07 Sep 2018

A cold wind blowing?

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The Commercial Court has been busy with a plethora of judgments involving freezing orders being handed down over the summer months.  Perhaps the most significant of these is Mr Justice Popplewell’s decision in Fundo Soberano de Angola v Jose Filomeno Dos Santos and others which serves as a salutary reminder of the importance of the full and frank disclosure obligation.

The claimants were the sovereign wealth fund of the Republic of Angola (“FSDEA”) and 7 of its subsidiaries which applied for, and obtained, a worldwide freezing order. The freezing order was obtained in support of several claims arising out of an alleged dishonest conspiracy between the 1st defendant, Mr dos Santos, former chairman of FSDEA, and his friend and business partner, the 2nd defendant, Mr Bastos, who was the 95% beneficial owner of the Quantum group of companies (the "Quantum group") (the 3rd to 20th defendants).  The 21st defendant was the bank in the UK where certain investment funds were held within the jurisdiction.

The claimants argued that, as part of the conspiracy, Mr dos Santos placed some $5 billion at the disposal of the Quantum group to manage and invest on FSDEA’s behalf when the Quantum group lacked the appropriate qualifications or experience for such a mandate.  It was alleged that most of the monies had not been invested at all but had been used by the Quantum group to extract excessive fees amounting to over US$ 406 million.  Where investments had been made, it was alleged that they were in projects related to Mr Bastos and were not in the interests of FSDEA at all.  The claimants also alleged that Mr dos Santos had committed FSDEA to pay around US$152 million in fees to the Quantum group and other companies related to Mr Bastos under contracts which were manifestly uncommercial and which were intended to divert money from FSDEA into Mr Bastos’ pocket.

The defendants denied any wrongdoing, claiming that they were the victims of political change in Angola following the decision of Mr dos Santos’s father to step down as president of Angola and the election of his replacement, President Lourenco, in August 2017.  They sought to discharge the freezing order on a number of grounds, including that the English Court had no jurisdiction to hear the underlying claims and that the claimants had breached their obligation to give full and frank disclosure when first applying for the freezing order.

The defendants were successful in knocking out all but a handful of the claims on jurisdictional grounds; it was not at all obvious that there was any real connection with the jurisdiction of England and Wales in any real sense.  But the judge reserved his most severe criticism for what he saw as the claimants’ unfair presentation of their case before Mr Justice Phillips, who granted the initial freezing order application, caused by a number of material breaches of their obligation to give full and frank disclosure.  The judge held that if the claimants had presented their case fairly, then they would have failed to satisfy Mr Justice Phillips that there was any real risk of dissipation so as to justify the grant of the freezing order in the first place.

The principles applying to full and frank disclosure are well known:

  1. The applicant is under a duty to make a full and fair disclosure of all material facts;
  2. The material facts are those which it is material for the judge to know in dealing with the application before the Court;
  3. The applicant must make proper enquiries before making the application.  The duty of disclosure applies not only to material facts known to the applicant but also to any additional fact which they would have known if they had made such enquiries;
  4. The extent of the inquiries to be made will depend on all the circumstances of the case including (a) the nature of the applicant’s case; (b) the order which is being sought and the probable effect of the order on the defendant; and (c) the degree of urgency and the time available for making inquiries;
  5. If material non-disclosure is established, the Court will be astute to ensure that the defaulting applicant is deprived of any advantage derived from that breach of duty;
  6. Whether the fact not disclosed is of sufficient materiality to justify immediate discharge of the freezing order will depend on the importance of that fact to the issues which were to be decided by the judge on the application; and
  7. The Court has a discretion, notwithstanding proof of material non-disclosure which justifies the immediate discharge of the freezing order, to continue the order (or to discharge but immediately make a new order) when the whole of the facts, including that of the original non-disclosure was “innocent” (in the sense that the relevant fact was not known or its relevance was not perceived) and if an injunction could properly have been granted even had the facts been appropriately presented.

The judge emphasised three points:

  1. The Court must be able to rely on the party appearing on a without notice application 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 matters which it can reasonably anticipate the absent party would wish to make.  It is a duty owed to the Court which exists to ensure the integrity of the process;
  2. The ultimate touchstone is whether the presentation of the application is fair in all material respects. In a complex case with a large volume of documents, it is not sufficient if disclosure is made in some part of the material, even if amongst that which the judge is expressly invited to read, if that aspect of the evidence and its significance is obscured by an unfair summary or presentation of the case.  It is essential to the efficient administration of justice that the judge can rely on having been given a full and fair summary of the available evidence and competing considerations which are relevant to the decision; and
  3. The duty is not confined to the applicant’s legal advisers but is a duty which rests on the applicant itself.  It is the duty of the legal team to ensure that the lay client is aware of the duty and what it means in practice.  The responsibility of the applicant’s lawyers in this respect is a heavy one but it is important that the lay client should understand and discharge the duty of full and frank disclosure because often it will be only the client who is aware of everything which is material.

Against that background, the judge concluded that the claimants had breached their duties of full and frank disclosure and fair presentation in eight material respects:

  • They had allowed a misleading impression of how the Quantum group had been appointed to be presented to Mr Justice Phillips.  The Claimants’ evidence suggested that the Quantum group had been appointed because of Mr dos Santos’ influence when the group had in fact been selected by the previous chairman of  FSDEA and following the submission of detailed proposals and at least three presentations by experienced investment professionals;
  • The claimants had presented the Quantum group as “an unknown and untested entity” when reasonable enquiries would have established that the group had managed assets for the Banco Nacional de Angola, the Angolan state bank, of US$2.3 billion in liquid assets and a further US$1 billion in private equity investments;
  • The claimants did not disclose or draw to the attention of the judge considering the application for the freezing order that the appointment of Quantum and its activities in relation to investment management were transparent and reported on to an audience within FSDEA beyond Mr dos Santos;
  • There was an unfair presentation of the use of the limited partnership model as evidence of impropriety;
  • The claimants had made a number of allegations of non-disclosure of conflicts of interest on the Quantum group’s part without drawing to the judge’s attention that Quantum had in fact disclosed a number of potential conflicts or that FSDEA had granted a waiver in relation to them;
  • There was non-disclosure and an unfair presentation in respect of the fees charged which were described as “breathtaking”, “extraordinary” and “eye watering” when it was subsequently accepted that it was common to charge fees on the amount of the committed capital rather than the amount drawn down and that the level of fees were in accordance with the traditional PE model;
  • There was a failure to present the stance of the 21st defendant fully or fairly. It had made clear to FSDEA that it would not take any action to allow movement of funds from the accounts without joint and express written instructions from both FSDEA and the Quantum group and that it would give prior notification if it intended to change that position.  Had the claimants correctly summarised the 21st defendants’ correspondence, Mr Justice Phillips would likely have concluded that there was no risk of dissipation in respect of the monies held by the 21st defendant;
  • Counsel’s skeleton argument stated incorrectly that the claimants were not seeking proprietary injunctions against Mr dos Santos and Mr Bastos.

Taking all of these factors into account, Mr Justice Popplewell held that the claimants’ breaches of duty were sufficiently serious and culpable to warrant discharging the freezing order and this was not a case in which it would be appropriate to grant a new freezing order on revised terms.

Practical implications

A without notice freezing order is often met with a discharge application, which invariably includes allegations of breaches of the duties of full and frank disclosure.  Nothing in Mr Justice Popplewell's decision is new law; this is an area where individual decisions turn very much on the Court's view of the facts.  However, Mr Justice Popplewell’s decision in this case may be indicative of a more restrictive approach to the grant of freezing orders generally.  It is certainly indicative of the Court looking more carefully at applicants' compliance with the duty to give full and frank disclosure.  Indeed, Mr Justice Popplewell’s approach has already been followed by Mr Justice Males in  his  decision in Galagaev & Others v Ananyev & Others handed down on 24 August 2018.

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Sue Millar

Sue Millar
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