Transactions Defrauding Creditors, Successful Enforcement of Judgments and JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov  EWCA Civ 1176
June 19, 2018
A. Enforcement of Judgments
There is an important difference between obtaining a judgment and successful enforcement of that judgment. JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov  EWCA Civ 1176 illustrates this, a case of embezzlement with a judgment for US$5 billion and only a relatively small amount recovered. In England a claimant can expect to have to pay the costs of third parties in obtaining their assistance in providing disclosure, or implementing court orders. A client aims to avoid being left with losses, an unsatisfied judgment, and legal costs. It is important to have in mind from the beginning of a case how any eventual judgment is going to be enforced, and to prepare for it. This requires planning.
Possible routes may involve insolvency proceedings. There may be a need to set aside transfers of assets. Planning includes considering where assets are likely to be and finding out where assets are through court orders, identifying what proceedings may have to be taken and where, time limits, what has to be proved, and collecting evidence. Many cases involve cross-border aspects. In other jurisdictions consideration has to be given to the local laws and remedies.
JSC BTA Bank v Mukhtar Ablyazov concerned a transfer by the father of an amount which was trivial in comparison with what he had embezzled, to his schoolboy son, who needed a visa to remain in the country to complete his education. There was no evidence on why the amount transferred would be safer from the claimant Bank in a London Bank account in the name of the son, rather than in an offshore account in the name of a less than transparent BVI company, from which the transfer had originated. The judge, upheld by the Court of Appeal, decided that the Bank had not proved the necessary intent required by section 423 of the Insolvency Act 1986 for setting aside transfers made to defraud creditors. The case was exceptional. The test to be applied means it will often not be difficult to prove in other cases the intention required. The decision is also an application of principle on when there can and cannot be a successful appeal against factual findings by the trial judge. It shows that many cases against transferees, including cases under section 423, will be in time for Limitation Act purposes, even though company money or trust assets were looted, many years previously.
Assets can be hidden in corporate or trust structures abroad by a determined defendant. It may be open to attack such structures using section 423. The section is not limited to assets located, or transfers which have taken place, within the territorial jurisdiction of the court. Where jurisdiction over proceedings with substantive claims against a defendant is in England, the court will do what it reasonably can to avoid its judgment being left unsatisfied.
B. Mareva Injunctions, Proprietary Injunctions and Disclosure orders.
A Freezing Injunction will have an ancillary order for disclosure of assets. The purpose is to make the injunction effective. If assets have been transferred prior to the granting of the order, there may be a question whether they are subject to the order. This may be because of beneficial ownership of them by the defendant or because the defendant has control over them. The width of disclosure to make the injunction effective and enable it to be policed is a matter of discretion. That disclosure can include disclosure of bank accounts which record transfers. It may involve disclosure of documents, evidence by witness statement made by the defendant, and cross examination of the defendant about what are or may be his assets, what transfers have been made and how assets are held. A defendant may be subjected to extensive pre-trial investigation of his assets. In proceedings based on proprietary claims the court may grant disclosure orders, including against third parties, requiring information including documents showing what has become of the assets claimed and what proceeds there may be. An injunction may be granted to safeguard those assets or their proceeds.
C. Transactions to Defraud Creditors
Section 423 is the replacement of section 172 of the Law of Property Act 1925 which had been based on the Statute of Elizabeth I (13 Eliz I c 5) of 1571 on Fraudulent Conveyances. This had made void transfers of assets to defraud creditors. Fraudulent transfers were commonly done, were inconsistent with due performance of bargains or other binding transactions, and enforcement of them through the courts. The Statute made void transactions which “…are devised and contrived of malice, fraud, covin [deception or fraud which is hidden], collusion or guile to the end, purpose and intent to delay, hinder or defraud creditors and others”. For gifts the principle applied by the case law was that persons must be just before they are generous, and that debts must be paid before gifts could be made.
The Statute was the forerunner of Fraudulent Conveyances legislation in the United States. In about 150 to 125 BCE, Paulus, a praetor (a Roman Magistrate), created a procedure which enabled a creditor to revoke acts carried out fraudulently and to his detriment by a debtor. Centuries later Justinian’s Digest (Justinian, Book IV, Title VI, para 679, no. 6) stated “… [I]f a person has alienated his property in fraud of creditors …they are allowed to bring an action cancelling the alienation, that is alleging that the property has not been alienated and therefore remains an item in the debtor’s estate.”. Jurisdictions whether civil law, common law, or otherwise, can be expected to have rules for setting aside transfers which have removed assets which would otherwise be available for creditors. There are jurisdictions which have a “Pauline action” (actio Paulina) allowing creditors to set aside such transfers. These include the Netherlands, its former colonies, Jersey and Guernsey.
D. The Transfer
The Bank was, until early 2009, controlled by Mukhtar Ablyazov (“MA”), who had embezzled more than US $6 billion. In 2008 the bank got into financial difficulties. On 30th January 2009 the bank informed its regulator in Kazakhstan that it could not meet its liabilities. On 2nd February 2009, MA was removed as chairman of its board of directors, and he fled to London. On 26th February 2009 there was transferred from a Swiss Bank account in the names of MA and his son, £1.1 million to a London bank account solely in the name of the son, who was 17 years old at school in England on a student visa. In August 2009 the bank commenced proceedings against MA in England, obtained a worldwide freezing order and in 2012 obtained judgments against him for more than US$5 billion. The balance on the account amounted to over £1 million. The solicitors for the Bank said there was a “serious likelihood” that the balance was subject to the injunction. It had been paid into court pending determination of the proceedings, which had been commenced by the son.
E. No Claims made by the Bank based on the transferred funds having originated from embezzled money
No claims were made against the son which would have required the Bank to prove that the funds transferred from the Swiss Bank account to London originated from the funds embezzled from the Bank by MA.
There was no tracing claim advanced by the Bank, asserting that the transferred money belonged to it. This would have been a claim that the transfer came out of assets which were proceeds of the money embezzled by MA in breach of his duties owed to the Bank as Chairman. This would have had to be proved on a balance of probabilities. “A man’s money is property which is protected by law. It may exist in various forms, such as coins, treasury notes, cash at bank, or cheques, or bills of exchange of which he is ‘the holder,’ but, whatever its form, it is protected according to one uniform principle. If it is taken from the rightful owner, or, indeed, from the beneficial owner, without his authority, he can recover the amount from any person into whose hands it can be traced, unless and until it reaches one who receives it in good faith and for value and without notice of the want of authority.” In this case the transfer had originated from an account in the name of a BVI company controlled by MA. If the money transferred was proceeds derived from embezzled money, then it would have been the Bank’s money held by the defaulting fiduciary (MA), who had been a director of the Bank. His son would not have been a bona fide purchaser for value without notice, because he had received a gift. The fact that the transfers went through Switzerland, which does not recognise beneficial ownership, would not have prevented tracing and a proprietary remedy. The son would have been liable to pay it over to the Bank.
Where a transferee has given value, the burden of proof would be on him to prove he was a bona fide purchaser for value without notice. This includes constructive notice. It depends on what a reasonable person should have realized.
Nor was there any claim that the son was liable as a constructive trustee either on the grounds of knowing receipt of misapplied assets belonging to the Bank, or for dishonest assistance of MA to act in breach of his fiduciary duties owed to the Bank as its Chairman by embezzlement, and dealing with the proceeds.
F. The Claims made by the Bank
(i)The Trust Claim – that the funds transferred belonged to MA
The Bank claimed that the £1.1 million belonged beneficially to MA, and the judgment could be executed on it as an asset of the judgment debtor. The Bank contended that there was no gift and the fund was held on resulting trust for the father. The son said that it was a gift to him, and was his, made to enable him to make investments to get a Tier 1 investment visa. Whether money transferred by a father to a son were a gift commonly arises in the context of a claim by a father to the proceeds of transferred assets. A gift requires there to have been an intention by the father to make a gift to his son. It will not be a gift if that intention is missing, for example if money is lent to the son, or transferred so that the son can invest it for the father, for example by buying a holiday home for the father. Under English law transfers from father to son are subject to a “presumption of advancement”. It is presumed that there is a gift unless the contrary is proved. This gave rise to an issue of fact – had the Bank on the evidence disproved the intention to make a gift? The Bank accepted that MA may well have wanted to obtain an investment visa for the son. The Bank argued that MA and the son had lied about the subsequent use of part of the transferred money, contending that it had been used 5 years after the transfer to pay a Swiss Lawyer retained by the father for proceedings in 2013-2014 in France to extradite him to states which had formed part of the former Soviet Union, including Russia. This had culminated in the Cour de Cassation quashing an extradition order. The judge rejected the factual contention, and observed that even had it been correct it would have been possible for the son to have helped out his father in these difficult circumstances from money that had been a gift. In criminal cases where a defendant has or may have lied, for example in a police interview, the judge may need to give a “Lucas” direction warning the jury that lies may be told to bolster a good defence, or for reasons which are consistent with an absence of guilt. The same is so in a civil case. The judge found that the transfer was an outright gift to the son, and this was not challenged on appeal.
(ii)The Claim under section 423
The Bank sought relief under section 423 setting aside any gift made, and enabling the Bank to enforce its judgment against that money. This would restore the position to what it was prior to the transfer. Section 423 applies to gifts and transfers at an undervalue, when there is the purpose stated in the statute.
G. What “Purpose” had to be proved under section 423?
Prior to the enactment of section 423, the jurisdiction was in section 172 of the Law of Property Act 1925, which subject to exceptions, including transfer to a bona fide purchaser for value without notice of the intent to defraud creditors, applied to “…every conveyance of property, made whether before or after the commencement of this Act, with intent to defraud creditors..” This had replaced the 1571 statute, in simpler words. These might have been taken to require dishonesty. Its judicial interpretation had not always been consistent. The position was criticised by the Cork Report, the Insolvency Law and Practice-Report of the Review Committee (Cmnd 8558, 1982). This recommended that the necessary intent should be an intent on the part of the debtor to defeat, hinder, delay or defraud creditors, or to put assets belonging to the debtor beyond their reach (Cork Report, para. 1215(b)). It also recommended that such intent should be capable of being inferred whenever it was the natural and probable consequence of the debtor’s actions in the light of the financial circumstances of the debtor at the time, as known, or taken to have been known, to him. Bowen LJ said in Edgington v Fitzmaurice (1885) 29 Ch.D 459 at p. 483, that “…the state of a man’s mind is as much a fact as the state of his digestion.” Medical science at the time did not have MRI. Diagnosis could require the skills of a detective. One could not be sure of what was happening inside a man. Intent is a factual conclusion derived from the evidence. It is usually a matter of inference. The natural and probable consequences of a transfer may have been obvious to and known by the transferor. This can be relevant to what is to be inferred was his motive. When James Bond points a machine gun at a villain next to him and pulls the trigger, it may not be that difficult to infer that he intended to kill.
It was not an objective of the 1571 statute to interfere with the giving of a few coins to the church collection plate. It is not an objective of section 423 to interfere with transfers, including gifts, from the assets of a debtor of a trivial amount. The requirement of proof of intention within the statutory purpose takes such cases outside of section 423.
Section 423 (3) provides:
“(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.”
Had the Bank proved that the transfer by MA was made for the statutory purpose defined in section 423(3)? In Inland Revenue Commissioners v Hashmi  EWCA Civ 981;  2 BCLC 489, a transfer of premises where the father carried on a restaurant business, was found to have been made with the statutory purpose, and the decision upheld on appeal. The defendant had for a number of years been deliberately and dishonestly under-declaring the profits of the business to the Inland Revenue, and the defendant must have known that, should his dishonesty ever be uncovered, he would become liable to pay very substantial sums in tax, interest and penalties. The judge accepted evidence that the defendant was a caring father who wanted to secure his son’s future and that this was “a” purpose of transferring the ownership of the property to him. The judge found that the defendant transferred the property when he did, “because he could not be sure, given the inherently risky way in which his taxation affairs were conducted, that he would be able to make the provision at a later date”.
The judge held that the transaction was also entered into for the prohibited purpose. The judgments in the Court of Appeal upheld this decision, holding that it is sufficient to come within section 423 (3) if the purpose can properly be described as “a” purpose, and not merely as a consequence. The motive had to be something which was positively intended. It did not have to be the dominant purpose. It had to be a “substantial” purpose of the transfer, meaning something more than trivial.
That a transfer is a gift is not sufficient to trigger application of the section. The fact that consequences within section 423 (3) were foreseen by the transferor does not satisfy the test, nor does the fact that the transfer in fact had these consequences. Purpose is different from consequences, even when these are foreseeable, or even obvious or inevitable. There is no constructive intent, which will trigger the section. It is a matter of actual objective and aim, one of motive, intention in fact present in the transferor’s mind at the time of transfer.
In JSC BTA Bank v Mukhtar Ablyazov, after pointing out that it was “at least an outcome” of the transfer of funds made by MA to the son that the funds were put beyond the reach of the Bank as a person who was making or might make a claim against MA, the judge had said:
“What I therefore have to determine is whether this was also a purpose of [MA] in making the Transfer. That depends … on whether [MA] positively intended that outcome.”
In the Court of Appeal, Leggatt LJ with whose judgment the other judges agreed, upholding this, said:
“… [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.”
In Inland Revenue Commissioners v Hashmi, Simon Brown LJ said:
“There may be cases in which, even absent the statutory purpose, the transaction would or might have been entered into anyway. That would not necessarily negate the section’s application; but the fact-finding judge on an application made to him under section 423 must be alert to see that he is satisfied that the statutory purpose has in truth substantially motivated the donor if he is to find that the section bites.”
The first sentence and the beginning of the second ask what would, or was likely to, have happened if there had been no purpose within the statute. Whether the purpose or motivation present was causative of the transfer, is not the test. The question is what purpose or motive was actually present. The last words echo the requirement of more than a trivial purpose.
Simon Brown LJ continued:
“I would, however, add this. If in fact the judge were to find in any given case that the transaction is one which the debtor might well have entered into in any event, he should not then too readily infer that the debtor also had the substantial purpose of escaping his liabilities.”
This is a comment on what findings of fact may be appropriate. A judgement may explain why a judge has found absence of a required intent, referring to another particular fact or factor in the case. The statement contains no rule of law, and does not lay down any presumption of absence of purpose on particular facts.
Section 423 (3) contains no requirement of dishonesty or fraud or deception. Leggatt LJ said:
“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.”
It had been judicial glosses and interpretations that had made section 172 uncertain in its ambit, led to the recommendations of the Cork Report, and resulted in its repeal and the enactment of section 423. This is an unequivocal affirmation by the Court of Appeal of the words of the statute, neither more nor less, with no judicial change and no gloss.
H. The Judgments applying setion 423 to the Facts
The judge held that the Bank had failed to prove that the gift was made by MA for the purpose in section 423. The Bank appealed on section 423, and lost again.
By the time of the transfer the father had already been removed as chairman, it was known that large sums had gone missing from the Bank and MA had fled from Kazakhstan to London. The judge found that:
(1) At the time of the transfer MA knew that he would be facing claims against himself and his assets in this jurisdiction.
(2) MA is a person who “time and again has shown that he will do all he can to prevent [the Bank] from being able to preserve and enforce against his assets”.
(3) There were advantages of an investor visa compared to a student visa as it allowed the son to remain in the UK without any of the restrictions imposed on those with only a student visa such as the need for a student sponsor and the need to find a job on graduation with an employer willing to sponsor a general visa.
(4) MA had initiated the process which led to the son applying for an investor visa, when he instructed a firm of immigration solicitors in January 2008, before any fraud was uncovered, albeit that “even at that early time MA is very likely to have appreciated that he had been involved in serious wrongdoing against [the Bank] for which he might get sued” .
(5) The investor visa application continued from when it was initiated in January 2008, until it was obtained.
(6) It was likely that MA would have made the transfer to enable the son to pursue the investor visa application even if he had not been at risk of a claim being made against him by the Bank.
(7) The £1.1 million transfer was sourced from a company incorporated in the British Virgin Islands controlled by MA, and the interests behind that company had been not transparent.
There was no evidence on why it would have been thought to be more effective to hinder the Bank, to transfer the amount to the son’s bank account in London through the Swiss Bank account in their joint names, from “…the relative obscurity…” of an account in the name of the BVI company.
(8) Vast sums had already been put away from the Bank in overseas bank accounts. The transfer was of a drop in the ocean compared with the massive sums MA had embezzled. It was not shown that at that time there was a course of conduct on the part of MA of making gifts. The judge said that the amount would have been almost de minimis.
These taken together indicated that the motive of MA was to benefit the son, and supported the factual conclusion, reached by the judge and upheld by the Court of Appeal, that it was not proved by the Bank that the transfer was made by MA with the intention of delaying the Bank or putting assets beyond its reach.
(I) When can there be an Appeal on facts to the Court of Appeal.
Whether or not an appellate court will entertain an appeal on the facts is a question of great practical importance. The principles and their application are shaped by considerations of practicality, the doing of justice and public policy.
(i) The judge sees the witnesses and hears their evidence: “…..as the evidence proceeds through examination, cross-examination and re-examination, the judge is gradually imbibing almost instinctively, but in fact as a result of close attention and of long experience, an impression of the personality of the witness and of his trustworthiness and of the accuracy of his observation and memory or the reverse….” The appellate court does not have the same facilities and means of forming a judgment as were possessed by the judge. The trial judge has sat through the entire case and his ultimate judgment reflects this total familiarity with the evidence. The insight gained by the trial judge who has lived with the case for several days, weeks or even months may be far deeper than that of the Court of Appeal whose view of the case is much more limited and narrow.
In Thomas v Thomas  AC 484, Lord Thankerton said at pp 487–488:
“(1) Where a question of fact has been tried by a judge without a jury, and there is no question of misdirection of himself by the judge, an appellate court which is disposed to come to a different conclusion on the printed evidence, should not do so unless it is satisfied that any advantage enjoyed by the trial judge by reason of having seen and heard the witnesses, could not be sufficient to explain or justify the trial judge’s conclusion.
(2) The appellate court may take the view that, without having seen or heard the witnesses, it is not in a position to come to any satisfactory conclusion on the printed evidence.”
(ii) Factual issues should be decided at the trial which is not simply a dress rehearsal for hearings on appeal.
(iii) An appeal should target particular matters and be a focussed exercise in finding errors. It is “telescopic” looking from a distance at particular features of a trial, and subjecting particular issues to close examination.
(iv) Duplication of the trial judge’s efforts on appeal would very likely contribute only negligibly to the accuracy of fact determination at a huge cost in diversion of judicial resources.
(v) Judges when they give their reasons for factual findings may well not describe in full everything which has influenced their factual findings, and its weight. This does not entail that the reasons are erroneously incomplete. There is room for a penumbra of uncertainty and debate if there is a retrial of the facts on appeal using the reasons in the judgment as a starting point for the arguments. “[The judge’s] expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualifications and nuance…of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation.”
Nevertheless, there are circumstances, where an appellate court should and will make its own findings of fact:
(vi)In Thomas v Thomas  AC 484, Lord Thankerton qualified his statement of principle :
“(3) The appellate court, either because the reasons given by the trial judge are not satisfactory, or because it unmistakably so appears from the evidence, may be satisfied that he has not taken proper advantage of his having seen and heard the witnesses, and the matter will then become at large for the appellate court.”
(vii) Where an issue has been determined applying the wrong legal test, and the facts found are for application of that wrong test. An example is findings on causation where the hypothetical facts of the counterfactual are wrong in law. For example looking at a counterfactual where the defendant would still be in breach of duty.
(viii) Where the findings of fact are “plainly wrong” or “…cannot reasonably be explained or justified” or “..the conclusion reached by the judge lies outside the bounds within which reasonable disagreement is possible and is thus one that no reasonable judge could have reached.”.
(ix) Where there is infection of the factual findings by “a material error”; for example overlooking relevant evidence, or misunderstanding the evidence.
The Bank was refused permission to appeal against a number of factual findings which would have opened up a wide ranging investigation and reweighing of evidence at the trial. A proposed appeal based on the “weight” attached to evidence by the judge may well offend against the principles. On questions of fact an appellate court is a court of error, and not a court for retrying the case.
(J) The Limitation Act 1980 and section 423: Time Limits
The judge held that the claim by the Bank under section 423 was an action by the Bank for a sum recoverable by statute subject to a six year limitation period. The Bank’s action against the son was begun in December 2015, more than six years after the transfer was made on 26th February 2009, and the claim may have been time-barred. The bank relied on section 32 of the Limitation Act , which provides for the postponement of the limitation period in certain cases. These include under s32 (1) (a) when the action is based upon the fraud of the defendant; or under s32 (1)(b) any fact relevant to the claimant’s right of action has been deliberately concealed from him by the defendant. The “defendant” includes the defendant’s agent and “any person through whom the defendant claims and his agent”. This is further elucidated in section 38 “(5) … a person shall be treated as claiming through another person if he became entitled by, through, under, or by the act of that other person to the right claimed…”. In this case the son became entitled to the fund by the act of the father in making the transfer.
Time does not run until the claimant has discovered the fraud or concealment, or could with reasonable diligence have done so. The Court of Appeal, agreeing with the judge, expressed the opinion that for the purpose of applying section 32(1)(a) and (b) of the Limitation Act 1980, the court would have had to consider whether there was fraud or concealment by MA because he was a “…person through whom the defendant claims”. Since it had not been shown that MA had had the necessary purpose under section 423 (3), this question did not arise.
Section 32(1)(b) applies to concealment irrespective of the particular cause of action. Its wording, earlier case law, and this decision will assist claimants resisting a Limitation Act defence advanced by a transferee, when the claimant has only found out about an asset transfer within the last 6 years, but many years after its assets have been taken. That there has been a transfer is a “fact relevant to [claimant’s] right of action” against the transferee. Where there has been concealment of the transfer within section 32(1)(b), the sub-section will apply whether the transferee is sued using section 423, or there is a proprietary or personal claim against him.
An important feature of the case is that no claim was advanced based on the transfer being funded from embezzled money or its proceeds. This case shows (i) what purpose has to be proved to bring a transfer within section 423; (ii) why on the facts and evidence the necessary purpose was not proved for this particular gift; (iii) the limits to appeals on issues of fact being entertained by an appellate court, and (iv) that claims against transferees, including under section 423, may well have a delayed commencement date for the running of Limitation by reason of section 32 of the Limitation Act 1980.