New Media Distribution Company Sezc Ltd v Kagalovsky (rev 1)

This is a claim under sections 423 to 425 of the Insolvency Act 1986 in respect of a transaction entered into at an undervalue by Iota Ventures LLP (“Iota” (Footnote: ¹)) at the instructions of the Defendant, Mr Konstantin Kagalovsky, in relation to a television network in Ukraine (“TVi”) indirectly owned by Iota.

New Media Distribution Company Sezc Ltd (“New Media”) brings this claim against Mr Kagalovsky. New Media is a company incorporated in the Cayman Islands. It is, and at all material times was, indirectly owned to approximately 85% by Mr Vladimir Gusinski. (Footnote: ²)

Iota is a Delaware limited liability partnership. The partnership is governed by an Amended and Restated Partnership Agreement dated 14 April 2008 (the “Partnership Agreement”). The parties to the Partnership Agreement are the owners in equal shares of Iota. At all material times, these partners were:

Section 423 proceedings ordinarily give rise to the three issues I have described in paragraph 13 above, together with argument about what relief – if any – is appropriate. (Footnote: ⁶) Although most of these issues do arise between the parties in the present case, there are additionally a number of anterior issues that arise between the parties regarding the availability of the section 423 remedy to New Media.

The issues, as I propose to consider them, are as follows: (Footnote: ⁷)

These seven issues are considered in turn below in Sections C to I. Before doing so, however, it is necessary to describe the evidence before the court. That is done in Section B below.

Evidence from the following witnesses of fact was adduced. On behalf of New Media, I heard evidence from:

Mr Kagalovsky relied upon his own evidence and that of Mr Frederic Newman:

Two points need to be considered further in relation to Mr Kagalovsky’s evidence:

Although Mr Kagalovsky would have wanted to give evidence, due to serious illness he was unable to do so. The title to these proceedings shows that Mr Kagalovsky acted in this litigation by his next friend, his wife, Natasha Kagalovsky. (Footnote: ⁹) It was common ground between the parties that Mr Kagalovsky lacked the capacity to give evidence at the trial, but that I should admit his written evidence.

I entirely accept the reason for Mr Kagalovsky’s non-attendance; and I endorse the view of both parties that this court should do its utmost to ensure that Mr Kagalovsky’s voice is heard. That obviously implies admitting into evidence Kagalovsky 3 and Kagalovsky 4, as well as other documents, such as the Amended Defence, which are verified by a statement of truth made by Mr Kagalovsky.

Nevertheless, I must bear in mind that it has not been possible for New Media to test Mr Kagalovsky’s evidence in cross-examination. Many cases have stressed that the basic principle under which English courts operate is that evidence is given orally, with cross-examination of witnesses, and that the admission of hearsay evidence is, and should be, the exception to the rule. (Footnote: ¹⁰) Here, for reasons I have explained, the admission of Mr Kagalovsky’s evidence is essential as a matter of justice. However, when considering that evidence, I bear in mind that New Media’s limited ability to challenge that evidence may be something that goes to its weight.

On 27 July 2018, New Media issued an application to exclude, as inadmissible, the evidence in paragraphs 48 to 50 of Kagalovsky 4. These paragraphs refer to certain propositions of Ukrainian and New York law and incorporate by reference further evidence that is appended to Kagalovsky 4, namely:

I dealt with this application at the beginning of the trial and ruled (for reasons given in my ruling at Neutral Citation Number [2018] EWHC 2742 (Ch)) that this evidence should be excluded.

It was contentious between the parties as to whether, in effecting the transaction described above, Mr Kagalovsky was acting with the requisite purpose within section 423(3) of the Insolvency Act 1986. This section provides that an order under section 423 shall only be made if the transaction in question was entered into for the purpose:

In this case, the Particulars of Claim allege two purposes on the part of Iota. Paragraph 12 alleges:

“A real and substantial purpose of [Iota] in entering into the Dilution (which purpose is to be attributed to [Iota] from Mr Kagalovsky in the light of the matters set out in paragraph 11 above) was:

12.1

to put an asset (TVi) beyond the reach of [Mr Gusinski’s Nominee] who had potential claims against [Iota]; and/or

12.2

otherwise to prejudice the interests of [Mr Gusinski’s Nominee] in relation to such claims.”

An alternative case – pleaded in paragraph 14 of the Particulars of Claim – was that Iota’s purpose was to put an asset beyond New Media’s reach, New Media having potential claims against Iota or to otherwise prejudice New Media in relation to such claims.

It seems to me that it is more appropriate to consider the alternative case pleaded in paragraph 14 of the Particulars of Claim rather than the primary case pleaded in paragraph 12. That is because the alternative case relates directly to New Media, whereas the primary case relates to Mr Gusinski’s Nominee.

Of course, the transaction whose purpose I am seeking to discern is the same in each case: it is the Dilution. The difference between the two pleaded cases is the identity of the “victim”: in the primary case, the victim is Mr Gusinski’s Nominee, in the alternative case it is New Media. Mr Gusinski’s Nominee, of course, had the benefit of the Nominee Judgment, which was paid pursuant to the Settlement Agreement and recorded by the court as satisfied. Thus, it is difficult for Mr Gusinski’s nominee – which is not a formal party to these proceedings – to show any on-going prejudice, and the fact of the Settlement Agreement and the payment of the judgment debt pursuant to the Settlement Agreement must at least be relevant to the question of purpose.

Of course, the Dilution occurred before the Settlement Agreement, and I do not say that the case pleaded in paragraph 12 of the Particulars of Claim must fail. Rather, I find that there is no way in which the averment in paragraph 14 of the Particulars of Claim can fail, whilst the averment in paragraph 12 succeeds. Accordingly, it makes sense to consider the alternative case pleaded in paragraph 14 of the Amended Defence.

It was admitted by Mr Kagalovsky that his purposes for effecting the Dilution were to be attributed to Iota. (Footnote: ²⁶)

The meaning of the term “purpose” in section 423(3) of the Insolvency Act 1986 was considered by the Court of Appeal in JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176. Leggatt LJ, considering the earlier decision of the Court of Appeal in Inland Revenue Commissioners v. Hashmi [2002] EWCA Civ 981, held as follows:

“13.

As mentioned, the Hashmi case establishes that, where the transaction was entered into by the debtor for more than one purpose, the court does not have to be satisfied that the prohibited purpose was the dominant purpose, let alone the sole purpose, of the transaction. In a passage quoted above, Arden LJ (with whom Laws LJ agreed) held that it is sufficient if the statutory purpose can properly be described as “a purpose” (my emphasis) of the transaction; but she later referred to “a real substantial purpose” and the term “substantial” was also used by the other members of the court. The significance of this epithet is not immediately clear. The word “substantial” is capable of bearing a wide range of meanings. In Re Brabon [2000] BCC 1171, Jonathan Parker J confessed to finding it difficult to distinguish between a “substantial” purpose and a “dominant” purpose. If, on the other hand, the contrast is between a “substantial” purpose and a “trivial” purpose, it is not easy to understand when it would make sense to regard putting assets beyond the reach of creditors as a “trivial” purpose for entering into a transaction at an undervalue.

14.

The description of the requisite purpose as a “substantial” purpose was not necessary to the decision of the Court of Appeal in the Hashmi case and to my mind it risks causing confusion. The word “substantial” is not used in section 423 and I can see no necessity or warrant for reading this (or any other) adjective into the wording of the section. At best it introduces unnecessary complication and at worst introduces an additional requirement which makes the test stricter than Parliament intended. I agree with the point made in McPherson’s Law of Company Liquidation (4^th ed (2017)), para 11-116, that there is no need to put a potentially confusing gloss on the statutory language. It is sufficient simply to ask whether the transaction was entered into by the debtor for the prohibited purpose. If it was, then the transaction falls within section 423(3), even if it was also entered into for one or more other purposes. The test is no more complicated than that.

15.

Arden LJ made this very point in the Hashmi case when she said (at [23]) that “there is no epithet in the section and thus no warrant for reading one in”. When later in her judgment she referred (at [25]) to a “real substantial” purpose, it is apparent from the context that the reason for using those adjectives at that point was to underline the distinction between a purpose and a consequence of the relevant transaction. As Arden LJ emphasised, it is not enough to bring a transaction at an undervalue within section 423 that the transaction had the consequence of putting assets of the debtor beyond the reach of creditors. That is so even if the consequence was foreseeable or was actually foreseen by the debtor at the time of entering into the transaction. Evidence that the debtor believed that the transaction would result in putting assets beyond the reach of creditors may support an inference that the transaction was entered into for the purpose of doing so, but the two things are not the same. To illustrate the distinction using a less homely example than that given by Arden LJ, a commander may order a missile strike on a military target knowing that it will almost certainly cause some civilian casualties. But this does not mean that the missile strike is being carried out for the purpose of causing such casualties.

16.

When judging a person’s intentions, we are generally more inclined to accept that an action was not done for the purpose of bring about a particular consequence, even if the consequence was foreseen, if there is reason to believe that the consequence was something which the actor wished to avoid or at least had no wish to bring about. Hence, in the example just given, where the missile strike had a clear strategic purpose, we may readily accept that it was not ordered for the purpose of causing civilian casualties – particularly if, for example, there is evidence that the commander gave anxious consideration to how many civilians were likely to be in the target area and planned the strike for a time when the number was expected to be low. By contrast, a consequence is more likely to be perceived as positively intended if there is reason to think that it is something the actor desired. Thus, evidence that a person who has entered into a transaction at an undervalue foresaw that the result would be to put assets out of reach of creditors and desired that result might lead the court to infer that the transaction was entered into for that purpose. But such a conclusion is not a logical or legal necessity. It is a judgment which has to be based on an evaluation of all the relevant facts of the particular case.”

Mr Kagalovsky’s case as to his purpose in effecting the Dilution is most clearly stated in Kagalovsky 3: (Footnote: ²⁷)

“6.

In effecting the Dilution, it was not my intention to prejudice any claim that [New Media] or [Mr Gusinski’s Nominee] had or might have against [Iota].

7.

As set out in paragraphs 12-13 of my First Witness Statement, I have always had a wider interest and motivation to preserve TVi as an independent broadcaster in Ukraine. I believe that the best way to achieve that aim was to take TVi into my exclusive control because I did not consider that Mr Gusinski shared my interest. In June 2009, an election was called in Ukraine which took place in January 2010. From the announcement of the election Mr Gusinski insisted that TVi’s output should reflect and support the Russian view towards Ukraine and in particular the Putin regime’s support of then President Viktor Yanukovych. Mr Gusinski’s insistence was linked to the fact that his own media business was and remains heavily supported by Gasprom Media, which acts effectively as an investment proxy for the Putin regime. Gusinski could not therefore afford to take a truly independent line in relation to the Ukraine election or he would put at risk that financial support from Gasprom Media.

8.

These are no mere reflections and my own very different motivation is evidenced by my extensive subsequent efforts to keep TVi as an independent broadcaster in Ukraine when TVi was itself seized and effectively taken off air. I refer to the judgments of Turner J in Kagalovsky v. Balmore Invest Ltd & Others [2013] EWHC 3876 (QB), [2014] EWHC 108 (QB) and [2015] EWHC 1337 (QB)…In or around April 2013, following the Ramos Judgment, a corporate raid was staged by the then current regime of Ukrainian President Viktor Yanukovych to remove TVi from my control using forged documents and fraudulent transfers and transfer TVi to the ultimate ownership of a series of UK companies…The management of TVi was physically locked out of TVi’s offices on 23 April 2013.

9.

I brought the proceedings against Balmore Invest Ltd and others, at very significant expense, in order to seek to keep TVi on air as an independent broadcaster in Ukraine. I did not commence these proceedings for financial reasons, given that TVi was not profit making and had no realistic prospect of becoming profit making in the future.

10.

It was the same motive that caused me to litigate for over two years in the Balmore case that motivated the Dilution: to ensure that TVi would be kept on air as an independent broadcaster. I considered that Mr Gusinski’s involvement in TVi would frustrate that aim. Mr Gusinski’s loyalty to the Yanukovych regime and to Putin’s administration in Moscow meant it would lose all editorial independence if Mr Gusinski continued to be directly involved in its running and broadcast output. I did not effect the Dilution in order to prejudice any claims by [Mr Gusinski’s nominee] or [New Media].”

It was in support of this case, so I understand, that Mr Kagalovsky contended that the Dilution was not unlawful according to Ukrainian law. (Footnote: ²⁸) Whilst I heard no evidence on the point, I am quite prepared to proceed on the basis of an assumption that Mr Kagalovsky believed the Dilution to be lawful under Ukrainian law, and I proceed to consider Mr Kagalovsky’s evidence in this light.

Even accepting that Mr Kagalovsky believed the Dilution to be lawful under Ukrainian law, and giving as much weight as I can to Mr Kagalovsky’s evidence, I am afraid that I do not accept this evidence. I find that, at the minimum, one purpose of the Dilution was to put an asset (TVi) beyond the reach of New Media (which had potential claims against Iota) and/or otherwise to prejudice the interests of [New Media] in relation to such claims. Indeed, I conclude that this was the purpose behind the Dilution.

I have reached this conclusion for the following reasons:

On Issue 5, I conclude that Mr Kagalovsky’s purpose was within section 423.

Issue 6 turns on whether New Media has standing to bring a claim under section 423 of the Insolvency Act 1986. This requires consideration of whether New Media is a “victim of the transaction” within the meaning of section 424(1). If so, then the application under section 423 is treated as made on behalf of every victim of the transaction. (Footnote: ³³)

Section 423(5) defines a victim as “a person who is, or is capable of being, prejudiced by” the transaction in question.

Mr Kagalovsky denied that New Media was a victim of the transaction for three reasons:

These points are considered in turn below.

I do not consider this to be a tenable argument, for substantially the reasons given in New Media’s written opening submissions at paragraph 67. This states (omitting references):

“…[Mr Kagalovsky] admits that, prior to the Dilution, [Iota] was the owner of a television station worth at least US$50 million. He has rightly abandoned his allegation that [Iota] was insolvent as at the date of the Dilution or would have become insolvent imminently. Further, as the New York State Court recorded in its judgment, he gave evidence in those proceedings that TVi was valuable when he took it from the partnership and said not long after the Dilution that “it is quite clear this is going to be very profitable”. The [New York Supreme Court] dismissed [Mr Kagalovsky’s] challenge to the New York State Court’s valuation of TVi, ruling that “the evidence presented at trial could reasonably have allowed the court to conclude that, given the lengths that defendants travelled to remove TVi from plaintiff’s control, funding for the network would have continued.”…”

Iota had debts, but these were as a result of the funding provided by Mr Gusinski and Mr Kagalovsky. The existence of these debts casts no doubt on the solvency or ability to pay of Iota assuming its continued indirect ownership of TVi. In short, and as explained in paragraph 60(6) above, the Dilution was the indirect but not the immediate cause of Iota’s default in relation to the Licence Agreements.

I have already considered, in Section E above, whether the New Media Judgment was compromised by the Settlement Agreement. I have held that it was not, and accordingly this point must fail.

I do not consider the underlying ownership of New Media to be in any way relevant to this claim. New Media is a legal person in its own right. It brings this claim in its own name. The ownership and control of New Media is irrelevant to these proceedings. I see no basis for piercing nor reason to pierce the corporate veil.

Paragraph 31 of the Amended Defence pleads that “…the Court in its discretion should decline to grant relief pursuant to sections 423-425 of the 1986 Act because [Mr Kagalovsky] and/or [New Media’s] claim have no or no sufficient connection with England and Wales for it to be just and proper for the Court to make an order against [Mr Kagalovsky].” There are then set out a series of propositions – largely uncontentious – showing the absence of links between this jurisdiction and (i) the Dilution and (ii) the persons involved in or affected by the Dilution.

It will be necessary to consider the territorial scope of section 423 and the extent to which this court can decline to exercise jurisdiction under section 423 because there is insufficient connection with this jurisdiction. Thereafter, it will be necessary to consider whether, in light of these matters, there is sufficient connection in the present case. If there is a sufficient connection, it will be necessary to consider the appropriate form of relief.

The question of territorial scope was considered in Re Paramount Airways Ltd [1993] 1 Ch 223. The Vice-Chancellor, Sir Donald Nicholls, noted the prima facie broad territorial scope of these provisions: (Footnote: ³⁶)

“…on its face, the legislation is of unlimited territorial scope. To be within the sections, a transaction must possess certain features. For instance, it must be at an undervalue and made at a time when the company was unable to pay its debts, the company must be in the course of being wound up in England or subject to an administration order, and so on. If a transaction satisfies these requirements, the section applies, irrespective of the situation of the property, irrespective of the nationality or residence of the other party, and irrespective of the law which governs the transaction. In this respect, the sections purport to be of universal application. The expression “with any person” merely serves to underline this universality. It is, indeed, this generality which gives rise to the problem.”

Although Nicholls V-C saw force in the need for some limitation on the ambit of the provision, he was unable to frame a clear-cut bright line: (Footnote: ³⁷)

“In the end, I am unable to discern any satisfactory limitation…The case for some limitation is powerful, but there is no single, simple formula which is compelling, save for one expressed in wide and loose terms (e.g., that the person, or the transaction, has a “sufficient connection” with England) that would hardly be distinguishable from the ambit of the sections being unlimited territorially and the court being left to display a judicial restraint in the exercise of the jurisdiction.

…

In my view the solution to the question of statutory interpretation raised by this appeal does not lie in retreating to a rigid and indefensible line. Trade takes place increasingly on an international basis. So does fraud. Money is transferred quickly and easily. To meet these changing conditions, English courts are more prepared than formerly to grant injunctions in suitable cases against non-residents or foreign nationals in respect of overseas activities. As I see it, the considerations set out above and taken as a whole lead irresistibly to the conclusion that, when considering the expression “any person” in the sections, it is impossible to identify any particular limitation which can be said, with any degree of confidence, to represent the presumed intention of Parliament. What can be seen is that Parliament cannot have intended an implied limitation along the lines of Ex parte Blain 12 ChD 522. The expression must be left to bear its literal, and natural, meaning: any person.”

However, this was by no means the end of the story. These provisions in the Insolvency Act 1986 contain a significant discretion in the court both as to the nature of the remedy to grant and whether a remedy should be afforded at all. On this, Nicholls V-C said: (Footnote: ³⁸)

“The discretion is wide enough to enable the court, if justice so requires, to make no order against the other party to the transaction or the person to whom the preference was given. In particular, if a foreign element is involved, the court will need to be satisfied that, in respect of the relief sought against him, the defendant is sufficiently connected with England for it to be just and proper to make the order against him despite the foreign element. This connection might be sufficiently shown by the residence of the defendant. If he is resident in England, or the defendant is an English company, the fact that the transaction concerned moveable or even immovable property abroad would by itself be unlikely to carry much weight. Likewise, if the defendant carries on business here and the transaction related to that business. Or the connection might be shown by the situation of the property, such as land, in this country. In such a case, the foreign nationality or residence of the defendant would not by itself normally be a weighty factor against the court exercising its jurisdiction under the sections. Conversely, the presence of the defendant in this country, either at the time of the transaction or when proceedings were initiated, will not necessarily mean that he has sufficient connection with this country in respect of the relief sought against him. His presence might be coincidental and unrelated to the transaction. Or the defendant may be a multinational bank, carrying on business here, but all the dealings in question may have taken place at an overseas branch.

Thus, in considering whether there is a sufficient connection with this country the court will look at all the circumstances, including the residence and place of business of the defendant, his connection with the insolvent, the nature and purpose of the transaction being impugned, the nature and locality of the property involved, the circumstances in which the defendant became involved in the transaction or received a benefit from it or acquired the property in question, whether the defendant acted in good faith, and whether under any relevant foreign law the defendant acquired an unimpeachable title free from any claims even if the insolvent had been adjudged bankrupt or wound up locally. The importance to be attached to these factors will vary from case to case. By taking into account and weighing these and any other relevant circumstances, the court will ensure that it does not seek to exercise oppressively or unreasonably the very wide jurisdiction conferred by the sections.”

In my judgment, a clear distinction must be drawn between those cases where the court has, as of right, a personal jurisdiction over the defendant, and those cases where the court has an element of choice as to the exercise of personal jurisdiction over a defendant, such that it may decline jurisdiction.

In Re Paramount Airways Ltd, Nicholls V-C recognised the importance of the safeguard provided by the need to seek permission to serve abroad (obviously in non-Brussels Regulation cases). In such cases, there plainly is less of a link between this jurisdiction and the defendant than the case where there is a mandatory jurisdiction in this court to hear the case. The other section 423 cases that were cited to me – Erste Group Bank AG (London Branch) v. JSC “VMZ Red October” [2015] EWCA Civ 379 and Orexim Trading Ltd v. Mahavir Port and Terminal Private Limited [2018] EWCA Civ 1660 – were both cases involving the question of service out of the jurisdiction, where the link between this jurisdiction and the defendant was more attenuated than where a mandatory jurisdiction existed. Plainly, before troubling a defendant outside the jurisdiction with a section 423 claim, the court must satisfy itself (amongst other things) that there was a good arguable claim against the defendant.

This requirement does not exist in the present case, because these proceedings have been commenced as of right. That does not mean that where a section 423 claim is commenced against a defendant as of right, the court should never exercise its undoubted discretion to make no order against that defendant. But it seems to me that a court having jurisdiction as of right should be slow to decline to make an order at all unless it is clear that the making of such an order will cut across the position under some relevant foreign law. Where that is the case, an English court seised as of right must pay careful regard to the exorbitance or potential extraterritorial adverse effect of making an order under the section 423 jurisdiction. That, naturally, will involve the sort of Henderson v. Henderson considerations already considered in this Judgment: but these will not be the only considerations.

In this case, as it seems to me, the making of an order under section 423 against Mr Kagalovsky will reinforce and support, rather than undermine, the New York Proceedings. In effect, providing New Media with the relief it seeks will buttress the New Media Judgment in a manner that respects, and certainly does not undermine, the New York jurisdiction. I can see nothing in making an order under section 423 that would cut across the law of Ukraine – and, indeed, no-one contended that this was the case.

In these circumstances, as it seems to me, it would be wrong for me to decline to exercise the jurisdiction that I have and wrong to decline to make an order under these sections of the Insolvency Act 1986.

Accordingly, I determine Issue 7 in favour of New Media, and must now consider the appropriate form of relief under section 423 of the Insolvency Act 1986.

I have concluded that New Media was and is a “victim” within the meaning of section 424(1)(c).

Mr Gusinki’s Nominee was once, but due to the Settlement Agreement, is no longer, a “victim”. Relief for Mr Gusinski’s Nominee is not necessary and, indeed, would be inappropriate. (Footnote: ³⁹) There is, in my judgment, no other person affected by the Dilution as a “victim”. Accordingly, it is the position of New Media that I must consider.

It is, therefore, necessary to consider the appropriate relief under section 423 only so far as New Media is concerned:

I shall leave it to the parties to draw up an appropriate form of order.