). I have drawn on those judgments as indicated below in setting out the facts and history of the disputes which has led to the proceedings and the applications before me. So far as the RJ is concerned, it is also necessary to do this to identify what matters have been determined in those proceedings.
Before me, NMDC was represented by Ms Barbara Dohmann QC and Mr Ajay Ratan. Mr Kagalovsky was represented by Mr James Ramsden QC, Mr Adrian Briggs QC (Hon) and Mr James Potts. I am grateful to Counsel for their assistance in this case.
The underlying disputes
The underlying disputes in the relevant proceedings are really between the defendant, Mr Kagalovsky and a Mr Gusinski.
The following is taken from the RJ (additions by me are in square brackets). In this judgment I gratefully adopt the definitions used by Justice Ramos below, save that in the extract I have replaced two of his definitions. First, I have replaced his definition of Iota Ventures LLP as the “Partnership” with the definition “IVL”. Secondly, I have replaced his definition of New Media Holding Company LLC as “New Media” with the definition “NMHC”. This is to bring the definitions into line with those used in the English proceedings and in the hearing before me.
“[1] Vladimir Gusinski and Konstantin Kagalovsky, two former friends, each a remarkable and successful businessman, agreed to form a partnership to create and operate a television network in Ukraine, to be known as the TVi Channel.
[2] The plaintiff New Media Holding Company LLC [incorporated in Delaware] (“NMHC”), is Mr Gusinski’s nominee to a partnership, Iota Ventures LLP [a Delaware limited liability partnership operating in Jersey] (“IVL”), that in turn, owned TVi. NMHC filed suit alleging that Mr Kagalovsky and his nominee to IVL, Iota LP [a Jersey limited partnership] (“Iota”) breached contractual and fiduciary obligations by transferring, without Mr Gusinski’s and NMHC’s knowledge or consent, ownership of TVi and its trademarks from IVL to entities owned and controlled by Mr Kagalovsky…. NMHC originally sought the return of TVi and its trademarks, but following this Court’s decision on summary judgement to strike that requested relief from the Complaint, the plaintiff is only pursuing monetary damages.
[3] Separately, New Media Distribution Company Limited (“ NMDC ”), which licensed programming content to IVL, filed suit alleging that IVL owed $3,681,870 in unpaid licence fees due under licence agreements dated January 1, January 14, and April 10, 2009 (the “ License Agreements ”). NMDC seeks payment of those fees, plus interest, in damages.
[4] In response, Mr Kagalovsky, Iota, and IVL filed counterclaims alleging that Mr Gusinski, NMHC, and NMDC mismanaged TVi in breach of fiduciary and contractual obligations, and fraudulently induced the formation of IVL and the execution of the Licence Agreements. Each seeks rescission of the agreements that they are a party to, and monetary damages.
[5] These actions were consolidated for discovery and for trial. Trial took place over 24 days from December 7, 2011 to April 26, 2012. 13 witnesses testified, including Mr Gusinski and Mr Kagalovsky. The parties also submitted designated depositions transcripts for 10 individuals, moved over 250 exhibits into evidence, and supplied experts reports.
[6] Mr Gusinski currently owns 85 per cent of NMDC, through NMHC….
[7] NMDC is a producer of Russian language media and owns a large Russian language media library.
[8] NMDC has another investor: in August 2008, AIG Investments (“ AIG ”) acquired 13.5 per cent of NMDC through AIG GEM Viaduct Media Holdings, L.P……
[9] Mr Gusinski is a Russian national currently residing in Israel. He serves as NMDC’s Chairman and CEO, and as NMHC’s Manager.
[10] Mr Kagalovsky is a Russian and British national currently residing in London, United Kingdom since 2004.
…….
[14] Mr Kagalovsky owns and controls defendants Iota, Aspida Ventures Ltd (“ Aspida ”), and Seragill Holdings Limited (“ Seragill ”). He does so through various trusts that he settled and of which he is a beneficiary.
….
[16] Mr Kagalovsky has complete and unfettered control over Iota, Aspida, and Seragill, through the trusts…..
[20] In early 2007, Mr Gusinski decided to create a television channel in Ukraine. He believed that the Ukrainian television market was promising.
[21] Mr Gusinski shared his plans for a Ukrainian television channel with Mr Kagalovsky, whom Mr Gusinski had known socially for years. Mr Kagalovsky expressed an interest and a desire to become involved. Over the next several months, the two discussed the project.
….
[23] Their meetings culminated in the formation of IVL and the execution of a Partnership Agreement on April 14, 2008. The purpose of this Partnership and the Partnership Agreement was to develop, own, and operate a Ukrainian television network, later named TVi. Mr Gusinski and Mr Kagalovsky would own and control TVi equally.
[24] The partners understood that it would take several years after TVi began broadcasting before the network would break even financially.
…..
[29] On April 14, 2008, NMHC, Mr Gusinski’s nominee, acquired a 50% interest in IVL. Mr Kagalovsky’s initial nominee to IVL, Petal Capital Holdings Limited [was later replaced by Mr Kagalovsky] with Iota LP, his current nominee to IVL. As a result, through the equal ownership interests in IVL of their respective nominees NMHC (Mr Gusinski), and Iota (Mr Kagalovsky), Mr Kagalovsky and Mr Gusinski owned and controlled the entirety of TVi. [TVi was in fact the name under which a Ukrainian entity operated. That entity was Teleradiocompany TeleRadioSvit LLC (“TRS”)].
…..
[31] On April 14, 2008, contemporaneous with NMHC’s acquisition of a 50% interest in IVL, Mr Kagalovsky and Mr Gusinski entered into an Amended and Restated Partnership Agreement of Iota Ventures LLP …..through their respective nominees.
…..
[65] Mr Kagalovsky understood from the start that IVL would be licensing content from NMDC.
[66] Mr Gusinski and Mr Kagalovsky agreed that the availability of rights to substantial content owned and produced by NMDC would provide a major competitive advantage to a new channel in the Ukrainian market……
[67] In 2009, NMDC and IVL executed the Licence Agreements. These agreements were dated January 1, January 14, and April 10, 2009, respectively.
….
[73] By the spring of 2009, Mr Kagalovsky and Mr Gusinski began to have serious disagreements over TVi’s operations. It became apparent that they needed a resolution mechanism in the IVL Agreement to resolve their disputes, but all attempts failed.
[74] In the summer of 2009, Mr Kagalovsky invited Mr Knyazhitsky [the CEO of TVi, at least in name, but whose functions as CEO had by this time largely been taken over by a Mr Yakovich] to Mr Kagalovsky’s home in the French Riviera to discuss TVi. Mr Kagalovsky admitted that he and Mr Knyazhitsky agreed that if Mr Gusinski refused to step down from TVi’s management voluntarily, Mr Kagalovsky would oust Mr Gusinski from TVi using “the traditional Russian and Ukrainian method” - diluting Mr Gusinski’s interest in TVi.
…
[90] In a series of corporate transactions that began on or about September 22, 2009, and that were completed by September 24, 2009, IVL’s ownership interest in TVi was reduced to less than 1% through the dilution of its interests in IMC and TRS. [IMC was an intermediate holding entity of TRS, TRS was the entity which operated as, and owned the business trading under the name, TVi, see above].
[91] As a result of these transactions, Aspida and Seragill today own the remaining 99 per cent of TVi.
….
[93] Neither Mr Gusinski nor NMHC were informed of any plans to reorganise TVi’s ownership or to issue shares in IVL’s subsidiaries. Neither Mr Gusinski nor NMHC were informed about the plan to transfer ownership of the network to Mr Kagalovsky’s trusts.
…..
[97] Contemporaneous with Mr Kagalovsky’s dilution of IVL’s ownership interest in TVi and without prior notice or consent, IVL stopped paying NMDC licence fees due under the Licence Agreements.”
In the applications before me, as in the application before Mr Clive Freedman QC, the parties have referred to the transactions summarised in paragraph [90] RJ as the “Dilution” and I adopt that definition. The New York proceedings commenced by NMHC I shall refer to as the “NMHC Action”. The New York proceedings commenced by NMDC I shall refer to as the “NMDC Action”.
Justice Ramos’ decision
So far as the claims by NMHC was concerned, Justice Ramos held that the defendants, Mr Kagalovsky, Iota, Aspida and Seragill were jointly and severally liable for the loss of NMHC’s interest in IVL calculated upon an enterprise value of TVi of $50 million, plus interest (paragraph [379]). Accordingly, in due course judgment was entered against these defendants for $25 million plus interest. It suffices to note the following holdings taken from the RJ relevant to reaching this conclusion:
“[307] Mr Kagalovsky and Iota have breached, and aided and abetted the breach of fiduciary duties owed to NMHC.
….
[313] NMHC has established that Iota breached its fiduciary duties by agreeing to, planning, participating in, and covering up, the dilutions of IVL’s ownership interest in TVi and its trademarks to companies owned by Mr Kagalovsky’s family trusts, all without NMHC’s knowledge or consent.
[314] Specifically, the dilutions of IVL’s ownership interest in TVi and its trademarks was a classic self-dealing transaction; Mr Kagalovsky stood on both sides of those transactions….
[315] Mr Kagalovsky completely dominated and controlled Iota, Aspida, and Seragill, and used his domination and control over those entities to dilute IVL’s ownership interest in TVi and its trademarks….
[316] Thus, Mr Kagalovsky’s actions are imputable to Iota, Aspida, and Seragill as his alter egos….
……
[319] NMHC also has established that Mr Kagalovsky aided and abetted Iota’s breach of fiduciary duties by knowingly agreeing to the dilution, funding the dilution, and creating and acquiring the companies necessary to effect the dilution…
[320] As an aider and abettor, Mr Kagalovsky is jointly and severally liable for Iota’s breach of fiduciary duty…..
…
[322] Defendants’ actions had also have breached the express and implied terms of the IVL Agreement….
…
[332] NMHC has established that Mr Kagalovsky tortiously interfered with the IVL Agreement: he had knowledge of Iota’s obligations under the IVL Agreement, and intentionally caused Iota to breach them by taking ownership and control of TVi and its trademarks without NMHC’s knowledge and consent, and without justification…..”
So far as the claims of NMDC against IVL and Mr Kagalovsky were concerned, Justice Ramos held the defendants jointly and severally liable in the full amount of NMDC’s unpaid invoices, plus interest. Accordingly, in due course judgment was entered in the sum of $3,681,870 plus interest. It suffices to note the following holdings taken from the RJ relevant to reaching this conclusion:
“[340] NMDC has established that it performed its obligations under the Licence Agreements.
[341] NMDC has established that IVL breached the Licence Agreements by failing to make a total of $3,681,870 in payments…..
……
[347] As a result, IVL is liable to NMDC for $3,681,870, plus interest, in damages.
…
[349] NMDC has provided TVi with $3,681,870-worth of programming content that TVi has aired without any reimbursement to NMDC.
[350] As the owner of beneficial interests in over 99 percent of TVi, Mr Kagalovsky has benefitted from TVi’s unpaid broadcasts of NMDC content.
[351] Mr Kagalovsky has been unjustly enriched by TVI’s broadcasts of NMDC content in the sum of at least $3,681,870.
In each case, counterclaims were raised. In the proceedings brought by NMHC, the counterclaims were brought against the two New Media companies and Mr Gusinski. In the proceedings brought by NMDC, they were brought against NMDC. They were all ordered, adjudged, decreed and resolved in favour of the New Media companies and against the counterclaiming parties (being Mr Kagalovsky and Iota). I shall have to return to those counterclaims later.
The New York Appeals
Mr Kagalovsky and Iota appealed the judgment in favour of NMHC. IVL, Iota and Mr Kagalovsky also appealed the judgment in favour of NMDC. The appeals were heard by the Supreme Court of the State of New York, Appellate Division, First Department. The decision in favour of NMHC was affirmed on appeal on 29 April 2014. On the same date, the decision in favour of NMDC was modified, so as to vacate the award against Mr Kagalovsky, and otherwise affirmed. As explained by Mr Clive Freedman QC in the FJ paragraph [7]:
“[7] …. This was because the existence of the licence agreements precluded a claim for unjust enrichment against Mr Kagalovsky and because Mr Kagalovsky was not a defendant in the [NMDC] action at trial.”
On 5 May 2014, Mr Kagalovsky and Iota filed a motion seeking re-argument or, in the alternative, leave to appeal to the New York Court of Appeals in relation to, at the least, the NMHC decision.
The Settlement Agreement
A settlement agreement was entered into on 15 August 2014. The nature and relevance of this agreement is explained in the FJ paragraphs [9] to [13]. I do not understand there to be any dispute that it settled the claims of NMHC and involved the payment by Mr Kagalovsky of a sum of $36,317,675.41 to Mr Gusinski. The question is whether the settlement goes further and also compromises the claims of NMDC. In broad terms, there is an outstanding issue as to whether the proceedings before me seeking relief pursuant to s423 Insolvency Act 1986 (“IA 1986”) are barred by the Settlement Agreement. Like Mr Clive Freedman QC, I do not have to resolve that issue on the applications before me. That will be a matter for trial.
The current proceedings
In these proceedings, NMDC seeks relief under s423 IA 1986 against Mr Kagalovsky. The particulars of claim are dated 4 March 2016. The NMDC Judgment (with accrued and accruing interest) is said to be unsatisfied. IVL is said to be unable to satisfy all or any part of it by reason of the Dilution. The Dilution is said to have been entered into by IVL at an undervalue and to have deprived IVL of its major asset to the substantial benefit of Mr Kagalovsky. NMDC’s case is that IVL entered into the Dilution for two real and substantial purposes: namely to prejudice the interests of both NMHC and NMDC in relation to their potential claims against IVL. NMDC claims to be a victim of the Dilution. The Dilution is said to have deprived IVL of over 99% of the indirect ownership of TVi. IVL is therefore unable to pay all or any part of sum owed under the NMDC judgment. NMDC is thus said to be prejudiced.
The proceedings were commenced by claim form dated 11 November 2015. By application issued on 1 April 2016 on behalf of Mr Kagalovsky a declaration was sought that the court “has no jurisdiction to try the claims brought against him; alternatively that the Court should not exercise that jurisdiction”. The grounds for that application was stated as being “the court of the State of New York is the appropriate forum and the law of the State of New York is the proper law and or alternatively all matters pleaded have been tried before the New York State Court and therefore the Courts of New York are the appropriate forum for such claims in so far as they have not already been definitively determined by the Courts of New York” (see FJ paragraph [1]).
The application was dismissed by Mr Clive Freedman QC on 6 September 2016:
“[62]… I reject the application for a declaration that the Court has no jurisdiction and/or that it should not exercise that jurisdiction. On the contrary, the Court does have jurisdiction and is mandated to exercise that jurisdiction. This is because Mr Kagalovsky is domiciled in London and since there is no express derogation relied upon by him from the basis of jurisdiction, namely his domicile in the UK, this Court is mandated to accept jurisdiction pursuant to Article 4 of the Brussels I (Recast) Regulation. There is no scope for the operation of the forum non-conveniens doctrine and specifically for a finding that the court of the State of New York is the appropriate forum.”
In the application before Mr Clive Freedman QC it was common ground that the New York proceedings had “definitively determined” certain matters. Mr Kagalovsky’s legal representative in the New York proceedings, Mr Frederic Newman stated, in two passages, that:
“(a)ccordingly, the issue which is now being tried in the English proceedings, involving the same parties and the same sum, has been judicially decided by the Supreme Court, Appellate Division, First Department and that decision is final and binding”
and
“…(t)he matters before the English Court are matters that have been before the Courts of the State of New York since 2009. […] [T]hey have been considered extensively both at trial at first instance and then by the Appellate Court of the State of New York. Issues as to whether Mr Kagalovsky diluted NMHC’s interests in TVi and all issues flowing from that dilution including the non-payment of licence fees have been determined”
Mr William Phillips, the legal representative of NMDC in the New York proceedings, agreed in his evidence that:
“…[the] final findings of the NY court… cannot be subject to a further dispute.”
Before Mr Clive Freedman QC the arguments centered on the effect of the Brussels I (Recast) Regulation and whether the English Court could and should apply the principle of forum non conveniens. Paragraph 24 of FJ is in these terms:
“There are cases which refer to the possibility of a stay or dismissal based on an abuse of process. Instead of seeking rulings that there has been res judicata or merger or an abuse of process or the like, Mr Kagalovsky’s application was predicated on the basis that this Court should not rule about any of these matters and that the New York State Court is the appropriate forum to rule on them…… He submits that the courts of New York, which have been seised of proceedings of the same or a related nature, will be best placed to adjudicate in respect of matters such as whether the issues now being litigated have already been decided in the New York proceedings, whether the claim now advanced should have been advanced in the now concluded New York proceedings and whether the claim was compromised.”
Although pointing out, for example, that:
“The English proceedings and the New York proceedings do not involve the same cause of action in that the cause of action in the English proceedings is under the Insolvency Act 1986 and is not a claim in contract or in tort in equity or restitution which was before the New York State court” (see paragraph 44(1) FJ).
Mr Clive Freedman QC made clear that he was deciding nothing final as regards res judicata, merger, issue estoppel or abuse of process:
“[64] The fact that I am dismissing the application for the reasons set out above is not intended to have an effect on the ability of Mr Kagalovsky to present his answer to the section 423 claim in the English Court. In reaching conclusions about the matters referred to in the preceding paragraphs, in view of the way in which the case has been presented by Mr Kagalovsky, I have noted that Mr Kagalovsky has not presented his case by seeking final findings in respect of res judicata or merger or issue estoppel or abuse of process (Henderson v Henderson) or by reason of the Settlement Agreement. It follows that my conclusions are not intended to preclude Mr Kagalovsky from raising these matters within the section 423 proceedings by way of a defence or a bar to the claim, nor NMDC from contending whether summarily or otherwise that these matters do not provide a defence or a bar. The conclusions which I have reached are limited for the purpose of dealing with the application currently before the Court.”
Section S423 IA 1986
Section 423 IA 1986 forms one of the sections comprising Part XVI of the IA 1986. That part provides as follows:
“ Part XVI E+W Provisions Against Debt Avoidance (England and Wales only)
423 Transactions defrauding creditors. E+W
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or
(c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—
(a) restoring the position to what it would have been if the transaction had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
(4) In this section “the court” means the High Court or—
(a) if the person entering into the transaction is an individual, any other court which would have jurisdiction in relation to a bankruptcy petition relating to him;
(b) if that person is a body capable of being wound up under Part IV or V of this Act, any other court having jurisdiction to wind it up.
(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as “the debtor”.
424 Those who may apply for an order under s. 423. E+W
(1) An application for an order under section 423 shall not be made in relation to a transaction except—
(a) in a case where the debtor has been adjudged bankrupt or is a body corporate which is being wound up or is in administration, by the official receiver, by the trustee of the bankrupt’s estate or the liquidator or administrator of the body corporate or (with the leave of the court) by a victim of the transaction;
(b) in a case where a victim of the transaction is bound by a voluntary arrangement approved under Part I or Part VIII of this Act, by the supervisor of the voluntary arrangement or by any person who (whether or not so bound) is such a victim; or
(c) in any other case, by a victim of the transaction.
(2) An application made under any of the paragraphs of subsection (1) is to be treated as made on behalf of every victim of the transaction.
425 Provision which may be made by order under s. 423. E+W
(1) Without prejudice to the generality of section 423, an order made under that section with respect to a transaction may (subject as follows)—
(a) require any property transferred as part of the transaction to be vested in any person, either absolutely or for the benefit of all the persons on whose behalf the application for the order is treated as made;
(b) require any property to be so vested if it represents, in any person’s hands, the application either of the proceeds of sale of property so transferred or of the money so transferred;
(c) release or discharge (in whole or in part) any security given by the debtor;
(d) require any person to pay to any other person in respect of benefits received from the debtor such sums as the court may direct;
(e) provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction to be under such new or revived obligations as the court thinks appropriate;
(f) provide for security to be provided for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property and for such security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction.
(2) An order under section 423 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the debtor entered into the transaction; but such an order—
(a) shall not prejudice any interest in property which was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and
(b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.
(3) For the purposes of this section the relevant circumstances in relation to a transaction are the circumstances by virtue of which an order under section 423 may be made in respect of the transaction.
(4) In this section “security” means any mortgage, charge, lien or other security.”
As I have explained, NMDC’s case is that IVL, in entering into the transactions which brought about the Dilution:
entered into a transaction;
24.2 which was at an undervalue, because the consideration it received was, in money or money’s worth, significantly less than the value, in money or money’s worth, of the consideration provided; and
24.3 which was entered into with the purposes of (among others) putting an asset (TVi) beyond the reach of NMDC which had potential claims against IVL and/or otherwise prejudicing NMDC’s interests in relation to such claims (another purpose being to damage claims that NHMC might bring); and
24.4 that NMDC has thereby been prejudiced and is a “victim” entitled to seek relief under the statutory provision.
The defence is dated 10 October 2016. By that defence (the “Defence”):
25.1 it is denied that the Dilution was a transaction entered into by IVL at an undervalue. It is asserted that TVi (or the Company operating it, TRS) had negative or no value;
25.2 it is denied that the Dilution caused IVL to be in a position where it could not meet the NMDC judgment. It is asserted that as at the date of that judgment IVL was insolvent or would imminently have become so;
25.3 it is asserted that Mr Kagalovsky did not benefit from the transaction, because he was left with an asset of negative or no value;
25.4 it is asserted that Mr Gusinksi did derive substantial financial benefit from the operation of TVi before any entitlement of NMDC arose;
25.5 it is asserted that the true purpose of the Defendant in causing IVL to enter into the Dilution was to protect TRS from serious and deliberate breaches by Mr Gusinski of (a) the priority principle (that is, of an agreement reached between Mr Gusinski and Mr Kagalovsky to the effect that Mr Gusinski would give priority to the interests of TVi over any other media or commercial interests that he might have) and (b) of other agreements (including the Licensing Agreements) and (c) certain pre contractual representations/understandings. Such purpose (it is said) does not fall within ss423 and 425 of the IA 1986;
25.6 NMDC is not a victim because its claim in respect of unpaid licence fees was compromised under the Settlement Agreement.
By its reply, dated 8 November 2016 (the “Reply”), among other things, the preliminary issue before me is raised by the following plea (see paragraph 4):
“Mr Kagalovsky seeks to defend the present claim, which is a new and distinct cause of action, based on old failed allegations which were finally and conclusively rejected by the New York State Court… as unanimously affirmed by the New York Supreme Court, Appellate Division… on an appeal made by Mr Kagalovsky.”
The Reply goes on to identify six issues which it asserts Mr Kagalovsky is estopped from denying, based on the determinations of the New York courts. In broad terms these issues are said to have been raised by way of defence and/or counterclaim in the NY Proceedings. Those issues (the “Alleged Estopped Issues” or “AE Issues”), and a summary of the points made about each of them, are as follows:
27.1 the “Value Issue”: Mr Kagalovsky asserts in his Defence that TVi had no value at the date of the Dilution. NMDC asserts that Justice Ramos decided that the value of TVi at the time of the dilution was at least $50 million and that this survived challenge in the appeal court;
27.2 the “Benefit Issue”: Mr Kagalovsky in his Defence asserts that he did not benefit from the Dilution. NMDC asserts that Justice Ramos decided that Mr Kagalovsky personally benefited from the Dilution, standing, as he did, on both sides of the transaction;
27.3 the “Protective Purpose Issue”: Mr Kagalovsky asserts that the purpose of the Dilution was to protect TVi from misconduct of Mr Gusinski (largely identified as breaches of agreements and alleged representations). NMDC’s case is that Justice Ramos decided that Mr Kagalovsky did not effect the Dilution with the purpose of protecting TVi from Mr Gusinski. He determined that there was no justification for the taking by Mr Kagalovsky of TVi and its trademarks;
27.4 the “Misconduct Issue”: NMDC’s case is that Justice Ramos determined that there had been no misconduct by Mr Gusinski, NMHC or NMDC amounting to any breach of duty. This is of course relevant to the Protective Purpose Issue;
27.5 the “Oral Agreement Issue”: NMDC’s case is that Justice Ramos determined that the Partnership Agreement and each of the Licence Agreements with NMDC contain merger clauses superseding any prior representations understandings and agreements and that Mr Gusinski, NMHC and NMDC openly disclosed all material information to the defendants, that he never represented to Mr Kagalovsky that NMDC would licence programming to TVi at or near cost, on the contrary that Mr Kagalovsky and Mr Gusinski agreed that NMDC would charge TVi market prices for its programming;
27.6 the “Licence Fee Debt Issue”: Mr Kagalovsky asserts that the due date for payment of Licence Fees to NMDC owed by IVL had been postponed. NMDC’s case is that Justice Ramos determined that NMDC performed its obligations under the Licence Agreements, that IVL breached the Licence Agreements and there was never any agreement to defer payment of outstanding licence fees.
A number of allegations raised by the Defendant in support of the allegations which NMDC asserts he is estopped from making, are scattered throughout the Defence. Those matters are also asserted by NMDC to be matters which Mr Kagalovsky is estopped from pleading (or that it would amount to an abuse were he permitted to plead them).
Under cover of a letter dated 16 November 2016, NMDC’s solicitors served a Notice to Admit Facts and gave intimation of an intention to apply for the determination of a preliminary issue seeking a court ruling on the estoppel point raised in NMDC’s Reply.
By letter dated 1 December 2016, Mr Kagalovsky’s solicitors wrote as follows:
“… You can take it that our client does not admit that he is estopped from making any of the allegations listed in paragraph 1 of the draft Order attached to your Application Notice sealed on 28 November 2016, nor that those allegations amount to an abuse of process. As stated previously, our client consents to application for direction for a preliminary issue to be tried.”
On 28 April 2017, just shy of five months of the letter “not admitting” any estoppel, Mr Kagalovsky’s solicitors enclosed a response to the Notice to Admit Facts. In that response NMDC’s case regarding five of the six AE Issues and supporting allegations was effectively conceded (that is, all matters save the Protective Purpose Issue).
NMDC’s solicitors replied to the letter of 28 April 2017 on the same day. They asserted that Mr Kagalovsky’s pleaded case was now incoherent in the light of the extensive admissions and that a draft amended defence was required for the efficient progress of the case. On 2 May 2017, Mr Kagalovsky’s solicitors refused to provide an amended defence. However, on 11 May 2017 they enclosed such a draft amended defence and on 15 May 2017 applied for permission to amend the Defence. The amendments reflect the concession that Mr Kagalovsky is estopped from raising five of the six AE Issues.
Before me, NMDC agrees to the proposed amendments so far as they consist of deletions of parts of the existing Defence or in admissions. However, it opposes proposed amendments which seek to change Mr Kagalovsky’s case regarding the purpose for effecting the Dilution. In effect, NMDC submits that the proposed amendments regarding purpose are also subject to issue estoppel (further or alternatively, their adoption in the proceedings would amount to an abuse of process) and/or that in light of matters that he is estopped from denying there is no real prospect of establishing the amended pleaded case as to purpose and that the amendment should not be permitted.
The proposed amended case on purpose
As currently pleaded in the Defence, Mr Kagalovsky’s case as to purpose is (in broad terms) to protect TRS from serious and deliberate breaches by Mr Gusinski of various agreements or various wrongs committed by him. It is conceded that that case cannot be continued in light of the findings of the New York Courts, not least that certain alleged agreements were not made and that there were no wrongful acts by Mr Gusinski (directly or through his nominees or agents).
The proposed amended case is, in broad terms, that Mr Kagalovsky’s purpose in carrying out the Dilution was to protect TRS from what Mr Kagalovsky believed to be serious and deliberate failings by Mr Gusinski. The proposed amended defence puts forward a case that Mr Kagalovsky “believed” that Mr Gusinkski had committed serious and deliberate wrongs or misconduct and that his, Mr Kagalovsky’s, purpose in effecting the Dilution was to protect TVi against these breaches that he believed had been committed.
The primary amended case on purpose is proposed to be set out in amended paragraphs 14 to 19 of the Defence. So far as material they are as follows:
“14….It is denied that the Defendant had as a real or substantial purpose in effecting the Dilution any purpose falling within s.423(3) of the 1986 Act, as alleged or at all. The true purpose of the Defendant in causing IVL to enter into the Dilution was that at the time he had a genuine and honestly held belief that he needed to protect TRS from what he considered were actions by or on behalf of Mr Gusinski that the Defendant believed were likely to cause TRS to become insolvent and/or shut down. The Defendant believed that the only way he could adequately protect TRS was by removing TRS from Mr Gusinski’s control by effecting the Dilution.
15. The basis for the Defendant’s belief as pleaded in paragraph 14 above was as pleaded at paragraphs 16 to 19 below (although it is admitted that the Defendant is estopped by the NMDC Judgement from alleging that there was in fact misconduct by Mr Gusinski, NMHC or NMDC that amounted to any breach of duty).
16. The Defendant believed that Mr Gusinski and/or his agents and nominee NMHC:
(1) caused IVL to purchase program licences from the Claimant under the License Agreement dated 1 st January, 14 th January and 14 th April 2009 at significantly above cost in that:
(a) All the media licensed to TVi by the Claimant had already been produced for the Russian TV network by NTV, which had already paid the Claimant for the media. The profit to the Claimant on the sub- licensing of the same media to TVi was therefore close to revenue value at 100%.
(b) The Licence Agreements increased the volume and price at which NMDC supplied media for broadcast to TVi. The market in Ukraine for licensed broadcast media had become depressed with the financial crisis and world economic slowdown of 2008. The Ukrainian advertising market had shrunk by 70% in the 12 months to 31 December 2008 and the corresponding price of licensed broadcast media had dropped in the same period by 20-30%. However the Licence Agreements increased all fees payable to NMDC for content broadcast by TVi. In 2008 NMDC charged Euro 5000 per episode for premiers and Euro 1000 per episode for repeat series. In contrast, under the 2009 Licence Agreements the per episode costs rose to US$15,000.
(2) Caused TRS in or around the end of 2008 and the beginning of 2009 to enter into several free to air (“FTA”) rebroadcasting agreements with small regional media companies that were poor value for money because they had limited geographic coverage but led to significant further increases in the prices payable to the Claimant under the Licence Agreements. This meant that no broadcasts were made by TVi into Kiev or most of the other major cities in Ukraine.
(3) Failed to take reasonable steps to ensure that TVi obtained sufficient viewership and market share in the Ukraine to make TVi viable. Inter alia, the Defendant believed that Mr Gusinski and/or his agents and nominee NMHC:
(a) Caused the Claimant to supply IVL with poor quality, overpriced programming, including programs that were priced by the Claimant on the basis that they were “premiere” shows when in fact they had already been broadcast on TV channels owned by Mr Gusinski, namely TeleClub and RTVI.
(b) Prevented TRS from properly advertising its programming, by refusing to allow it to have a sufficient advertising budget; and
(c) Failed to obtain FTA licences or rebroadcasting agreements for TVi with a good level of geographic coverage in the Ukraine, including failing to obtain any FTA licence or rebroadcasting agreement that covered Kiev and other major Ukrainian cities.
(4) From 2008 to 2009, caused TRS to purchase broadcasting transmission services from Overseas Media (the Gusinski-controlled entity which had formerly supplied satellite broadcast services to TVi) at significantly above market prices. In particular:
(a) Until the end of 2008, TRS paid Overseas Media a monthly fee for the transmission of programming from New York to TVi in Ukraine;
(b) From February 2009, TRS paid Overseas Media a monthly fee for a data link to move programs from New York to Kiev;
(c) These expenses were only incurred by the Partnership because NMHC procured the purchases through Overseas Media, wholly licenced to Mr Gusinski or a company under his ownership and control
(5) Caused NMHC to refuse to remit funds to IVL that were necessary for TRS to operate. In particular, IVL’s draft budget for the period September 2009 required NMHC to loan US$1.6 million to IVL; however NMHC informed IVL in or around mid-September 2009 that it was prepared to loan only US$850,000 to IVL for that period.
17. The Defendant believed that the reason that TRS lost over US$24 million from 2008 to September 2009 was, at least in large part because of what he considered to be Mr Gusinski’s conduct as set out in paragraph 16 above.
18. The Defendant believed that, as at the date of the Dilution, TRS (and therefore IVL) were insolvent or would have become insolvent imminently in the absence of continued funding by NMHC and Iota, which neither partner was under any obligation to provide.
19. The Defendant believed that, since Mr Gusinski refused to step down voluntarily from TRS’s management, it was necessary for TRS to be removed from Mr Gusinski’s control in order to prevent further losses, avoid the otherwise imminent insolvency of TRS and IVL, and prevent TVi being closed down.
20. The Defendant was advised that the mechanism by which the Dilution was carried out was lawful according to Ukrainian law, and reasonably believed that the Dilution was so lawful.”
The respective cases
NMDC submits, in broad terms, that:
37.1 It is now too late to seek amendment to the extent that it is not agreed (Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 (Comm)).
37.2 The proposed amendments regarding purpose are precluded by the doctrines of issue estoppel/abuse of process. Further, in light of the matters which Mr Kagalovsky is estopped from denying, there is no real prospect in him establishing the purpose set out in the amended case and the proposed amendments as to purpose are inadequately pleaded as regards a basis for the beliefs asserted.
37.3 In any event, the purpose pleaded, even if made out, would not prevent the purpose being a prohibited purpose (see Arbuthnot Leasing International Limited v Havelet Leasing Limited (No 2) [1990] BCC 636).
The submissions of Mr Kagalovsky can broadly be summarised as being:
The amendment application is not too late;
38.2 The amendments as to purpose are properly pleaded and at this stage should be permitted;
38.3 The amendment as to purpose is not subject to the rules regarding issue estoppel or abuse of process:
Ramos J did not decide the issue of purpose and therefore there has been no decision on the same issue as that aising between the parties to the proceedings;
Even if he did, such decision was not necessary or fundamental to his decision;
Accordingly, neither issue estoppel nor abuse of process applies so as to prevent the amendments being permitted;
In any event, there are special circumstances making it just for the court not to apply the doctrine of issue estoppel.
Amendments and late amendments
I deal with this issue first. If correct, it provides a short route to determine the application to amend.
I am satisfied that this is not a “very late application to amend” of the sort considered in the Quah Su-Ling case where the principles set out in cases such as Swain-Mason v Mills & Reeve [2011] 1 WLR 2735 and Mitchell v News Group Newspapers [2013] EWCA Civ 1537 were helpfully drawn together and summarised (see paragraphs [37] to [39]). As Carr J said at paragraph [38]:
“(b) where a very late application to amend is made the correct approach is not that the amendments ought, in general, to be allowed so that the real dispute between the parties can be adjudicated upon. Rather, a heavy burden lies on a party seeking a very late amendment to show the strength of the new case and why justice to him, his opponent and other court users requires him to be able to pursue it. The risk to a trial date may mean that the lateness of the application to amend will of itself cause the balance to be loaded heavily against the grant of permission;
(c) a very late amendment is one made where the trial date has been fixed and where permitting the amendments would cause the trial date to be lost. Parties and the court have a legitimate expectation that role fixtures will be kept;
(d) lateness is not an absolute, but a relative concept. It depends on a review of the nature of the proposed amendment, the quality of the explanation for its timing, and a fair appreciation of the consequences in terms of work wasted and consequential work to be done”.
The application in this case is not a “very late application to amend” of the sort considered by Carr J (see especially paragraph [38](c) of her judgment cited above). Proceedings are at a fairly early stage and no trial date has been set. Accordingly, I decline to apply the principles applying to very late applications to amend, where a heavy burden lies on the party seeking a very late amendment, to this case.
Of course, the more general principles regarding applications to amend do apply. These principles were not in dispute before me. They are conveniently summarised in paragraph [36] of Carr J’s judgement in the Quah Su-Ling case:
“[36] An application to amend will be refused if it is clear that the proposed amendment has no real prospect of success. The test to be applied is the same as that for summary judgement under CPR Part 24. Thus the applicant has to have a case which is better than merely arguable. The court may reject an amendment seeking to raise a version of the facts of the case which is inherently implausible, self-contradictory or is not supported by contemporaneous documentation.”
Issue estoppel and abuse of process
As I understood matters there was little dispute between the parties as to the applicable principles of issue estoppel and the wider, Henderson v Henderson, type of issue estoppel/abuse of court process (See e.g. Virgin Atlantic Airways Limited v Zodiac Seats UK Ltd [2013] UKSC 46; [2014] AC 160). Further, that most of the requirements of issue estoppel are satisfied as regards many of the issues raised and determined in the New York proceedings against Mr Kagalovsky means that the areas of dispute regarding the application of the relevant principles are fairly limited.
A convenient starting place is The Sennar (No 2) [1985] 1 WLR 490. In that case, Lord Brandon conveniently summarised the three requirements to establish an issue estoppel (at page 499A-C):
The first is that that the judgment must be (a) of a court of competent jurisdiction; (b) final and conclusive and (c) on the merits. I did not understand the defendant to challenge that the judgment of Ramos J met these conditions.
The second is that the parties (or their privies) in the earlier action relied on as creating an estoppel and thus in the later action in which the estoppel is raised as a bar, must be the same. One might be forgiven for thinking that, in light of the concession regarding five of the six AE issues, this was not a live issue. However, at one point, well into oral submissions and although not flagged up in the skeleton argument, the defendant raised the point that there was no relevant identity or privity of parties. I sought confirmation overnight of precisely which issues decided by Ramos J were said to be ones where there was no relevant privity. Overnight, only one issue decided by Justice Ramos was identified as being one where privity was said not to exist. In the end, I did not understand this to be a point that was pursued.
The third is that the issue in the later action, in which the estoppel is raised as a bar, must be the same issue as that decided by the judgment in the earlier action. It was this requirement that raised the most debate before me. I deal with this further below.
Finally, although not forming part of the formulation of Lord Brandon, it is clear that there is a residual role for special circumstances in which the operation of issue estoppel may be prevented from giving rise to a bar (see e.g. Arnold v National Westminster Bank plc [1991] 2 AC 93). Special circumstances are relied upon in the final analysis. I will therefore have to return to it.
As regards the requirement that the issue be the same in the two sets of proceedings, the Defendant naturally relied on cases stressing that the estoppel only arises in respect of findings of a previous court which were on the same issue as that raised in the new proceedings (see e.g. New Brunswick Rly Co -v-British & French Trust Corpn Limited [1939] AC 1 at 43) and the determination of which in the earlier proceedings was necessary or essential to the court’s or tribunal’s decision: so fundamental that without it the decision could not stand (see e.g. Kirin-Amagen Inc v Boehringer Mannheim Gmbh [1997] FSR 289).
On the other hand, the Claimant relied on cases where the requirement of “same issue” was met but where the claimant had sought to put a “different legal slant” on the same events (Gaydamak v Leviev [2014] EWHC 1167 (Ch)) or where the issues in the two sets of proceedings were held to be “essentially” or “in substance” the same (Ackerman v Thornhill [2017] EWHC 99 (Ch)).
The widest scope of the estoppel asserted
It is important to note that NMDC does not say that Mr Kagalovsky is prevented from denying that his purpose was as pleaded against him. This is not a case where NMDC says that it is entitled to summary judgment on the purpose issue. Rather, its case is that Mr Kagalovsky is estopped from asserting the particular case as to his purpose that he seeks to put forward in his proposed amended defence in the proceedings before me.
At its widest the submission for NMDC, as I understand it, is that the New York courts have determined that Mr Kagalovsky did not have the protective purpose that is now alleged. The submission is developed as follows.
First, NMDC says that in the New York proceedings, both in his defence and counterclaims, Mr Kagalovsky asserted that the Dilution was justified and was necessary. Thus, in his Answer and Counterclaim in the NMHC Action Mr Kagalovsky pleaded as follows:
“Plaintiff’s claims in the Complaint are barred, in whole or in part, by the doctrines of necessity and/or justification” (Answer paragraph 97)
“Each of the foregoing steps [comprising the Dilution] was instituted out of necessity to prevent Gusinski and the VG Entities from closing down the TVi Channel, and to preserve the interest that IVL had in the station up to the date upon which IVL had become deadlocked”(Counterclaim paragraph 96).
Identical pleas are to be found in his Answer (paragraph 59) and Counterclaim (paragraph 82) in the NMDC Action.
Secondly, in the RJ, the finding was as follows:
“[158] Mr Kagalovsky has provided no justification for his taking of TVI and its trademarks. Mr Kagalovsky acknowledged at trial that to resolve his dispute with Mr Gusinski, “[t]here were a few options,” including selling TVi to Mr Gusinski. But Mr Kagalovsky did not want to become dissociated with TVi because “[i]f I just left, that would be a big blow to my reputation in the Ukraine” (paragraph [158]).
In my judgment, this finding of itself does not give rise to an issue estoppel as regards purpose beyond (taken with other determinations of Ramos J) an issue estoppel preventing Mr Kagalovsky from raising the purpose set out in the original, unamended, defence before me. I should add that it was in relation to this paragraph of the judgment that, at least one point, Mr Kagalovsky’s counsel sought to assert that there was no relevant identity of persons, or privity, such as to found an issue estoppel at all. In my view, Mr Kagalovsky is correct to say that there was no express finding in the Ramos J reasoned judgment which of itself found that his purpose was or was not the relevant purpose identified in s423 IA 1986. Nor did Ramos J make an express finding as to Mr Kagalovksy’s beliefs as now sought to be pleaded by amendment.
The question, in my judgment, is a more subtle one. Namely in the light of relevant findings of fact of Ramos J that do bind Mr Kagaslovsky, is there a real prospect of him establishing that his purpose and beliefs were as set out in the proposed amendments?
Mr Kagalovksy’s witness statement on this application
As NMDC has pointed out, Mr Kagalovsky’s witness statement, which is before me for the purposes of the applications before me, is slightly problematic in that it was made on 12 April 2017, at a time when the purpose alleged in the Defence was different to that in the proposed amended Defence and when he was still denying that any issue estoppel operated at all.
In that witness statement he asserts, among other things, that:
“7. Irrespective of whether the Court concludes that, in the present proceedings, I am not able to deny findings of Justice Ramos in relation to these issues [that is, the AE Issues, other than the Protective Purpose issue], I nevertheless at all material times honestly and reasonably believed to be true all of the facts stated in the Defence in relation to these issues and this was the basis for my belief that I needed to effect the Dilution in order to protect TVi from Mr Gusinski by removing TRS from his control.
…
9. In summary, I considered that Mr Gusinski was deliberately seeking to operate TVi so as to derive substantial and unwarranted profits from IVL for himself via NMDC and the Licence Agreements.”
He then goes on to deal with his belief on a number of matters, effectively (or in large part) set out in the proposed amended paragraph 16 of the Defence.
What did the NY proceedings decide in relation to the proposed amended purpose pleading?
Proposed Paragraph 16(1)
The allegation is that Mr Kagalovsky believed that Mr Gusinksi (and his agents or nominee NMDC) caused IVL to purchase programme licences from NMDC under the Licence Agreements at significantly above cost. This belief is said to arise from the facts that (i) NMDC had already produced the relevant media for a Russian TV Network, which had already paid NMDC. The profit on sub-licensing to TVi is therefore said to be “close to revenue value” at 100% and (ii) episode costs rose substantially under the 2009 Licence Agreement notwithstanding a shrinking and depressed market in the Ukraine.
In the NMDC Action and the NMHC Action one of the allegations in the counterclaim brought by Mr Kagalovsky (and Iota) against NMDC was, in broad terms, that Mr Gusinski and NMHC, in breach of rules about conflict of interest and self-dealing, caused IVL to enter into multiple licence agreements with NMDC that were “onerous, unfair and in excess of fair market value” (see paragraph 32 Joint Answer and Counterclaim (“NMDC Action JAC”)) and that NMHC, NMDC and Mr Gusinski took advantage of their positions of trust and obtained excessive licensing fees for content issued to IVL by NMDC (paragraph 33 NMDC Action JAC). Almost exactly the same complaints were made in the counterclaim of Mr Kagalovsky in the NMHC Action against NMHC, Mr Gusinski and NMDC (see e.g. paragraphs [32] and [33]).
In addition it was alleged in the New York proceedings, as it is in the Defence (prior to amendment) in the proceedings before me, that the prices charged by NMDC to IVL were in breach of an agreement to supply NMDC programming “at or near ...direct cost with only a minimal profit” by causing IVL to purchase programming from NMDC at a price “significantly higher than the cost of the rights to those programmes” (see, for example, “Findings of fact and conclusions of law” submitted by Mr Kagalovsky, Iota and Iota Ventures in the New York proceedings (“Mr Kagalovsky’s Proposed Findings” or “KPF”), paragraph 157 (Findings of Fact), paragraph 11 (Findings of Law) paragraph 8 (Findings of Law under heading “Breach of Contract against Gusinski and NMHC”). Further, there was an allegation of conspiracy against (among others) NMDC, one element of which was said to be acting on instruction of NMHC and Mr Gusinski to enter onerous and inequitable contracts with IVL (paragraph 7 Findings of Law under heading “Conspiracy to breach Fiduciary Duties against Gusinski, NMHC and NMDC”).
The New York court rejected the allegation that agreement was reached to provide programming at or near cost (see e.g. RJ paragraphs 173, 180, 184). Such an allegation does not remain in the proposed amended defence.
However, Ramos J also decided that Mr Kagalovsky agreed that NMDC would charge IVL market prices and that the prices charged were in fact at or below market rates (see RJ paragraphs referred to below):
“[180] Mr Gusinski credibly denied ever representing to Mr Kagalovsky that NMDC would licence programming to TVi at or near cost.
[181] Instead, Mr Gusinski and Mr Berezin credibly testified that Mr Kagalovsky and Mr Gusinski discussed and agreed that NMDC would charge TVi market prices for its programming. Otherwise, Mr Gusinski would be subsidising [IVL] at NMDC’s expense; the partners provided [IVL] with equal funding, so Mr Gusinski would be contributing more to [IVL] financially than Mr Kagalovsky if Mr Gusinski caused NMDC to provide programming at below-market prices.
[182] ….. Mr Kagalovsky and his attorney… were therefore aware from the outset that NMDC content would be charged “on market terms….
[183] Moreover, Mr Kagalovsky understood that the prices NMDC charged for its programming content could vary significantly regardless of production costs. For example [See further re free-to-air broadcasting below]…
[184] In light of the above, Mr Kagalovsky’s testimony that Mr Gusinski agreed to supply NMDC programming “at or near his direct cost with only a nominal profit” was not credible.
[185] Mr Kagalovsky has claimed that Mr Gusinski concealed that NMDC’s production costs for programming licensed for broadcast on TVi had already been paid for through contracts with Russian broadcasters. Both documents and testimony show otherwise.
[186] Mr Gusinski credibly testified that he orally informed Mr Kagalovsky that the production costs for NMDC’s programming were already paid for through NMDC’s contracts with Russian television networks.
[187] Additionally, on January 12, 2008, Mr Gusinski sent Mr Kagalovsky a Confidential Offering Memorandum for NMDC, dated September 25, 2007, so that Mr Kagalovsky could have a full understanding of how NMDC worked. The Offering Memorandum described NMDC’s cost structure in several places, and notes specifically that the rights to the series NMDC sold in Ukraine had very low marginal costs, since they were originally produced for the Russian market..
[194] Mr Kagalovsky approved of all the agreements that Mr Brown signed on IVL’s behalf, including all agreements with companies affiliated with Mr Gusinski.
[200] Mr Gusinski credibly testified that before Mr Kagalovsky approved of licence agreements between the Partnership and NMDC, Mr Gusinski provided him with copies of NMDC’s licence agreements with other broadcasters in Ukraine so that he could review the prices NMDC was charging. Mr Kagalovsky admitted that he regularly discussed with Mr Gusinski the pricing for content aired on TVi.
[203] In light of the above, Mr Kagalovsky’s testimony that he did not negotiate the terms of the April 10, 2009 Licence Agreement is not credible….
[205]-[212] [Details of the independent and objective information about programing including costings obtained by Mr Kagalovsky]
[213] Mr Gusinski, Marc Kasher, and Chris Renaud credibly testified that NMDC licensed programming to [IVL] at or below market prices.
[214] As Mr Gusinski and Mr Renaud credibly testified, while NMDC was licensing content to [IVL], the highest per-episode price NMDC charged [IVL] was lower than the lowest per-episode price that NMDC charged other Ukrainian broadcasters for similar programming content and broadcasting rights.
[215] Mr Kasher also credibly testified that NMDC had the opportunity to sell content to much larger broadcasters for $23,000 to $24,000 per episode, but instead sold to [IVL] at $15,300 per episode.
[220] Defendants have offered no competent or credible evidence that NMDC charged [IVL] anything but market prices for content. Even Mr Kagalovsky conceded that NMDC was providing content “at prices at least equal to… market rates”.
[369] Defendants had full knowledge of, and consented to, all of [IVL’s] related-party transactions with companies affiliated with Mr Gusinski. Mr Kagalovsky actively participated in negotiations for NMDC programming content and was sent and approved of all agreements between [IVL] and entities affiliated with Mr Gusinski prior to their execution. Thus, none of the related-party transactions are in breach of any fiduciary duties…..
[370] The related-party transactions are protected by the business judgment rule. See Solomon v Armstrong, 747 A.2d 1098, 1115 (Del Ch.1999) (“[I]n a classic self-dealing transaction the effect of a fully-informed shareholder vote in favour of that particular transaction is to maintain the business judgment rule’s presumptions.”) Defendants have offered no credible evidence to rebut the business judgement rule’s presumptions. Indeed, the prices [IVL] paid NMDC for programming were at or below market rates.
[371] Defendants also have not established that Mr Gusinski, [NMHC], or NMDC breached the duty of candor. For example, Defendants had knowledge of, and consented to, all major decisions affecting [IVL] and TVi, including all agreements between [IVL] and entities affiliated with Mr Gusinski, hiring decisions for TVi’s top managers, decisions concerning TVi’s operational budget and advertising, decisions concerning free-to-air distribution, and other TVi operational issues.”
44. I am satisfied that these findings are ones that give rise to an issue estoppel as against Mr Kagalovsky, alternatively that it would be an abuse were he in these proceedings to seek to challenge those findings.
45. In light of these findings, and in particular, that (a) with full knowledge it was agreed by Mr Kagalovsky that licensing of media to TVi would not be by reference to cost, but market value; (b) that with full knowledge of prices being charged in the market as well as those to be charged by NMDC to TVi, he agreed to the latter and (c) that the prices paid by IVL to NMDC were at or below market rates and (d) that the partners understood that it would be several years after TVi began broadcasting before the network would break even financially (see RJ paragraph [24]), the question is whether there is a real prospect of Mr Kagalovsky establishing that, at the time of the Dilution, he genuinely believed that Mr Gusinski caused IVL to purchase program licences at the relevant cost to IVL such that TRS had to be removed from Mr Gusinski’s control to avoid further losses. In my judgment, there is no real prospect of him establishing that case and therefore the proposed amendment to paragraph 16(1) of the proposed amended defence should not be allowed, and that sub-paragraph should not be permitted to proceed to trial. In reaching this view I have also taken into account the proposed amended paragraph 17 of the Defence. In my judgment, the proposed amended paragraph 16(1) does not provide a real prospect for establishing the belief set out in paragraph 17.
I obtain some support for this view, though it is not essential to my view, from the evidence before (and finding of) Ramos J that “even if Mr Gusinski agreed to supply NMDC programming at or near cost, Mr Kagalovsky admitted it was not critical to his decision to invest in IVL.” (RJ paragraph 358). If programming at or near cost was not critical to his decision to invest in IVL, it is difficult to understand how Mr Kagalovsky could have had a genuine belief that Mr Gusinski had to be removed from TVi, to protect TVi, because of his (asserted) belief that Mr Gusinski had caused IVL to purchase program licences at significantly above cost, but at or below market price.
Proposed paragraph 16(2)
In brief, the proposed amended paragraph 16(2) asserts a belief on the part of Mr Kagalovsky that Mr Gusinski (his agents and NMHC) caused TRS to enter into several free to air (“FTA”) rebroadcasting agreements with small regional media companies that were poor value for money, with limited geographic coverage but resulting in further increases in prices payable to NMDC under the Licence Agreements.
Issues relating to FTA rebroadcasting agreements were relied upon by Mr Kagalovsky in the New York proceedings in relation to his defence of necessity/justification.
The findings of Ramos J on these issues include:
“[61] Initially, TVi was distributed solely by cable and satellite. But in late 2008, through the collective efforts of…. Mr Kagalovsky and Mr Gusinski, TVi signed several rebroadcasting agreements for free-to-air distribution of TVi in large cities in Ukraine (cities of over one million in population). “Free-to-air” refers to the type of television broadcast that can be received by anyone with an antenna; it is broader than cable distribution, which requires each receiving household to be wired for cable.
[63] Signing rebroadcasting agreements in major cities, as TVi was doing, was an accepted method of building a nationwide free-to-air network.
[69] … the January 14, 2009 Licence Agreement… was the first licence agreement to grant TVi the more valuable rights for exclusive, free-to-air broadcasting, which Mr Kagalovsky and Mr Gusinski agreed was necessary to realise their goal of growing TVi.
[70] Under the April 10, 2009 Licence Agreement, NMDC agreed to license 276 episodes of non-exclusive programming for pay television and free-to-air broadcast on TVi. [IVL] agreed to pay…[price set out].
[71] … the April 10, 2009 Licence Agreement…did not list the per-episode price, [but] Mr Kagalovsky admitted that he had knowledge of these prices before the agreement was executed.
[183]….[See above for early part of this paragraph] For example, Mr Kagalovsky understood that when TVi moved from cable and satellite programming and began broadcasting free-to-air, [IVL] would have to pay more for free-to-air broadcasting rights than it did for cable and satellite rights, even for the same television series….
[216] …. The prices that NMDC charged [IVL] for free-to-air Premier programming…. were lower than the prices reflected in Mr Romanet’s analysis [Mr Romanets was, a former Deputy Head of Acquisitions at one of TVi’s competitors, ICTV, and was one of the independent advisers to Mr Kagalovsky and IVL: see paragraph [205]].
I am satisfied that these findings are ones that give rise to an issue estoppel as against Mr Kagalovsky, alternatively that it would be an abuse were he in these proceedings to seek to challenge those findings.
In the light of the findings of Ramos J regarding the information provided to Mr Kagalovsky, his knowledge of and consent to relevant agreements and to major decisions affecting IVL and TVi (see RJ paragraph [371]), in my judgement there is no real prospect of Mr Kagalovsky establishing that he had a genuine belief that Mr Gusinski, his agents or NMHC were responsible for the entry into the FTA rebroadcasting agreements such that it was necessary to remove TRS from his control (paragraph 19 of proposed amended Defence) or that such removal was necessary because of a genuine belief that Mr Gusinski’s conduct in relation to the matters set out in proposed amended paragraph 16(2) had caused the losses identified in proposed amended paragraph 17 of the Defence.
Proposed paragraph 16(3)
In summary, by the proposed amended paragraph 16(3) of the Defence, Mr Kagalovsky asserts a belief in a failure, on the part of Mr Gusinski, his agents and NMHC, to take reasonable steps to ensure TVi obtained sufficient viewers and market share to make it viable. Three matters are relied upon, all of which are said to have been believed by Mr Kagalovsky. The first is said to be the supply of poor quality and overpriced programming by NMDC, including the provision of shows priced as “premiere” shows when they were not. The second is a refusal to allow TRS to have a sufficient advertising budget. The third is a failure to obtain FTA licences or rebroadcasting agreements for TVi with a good level of geographic coverage in the Ukraine, including Kiev and other major cities.
Similar allegations, but based on asserted reality rather than Mr Kagalovsky’s belief, were decisively rejected in the New York proceedings. I refer to the passages I have already cited above. In addition, the following passages of the RJ should also be considered:
“[41] Mr Kagalovsky told Mr Brown that Mr Dementiev’s involvement in TVi ensured that Mr Kagalovsky maintained control over the financial and legal aspects of [IVL], particularly in Ukraine
[202] Mr Gusinski credibly testified that Mr Kagalovsky was personally involved in selecting the television content that TVi licensed from NMDC and other content providers. Mr Gusinski credibly testified that Mr Kagalovsky asked NMDC to send all of its series to him for him to watch, which NMDC did. Mr Gusinski also credibly testified that Mr Kagalovsky always had his own opinion about whether a series was good or bad, and selected the programs he liked for inclusion in the licence agreements with NMDC.
[204] Mr Kagalovsky’s testimony that he “deferred to [Mr Gusinski’s] judgment on all matters related to programming” is also not credible. Mr Kagalovsky admitted at trial that he was involved in the approval of specific programming schedules for TVi and discussed many proposed schedules for TVi’s programming. In April 2008, Mr Kagalovsky attended Mipcom, one of the largest markets for television programming held in Cannes, France, to investigate and determine the content that could be acquired for TVi. He also contacted Mikhail Galkin many times to discuss programming and scheduling.
[205] With Mr Gusinski’s encouragement, Mr Kagalovsky obtained independent and objective information about NMDC’s programming. …
[206] In 2008 and 2009, Mr Romanets and Mr Kagalovsky corresponded often about programming. Mr Kagalovsky sometimes would call up Mr Romanets to ask Mr Romanets’ opinion on programs that TVi was considering to show. Mr Kagalovsky also discussed programming acquisitions with Mr Romanets, and Mr Romanets sent Mr Kagalovsky proposed programming schedules and ratings for programs that TVi would potentially acquire, including from NMDC…….
[207] In August 2008, Mr Romanets prepared for Mr Kagalovsky an analysis of the programs aired on TVi and the major Ukrainian television networks. Among other things, Mr Romanets reviewed TVi’s programming strategy and made suggestions about what TVi should air at different time slots. Mr Romanets also outlined the typical programming acquisition costs for the major networks…
[208] At Mr Kagalovsky’s request, Mr Romanets also used his experience and professional judgment to grade the programs that NMDC made available for licensing. Mr Romanets communicated his grades to Mr Kagalovsky……
[209] Mr Knyazhitsky advised Mr Kagalovsky about the price of programming. Likewise, Mr Romanets and Mr Knyazhitsky regularly informed Mr Kagalovsky about prices for programming from non—NMDC providers….
[222] All major management decisions of [IVL] and TVi were made with Mr Kagalovsky’s knowledge and consent. Mr Kagalovsky called Mr Gusinski and his colleagues regularly to discuss the details of operations. Mr Kagalovsky also travelled to Ukraine and held numerous meetings there with TVi’s management, employees, and journalists in connection with managing and operating TVi.
[372] … Defendants offered no credible evidence that Mr Gusinski, [NMHC] or NMDC violated any duty of care…… For example, while Mr Gusinski and his representatives were involved in [IVL], TVi rose from the 47th-ranked broadcaster in Ukraine to the 14th-ranked broadcaster in a little over one and a half years. TVi, in which the partners had invested around $24 million to develop, was worth nearly $57 million at that point in time.”
I should add that there are a number of other relevant passages in the RJ regarding findings and evidence relating to Mr Kagalovsky’s full knowledge, consent to and participation in matters of pricing and programming (see eg. paragraphs [191]-[204]).
Again, I am satisfied that these findings are ones that give rise to an issue estoppel as against Mr Kagalovsky, alternatively that it would be an abuse were he in these proceedings to seek to challenge those findings.
In the circumstances, including the full knowledge and consent of Mr Kagalovsky as found at (eg) RJ paragraphs [369] to [371], my view is that there is no real prospect of Mr Kagalovsky establishing that he had a genuine belief that Mr Gusinski, his agents and NMHC had failed to take sufficient steps to ensure that TVi obtained sufficient market share and viewership to make it viable and that in light of that he genuinely believed that Mr Gusinski had to be removed from TVi for its protection. I should add that the fact that no credible evidence was presented that there was any relevant violation of a duty of care (RJ paragraph [372]) is a factor, in my judgment, weighing against there being any real prospect of establishing a genuine belief in the same.
Proposed paragraph 16(4)
Proposed paragraph 16 (4) focuses on a belief of Mr Kagalovsky, that Mr Gusinski and or his agents and/or NMHC caused TRS to purchase broadcasting transmission service from an entity controlled by Mr Gusinski, namely Overseas Media, at significantly above market prices.
Such purchasing at above market price was relied upon in the New York proceedings as part of the defence and counterclaim including the asserted necessity and/or justification of the Dilution.
Ramos J found:
“[192] Mr Kagalovsky always understood that [IVL] would be licensing content from companies affiliated with Mr Gusinski, including NMDC, and that other companies affiliated with Mr Gusinski, such as Overseas Media, would be providing services to [IVL].
[193] Mr Brown [Mr Kagalovsky’s nominee], who executed agreements on behalf of [IVL] also understood that NMDC and Overseas Media were affiliated with Mr Gusinski.
[194] Mr Kagalovsky approved of all the agreements that Mr Brown signed on [IVL’s] behalf, including all agreements with companies affiliated with Mr Gusinski. Mr Brown understood that all the agreements between [IVL] and any company affiliated with Mr Gusinski had been agreed to by Mr Kagalovsky and Mr Gusinski.
[195] Mr Gusinski actively sought Mr Kagalovsky’s approval for any related-party transactions. For example, Mr Gusinski sought Mr Kagalovsky’s approval for all films sold by Mr Gusinski’s companies to [IVL] for broadcast on TVi.
[198] … Mr Kagalovsky also received drafts of the agreements with Overseas Media before they were executed. Mr Kagalovsky also had access to all the contracts [IVL] entered into with any company affiliated with Mr Gusinski.
[199] Additionally, Mr Gusinski credibly testified that Mr Kagalovsky received information about the shares and ratings that NMDC programs achieved in similar markets or channels.
[200] Mr Gusinski credibly testified that before Mr Kagalovsky approved license agreements between [IVL] and NMDC, Mr Gusinski provided him with copies of NMDC’s license agreements with other broadcasters in Ukraine so that he could review the prices NMDC was charging. Mr Kagalovsky admitted that he regularly discussed with Mr Gusinski the pricing for content aired on TVi.
[202] Mr Gusinski credibly testified that Mr Kagalovsky was personally involved in selecting the television content that TVi licensed from NMDC and other content providers….
[219] The services provided by Overseas Media were also on cost-plus basis, as agreed. The Production Services Agreement contains a schedule that delineates the up-front and recurring costs that Overseas Media incurred, and that [IVL] would be reimbursing.
[221] Defendants have offered no competent evidence that Overseas Media charged [IVL] excessive prices for its services. [IVL] advised in a letter dated September 12, 2008: “We can advise that we are satisfied with the quality of programming as well as production and broadcast services that you provide us with.”
Again, I am satisfied that these findings are ones that give rise to an issue estoppel as against Mr Kagalovsky, alternatively that it would be an abuse were he in these proceedings to seek to challenge those findings.
In light of these findings, and ones referred to earlier, and especially given the knowledge and consent of Mr Kagalovsky I am satisfied that there is no real prospect of him establishing that he had a genuine belief as set out in proposed paragraph 16(4) and that that belief gave rise to a genuine belief that he had to protect TRS against Mr Gusinski by carrying out the Dilution.
Proposed Paragraph 16(5)
Proposed paragraph 16(5) sets out the alleged belief that Mr Gusinski (and his agents or nominee) refused to remit funds to IVL that were necessary for TRS to operate in particular as regards a draft budget for the period September 2009, when it was said that NMHC was required to loan US$1.6 million to IVL but was only prepared to loan US$850,000.
This alleged failure to provide funding also featured as part of Mr Kagalovsky’s defences and counterclaims in the New York proceedings (see, for example, Amended Answer and Counterclaim in the NMHC Action paragraph 65).
Relevant findings on this matter in the RJ include the following:
[169] Mr Dementiev’s testimony that Mr Gusinski’s decision to fund $850,000 in September 2009 helped “ma[ke] it impossible to make the January 1 and 14 licences on or about September 25” was not credible. Any resulting funding shortfall was Mr Kagalovsky’s fault, not Mr Gusinski’s. Mr Gusinski and Mr Yakovich credibly testified that Mr Kagalovsky agreed that he would contribute $300,000 and Mr Gusinski would contribute $850,000 in September 2009. Mr Yakovich credibly testified that Mr Dementiev confirmed this understanding to him on September 16, 2009. In fact, a cash flow spreadsheet that Mr Dementiev sent Mr Yakovich reflects a planned $850,000 contribution from [NMHC] and a planned $300,000 contribution from Iota on September 20, 2009. But Mr Kagalovsky never made his agreed-upon contribution.
[170] Mr Dementiev’s testimony that Mr Kagalovsky was excused from contributing $300,000 because it would put the partners out of parity was not credible. According to Mr Dementiev, to maintain parity in September 2009, Mr Gusinski would need to contribute an additional $750,000 in funding - for a total of $1.6 million-if Mr Kagalovsky contributed $300,000. This does not add up. If Mr Gusinski contributed that additional $750,000 in September 2009, his total contribution to [IVL] would be $12.8 million. If Mr Kagalovsky contributed $300,000 in September 2009, his total contribution would have been $11.9 million. This results in a $900,000 disparity in funding.”
Again, I am satisfied that these findings are ones that give rise to an issue estoppel as against Mr Kagalovsky, alternatively that it would be an abuse were he in these proceedings to seek to challenge those findings.
In light of these findings, I am satisfied that there is no real prospect of him establishing that he had a genuine belief as set out in proposed paragraph 16(5) and that that belief gave rise to a genuine belief that he had to protect TRS against Mr Gusinski by carrying out the Dilution.
Conclusion on protective purpose
As I have said, I am satisfied that the findings of Justice Ramos are ones that Mr Kagalovsky is prevented from contradicting by virtue of the doctrine of issue estoppel and/or abuse of process. I have considered the authorities that I was referred to for the proposition that in exceptional circumstances justice may require a party to be released from the usual consequences of an issue estoppel (or indeed abuse of process argument). I am unable to detect in this case any such exceptional circumstances.
In the light of the detailed findings of Justice Ramos I am satisfied that there is no real prospect of Mr Kagalovsky establishing a genuine belief in the matters set out in proposed paragraph 16 of the amended defence. I should add that although I have cited only a number of the paragraphs in RJ, I have carefully considered the whole reasoned judgment. The separate paragraphs of proposed amended paragraph 16, to a greater or lesser extent contain overlapping allegations and I have not necessarily cited in this judgment each and every paragraph of RJ that might be relevant.
It follows therefore that the proposed amended paragraphs 16 and 17 should not be permitted to proceed and permission to amend should be refused.
As regards proposed paragraph 18, subject to further submissions, it seems to me that, subject to any further particularisation that may be required, the paragraph may survive. However, I am not currently persuaded, even if it does survive, that there is a real prospect that such a belief would form the basis for the asserted belief in proposed amended paragraph 19 (or paragraph 14).
Paragraph 19, as I understand it, is in effect a repetition of the last two sentences of proposed paragraph 14. In light of my findings I do not consider, subject to any further submissions, that that paragraph and those sentences of proposed paragraph 14 can survive. It also follows proposed paragraph 15 cannot survive.
It follows that I do not need to consider NMDC’s submission that the proposed amended pleading should not be allowed because in any event it does not reveal a defence under s423 IA 1986 to the purpose pleaded against Mr Kagalovsky. I can however briefly state that I am against NMDC on this point. In my judgment, the Arbuthnot Leasing case was one where the purpose undoubtedly was to place assets beyond the reach of a potential creditor. It was held that the motive for doing so, namely to save the business, did not prevent the purpose falling within s423 IA 1986. Here, if the purpose had been to protect IVL by removing Mr Gusinski, it does not follow that the purpose was necessarily to put assets beyond the reach of NMDC and/or NMHC with regard to claims that they might make against IVL.
I invite the parties to submit an agreed order to the extent that they are able. To the extent any issues are unresolved then a further hearing will be necessary to resolve the form of order resulting from this judgement. If an agreed order is not made on the handing down of this judgement then I will adjourn any unresolved issues and extend the time for lodging a notice of appeal so that the relevant period only starts to run once the order disposing of all issues consequential on this judgment has been made. The parties should apply for a further hearing if an order is not agreed and lodged by 4pm on 3 October 2017.