In the recent case of Cherkasov & others v Olegovich  EWHC 756 (Ch) the English courts considered the public policy exception set out in Article 6 Cross Border Insolvency Regulations 2006 (CBIR) and whether security for costs could be ordered against the official receiver of a Russian company (who had obtained recognition in England under CIBR) when he applied for an order for the production of evidence by some of the former managers of a Russian company under section 236 of the Insolvency Act 1986 (IA).
Dalnyaya Step LLC (Company) was incorporated in the Russian Federation. Following an order in Russia placing the Company into liquidation and the appointment in the Russian Federation of a Mr Nogotkov as its “official receiver”, Mr Nogotkov subsequently obtained a recognition order in England under CBIR, which was granted.
Mr Nogotkov then made a section 236 IA application against some former managers of the Company in September 2016. The hearing is listed to take place over five days in November 2017.
In response, the former managers lodged an application for security for costs relating to the November 2017 hearing and issued an application to set aside the recognition order on the basis that Mr Nogotkov had failed to disclose matters which would have been manifestly contrary to public policy in the state where the recognition was sought (Article 6 CIBR), giving grounds for the Court to refuse recognition. They suggested the liquidation of the Company was linked to a $230M fraud involving Russian public officials and allegations were made that Mr Nogotkov was controlled by the perpetrators of the alleged fraudulent scheme.
The main issue for the Court was whether it could apply the security for costs provisions, not only to a section 236 IA application, but also to the application to set aside the recognition order made under CBIR. This meant that the Court had to decide on:
(1) the nature of the set aside application and therefore the nature of the recognition application – whether it was a “proceeding” within the meaning of CPR 25.12 (which states that a defendant to any claim may apply for security for his costs of the proceedings); and
(2) whether the former managers were “defendants” to the recognition application.
Arguments and Decision
Mr Nogotkov argued that the set aside application was a free-standing, unique form of application which had no respondent. The Court disagreed, finding that the recognition application itself was a proceeding within the meaning of CPR 25.12 and that the former managers could properly be described as the defendants to the recognition application since the Model Law and Schedule 2 of CBIR contemplate a number of circumstances where a party will wish to oppose the grant of a recognition order, including where a person wishes to contend pursuant to Article 6 CBIR that the grant of the recognition order would be “manifestly contrary to the public policy of the jurisdiction in which the order is sought”. The Court considered that the application to set aside the recognition order was “part and parcel” of the recognition order application lodged by Mr Nogotkov.
In this case, it appeared the sole purpose of Mr Nogotkov’s application for recognition of the liquidation was in fact to seek relief against the former managers, who had not been served with the recognition application. The Court decided that Mr Nogotkov should not be able to benefit from the advantage of having obtained the recognition order ex parte thus obliging the former managers to bring an application to set it aside.
The Court also confirmed that the section 236 IA application in this instance was a proceeding where Mr Nogotkov was the claimant and the former managers were the defendants.
Following confirmation that the factors for granting security of costs were met in the case (including the fact that the Company had no assets in UK, it was practically impossible to enforce a costs order against him in Russia and he had substantial funds available to him, so it would not stifle his ability to participate in the November 2017 hearing) the Court ordered Mr Nogotkov to provide security for costs for £1 million in respect of the set aside and section 236 applications.
In her judgment, Mrs Justice Rose made it clear that the Court’s decision in this case was inextricably linked to its particular facts involving allegations of fraud and corruption on the part of the Russian authorities and the concealment of this background information by Mr Nogotkov when he applied for recognition.
The Court confirmed that the public policy exception must be read restrictively and would only be relevant in a small number of cases, but on the facts, this case appeared to fall within that small class.
Notwithstanding the very particular nature of this case, the judgment presents a helpful review of the public policy exception as well as a useful analysis as to whether certain applications qualify as proceedings under CPR 25.12, to enable security for costs to be awarded.