East-West United Bank S.A. v Vladimir Gusinski & Ors

This is my judgment on an application by the Claimant concerning legal professional privilege and the ‘iniquity exception’.

This judgment is structured as follows:

The Claimant is East-West United Bank SA, incorporated in Luxembourg.

The First Defendant is Vladimir Gusinski. He does not participate in this application. Indeed, he has been debarred from defending the claim against him, as he failed to comply with an unless order made by Deputy Master Dovar on 7 March 2023.

Mr Gusinski is a businessman and a Russian national. His business interests include the “New Media Group”. He disagrees with the term ultimate beneficial owner, but admits that he beneficially owns the group’s topmost holding company, N M Holding Co Ltd. That company (he says) owns 93% of the shares in New Media Distribution Company SEZC Limited, which in turn owns or controls the various companies in the New Media Group, directly or through further subsidiaries. Mr Gusinski has said in a witness statement (made for the purposes of an arbitration, as to which see below) that he “completely controls” the New Media Group.

The Second Defendant is GSC Solicitors LLP (GSC). GSC acted for Mr Gusinski and his companies in various matters over several years.

The Third Defendant, Mr Samuels, is a solicitor and consultant at GSC. He had day to day conduct of the matter relevant to the present claim and application.

As well as the three Defendants, there are five more Respondents to this application:

I will refer to the dissolved company New Media Distribution Company SEZC Limited as “the First Respondent Company”, to distinguish it from the First Respondent proper (the Financial Secretary of the Cayman Islands). I will also use the term “Respondent Companies” as a term encompassing the First Respondent Company and the Second to Fifth Respondents.

All of the Respondent Companies are or were part of the New Media Group, and subsidiaries (at various levels) of N M Holding Co LLC.

The starting point is a loan. In 2013, the Claimant provided a USD 75 million credit facility to New Century Distribution LLC (later GmbH) (the Borrower). The Borrower is part of the New Media Group, being a third-level subsidiary of N M Holding Co LLC. Over time, the Borrower’s obligations were guaranteed by other group companies. Relevantly, each of the Respondent Companies guaranteed the Borrower’s debt in about 2017. It was a term of the facility agreement that payments receivable by the Borrower under certain key contracts, and payments in of over USD 10,000, must be paid into an account held with the Claimant (rather than into an account held with some other bank). I am told that in Luxembourg, where the Claimant is incorporated, this would assist recovery of debts owed by the Borrower to the Claimant.

In January 2018, the Claimant served an acceleration notice, seeking immediate payment of USD 9,596,920.60. The Borrower did not make that payment. The Claimant served demands dated 23 January 2018 on the guarantors, including the five Respondent Companies. They also did not pay.

On about 25 January 2018, the Borrower obtained a temporary insolvency moratorium from the Swiss courts. On the face of it, this was in order to restructure its indebtedness and pay its creditors. The Claimant says that this moratorium was sought for an ulterior and improper purpose, namely to reduce the prospects of enforcement by the Claimant.

On 28 February 2018, the Claimant filed a request for an LCIA arbitration (the Arbitration). The eventual respondents to the Arbitration were the five Respondent Companies which had guaranteed the debt owed to the Claimant. The Second Defendant, GSC, acted for the Respondent Companies in the Arbitration, and the Third Defendant, Mr Samuels, had day-to-day conduct. GSC and Mr Samuels took instructions from the First Defendant, Mr Gusinski. The arbitration was hard fought for many months until the Respondent Companies withdrew their defences.

At around the same time, the First Respondent Company was engaged in separate litigation with a Mr Kagalovsky. Marcus Smith J gave judgment in those proceedings, and on 12 November 2018 ordered Mr Kagalovsky to pay about USD 5.2 million into GSC’s client account, for the benefit of the First Respondent Company. Under the terms of Marcus Smith J’s order, the money was to be held by GSC until 10 December 2018. After that date, it could be paid out to the First Respondent Company (unless a further order had been made).

It is the Claimant’s case in the present proceedings that Mr Gusinski, on behalf of the Respondent Companies, deliberately misled the arbitral tribunal about what was to be done with the money in GSC’s client account. In particular, the Claimant alleges a series of representations made by the Respondent Companies’ counsel to the arbitral tribunal that the c£5.2m in GSC’s client account, less a small amount for certain costs, was “specifically earmarked for repayment” to the Claimant, and would satisfy more than half of the sum owed by the Respondent Companies to the Claimant. The Claimant says that GSC also undertook to give “5 business days’ notice before any withdrawal of the Judgment Sum from its client account is made which would reduce the sum held to less than USD 4.75 million.”

On 11 December 2018, the arbitral tribunal ordered the Respondent Companies (together with other respondents to the Arbitration) to pay USD 4.75 million to the Claimant forthwith, and a further USD c4.4m by 31 March 2019. The arbitral tribunal noted that “In making this Award, the Tribunal has sought to avoid the bankruptcy of the Respondents for the sake of a short period of delay. In particular, the Tribunal took account of the statement of the Respondents’ Leading Counsel that the majority of the Kagalovsky Judgment sum has been “specifically earmarked for repayment” of the Claimant’s loan and that the sum was in the jurisdiction.”

GSC did not transfer the USD 4.75 million to the Claimant. On 14 January 2019, Andrew Baker J made an order permitting the Claimant to enforce the award against the First Respondent Company, the Second Respondent, and the Third Respondent, and entered judgment against each of them. He directed that enforcement could only take place 14 days after service of his order.

Meanwhile, Mr Gusinski took steps to wind up the First and Second Respondent Companies. On 21 January 2019, joint provisional liquidators were appointed in the Cayman Islands. On 25 January 2019 the order in respect of the First Respondent Company was recognised in England and Wales, by virtue of a recognition order made by Deputy ICCJ Schaffer. This restricted any further enforcement of the Judgment against that company. The Claimant says that Mr Gusinski’s purpose in procuring the insolvency proceedings above was to prevent the Bank from enforcing the award against the First and Second Respondent Companies.

GSC then, having given notice of their intention on 25 January 2019, transferred the majority of the USD 4.75m to the joint provisional liquidators of the First Respondent Company. Some money was also transferred to the Borrower, and some to GSC itself as fees. The vast majority of the USD 4.75m is no longer within the jurisdiction, or easily available to the Claimant to satisfy the judgment debt enforcing the arbitral award.

In the present proceedings, it is the Claimant’s contention that it has an interest in the so-called Earmarked Funds - in particular, by way of an equitable assignment, an equitable charge, and/or a constructive trust. The Claimant further alleges that GSC and Mr Samuels acted in breach of trust and/or fiduciary duties (inter alia) by transferring the money to the joint provisional liquidators of the First Respondent Company.

The Claimant also pleads a claim in conspiracy. The Claimant alleges that Mr Gusinski conspired with various parties to “use both lawful and unlawful means to delay and ultimately avoid payment to the [Claimant] of the Earmarked Funds or the sums due under the Facility”. The alleged conspiracy is set out in some 18 pages of the lengthy Particulars of Claim. I will not summarise all of those paragraphs, but they include allegations such as:

Mr Gusinski responded to the conspiracy allegations only very briefly in his Defence. He made no admissions about many of the facts alleged by the Claimant. He denied that the inferences relied on by the Claimant could be validly drawn from the facts alleged. He also said that “All actions taken by the NM Group and/or Mr Gusinski were taken for the purpose of protecting the Group against what they considered to be an illegitimate attack on it by the Bank and preserving its assets and generally, in the interests of the Group and its creditors in view of its financial difficulties.”

GSC and Mr Samuels dealt with the conspiracy allegations far more comprehensively in their Defence. They address some of the allegations head-on. However, their response to many allegations was said to be limited by, or was restricted to, a plea that they were “unable to plead to the [Claimant’s] allegations without the consent of the [Respondents] or the permission of the Court. That is because the [Respondents] are entitled at least arguably to assert privilege in the matters pleaded…”

The Claimant’s application is at least partly made in order to resolve these issues of privilege, so as to enable GSC and Mr Samuels to plead their cases fully. The Claimant seeks an order that the iniquity exception applies “to all communications between (a) any one or more of the First Defendant or the [Respondent Companies] and (b) any of the Second or Third Defendants relating in any way to matters concerning the issues raised in this claim. For the avoidance of doubt, the iniquity exception likewise extends to all communications between (i) the Second and/or Third Defendants acting on behalf of the First Defendant and/or one or more of the [Respondent Companies] and (ii) Counsel instructed by the Second and/or Third Defendants on behalf of the First Defendant and/or one or more of the [Respondent Companies], relating in any way to matters concerning the issues raised in this claim.”

The Claimant was represented by Clare Stanley KC, leading James Walmsley.

Mr Gusinski has not responded to the application. He was not represented at the hearing.

GSC and Mr Samuels, represented by Andrew George KC, have taken a neutral position on the application. They have been cooperative, for example in agreeing the terms of a draft order should the application succeed. Any privilege would of course belong to the Respondent Companies (their former clients), and so their neutrality is quite appropriate.

None of the five Respondents, to whom any privilege would belong, has resisted the application. None was represented at the hearing. It appears from the evidence, in particular the seventh Witness Statement of Aleksey Stoliarov dated 7 July 2024, that all have been served; that all have had an opportunity to participate; and that none has asserted their right to privilege or defended the application in any way. Further:

Accordingly, this application is unopposed by any party.

The leading case on the so-called “iniquity exception” to legal professional privilege is Al Sadeq v Dechert LLP and others [2024] EWCA Civ 28. In that case, Popplewell LJ (with whom Males LJ and Underhill LJ agreed) considered the unfortunate plethora of descriptions of the threshold test in the authorities: for example, a “prima facie”, “strong prima facie”, or “very strong prima facie” case on the evidence showing that the relevant iniquity has taken place. The test is now, thankfully, much clearer.

I derive the following principles from Al Sadeq v Dechert LLP and others [2024] EWCA Civ 28, paragraphs [52]-[108] and [154]-[169]:

I will expand on two points from the above summary:

In this section, I will identify the alleged iniquity; consider whether it engages the exception; and then consider whether on the evidence before me it meets the merits threshold.

Miss Stanley KC, in her skeleton argument (prepared with Mr Walmsley), says that Mr Gusinski “took the deliberate decision to avoid the New Media Group repaying [the sums owed to the Claimant] and set about devising and implementing a dishonest scheme which allowed him to achieve that”.

Miss Stanley KC was careful to differentiate between the allegations made in the application, and the allegations made in the claim proper. In the claim proper, the Claimant alleges that GSC and Mr Samuels participated in that dishonest scheme. In the application, however, the Claimant does not rely on that allegation. I will decide the application on the agreed basis that GSC and Mr Samuels were not bound up in the alleged scheme, but I do not make any findings to that effect.

I have considered the Fourth Witness Statement of Mr Stoliarov dated 8 August 2023. The statement, over 31 pages, gives a very detailed account of (quoting Miss Stanley KC’s words) an alleged strategy to employ “any means necessary to dodge repayment”, a strategy which was “dishonest, and at the least sharp practice”.

I address in this judgment certain elements of this alleged strategy which I find most likely to engage the exception, and best supported by evidence. Those elements are:

I do not, however, address certain other elements of the alleged strategy, even though they may indeed be sufficiently serious and supported by sufficient evidence. For example, Mr Stoliarov asks the Court to infer that a certain Letter of Guarantee bearing the date of 18 January 2018 is a fabrication. He does so by referring to numerous circumstances and other documents. Miss Stanley KC, however, did not take me to those documents in any detail, or develop submissions about those circumstances, presumably because her case was strong enough already, and because to do so would take up too much of the limited time available at the hearing. I am not therefore going to address that particular element of the more general alleged strategy in this judgment. Similarly, where my judgment is silent on other particulars set out in Mr Stoliarov’s 31 page witness statement, or on the numerous pleaded allegations said to form part of the strategy (or indeed conspiracy), it should not be inferred that I find the allegations insufficiently iniquitous or insufficiently evidenced. If I were to closely consider every particular of the alleged strategy, I would have needed to extend the hearing, probably by another full day. Rather, I am focusing on three major allegations because that is sufficient, in my judgment, to find on a prima facie basis whether the alleged iniquitous strategy existed. Only by doing so can I deal with the Claimant’s application justly and proportionately.

In my judgment, the alleged conduct falls within the category of wrongdoing which would engage the iniquity exception, so long as the evidence meets the merits threshold.

The alleged wrongdoing is sufficiently iniquitous. It is alleged that Mr Gusinski and his companies avoided repaying an undefended debt by misleading the Swiss courts and the Arbitral Tribunal, and by transferring funds within the group of companies. This has clear similarities with the case of Eustace which I referred to in paragraph [33(i)] above, where the bank’s security had been transferred at an undervalue to members of the transferors’ family in order to prejudice the bank’s interest. Similarly here, it is alleged that Mr Gusinski intentionally misled the Swiss Court and the Arbitral Tribunal and transferred assets around the New Media Group in a strategy which intentionally prejudiced the Claimant’s ability to recover sums indisputably owed. As well as following Eustice, in my judgment the allegations in this case fall squarely within the more broadly worded category of “underhand conduct [equivalent to fraud] which is in breach of a duty of good faith, or contrary to public policy or the interest of justice.”

Further, GSC and Mr Samuels deny knowing that statements made to the Arbitral Tribunal were false. I am asked by the parties to decide this application on the basis that GSC and Mr Samuels were not bound up in the alleged scheme. If their denial is made out at trial, it would mean that they (as well as the Arbitral Tribunal) were misled by Mr Gusinski about his intentions for the Earmarked Funds. That would be an abuse of the normal solicitor/client relationship, and an indicator (indeed, a “hallmark”) of the kind of iniquity which negates legal professional privilege (see paragraph [33(ii)] above).

When deciding whether or not there is a prima facie case, my assessment is limited to the material available to me. See paragraph [32(vi)] above. Importantly, in the present case, no evidence has been filed by the Respondent Companies or Mr Gusinski to contradict the evidence relied on by the Claimant, and GSC and Mr Samuels are neutral. In my judgment, it would be wrong to speculate on what evidence might be available to contradict the allegations if the Respondents had chosen to respond. Nevertheless, the right to legal professional privilege is extremely important, and so I have considered the evidence with care (rather than waving the application through because it is unopposed). I have taken particular care when deciding whether I can correctly draw the inferences sought by the Claimant from uncontradicted evidence.

With all this in mind, I must now decide whether it appears, on the basis of the evidence before me, more likely than not that the iniquity exists.

First, the alleged abuse of the Swiss moratorium. This allegation concerns a sequence of events in January 2018. The Claimant served on the Borrower and the Respondent Companies an acceleration notice dated 15 January 2018, and a demand notice dated 23 January 2018 (the latter of which sought payment from (inter alia) the Respondent Companies). On 25 January 2018, the Borrower applied to the Swiss court for a provisional moratorium.

On the face of the order of Cantonal Judge C Frey dated 29 January 2018, in the Canton of Zug Cantonal Court, the Borrower had relied on evidence showing that “by the end of March of 2018 payments of over USD 3 million are expected”, and that “the reason for the debt restructuring request is the maturity of a bank loan as the result of the late payment caused by the applicant's liquidity shortage… and the petitioner, in the context of a moratorium with East-West United Bank S.A., wishes to agree on a new bilateral payment plan”.

The Claimant alleges that important aspects of the Borrower’s evidence were false. Mr Stoliarov states that he does not recall any approach by anyone representing the Borrower for a “bilateral payment plan” during the course of the moratorium, or any other offers. (There was a without prejudice discussion with Mr Gusinski on 27 November 2018, but that seems irrelevant to Mr Gusinski’s intentions in January 2018.) Moreover, the “over USD 3 million” payments referred to in Judge Frey’s order was not received by the end of March 2018. The Claimant relies on all this as evidence that the Swiss Moratorium was obtained by misleading the Swiss Court on an important point (the intention to restructure the debt).

Secondly, I have seen bank statements evidencing that the Borrower received substantial payments in 2018 and early 2019, although none was paid to the Claimant. Indeed, it appears from the evidence I have seen that incoming payments were diverted to accounts with banks other than the Claimant, in breach of the facility agreement, and that the Borrower paid money to (or for the benefit of) other companies in the New Media Group. All of this evidence implies that Mr Gusinski, through the Borrower, was using the Moratorium to retain control of the Borrower and to divert payments which could have been used to satisfy the debt owed to the Claimant.

Thirdly, the Bank complains that false representations were made to the Arbitral Tribunal and the Bank to the effect that the Earmarked Fund would be available to the Bank. There is abundant evidence, including written correspondence and a transcript of submissions made to the Arbitral Tribunal, that support this allegation.

The Tribunal’s partial final award issued on 11 December 2018 (the First Award) included the following passages:

Shortly after the First Award, on 18 January 2019 the First Respondent Company petitioned for its own winding up. On 21 January 2019, joint provisional liquidators were appointed. The proximity in timing between the assurances being given about the availability of USD 4.75m to repay the Claimant, and the appointment of provisional liquidators (who took control of that money) implies (according to the Claimant) that the assurances of the availability of funds were false.

On a careful assessment of the material before me, it appears more likely than not on the balance of probabilities that the Borrower, controlled by Mr Gusinski, misled the Swiss court about its intentions when applying for the moratorium; that the Respondent Companies, controlled by Mr Gusinski, misled the Arbitral Tribunal; and that the Borrower, controlled by Mr Gusinski, diverted funds which could have been seized by the Bank to other companies within the New Media Group.

There is, therefore, a prima facie case of the iniquity relied on by the Claimant as giving rise to the iniquity exception, namely a decision by Mr Gusinski to avoid the New Media Group repaying the sums owed to the Claimant, and a sufficiently dishonest or underhand scheme which allowed him to achieve that. In my judgment, there is sufficient evidence here to satisfy the merits threshold for that iniquity.

In conclusion, no legal professional privilege applies to documents and communications brought into existence as part of or in furtherance of the alleged decision by Mr Gusinski to avoid the New Media Group repaying the sums owed to the Claimant, and the alleged scheme which has so far allowed him to achieve that. This includes, for the avoidance of doubt, the matters raised in the present claim.