Royal Courts of Justice
Strand, London, WC2A 2LL

14 November 2001

B e f o r e :

THE HONOURABLE MR JUSTICE GARLAND

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CROWN RESOURCES AG

Claimant

-and-

VINOGRADSKY and others

Defendants

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Clive Freedman QC and Robert Hantusch (instructed by Teacher Stern Selby) for Crown.
Robert Anderson (instructed by Garstangs) for the first defendant and his creature companies.
Edward Cohen (instructed by Stockler Charity) for the second and fourth defendants.

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REASONS FOR JUDGMENT

Mr Justice Garland

1. During the afternoon of Wednesday, 31st October 2001 I gave a short judgment in these terms:-

The Claimants, by this action, sought to recover US$7.923 million, representing secret commissions obtained by the two personal Defendants from the Claimant’s customers, counterparties and brokers, paid to and distributed through the Defendants’ creature companies, the Corporate Defendants.

The Claimant also sought ancillary relief in the taking of accounts and tracing monies impressed with constructive trusts in its favour.

The hearing began on Monday, 29th October, having been adjourned from Wednesday, the 24th, to allow the parties to complete the preparation of the trial bundles. I had refused an adjournment on the ground of the alleged ill-health of the First Defendant who, on Friday, the 26th, came to terms with the Claimant on his own behalf and on behalf of the Third, Fifth and Seventh Defendants.

The terms were set out in a confidential schedule annexed to a Tomlin Order which provided:-

(i) The First, Third, Fifth and Seventh Defendants have permission to withdraw their Re-amended Defence and the Third Defendant has permission to withdraw its Part 20 claim.

(ii) The order of Mr Justice Toulson, dated 15th June 2001, be discharged as between the Claimant and the First, Third, Fifth and Seventh Defendants forthwith upon a certificate being provided by the solicitors for the Claimant and the First, Third, Fifth and Seventh Defendants that Clauses 5 and 7 of the schedule have been performed.

(iii) All further proceedings herein between the Claimant and the First, Third, Fifth and Seventh Defendants be stayed, save for liberty to apply for the purposes of enforcing the said schedule.

(iv) There be no order as to costs between the Claimant and the First, Third, Fifth and Seventh Defendants.

The order of Mr Justice Toulson had increased the ceiling of the freezing orders to the sum of US$10 million.

Since the Second Defendant and his companies had adopted or repeated a number of defences raised by the First Defendant and his companies, the former were clearly at some considerable disadvantage on learning of the compromise.

However, Mr Freedman, Queen’s Counsel, for the Claimant, opened his case against the Second, Fourth, Sixth, Ninth, Tenth and Eleventh Defendants but, towards the end of the afternoon, a faxed witness statement was received from the Second Defendant, who was in Moscow rather than in London attending the hearing.

He stated that he recognised the difficulty caused by the First Defendant having come to terms with the Claimant and continues:-

While I do not accept any of the claims made against me and Lakehall, I consider that I have no option but to take no further part in these proceedings.

In paragraph 6 he states:-

In these circumstances, I have given instructions to my solicitors to serve this witness statement and then to take no further part in the case.

In paragraph 7 he adds:-

The difficulty I have been placed in has been exacerbated by [and I insert the word ‘the’] difficulty in finding further funding for these proceedings in the light of the injunctions made against me and Lakehall.

Mr Cohen, on behalf of the Second Defendant and Lakehall, applied under CPR 42.3 for an order declaring that the solicitors, Stockler Charity, had ceased to be the solicitor acting for his clients.

Mr Freedman applied for an injunction restraining the solicitors from parting with any monies in the Defendants’ client account until enquiries could be made into the funding of the defence by a company, Rinex Vostock, there being evidence that this was another company controlled by the Second Defendant in which he had a beneficial interest and which was now his employer.

I declined to make an order under CPR 42.3 until I had had time to reflect , but did make an order freezing all monies in the client account.

On the morning of Tuesday, the 30th, after being addressed by Mr Cohen and referred to authority, I made the order under CPR 42.3 and discharged the freezing order when it appeared that the sum involved was approximately £14,000 from which Stockler Charity would expect to be paid and over which, in any event, they had a lien.

Mr Cohen, and those instructing him, withdrew.

Mr Freedman subsequently applied to join Rinex Vostock as a party for the purposes of costs only under CPR 48.2(1). Mr Freedman indicated that he would, in the circumstances, proceed under CPR 3.4(2)(a) on the grounds that the Re-amended Defence disclosed no reasonable grounds for defending the claim. He could, of course, have asked for summary judgement under CPR 24.2(a)(ii) but it is accepted - and there is authority for the proposition - that the test to be applied under 3.4(2)(a),“no reasonable grounds for. defending the claim”, is the same as that under 24.2(a)(ii),“no real prospect of successfully defending the claim”.

Mr Freedman, therefore, continued to open the case in detail referring to the witness statements, documents and the previous proceedings, in particular, to the Second Defendant’s examination as to his assets and means before Mr Justice Crane on 3rd August.

I was provided with evidence as to the legal position in the Russian Federation relating to the enforcement of foreign judgements, there being no treaty providing for reciprocity. I am persuaded by the evidence that it would be of assistance to the Claimant, and to the courts of the Russian Federation, if I were to give a comparatively full judgement with references to the documents. This I propose to do but in the form of reasons for the judgement which I now give in order to avoid delaying the steps which the Claimant proposes to take by way of obtaining further disclosure from third parties and the taking of accounts and carrying out further investigations.

I am entirely satisfied, having received evidence and heard argument, that I should strike out the statements of case of the Second and Fourth defendants as affording no reasonable grounds for defending the claim. I propose to make the orders and declarations sought, subject to additions and amendments which have been discussed, in the draft order put before me.

The Claimant will draw up a revised order which can then be submitted through the usual channels and initialled and dated by me; that then becoming the order of the court.

2. It is not, of course, necessary in the circumstances, for these Reasons to mirror a judgement after a contested trial, reviewing all the evidence both factual and expert, the arguments that arose from it, and points of law taken. What I propose to do is to provide a reasoned review of the claim, the defences raised but which I have struck out, and the rationale of those parts of the Order dealing with the bases of liability, recovery, the continuation of the freezing orders, Third Party disclosure, costs and service of the Order.

An Overview

3. The Claimant, Crown Resources AG (“Crown”), is a Swiss Corporation into which, on 30th June 2000, was transferred the business of its predecessor, Crown Trade and Finance Limited (“CTFL”), a company incorporated in Gibraltar, which was in turn the successor, in 1997, of Crown Trade Finance Inc (“CTFI”), a company incorporated in the British Virgin Islands (“BVI”). CTFL had an English service company, Crown Commodities Ltd.(“CCL”) whose undertaking was also transferred into Crown in September 2000 which commenced the action as successor in title to the business of CTFL and as transferee of the undertaking of CCL. The Chairman of Crown was Alexey Kouzmitchov, the Chief Executive Officer, Elliot Spitz and the Chief Financial Officer, Vladimir Ploujnikov. Crown had a sister company in the Russian Federation, Alfa Eco, the International Department of which was concerned with servicing the trade outside the Russian Federation conducted by CTFL as a commodities trader. A substantial part of Crown’s business comprised importing Russian crude oil and oil products into Western Europe; the extent of this activity was to the value of US$ 80 - 90 million per month. Alfa Eco and Crown used three Isle of Man companies - Eastmount Properties, Lamport and Fulbrook -to make legitimate payments to staff in respect of offshore work. The oil was bought from Tyumen Oil Company, referred to as “TNK”.

4. The two personal Defendants provided services for CTFL in two ways:-

(i) through the International Department of Alfa Eco; and

(ii) as employees of CCL for part of the relevant period.

5. The Claimant’s case is that in either capacity they owed CTFL fiduciary and other duties as agents or sub-agents and that they breached these duties and/or were guilty of conspiracy to injure Crown by unlawful acts by taking secret commissions from Crown’s customers, brokers and counterparties and, in the case of three creature companies, Comtrans Ltd, Canley Ltd and Connexton Capital Ltd, took advantage of corporate opportunities that arose by steering CTFL and Crown contracts to those companies thereby earning very substantial profits.

6. Those who paid secret commissions were:-

(i) Russische Mineralol Handels Gesellschaft G.m.b.H.(“Russoil”), a German company based in Hamburg, a customer of Crown (J28). Yuri Samsonov was an employee. He died after a long illness in November 2000. Serguei Kichilov was also an employee before becoming a Director of Sunimex G.m.b.H.

(ii) Sunimex AG (B1,328; D6.184 and 273), a Swiss company and customer of Crown, that only traded for a short time before being replaced in August 2000 by-

(iii) Sunimex Handels G.m.b.H.(D7.22), a German company controlled by Serguei Kichilov.

(iv) Raffinachem AG (J226-227, 241-242), a Swiss company (of which Michael Schwabacher was Principal, having also been Principal of Sunimex AG) and which provided consultancy services to CTFL. These included hedging arrangements to protect CTFL from price fluctuations.

(v) J & S Service and Investment Ltd (“J&S”), a Polish customer of Crown (J243-246 and A2/B/1).

(vi) Apollo Interoil Ltd (references as above), a. Slovakian company and customer of Crown.

(vii) Crudex OY, a Finnish company and customer of Crown.

(viii) Simpson Spence and Young Ltd (“Simpson”)(D3.251 and Witness Statement Aishford A2/B/1), shipbrokers to Crown.

The Creature Companies

7. The Third, Fifth and Seventh Defendants were creatures of the First Defendant. Keane Trading Ltd (“Keane”) is registered in Jersey as is Krays Ltd; Marne Corporation (“Marne”) is registered in the Bahamas. The Fourth, Sixth, Ninth Tenth and Eleventh Defendants I find were creatures of the Second Defendant. Lakehall Trading Ltd is registered in the Isle of Man. Armadillo Ltd, Comtrans Ltd, Canley Ltd and Connexton Capital Ltd (“Connexton”) were all registered in the BVI.

The Movement of Money

8. Between June 1998 and November 2000, a total of US$ 7.923 million was paid to the Third, Fifth, Seventh and Eleventh Defendants and shared equally with, first, Lakehall, then Armadillo with the exception of payments by Russoil which were shared as to 50% with Raffinachem and 25% each between the First Defendant and Lakehall and of payments to Connexton which were not shared. These payments were as follows (all in US$):-

In July 2000 to Keane by Raffinachem: 152,760.00 being half a sum of 305,520 paid by Crown to Raffinachem in respect of a hedging agreement (J.242).

Between Mar and Oct 1999 to Connexton by Simpson: 232,634.99 (B1.155-156)

Payments to Lakehall and Armadillo from Krays, Keane and Marne were as follows:-

9. The claim against Comtrans, and to a lesser extent Canley and Connexton, derives from the evidence of Reynold Akwa (B1.120 and H3.300-339) from which it appears that some US$ 1 million was invested on the stock market on behalf of Canley, which, Mr Akwa makes clear was beneficially owned by the Second Defendant. Not only was the Second Defendant beneficially interested in Comtrans, which he flatly and dishonestly denied (B1.159 et seq) but its assets had been rapidly depleted after the making of the search and freezing orders (F4.118 et seq). Armadillo had transferred $150,000 to Comtrans in December 2000. Marina Yetsenko (B1 Tab 2.6 pp 159 et seq), head of the Oil Products Transport Division of Alfa Eco, provides important evidence about the Second Defendant placing contracts with Comtrans, Canley and Connexton. The Claimant therefore asked for accounts to be taken of profits made and for payment to it of the amounts so ascertained. The evidence that Comtrans was a creature of the Second Defendant is overwhelming.

The Corporate Defendants

10. Keane, Krays and Marne were all beneficially owned by the First Defendant and used to channel commissions calculated as 10, 7 or 5 cents per barrel of oil, and in the case of Keane, the half share of the sum paid by CTFL to Raffinachem. Half of the Russoil receipts were paid to Raffinachem, the remaining half and all other receipts were divided between the First and Second Defendants; one half being paid on by Krays, Keane and Marne, first to Lakehall and then to Armadillo. All the paying parties had trading relationships with Crown. The payments were not authorised or connived at by Crown, a matter to which I shall come. They were therefore secret commissions or bribes, clearly procured or solicited by the First and Second Defendants. Some were paid under the cover of sham “consultancy” agreements. In the summer of 2000 the Second Defendant attempted to deceive the Natwest Bank by manufacturing two bogus consultancy agreements between Lakehall, Keane and Marne.

11. Lakehall, Armadillo, Comtrans, Canley and Connexton were, in my judgement, plainly creatures of the Second Defendant. Lakehall was used until the Bank became suspicious and payments were switched to Armadillo. Lakehall was incorporated with the assistance of Dimitri Ploujnikov and received legitimate bonuses from Eastmount for the Second Defendant. Reference has been made to Lakehall’s receipt of $1.154 million from Marne and $834,000 from Keane. The earliest payment on 14th July 1998 was $48,000 from Krays; the last, 25th July 2000, nearly $43,000 from Marne. On 28th July, the Bank, Natwest Offshore in Douglas, Isle of Man wrote to the Second Defendant who had applied to open an account for a new company, Nefta, which was to be funded by Lakehall (J247A). The bank, with its obligations not to become involved in money laundering in mind, enquired who Marne and Keane were and why they were paying Lakehall “quite large and very regular funds”. The letter was in fact sent to Dimitri Ploujnikov’s address.

12. On 19th September (J254) the Second Defendant sent the bank “copies of the contracts you have requested me to send”. These were virtually identical consultancy agreements, Marne/Lakehall dated 1st May 1998 and Keane/Lakehall dated 30th August 1999. On 23rd October the bank replied (J259) that the agreements appeared to have expired, that they did not know anything about Marne and Keane, and that the agreements contained no contract values. In fact the agreements are very similar to the Russoil/Keane agreement which does have a value of 10 cents per barrel (J173,177). The Second Defendant did not reply, any urgency in setting up Nefta having apparently evaporated.

13. The Second Defendant had to concede that the agreements had been manufactured but claimed that Dimitri Ploujnikov suggested doing so. Dimitri Ploujnikov denies it.

14. It is not without interest that in March of this year, before the Marne bank statements had been disclosed, the Second Defendant felt able to say (G1. 126), referring to the first payment to Lakehall by Krays:-

This was a consultancy fee arranged in the summer of 1998 before I took up employment with the Claimant. As such I believe it is not any of the Claimant’s concern.

He then continues:

There is reference to payments received by Lakehall from Marne. These were further consultancy payments to which Lakehall became entitled in respect of consultancy services in the summer of 1998 before I became employed by Crown. Sums representing the Marne and Krays payments remain in Lakehall’s account.

He also said that Reynold Akwa controlled Armadillo and used it to release cash in Moscow (G1. 199). The untruth of these statements is self-evident.

15. The Second Defendant then gave a very different account of a visit to the bank with Dimitri Ploujnikov in February 2000 when they had a meeting with Mr Farnall and Mr Bloomfield who were assistant managers. The Second Defendant alleges that Keane and Marne were discussed during the course of along meeting. Mi-Ploujnikov(131.51) states that they were never mentioned and that on the contrary the Second Defendant stressed several times that CTFL was the main source of income for Lakehall. In addition, the meeting lasted no more than 45 minutes. If Marne and Keane had been mentioned in February it is inconceivable that the bank would have written a letter signed by Mr Farnall in the terms of that of 28th July. In addition, the bank’s record of the meeting, which was in fact on 11th February, contains no reference to Marne and Keane (J221 and 222). Further, manuscript notes prepared before the meeting again make no reference to either company (F3.295 and 309). It is abundantly clear that there was no reference to Marne and Keane in February and that the Second Defendant’s account is dishonest. Further, if Mr Kouzmitchov’s document of 12th June 1998 had in fact been in existence either in February or July 2000 all the Second Defendant need have said was,“These are payments which I am authorised to receive by the Chairman of my employer”.

16. Armadillo, as has been seen, received nine payments from Marne and Keane between 12th September and 20th November 2000 amounting in all to US$ 686,116. Reynold Akwa’s evidence (B1.130) was that he managed Armadillo, which was the Second Defendant’s company, on his behalf and at page 133, describes how on the Second Defendant’s instruction, shortly after the freezing orders made on 12th December, he transferred monies out of Armadillo:-

which I arranged to be paid to Prodeco on 22nd and 27th December which was an intermediary company for expenses of Mr Kholodov and Rinex Vostock. I asked Mr Kholodov at the time where there was a problem about these payments in the light of the injunction against him and he told me that as there was no injunction against Armadillo these payments were proper and I therefore arranged for them to be sent.

In fact a total of $400,000 was transferred to Prodeco; $150,000 had been transferred on 6th December to Comtrans. Earlier large payments had been paid in respect of a Mercedes car, and a hotel bill running to more than $30,000. It is, in my view, abundantly clear that Armadillo was the creature of the Second Defendant, being used in exactly the same way as Lakehall when Lakehall had to be abandoned because of the bank’s suspicions.

17. I have already referred to Comtrans which I also hold to be a creature of the Second Defendant. Canley, in which the Second Defendant denied any beneficial interest, was in fact promoted by him and his wife albeit he maintained that it was his wife’s property in the course of his evidence before Crane, J. He denied any beneficial interest and could give no explanation as to where its money went. However, in October 1998 (F4.224) he is shown on the Return as a beneficial owner and then (F4.225) the company is described as established by Indosuez Trust Services Ltd. for the beneficial ownership of Mr Mikhail Kholodov and his wife Mrs Natalia Kholodova. It concludes:-

They have requested that we establish this company to act as an investment holding company to hold their personal funds for investment.

At F4.217 and 218 there is internal correspondence of Banque Indosuez arising from the Second Defendant’s anxiety:

to protect his assets from Crown Commodities, his previous employers in the event that they successfully bring a civil action against him for breach of contract and/or breach of fiduciary duties and/or conversion arising from his past employment.

He is said to have a discretionary portfolio and a fixed deposit with a current total value of over US$ 1.1 million, and on 20th February, a total of US$ 1,153,722.90 was transferred to a Swiss bank thereby emptying Canley’s account with Credit Agricole Indosuez. There is, in my judgement, no doubt whatsoever that the Second Defendant’s denial of any beneficial interest in Canley is as dishonest as many of his other assertions and wholly consistent with his willingness to concoct false documents in order to deceive the bank. I have no hesitation in inferring that Connexton was also his creature.

The Claimant’s Case in Law

18. This is that the Second Defendant, employed by Alfa Eco or CCL was in a position of sub-agent qua Crown. When he was employed by Crown after July 2000 he owed the duties of an employee. Mr Freedman referred to Article 37 of Bowstead and Reynolds on Agency - 16th Edition at page 162 which is in the following terms:-

1. The acts done on the principal’s behalf by a sub-agent whose appointment was authorised or ratified by the principal bind the principal as if they had been performed by the agent himself.

2. The relation of principal and agent may be established by an agent between his principal and a sub-agent if the agent is expressly or impliedly authorised to constitute such relation, or if his act is ratified, and it is the intention of the agent and of such sub-agent that such a relation should be constituted.

3. But there is no privity of contract between a principal and a sub-agent as such merely because the delegation was effected with the authority of the principal; and in the absence of such privity the rights and duties arising out of ans. contracts between the principal and the agent and between the agent and the sub-agent respectively are only enforceable by and against the immediate parties to those contracts. However, the sub-agent may be liable to the principal as a fiduciary, in tort and possibly in other respects.

The decision in Powell and Thomas v. Evan Jones & Co [1905] 1 KB 11 is authority for the last sentence of the passage quoted. The headnote is as follows-

Agents who were employed for commission to procure an advance of money for their principals, employed for that purpose, with the assent of the principals, as sub-agent, on the footing that he should share the commission with them. The sub-agent was aware that the agents were acting in the matter for their principals. He succeeded in procuring the advance of the required amount by a company. Without the knowledge of the agents or their principals, the sub-agent received from the company a commission for introducing the business to them. Held that on the facts there was evidence that the contractual relation of principal and agent had been established between the principals and the sub-agent and secondly, that even if no privity of contract existed between them the sub-agent stood in a fiduciary relation to the principals and was therefore accountable to them for the commission which he had received from the company.

At page 18, the Master of the Rolls said:-

The learned judge appears to have held, independently of that conclusion, that, inasmuch as Cowperthwaite knew that Powell and Thomas in employing him, were acting as agents for Evan Jones & Co for the purpose of procuring an advance for them, either directly or through an intermediary. He stood in such a fiduciary relation to Evan Jones & Co as debarred him from acting in a manner contrary to their interests or putting himself in the position of having an interest of his own in the matter which might lead him not to obtain from the Law Guarantee and Trust Society the best terms possible for Evan Jones & Co. In these circumstances he was under a personal incapacity to receive any secret reward from the Law Guarantee and Trust Society; and it is clear that in respect of any money which he received as such a reward, he would be a debtor as for the money received for the use of the persons to whom he stood in that fiduciary relation.

More recently, in Henderson & Ors v. Merrett Syndicates Ltd & Ors [1995] 2 AC 145, Lord Goff approved the passage in Bowstead (which was the same in the 15th Edition) as a correct statement of the law.

19. I have no difficulty with the proposition that when the Second Defendant was not directly employed by Crown but was employed by Alfa Eco or CCL, he was a sub-agent involved in CTFL’s trade and with their customers, brokers and counterparties, and as such, owed them a fiduciary duty which was breached by the taking of secret commissions and other payments contrary to the interests of Crown.

20. Mr Freedman submitted that the corporate Defendants would be liable under the principal of “accessory liability” as formulated in Royal Brunei Air Lines v. Philip Tan Kok Ming [1995] 2 AC 378. This liability, it appears to me, presupposes that the Defendant has assisted a “trustee” in mishandling trust property whether or not he has received any. I do not. consider it necessary to make a definitive finding on this point having regard to the decisions which I have reached at 19. above and 21. below.

21. Mr Freedman argued that those into whose hands the money came were trustees of it on the principles to be derived from Attorney General for Hong Kong v. Charles Warwick Reid & Ors [1994] 1 AC 324. This decision effectively overruled (although I am conscious that a decision of the Privy Council is persuasive only) the earlier decision of the Court of Appeal in Lister v. Stubbs [1890] 45 Ch Div 1, by regarding money improperly received by a person in a fiduciary position as subject to a constructive trust in equity although in law the fiduciary was a debtor (Lister v. Stubbs). In the latter case the headnote is as follows:-

The Plaintiffs, a manufacturing company, employed the Defendant, who was their foreman, to buy for them certain materials which they used in their business; and the Defendant, under a corrupt bargain, took from one of the firms of whom he so bought large sums by way of commission, a portion whereof he invested. The Plaintiffs brought an action against the Defendant to recover the monies so paid to him, claiming to be entitled to follow such monies into the investments thereof, and they moved for an injunction to restrain the Defendant from dealing with the investments or for an order directing him to bring the monies and the investments into court. Held: that the relation between the Defendant and the Plaintiffs was that of debtor and creditor and not that of trustee and cestui que trust and that the Plaintiffs were not entitled to the order.

In Attorney General for Hong Kong v. Reid at page 336F. Lord Templeman said:-

The decision in Lister v. Stubbs is not consistent with the principles that a fiduciary must not be allowed to benefit from his own breach of duty, that the fiduciary should account for the bribe as soon as he receives it and that equity regards as done that which ought to be done. From these principles, it would appear to follow that the bribe and the property from time to time representing the bribe are held on a constructive trust for the person injured. A fiduciary remains personally liable for the amount of the bribe if, in the event, the value of the property then recovered by the injured person proved to be less than that amount.

Lord Templeman went on to comment that the decision in Lister v. Stubbs was inconsistent with earlier authorities which had not been cited and that both Lister v. Stubbs and Metropolitan Bank v. Heiron 5 ExD 319 should not be followed. I am fully persuaded that I should follow Attorney General for Hong Kong v. Reid rather than Lister v. Stubbs which Lord Templeman demonstrates was decided per incuriam. It follows therefore that the monies received by the corporate Defendants as secret commissions would be held on constructive trusts for Crown although where there was any admixture with legitimate funds, the “last out” rule would apply.

22. Conspiracy. In my judgement, there was a conspiracy by the First and Second Defendants to injure Crown by unlawful means, that is, the retention of money for which they were accountable. The case of Kuwait Oil Tanker Co s.a.k.& Anr v. Al Bader & Ors [2000] 2 AER (Comm) 271 makes it clear that the tort of conspiracy is more wide-ranging than had previously been supposed and all that is necessary is to establish an intention to injure the Claimant but not a predominant purpose or intention to do so. The intention to injure has to be proved but there is no reason why such an intention cannot be inferred from the facts. The Defendants were clearly acting in concert; they were siphoning off money to which Crown was entitled in breach of fiduciary duty and then retaining and disposing of it through their creature companies. The Defendants and their creature companies are plainly liable for the tort of conspiracy. So far as Lakehall and Armadillo are concerned, they held sums paid over by Krays, Marne and Keane as constructive trustees, the money being already subject to constructive trusts from the moment they had received it. The Claimants are therefore entitled to judgement both at common law and in equity.

23. I come next to various matters raised by way of defence, albeit the First Defendant abandoned his pleading. I propose to deal with them in the following order:-

(1) That Crown Resources AG is not the correct Claimant, at least in part.

(2) That Crown has not suffered any loss because it was only acting as a commission agent for TNK at 55 cents per metric tonne.

(3) That the proper law of the personal Defendants’ relationship with Crown was Russian law, which does not embrace any notion of “secondment” by one employer to another and, astonishingly, provides no remedy for the taking of secret commissions.

(4) That by a letter dated 12th June 1998 Mr Kouzmitchov gave the Defendants carte blanche to accept commissions.

(5) That the Defendants’ engagements were illegal because the terms included provisions for the evasion of tax by impermissible offshore payments.

(6) That the Russoil payments were merely being held to the account of Mr Samsonov.

(7) That the Sunimex payments were being held, in the words of Mr Vinogradsky, so that they:

could be drawn down in cash and utilised by Mr Vinogradsky in Russia on behalf of Sunimex G.m.b.H. (B1.329)

I do not consider it necessary to deal with these matters in great detail. The First Defendant has abandoned them; the Second Defendant has not come to court to make them good.

24.(1) Crown’s Locus Standi. The Claimant is entitled to bring the action because the causes of action were a part of the assets sold by CTFL to Crown AG by the agreement dated 30th June 2000 (J231-240) and the Defendants by virtue of their senior management positions in CCL must have known about the sale. The claims are predominantly those of CTFL. Insofar as there were claims of CCL, they would have passed to Crown upon the transfer of undertaking which occurred on 1st September 2000 and of which notice had been given by a letter dated 2nd August 2000 to employees of CCL (J248B). When the Second Defendant resigned on 6th October 2000 he did so using Crown notepaper (J256). Any causes of action of CCL in connection with the employment relationship of the Second Defendant would have been transferred to Crown by virtue of the transfer of undertaking regulations.

(2) The assertion that Crown was acting only as a commission agent and therefore had suffered no loss derives from the Defendants’ witness statements (B1. 190 et seq; B1.24 8 et seq) and their expert, Mr Daly (C2.25) but is refuted by Mr Spitz (B1.28), Mr Sayer (B1. 115) and the expert evidence of Mr Redman (C2. 1). There were two agreements governing the relationship of CTFL and TNK. The first (J66-95) is a standard form of contract on a principal to principal basis. The second (J96-104) gave Crown exclusive rights in return for the commission of 55 cents per tonne. Crown was, in effect, buying forward and then entering into hedging agreements to protect itself against price fluctuations in a volatile market. Looking at the documentation as a whole, including the Claimant’s “Position Sheets”(A2.182 et seq; 190, 203, 218, 219, 233 enlarged), it is beyond argument that Crown were trading as principals.

The assertion that they were not carries the necessary corollary that they were defrauding TNK by making secret profits. Since Crown and TNK had the same auditors, it would be surprising if such a fraud remained undiscovered or if TNK had remained silent if they considered that the prices they were obtaining were inadequate. This was an ill-considered and damaging allegation which should never have been made.

(3) The Proper Law. The Claimant is relying on breaches of fiduciary duty in the absence of privity of contract and the tort of conspiracy. The Defendants had contended that the relationship between the Defendants and Crown was governed by Russian Law which, according to their experts,(and astonishingly to anyone familiar with Common Law and Western European systems) permits the taking of commissions by employees and agents from clients’ customers brokers and counterparties. The Claimant had cogent expert evidence to the contrary. However, in my view, since the Defendants’ activities involved dealing outside the Russian Federation in a variety of different jurisdictions, this would make Rule 202(2)(c) of the current edition of Dicey & Morris (edited by Sir Lawrence Collins) applicable, regard being had to Rule 204. Insofar as the Defendants’ activities could be regarded as inducing breaches of contract between the payers and CTFL, the relevant country would be that where the effective breaches occurred and the resultant economic loss was sustained. These considerations would point to England or Gibraltar during the life of CTFL and CCL or to Switzerland from 1st July 2000. However, absent any evidence of the law of Gibraltar or the law of the Canton of Zug, those laws are taken to be the same as English Law. These proceedings therefore fall to be determined by English Law.

(4) The Kouzmitchov Letter of 12th June 1998 (J64/65). It is in the following terms:-

Hereby I allow that L. Vinogradsky and M. Kholodov act on organisation of special money fund on the basis of the address transfers from counter-agents, in particular from ship brokers and pipeline oil buyers. For these purposes it is planning to create an offshore company which account will serve as the collecting point of the funds.

Received funds are planning to be used as additional bonuses for the above mentioned employees, for the employees’ incentive for their success in work at my approval, as well as for outstanding “budgetary” and other expenses.

All actions on work shall be reported personally to me.

The first and obvious comment about this letter which the Claimant says is a forgery, is that it would have been a complete defence from the outset and would have made the five-day hearing before Toulson, J. in June take a wholly different course. It was not disclosed until 30th August in the First Defendant’s supplemental list of documents provided pursuant to the order of Owen, J. on 23rd July. It would have been the cornerstone of any pleading.

Mr Freedman submitted that the incremental build-up of the Claimant’s case due to the reluctance on the part of the Defendants to make proper disclosure is wholly inconsistent with any connivance on the part of the Claimant with the activities of the Defendants. The Claimant’s original discovery of the Russoil payments leading to the freezing and search orders in December of last year led to the unmasking of Keane and disclosure by the banks revealed the payments. from Sunimex. The Marne bank statements were not produced until during the hearing before Toulson, I, the First Defendant having produced a list of documents on 8th June which made no reference to Keane or Marne. In March of last year the Second Defendant was maintaining that the payment from Krays of US$ 48,000 was a consultancy fee going back to the summer of 1998 and that payments received by Lakehall from Marne were in respect of consultancy services also in the summer of 1998 before he was employed by Crown. This dishonest prevarication is so inconsistent with the genuineness of the Kouzmitchov letter as to require no further elaboration. The Defendants were no strangers to concocting false documents, including the Russoil/Keane agreement (J173), and there is an overwhelming inference that the letter did not come into existence until shortly before its disclosure at the end of August. The First Defendant gives an account in his June witness statement (B1.193) of helping Mr Kouzmitchov to draft the letter. Mr Kouzmitchov (B1.106) denies ever having seen it before and states that he considers that it is a forgery. The Claimant’s handwriting expert, Mr Robert Radley (C2.188) considered the signature a “high class simulation”. I have no hesitation in finding that the letter is a forgery.

(5) The Illegality Defence (A1.88/89). Paragraph 5 of the Second and Fourth Defendants’ Amended Defence is in the following terms:-

Further or alternatively, the payments offshore to Lakehall by Lamport Trading Ltd on behalf of CTFL and/or CCL/Crown were designed to, and did, evade the payment of income tax. The parties did not genuinely intend that Mr Kholodov would work offshore (and he did not in fact do so) such that income tax would probably not be payable, pursuant to Sections 19 and 192 of the Income and Corporation Taxes Act 1988. In the premises:

(i) Mr Kholodov’s contract of employment with CCL was void for illegality and/or is unenforceable as being contrary to public policy.

(ii) If (which is denied) Crown otherwise had any claim against Mr Kholodov for the alleged breach of his contract of employment or for alleged breach of fiduciary duty arising out of such contract of employment, such a claim is unenforceable.

25. The Claimant’s arguments were:-

(1) That in fact the Second Defendant, albeit his family lived in Moscow, spent a very substantial part of his time offshore and even when he was at home in Moscow it is a proper inference from the size of the restaurant bills revealed by his credit card transactions that he was engaged in corporate entertaining. Analysis of the Second Defendant’s credit card transactions and mobile telephone bills point to his spending very nearly half his time abroad. Mr Chartres (B1. 119), an Accountant, states that “split” salaries to reflect home and offshore earnings are perfectly legitimate and recognised by the Inland Revenue.

(2) In any event the claim is based on breach of fiduciary duty to CTFL and the tort of conspiracy which are independent of any contract of employment, whether with CCL or Crown.

(3) The receipt of secret commissions creates - a constructive trust in the recipient (Attorney General for Hong Kong v. Reid). Illegality does not prevent the property passing or the court from enforcing, property rights: Tinsley v. Milligan [1994] 1 AC 340. It is not necessary to recite the facts of the case; in his speech Lord Browne-Wilkinson considered some of the leading illegality cases, Bowmakers Ltd v. Barnet Instruments Ltd [1945] KB 65; Ferret v. Hill [1854] 15 CB 207; Taylor v. Chester LR 4 QB 309 and Alexander v. Rayson [1936] 1 KB 169 and said:-

From these authorities the following propositions emerge:

(i) Property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract.

(ii) A plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right.

(iii) It is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough.

This passage was commented on by Peter Gibson, L.J. in Hall v. Woolston Hall Leisure Ltd [2001] 1 WLR 225 at 233 where he said:-

But when the Claimant is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract the court is neither bound nor entitled to reject the claim unless the illegality of necessity forms part of the Claimant’s case.

Later, at page 237, he said:-

It therefore follows that the correct approach of the tribunal in a sex discrimination case should be to consider whether the applicant’s claim arises out of or is so clearly connected or inextricably bound up or linked with the illegal conduct of the applicant that the court could not permit the applicant to recover compensation without appearing to condone that conduct.

The Defendant has not sought to make good the allegation of illegality but the court is bound to look with care at such an allegation when it has been raised. In my judgement, there is at worst a conflict of evidence, the Claimant by its witnesses strenuously denying any illegality. On the facts there would appear to be a good arguable case that the Second Defendant did work offshore for a sufficiently large proportion of his working year to qualify for split remuneration. Even had there been illegality as alleged, this would not have prevented the Claimant from recovering the sums claimed and pursuing its other remedies for the reasons given at (2) and (3) above. I therefore reject this defence.

(4) The Samsonov Defence. This is to be found in paragraph 18 of the Amended Defence. I ignore the sub-paragraph numbering:-

Mr Samsonov (who Mr Kholodov understood to control the shares in Russoil) wanted to withdraw monies from Russoil and move them offshore and Mr Vinogradsky had agreed to assist him in that regard. Some of the monies would be transferred to an account nominated by Mr Samsonov and some would be sent to Mr Vinogradsky but a third party who could be trusted was also needed to hold part of the monies for Mr Samsonov, Mr Vinogradsky asked Mr Kholodov if he would be prepared to receive and hold monies in this way in Lakehall’s account and Mr Kholodov agreed to do so on the basis that one day Mr Samsonov would asked for the monies to be transferred elsewhere and that it would be necessary to comply with that direction. Pursuant to that arrangement various payments were received by Lakehall from Keane in which neither Lakehall nor Mr Kholodov claims any beneficial interest.

The Claimant’s argument can be briefly summarised as questions and comment:-

(i) If these large sums were paid to the First Defendant in a trust capacity why did the First Defendant personally receive the sum of US$ 300,000 from Keane on 13th September 2000?

(ii) If the monies were to be held by Keane as a trustee, why was it necessary to pay some of them to the Second Defendant or Lakehall or indeed any other company?

(iii) If the defence is true, why are there no documents whatsoever even of the most informal kind to evidence the trust relationship?

(iv) Why are there no accounts or other records of dealings with the monies allegedly held on trust?

(v) There were documents created which purported to show a relationship under which Keane was allegedly being paid for services rendered pro rata to the value of the oil supplied. These documents were, on the Defendants’ case, a sham. Why were sham documents created and why did the First Defendant in particular participate (see J 173)?

(vi) There has not been any third party claim. Indeed, Larissa Sidorenko, Samsonov’s partner in the last years of his life, had stated (B1. 150):-

I do not think that he had any interest or involvement personally in these arrangements. I am sure that had he some interest in having these monies paid to or for his account offshore he would have organised it differently and he would have told me about the arrangements in any event. My understanding from my involvement with Mr Samsonov over some 15 years was that he would have told me if these arrangements had been for his benefit.

A little later she states:-

I do not believe that Mr Samsonov’s former wife has any interest in the monies paid to Keane nor do I. I do not believe, as I have mentioned, that any of the money paid to Keane belonged to Mr Samsonov or that he or I or his former wife would have any claim on these funds.

This defence is incredible. There is not a shred of independent evidence to support it.

(5) The Sunimex Defence. Serguei Kichilov is a Director of Sunimex Handels G.m.b.H. having formerly been a commercial manager with Russoil which he left in July or August 2000 for a brief period with Sunimex AG. The arrangements with Sunimex mirror the arrangements with Russoil. There is a similar admittedly sham agreement (Amended Defence of First Defendant 18.2.4. and 19.5) and the money was similarly dealt with by Keane. In his witness statement of June 2001 (subsequently withdrawn) the First Defendant stated (B1.226):-

The arrangement which I made with Mr Samsonov and Mr Kishilov in relation to Sunimex was materially identical to that which I had concluded with Mr Samsonov in respect of Russoil. Again invoices were raised by Keane and paid by Sunimex for the purpose of moving monies offshore. This was done at the behest and for the benefit of Sunimex’s shareholders.

A little later he continues:-

I understand that the monies received from Sunimex AG are held for Mr Samsonov and those monies received from Sunimex Handels G.m.b.H. are held for the benefit of that company. None of these monies belong to either the Defendants or Crown.

Mr Kichilov, in his witness statement of 16th February of this year, stated:-

The monies involved are not held beneficially for any of the Defendants in this case but rather are held on trust for other interests altogether.

However, in his third witness statement made in September of this year, he states (B1.329):-

Sunimex G.m.b.H. then paid Keane about $504,000 between October and December 2000. I instructed Mr Vinogradsky to transfer money out of this US$ 504,000 held on the account of Keane to another account whereby monies could be drawn down in cash and utilised by Mr Vinogradsky in Russia on behalf of Sunimex G.m.b.H. Two payments were made out of the account in the sums of $49,000 and about $79,000. I can confirm on behalf of Sunimex that Mr Vinogradsky was authorised to make those transfers and that the cash was utilised on behalf of Sunimex G.m.b.H. at a time when I was unable to travel to Russia and conduct business there on behalf of Sunimex.

Mr Vinogradsky’s version (B1.227) was:-

I received instructions from Sunimex that it required cash from the monies deposited in the account of Keane to be made available in Moscow. I utilised the account of Armadillo and transferred the sum of US$ 128,000.

He had earlier made reference to this payment (B1.225):-

I received instructions from Mr Samsonov that he required cash to be made available in Moscow. I asked Mr Kholodov if he knew of any vehicle to draw down cash in Moscow and he gave me the name of the company Armadillo. At Mr Samsonov’s instructions I transferred two payments totalling approximately US$ 180,000 to Armadillo’s account.

To put it at its highest, these versions march uneasily together. As in the case of Russoil there are questions to be asked and comments to be made:-

(i) If Keane was holding the money in some sort of trust capacity (but was it for Samsonov or Sunimex?) why was it mixed with receipts from other sources and why was some paid out to Lakehall?

(ii) Why is there no documentary evidence, however informal, of the trust arrangement? The only documentary evidence is the consultancy agreement which is admitted to be a sham.

(iii) Why are there no accounts or other records of dealings with the monies held on trust?

(iv) Why was there no earlier demand for the return of the funds: the only demand is a belated one by Sunimex (D8.170) on 5th September of this year for $376,000?

This Defence is no more credible than the Samsonov Defence and I reject it.

26. For. the reasons given, I pronounced judgement in favour of the Claimant against the Second, Fourth, Sixth, Ninth, Tenth and Eleventh Defendants. The Claimant is entitled to judgement on the grounds that monies deriving from secret commissions or other payments by Crown’s customers, brokers and counterparties are, or were, held on constructive trusts in favour of the Claimant and therefore traceable. The Claimant is also entitled to recover monies in hands of the Defendants as damages for conspiracy. Since the Claimant may have to elect between personal and proprietary remedies, I have made a number of declarations. The form of order was discussed and drawn up with a view to assisting the Claimant as far as possible in tracing trust monies, and in the cases of Comtrans, Canley and Connexton, taking accounts. I have, however, to deal with a number of matters relating to the form of relief sought and costs.

Disclosure

27.(1) CMC Group. On 21st September 2001 at a Case Management Conference, Mackay, J. made an order:-

That CMC Group plc of Bayley Hall, Queens Road, Hertford, Hertfordshire (“CMC”) do provide specific disclosure pursuant to CPR 31.17 by 4.30 p.m. on 5th October 2001 of all documentation relating to financial dealings between CMC and the Ninth and Tenth Defendants between 1st October 2000 and 1st April 2001. When providing such disclosure CMC must specify any of those documents:-

(a) which are no longer in its control; or

(b) in respect of which it claims a right or duty to withhold inspection.

CMC is a financial services company which in effect acted as brokers for the Second Defendant and has had paid to it significant sums of money. CMC maintained that the account was not held in the name of either Comtrans, Armadillo or Canley but in the name of Mr Akwa. Accordingly, his further co-operation was sought and he provided a letter of authority allowing for the disclosure of the accounts to the Claimant’s solicitors. Unfortunately Mr Akwa’s account with CMC is in deficit and CMC have refused to release their files without a further court order unless the balance outstanding on the account is paid. The Claimant now requires disclosure of all information relating to financial dealings between CMC and Mr Akwa including details of all counterparties to all transactions involving Mr Akwa for the purposes of enforcing the judgement. They are entitled to such an order.

(2) The Banks. On 23rd July 2001 Mr Justice Owen made an order:-

That the following banks in London do by 4.30 p.m. on 31st August 2001 provide specific disclosure of their entire files relating to the following customers and copies of all documentation showing the details of all receipts into the accounts of such customers (including the identities of the source of all such receipts) and all payments from the accounts of such customers (including the identities of the payees) pursuant to CPR 31.17 and the Bankers’ Books Evidence Act 1879:-

Bank	Location	Customer
Credit Agricole Indosuez	London	Canley Ltd
Natwest	London	Comtrans

Credit Agricole Indosuez disclosed their files on 31st August but some of the receipt and payment slips were missing. Further letters have produced no response.

Natwest disclosed copy statements for a sterling current account, two US dollar current accounts and a US dollar deposit account belonging to Comtrans on 24th August. On 30th August the Claimant’s solicitors wrote to the bank requesting copies of all debit instructions from the deposit account other than to the investment account and likewise from the investment account other than to the deposit account. They were informed by the bank that the process would take between two to three weeks but despite a reminder on 16th October the bank have not yet produced the documentation sought. It is, of course, required for the investigation of Comtrans and the Claimant is entitled to an order.

(3) Costs.

(a) The Claimant is entitled to its costs of preparing for and appearing at trial including the costs of interlocutory proceedings reserved to the Trial Judge, but on what basis? Mr Freedman asked for an order for indemnity costs on the footing that the Second Defendant’s case had been founded in dishonesty such as the denials of beneficial interest in Armadillo and Comtrans, reliance on a forged document, shifting defences and the making of serious allegations against the Claimant of illegality and that as commission agents for TNK Crown were defrauding TNK by making profits for which they failed to account. Having made such allegations, the Second Defendant not only failed to make them good by evidence in court; he failed to appear at all. In my judgement, the Claimant is entitled to its costs on an indemnity basis.

(b) It will be necessary to make detailed provision in the Order for some of the many previous orders, in particular that of Sachs, J. made on 22nd March 2001 in favour of the Second and Fourth Defendants. The Claimant may apply to set aside the order, and possibly others, on the ground that they were obtained by fraud, but any orders in favour of the Second and Fourth Defendants will be stayed until the judgements in favour of the Claimant have been fully satisfied.

(c) I will extend the time for commencing detailed assessment in accordance with CPR 47.7 as there are clearly going to be further costs incurred in enforcing the judgements, but that will be without prejudice to the Claimant’s entitlement to commence detailed assessment at any time or to apply for a payment on account of costs pursuant to CPR 44.3(8).

(d) Rinex Vostock (“RV”). The Second Defendant maintains that this company has been his employer since May 2001 (A2.114 et seq). During his examination before Crane, J. in August it became clear that RV, in addition to funding the Second Defendant’s defence, had been a generous employer. I am also satisfied on Mr Akwa’s evidence (B1. 130; 133) and the inferences properly to be drawn from the evidence given before Crane, 1, that RV is controlled by the Second Defendant and that it would be proper, pursuant to CPR 48.2(1) for RV to be added as a party to the proceedings for the purposes of costs only. This would enable the Claimant to apply under S. 51 of the Supreme Court Act 1981 for an order for costs against RV.

(e) There was an Application Notice dated 12th October 2001 for the production of documents by senior staff of Crown, Mr Spitz and Mr Vladimir Polouzhnikov to whom reference has been made, and Mr Dimitri Ploujnikov, which came before Davies, J. on 15th October and subsequently before me for a variation. Since neither Defendant has made any use of the material sought, I am prepared, of my own motion, to order them to pay the costs of and occasioned by the Application Notice, including the hearings before Davies, J. and myself, on an indemnity basis. There will have to be a detailed assessment of the costs. Again, the time for commencing detailed assessment will be extended generally but without prejudice to the named persons being at liberty to commence detailed assessment at any time.

28. I have, on the Claimant’s application, made provision for the service of the Order on the various Defendants. It is at liberty to make further applications if necessary. By virtue of CPR 42 PD-005, where an order has been made under CPR 42.3, until the party for whom the solicitor has ceased to act gives a new address for service pursuant to CPR 65(2), CPR 6.5(6) will apply. In the circumstances, and in order to avoid delay, I ordered that the address for service of the judgement on the Second, Fourth, Sixth, Ninth, Tenth and Eleventh Defendants should be that of the Second and Fourth Defendants’ solicitors.