English High Court confirms that without notice applicants are under an onerous duty to satisfy the requirement of full and frank disclosure.

By Oliver E. Browne, Robert Price, and George Schurr

In the recent cases of Fundo Soberano de Angola & ors v. Jose Filomeno dos Santos & ors [2018] EWHC 2199 (Comm) and Galagaev & ors v. Ananyev & ors (2018) QBD (Comm) (unreported), the English High Court has confirmed that the duty of full and frank disclosure is a serious and onerous obligation that applies to litigants and their legal advisers alike. In Fundo Soberano v. dos Santos, Popplewell J held that legal advisors have a responsibility to ensure their client understands and complies with the duty of full and frank disclosure on a without notice application, just as a legal advisor has an obligation to ensure a client understands and complies with the general duty to disclose documents under CPR Part 31. Further, the full and fair manner in which material is presented to the court, not simply its disclosure, is of critical importance to the court’s consideration of whether the duty has been discharged. Males J held in Galagaev that in large and complex cases, it is incumbent upon the applicant’s legal advisors to draw the judge’s attention explicitly to material issues and to explain their impact on the applicant’s case. Simply directing the judge to the relevant material without explaining the significance of the material in question may be insufficient to discharge the duty of full and frank disclosure.

Following these judgments, legal advisors would be well advised to inform their clients of the serious nature and extent of their obligations as soon as a without notice application is considered. In particular, if advising lay clients “from different legal and cultural backgrounds and with varying levels of sophistication” (Fundo Soberano v. dos Santos at §53), practitioners must positively act to ensure that their lay clients undertake “the fullest inquiry into the central elements of their case” (Fundo Soberano v. dos Santos at §83). To the extent that the circumstances require, practitioners must actively supervise their clients’ compliance with that obligation to ensure that the applicant’s case is presented as fully and fairly as the duty requires.

Facts

Fundo Soberano v. dos Santos

Fundo Soberano de Angola (FSDEA) is the sovereign wealth fund of the Republic of Angola. FSDEA invested approximately US$5 billion of funds between November 2013 to December 2014, split between two portfolios in the following proportions: approximately US$3 billion in the “Illiquid Portfolio” (i.e., long-term capital and infrastructure investments) and US$2 billion in the “Liquid Portfolio” (i.e., liquid investments with a maturity not exceeding three months). These assets were held in London cash and security accounts under the custody of The Northern Trust Company, and managed by Quantum Global Investment Management AG (QGIM) under the terms of an English law governed Investment Management Agreement dated 29 November 2013 (the IMA). The IMA was signed by Mr. Dos Santos (the first defendant, and a former chairman of FSDEA) for and on behalf of FSDEA, and Mr. Bastos (the second defendant, and 95% beneficial owner of QGIM) for and on behalf of QGIM. The defendants asserted that the IMA existed in relation to the management of the Liquid Portfoilo, and that the Illiquid Portfolio was managed at all times via a limited partnership arrangement domiciled in Mauritius.

FSDEA alleged that the first defendant had misappropriated portfolio funds with the assistance of the second defendant; and that rather than investing the US$5 billion for the benefit of FSDEA, QGIM had used the funds to extract considerable fees (allegedly US$406 million) and had diverted them into unrelated projects belonging to the second defendant. FSDEA asserted multiple causes of action against QGIM (and affiliated investment vehicles), including a proprietary claim in respect of funds that were allegedly misappropriated, unlawful means conspiracy, breach of contract and fiduciary duty, and a claim in knowing receipt.

A Worldwide Freezing Order (WFO) was granted on 27 April 2018 by Mr. Justice Philips, prohibiting all the defendants (other than The Northern Trust Company) from disposing of or otherwise dealing with their assets up to a value of US$3 billion. At the return hearing held during 24-30 July 2018, the defendants successfully sought to have the WFO set aside on a number of grounds.

Galagaev v. Ananyev

In Galagaev, the claimants were equity investors in a Russian bank. The central allegation was that the defendants had fraudulently induced the claimants to exchange their holdings in the bank for worthless loan notes, thereby causing the claimants loss. The claimants obtained a freezing injunction against the defendants’ assets citing a real risk of asset dissipation, which the Judge accepted. A key aspect of the claimant’s evidence was a sale by the first defendant (D1) of its holdings in one Russian bank (Bank V) to a second Russian bank (Bank B). The claimant further relied on a payment by D1 of US$30 million into court (to release it from a separate freezing order) as evidence of an (improper) act facilitating the sale of D1’s holdings in Bank V.

At the return hearing on 24 August 2018, the defendants sought to have the freezing injunction set aside on the basis that the claimants had failed to make full and frank disclosure, specifically in relation to the sale of D1’s holdings in Bank V to Bank B.

Judgment

Fundo Soberano v. dos Santos

In his lengthy judgment dated 16 August 2018, Popplewell J ordered that the WFO be set aside and that no new freezing order be granted.

Popplewell J found that the claimants had breached their duty of full and frank disclosure in eight material respects. Having referred to the applicable legal principles summarised by Ralph Gibson LJ in Brink’s Mat Ltd v. Elcombe [1988] 1 WLR 1350, the Judge highlighted three key points in relation to the duty of full and frank disclosure:

• Compliance with the duty is important and necessary to ensure that the court meets its own legal obligations to ensure a fair hearing under Article 6 ECHR. If the court considers a hearing on a without notice basis, “it must be able to rely on the party who appears alone to present the evidence and argument in a way which is not merely designed to promote its own interests, but in a fair and even-handed manner, drawing attention to evidence and arguments which it can reasonably anticipate the absent party would wish to make” (§51).
• Secondly, whether an applicant has given the court a full and fair presentation of the material is the “ultimate touchstone” of the duty, not simply disclosure of the material. “In a complex case with a large volume of documents, it is not enough if disclosure is made in some part of the material…if that aspect of the evidence and its significance is obscured by an unfair summary or presentation of the case” (§52).
• Thirdly, the duty of full and frank disclosure is a very serious duty that may be considered equivalent to the CPR 31 duty of disclosure. The duty must be met by the applicant and their legal advisers equally, and it is incumbent upon English solicitors and barristers to supervise compliance and “ensure that the lay client is aware of the duty of full and frank disclosure and what it means in practice for the purposes of the application in question” (§53). Indeed, the applicant and their legal advisers must together “make the fullest inquiry into the central elements of their case” (§83) if they are to proceed with a without notice application, often because “it will only be the client who is aware of everything which is material” (§53).

On the facts before him, Popplewell J identified eight breaches of duty, which, “taken cumulatively are serious and substantial…the unfair presentation in this case in the respects I have identified goes far beyond the odd accidental slip, and goes to the central elements of the case alleging dishonesty in support of a US$3 billion freezing order and proprietary order” (§83). In his judgment, the seriousness of the breaches taken together were of such a magnitude as to “warrant discharging the WFO and not granting fresh relief, irrespective of the other grounds of challenge” (§85, emphasis added in bold).

Galagaev v. Ananyev

Similarly, in Galagaev, Males J found that the claimants had failed to satisfy their duty of full and frank disclosure when they first sought the freezing order without notice. As such, Males J discharged the injunction without prejudice to the claimants’ right to reapply with a properly argued case.

In particular, Males J found that the claimants had failed to draw the court’s attention to the fact that the Russian Central Bank had directed D1 to sell its holdings in Bank V to Bank B, which negated any inference of dissipation. In this context, the payment by D1 of US$30 million security into court was simply made in order to enable the sale to proceed and allow D1 to comply with its legal obligations to the Russian Central Bank.

Although the claimants argued that the Judge had, at the without notice hearing, been directed to an English translation of a relevant Russian news article that indicated the sale of D1’s holdings in Bank V was required by the Russian Central Bank, the court held that this critical point was not brought to the Judge’s attention with sufficient clarity. Having considered the authorities (including Brink’s Mat Ltd v. Elcombe and Fundo Soberano v. dos Santos), Males J held that if evidence as to the underlying nature of D1’s sale had been clearly considered when he balanced the competing interests of the parties, the claimants’ evidential case for the risk of dissipation would have been weakened considerably.

Comment

Aside from reaffirming that the principles summarised in Brink’s Mat Ltd v. Elcombe remain good law, the Fundo Soberano and Galagaev judgments confirm that the duty of full and frank disclosure is an important and onerous duty that applicants and their legal advisors must discharge to the fullest extent. In particular, practitioners are reminded that they have a responsibility to ensure that their client understands and complies with that duty, and that, if necessary, they must supervise their client’s compliance with that obligation. Furthermore, both Fundo Soberano and Galagaev confirmed that the full and fair manner in which material is presented to the court is most critical in considering whether the duty of full and frank disclosure has been properly discharged. Disclosure alone may well be insufficient (particularly in large and complex cases), even if the judge has been directed to the relevant material.