Enforcement Tools: Tracing, Transactions at an Undervalue and Charging Orders

Kazakhstan Kagazy v Baglan Abdullayevich Zhunus [2021] EWHC 3462?(Comm Ct, Henshaw J)

This is an important case regarding enforcement in a large-scale fraud, and the judgment is a?tour de force?of some of the tools the court is able to exercise against a judgment debtor. It is a long judgment (some 99 pages) so this note is intended to serve as a high level summary of the issues that arose and how the court determined them.

The case concerned the enforcement of an unsatisfied judgment for approximately $300m. The primary defendant, Mr Arip, had been found guilty of contempt in failing to pay the judgment sum and sentenced to two years in prison. The claimants sought to enforce against various property assets in England, held in the name of third party companies (as well as cash held in a Swiss account). Alternative orders were sought on the basis that there were transactions at an undervalue (s.423 Insolvency Act 1986) which resulted in assets being transferred to the companies, or by way of final charging orders against the property assets.

The primary issue was the tracing claim, as to which the Court dealt with the following key matters:

1.??????????The law governing the tracing claim: The defendants said the tracing claim was governed by Kazakh law, which did not recognise the concept of tracing. However, the starting point was (since the properties were located in England) that questions of title to the properties were governed by English law. It is generally a pre-condition of tracing in equity that there be a fiduciary relationship (Agip v Jackson?[1991] Ch 547, 566H (CA)). Where the duties arise under a foreign law, the question is whether those duties would be regarded by an English court as fiduciary duties, such that it was unconscionable for the defendant to retain those assets. As such, even if Kazakh law (being the law governing the relationship between the defendant and the person to whom he owes duties) does not recognise tracing, a tracing claim?can?still lie. Accordingly, the Court held that English law should be applied.

2.??????????The requirements for a tracing claim under English law, as set out in?Foskett v McKeown?[2001] 1 AC 102, and other cases: The Court went in detail through these applicable principles including that:

(a)????????Tracing is the process of identifying a new asset as a substitute for the old. It is neither a claim nor a remedy, but the process by which the claimant demonstrates what has happened to his property, and justifies his claim that the proceeds can properly be regarded as representing his property. The tracing exercise may then lead to a personal claim (i.e. against the trustee) or a proprietary claim (i.e. assertion of beneficial ownership of the proceeds).

(b)????????Tracing can occur even where the chain of payments and investments is complex.

(c)????????Inferences may be drawn where appropriate.

(d)????????Where a defendant claims to be a bona fide purchaser, he has the burden of proving that. This usually means the defendant showing he has acted in good faith. He must obtain legal ownership of the asset and do so before receiving notice of the claimant’s equitable interest. Such notice may be actual notice or constructive notice (i.e. when a reasonable person would have appreciated the probable existence of the claimant’s interest, or should have made enquiries).

(e)????????Tracing may occur where money is stolen even in the absence of a pre-existing fiduciary relationship.?

3.??????????Mr Arip had breached duties which English law would regard as fiduciary (as Picken J had held in the liability trial). The defendants argued they were not bound by those findings as they were not a party to the proceedings. But, the court said, an earlier decision is binding on the defendant?and their privies. And a person which has acquired such rights as he may have from the party to the earlier litigation is a privy. That was the case here: the defendants had acquired such rights as they may have through Mr Arip, so were bound by the earlier findings.?

4.??????????The assets represented the traceable proceeds of Mr Arip’s frauds. This evidence came from documentation, summarised in a very detailed Statement of Facts, from the claimants, and the claimants’ forensic accountancy evidence analysing the documents.?

5.??????????No attempt had been made by the defendants to prove that the relevant trust was a bona fide purchaser for value without notice.?

6.??????????The claim was not time barred as s.32 of the Limitation Act 1980 applied (time ran from when C discovered the fraud/concealment or could with reasonable diligence have discovered it).?

As for the s.423 Insolvency Act 1986 claim, the claimants said (in the alterative) that if the settlement into trusts (which was used to buy the assets) was prima facie effective, then they were to be set aside as transactions at an undervalue. As to this, the court said:

-???????The purpose of s.423 is to allow the unscrambling of transactions which deplete the assets of a debtor which would otherwise be available for creditors.?

-???????‘Transaction’ has a broad meaning and includes settlement of property into a trust.

-???????It must be shown that the transaction was done for the purpose of putting assets beyond the reach of a person who is making or may at some time make a claim against the transferor, or otherwise prejudices the interests of such a person. But that need not be the sole or dominant purpose.?

-???????A ‘victim’ is entitled to bring a claim under this section. It is sufficient that the transferor acted with the purpose of defrauding any person who had made or might make a claim against him.

-???????Once the conditions are satisfied, a wide range of remedies are available.?

-???????S.423 can be applied in respect of overseas persons and transactions, so long as the subject matter has sufficient connection with England and Wales.

-???????A claimant can rely on s.32 of the Limitation Act 1980 to extend time to bring a s.423 claim.

The court found that there had been transactions at an undervalue, drawing the inference that they must have been motivated by the desire to place assets beyond the reach of potential creditors.

As for the charging orders claim (which was in the further alternative), the claimants argued that if the properties were not beneficially owned by them, they were held on bare trust (by nominee or bare trustee) for Mr Arip and the claimants were entitled to enforce the judgment against them. As to this:

-???????A bare trust may arise where, although assets were settled on a discretionary trust, the settlor has power to call for them or exercises other powers tantamount to ownership; or where a person has control in practice over the trust assets because the trustees do whatever he asks.

-???????The Court held that the evidence pointed to the conclusion that (if the claimants themselves did not own the properties in equity), then Mr Arip was their true beneficial owner.