ALEXANDER TUGUSHEV v. VITALY ORLOV

HCMP 1116/2018

[2019] HKCFI 1697

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1116 OF 2018

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D E C I S I O N

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Background

1.  This is an application by the Defendant, Mr Orlov, for (1) disclosure of matters relating to a funding arrangement under which the Plaintiff, Mr Tugushev, obtained funding from a third party for these proceedings (“Disclosure Application”); and (2) security for costs in these proceedings in the sum of HK$1,852,000 (“Security Application”).

2.  On 23 July 2018, the Plaintiff obtained from the English Court a worldwide freezing injunction order against the Defendant and his assets (“Injunction”), in substantive proceedings commenced by the Plaintiff, in which the Plaintiff alleges that he is the victim of a complex conspiracy, whereby the Defendant had misappropriated the Plaintiff’s one-third share in an international fishing business co-founded by the Plaintiff, the Defendant and another party, said to be worth over US$350 million (“UK Proceedings”).   In aid of and ancillary to the UK Proceedings, the Plaintiff obtained from the Hong Kong Court on 24 July 2018 an injunction to restrain the Defendant from disposing of or dealing with his assets in Hong Kong, up to the value of US$350 million (“HK Injunction”).  The HK Injunction was continued on 3 August 2018.

3.  The Plaintiff admits, and has disclosed both to the English Court and the Hong Kong Court, that he only has limited means mainly as a result of the Defendant’s massive wrongdoings, and that his litigation in the UK is being funded by a third party (“Funder”) in accordance with the relevant rules in England which make such funding arrangements lawful.  According to the Plaintiff, the costs of the Hong Kong proceedings are being treated separately from the costs of the UK Proceedings under the funding arrangements, in that the costs of the Hong Kong proceedings are met separately by way of a loan advanced by the Funder to the Plaintiff.

4.  In the Disclosure Application, the Defendant seeks an order for the Plaintiff to disclose the identity and location of the Funder; the amenability of such Funder to the jurisdiction of the Hong Kong Courts; and the terms of the agreement under which funding is provided to the Plaintiff, with a copy of such agreement.  The Defendant claims that upon disclosure by the Plaintiff, and in the event that such disclosure demonstrates that the funding arrangements fall foul of the prohibition on maintenance and/or champerty in Hong Kong, the Defendant will pursue his application to strike out these proceedings as an abuse of process.

5.  The Defendant had also applied to the English Court for disclosure of the Funder, for details of the funding arrangements, and for security for costs. Security of £1.5 million has been paid into court by the Plaintiff in the UK Proceedings, as a consequence of which the Defendant has abandoned the disclosure application there.

Whether disclosure should be ordered

6.  The Defendant claims in these proceedings that disclosure should be ordered, so that he can pursue his application to strike out these proceedings if it is revealed from the disclosure that the funding arrangement is against the prohibition on maintenance and/or champerty. 

7.  As Leading Counsel for the Plaintiff has highlighted, it is clear from the decision of the Court of Final Appeal in Unruh v Seeberger (2007) 10 HKCFAR 31, at para 95, that:

“It has never been a defence to an action nor a ground for a stay to show that the plaintiff is being supported by a third party in an arrangement which constitutes maintenance or champerty.”

8.  The above principle has been repeated and applied in Hong Kong in the cases of Raafat Inman v Life (China) Co Ltd [2018] 4 HKLRD 152, and Li Xiao Yi v Alan Chung Wah Tang [2018] HKCFI 939.  In Raafat Inman, the Court observed:

“ … It is well-settled that maintenance or champerty is not a defence nor a ground for a stay unless the plaintiff is obliged to found his cause of action on the illegal agreement, which is not the case here… I reject the plaintiff’s submissions that maintenance or champerty is a ground for a stay, and hence the parties are not dealing with a private or civil law dispute in the Application.”

9.  The Court also pointed out in Li Xiao Yi, at para19:

“It is difficult to see what legitimate interest the Applicants have in investigating the funding of the bankruptcy administration. It has never been a defence to an action nor a ground for a stay to show that the plaintiff is being supported by a third party in an arrangement which constitutes maintenance or champerty…”

10.  In Abraham & Anor v Thompson & Ors [1997] 4 All ER 362, Millett LJ explained, when allowing an appeal against a decision ordering disclosure of the identity of a litigation funder:

“Before 1967 maintenance was not only contrary to public policy but also both tortious and criminal. Even so, it was not an abuse of the process of the court for a plaintiff without the means to pay his own costs let alone to meet those of the defendant to bring proceedings with financial assistance provided by a third party, and the court would not stay such proceedings on this ground…

In making the order for disclosure in the present case the judge was adopting the approach foreshadowed by Kennedy LJ in Condliffe v Hislop [1996] 1 All ER 431 at 439. In my judgment such an approach would not be justified unless there was clear evidence of an abuse of the process of the court and, for the reasons I have given, the presence of unlawful maintenance is not by itself such an abuse.” (Emphases added)

11.  From the authorities, it seems clear that even if there was unlawful maintenance and/or champerty, that by itself is not a ground for striking out the proceedings in Hong Kong.  There has to be “clear evidence of an abuse of the process of the court”, but the Defendant has not pointed to any such evidence, apart from the need to discover if there is further evidence of unlawful maintenance and/or champerty.  For that reason, I agree with the Plaintiff, that the Disclosure Application is a fishing expedition and should not be allowed.

12.  Further, I am not satisfied that the loan obtained by the Plaintiff from the Funder amounts to maintenance or champerty.  Once advanced to the Plaintiff, whilst he remains liable to repay the loan on its due date, the Plaintiff is at liberty to utilize the loan, as his own money, for any purpose as he deems necessary and fit.  There is no basis to suggest that the loan constitutes “officious intermeddling” in litigation, or involves “abetting and encouraging unrighteous suits, so as to be contrary to public policy”, nor “trafficking” in the outcome of litigation, the mischief against which maintenance and champerty are directed (Unruh v Seeberger (2007) 10 HKCFAR 31, at para 100).

13.  The Defendant argued that there was no business sense for anyone to make a loan to the Plaintiff, well knowing that he has little means of repaying, unless it was via the proceeds of litigation.  As highlighted for the Plaintiff, the Court should not speculate on the commercial motives of a lender without clear and sufficient facts.  The Hong Kong proceedings are ancillary to the UK Proceedings, and if the HK Injunction freezes significant assets of the Defendant in Hong Kong, there is indeed commercial sense for the Funder to make a loan for the Hong Kong proceedings, without rendering the loan champertous or maintenance.

14.  In any event, the Defendant has sufficient materials from what the Plaintiff has voluntarily disclosed, to pursue his application to strike out, and make his submissions on the information available, if he so wishes.  On the Plaintiff’s admissions, there is a funding agreement for the UK Proceedings which complies with and is lawful under English law, details of which the UK Court has not made any orders for disclosure or discovery.  The Funder has made a loan to the Plaintiff, advanced on an “as needed” basis, repayable in 3 years, at an interest rate of 8% per annum, as confirmed in the affidavit evidence filed on behalf of the Plaintiff.  The Hong Kong proceedings are not part of the funding arrangements for the UK Proceedings made between the Plaintiff and the Funder.  If the Defendant maintains that these constitute an abuse of court process to warrant a striking out of the Hong Kong proceedings, he is at liberty to pursue his case.  Any further details of the litigation funding arrangement for the UK Proceedings should properly be sought from the UK Court.

15.  The “confidentiality club” proposed by the Defendant, that disclosure in Hong Kong may be limited to members of his English and Hong Kong legal teams, is totally unjustified.  As Leading Counsel for the Plaintiff pointed out, if disclosure sought in Hong Kong is for the Defendant’s application to strike out these proceedings in Hong Kong as maintenance or champertous, there is absolutely no need for members of the Defendant’s team of English lawyers to review and advise on the funding arrangement for Hong Kong.  Whether the funding arrangement challenged by the Defendant is an abuse of process as maintenance or champerty is a matter of Hong Kong law, on which the Defendant’s English lawyers are not able to advise.  The Plaintiff claims that this is the Defendant’s attempt to sabotage the Plaintiff’s attempts to secure funding to bring his claims to court, and is evidence of the Defendant’s abuse.

16.  The case of Waterhouse v Contractors Bonding Ltd [2014] 1 NZLR 91, on which reliance has been placed by the Defendant, is distinguishable.  Significantly, the Plaintiff here has a proper and permissible cause of action in the UK Proceedings, for which the HK Injunction was granted in aid.  Waterhouse concerned whether the funding arrangement was effectively an assignment of a bare cause of action, which is not permissible under the law of New Zealand and which may amount to an abuse of court process.  It was on that basis that the Supreme Court of New Zealand held that disclosure could be ordered of the existence of the litigation funder and the terms of the litigation funding arrangement, as being relevant to an application for stay on the ground of abuse of process.  In the present case, the claimant suing in the UK Proceedings and in the Hong Kong proceedings is not the assignee of any cause of action (as in Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy [2014] 2 HKLRD 86), but the Plaintiff himself.  Further, as found by Millet LJ in Abraham, the presence of unlawful maintenance is not by itself an abuse of court process under Hong Kong and English law.

17.  An order on the Disclosure Application is neither warranted, nor is it necessary for the fair disposal of the intended striking out application.

18.  As for the Defendant’s argument that disclosure of the Funder’s identity is relevant to and would facilitate a costs order against the Funder under Order 62 rule 6A RHC, the power to award costs against a non-party only arises at the stage when the costs of and incidental to the relevant proceedings have been incurred, and the question arises as to who should be ordered to pay them (Abraham & Anr v Thompson & Ors [1997] 4 All ER 362).  This is normally exercised after trial and the Court’s proper consideration of all the circumstances, and where the Court is satisfied that it is in the interests of justice to do so (s 52A (2), High Court Ordinance).  The decision of the Court of Final Appeal in Nina Kung v Wang Din Shin (2006) 9 HKCFAR 800 supports the proposition that the appropriate time at which to order disclosure of the identity of the third party who may be exposed to a costs order is after the determination of the substantive claim, and only if the party to the litigation is unable to pay the costs.

19.  The Disclosure Application for the purpose of seeking a costs order against the Funder is premature and unnecessary at this stage.

Whether security should be ordered

20.  The Plaintiff accepts that he is resident outside Hong Kong, and by his solicitors’ letter dated 8 March 2019, offered to pay $800,000 as security.  In their reply of 15 March 2019, the Defendant’s solicitors agreed to the amount, but insisted on the inclusion of conditions to the payment.  These include conditions that the security payment be made from the Plaintiff’s own funds or, if provided by the Funder, that payment should be accompanied by assurances to confirm that neither the Plaintiff nor the Funder will seek to recover or trace into such monies, if the security payment is not required for any costs order made in favor of the Defendant.  The Defendant also required that neither the Plaintiff nor the Funder would seek to recover or trace into the security money, if the funding arrangements are void or avoided on grounds of champerty, maintenance, or otherwise. 

21.  These conditions were not acceptable to the Plaintiff.

22.  The Summons is for security in the sum of $1,852,000.  Considering that the Hong Kong proceedings are only ancillary to the UK Proceedings, that the Hong Kong proceedings only seek the HK Injunction, and that the costs that may be incurred in the Hong Kong proceedings would be confined to opposition to and any interlocutory applications related to the HK Injunction - which can only be limited in scope, my judgment is that a sum of $800,000 is in fact reasonable. Such security is to be furnished by payment into court.  On the state of the evidence as it stands now, the conditions sought by the Defendant (on the premise that there is maintenance and/or champerty, which has not been established) are unnecessary.

Disposition

23.  The Disclosure Application is dismissed, and I allow the Security Application by ordering the Plaintiff to make payment into court of $800,000 within 14 days.

24.  In view of the orders I have made, the order nisi on costs is that the costs of and occasioned by the Disclosure Application are to be paid by the Defendant to the Plaintiff, whereas the Plaintiff’s costs of the Security Application incurred after 8 March 2019 are to be paid by the Defendant to the Plaintiff.  Such costs are to be summarily assessed on paper.  The Plaintiff should prepare its statement of costs pursuant to such order within 14 days, and the Defendant should submit its statement of objections, if any, within 14 days thereafter.