24 Apr 2020

Act in haste, rejoice at leisure?

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ArcelorMittal USA LLC (“AMUSA”)’s application for US$1.5bn freezing order against Mr Ravi Ruia, Mr Prashant Ruia and Essar Global Fund Limited (“EGFL”) is dismissed in the latest decision in this long running dispute between the two rival steel conglomerate group companies.

The Court of Appeal has upheld Mr Justice Henshaw’s recent judgment in ArcelorMittal USA LLC v Mr Ravi Ruia and others [2020] EWHC 740 (Comm) (the “Judgment”), in which AMUSA’s on notice application for a US$1.5bn worldwide freezing injunction and ancillary disclosure (the “WFO Application”) was dismissed.

Factual background

The WFO Application and AMUSA’s underlying claim for conspiracy are the latest developments in a long running dispute between two of the world’s leading steel and mining group businesses, the ArcelorMittal group and the Essar group.

The present proceedings arise out of an ICC Award which was made on 19 December 2017, pursuant to which Essar Steel Limited (“ESL”, a Mauritian company) was ordered to pay AMUSA (a Delaware company) more than US$1.5bn in damages, costs and interest in respect of a wrongful repudiation of a contract for the sale of steel pellets entered into in connection with a major project in Minnesota (the “Amended Pellet Sale Agreement”).

Since the Award was made, AMUSA has sought to enforce the Award in multiple proceedings across various jurisdictions, including Mauritius, Minnesota, Cayman Islands, India and Delaware. These latest proceedings, brought before the English Court, is AMUSA’s most recent attempt to make a recovery in respect of the Award, on the basis of a claim for unlawful means conspiracy against certain individuals and other related companies in the Essar group.  It is alleged that a series of transactions which were entered into by certain of the companies in the Essar group dating back to 2012 were purportedly designed, in anticipation, to frustrate enforcement of the Award. The freezing order was sought in support of AMUSA’s claim for damages in the conspiracy claim.

The WFO Application

It was common ground between the parties that, if AMUSA were to be successful in obtaining the injunctive relief sought, the onus was on them to satisfy the Court that it was appropriate to grant the relief on the basis that: (i) AMUSA has a good arguable case on the merits which is justiciable in England; (ii) there is a real risk that the Respondents may dissipate assets before enforcement of any judgment in the underlying conspiracy claim; and (iii) it is just and convenient in all the circumstances to grant the relief sought. Turning to each of these limbs in turn:

Good arguable case on the merits

The core of AMUSA’s conspiracy claim is that the Defendants combined together with a common intention, to injure or cause loss to AMUSA by unlawful means, and in particular to:

  • Fraudulently induce AMUSA to enter into the Amended Pellet Sale Agreement;
  • Wrongfully procure or induce ESL to breach its obligations under the Award, including its obligations not to mislead the arbitral tribunal and to pay the Award; and
  • Wrongfully strip ESL of its assets and prevent ESL from taking steps to recover them, thereby impeding AMUSA’s attempts to enforce the Award. The allegations concerning asset stripping fall broadly in to five categories:
    • A series of transactions in 2012 and 2013 by which ESL was divested of its interest in Essar Steel India (an asset then worth approx. £1.5bn) and received nothing in return (the “2012 and 2013 Transactions”);
    • A restatement of ESL’s accounts in 2016 to re-characterise as an equity interest what had in the 2014 and 2015 accounts been described as a “receivable” in the sum of almost £1.5bn due to ESL from EGFL, the Eighth Defendant (the “Restatement of ESL’s Accounts”);
    • ESL’s entry into a Deed of Subordination with the Essar group’s main lender, VTB Bank, in October 2016, one effect of which was to postpone any liability EGFL might otherwise have had to ESL (the “Deed of Subordination”);
    • The alleged removal of ESL’s interest in Essar Steel UAE Limited (“Essar Steel UAE”) in 2015, for no or inadequate consideration; and
    • A transaction in 2014 involving the assets of Essar Steel Algoma Inc (“Algoma”), which are said to have involved stripping Algoma of assets in a manner prejudicial to its creditors of both Algoma and ESL itself.

The Judgment is highly critical of the arguments upon which the WFO Application was based. In particular:

In relation to the allegation that ESL fraudulently induced AMUSA to enter into the Amended Pellet Sale Agreement, Henshaw J was persuaded by submissions made on behalf of Ravi and Prashant Ruia, which asked what the Respondents could possibly have gained from such a plan which would “seemingly have involved positively creating… the liability that was then sought to be evaded” (Paragraph 56).

In relation to the allegations concerning asset stripping, Henshaw J concluded that the overall purpose of the intra-group transactions was so as to effect a valid and legitimate corporate restructuring and commented that “it strains credibility to suggest that the restructuring plans were made in anticipation of future claims under a guarantee from [ESL] which had not yet been sought or mentioned, under an agreement not yet entered into, in respect of prospective breaches that had not yet occurred” (Paragraph 56).

Similarly, when looking at the five main components of the alleged asset stripping (and the related allegation concerning the procurement of the breach of the ICC Award), the Judgment is equally unequivocal:

  • The allegations relating to the 2012 and 2013 Transactions “lack[s] cogency” (Paragraph 214(i));
  • AMUSA’s arguments relating to the Restatement of ESL’s Accounts was “inconsistent with [AMUSA’s] overall case of conspiracy” (Paragraph 14(ii)), and AMUSA had not “put forward any realistic case that the change amounted to dissipation or attempted dissipation of an asset, let alone a clear debt claim” (Paragraph 214 (iv));
  • The allegations concerning the Deed of Subordination were “wholly lacking in evidential support or cogency” (Paragraph 214(v));
  • The allegations concerning Essar Steel UAE Limited had “no substance” (Paragraph 214(vii)); and
  • there is no plausible case that the Algoma transaction occurred pursuant to the alleged conspiracy” (Paragraph 214(vii)).

Ultimately, Henshaw J found that AMUSA had sought to “pile inference upon inference without any real basis” (Paragraph 68), and ultimately drew the conclusion that he was “not persuaded that AMUSA has a good arguable case of a claim for USD 1.5 billion, or any other currently quantifiable sum” (Paragraph 215).

Real risk of dissipation of the assets before enforcement

AMUSA’s case on risk of dissipation relied on a combination of the “asset stripping” allegations outlined above together with the findings of certain other courts in other jurisdictions on related (but not the same) matters and also certain acts alleged to have been undertaken by the Defendants, so as to place ESL’s assets beyond the reach of AMUSA’s enforcement efforts.

Whilst the Judge considered each of the specific arguments raised by AMUSA in relation to the alleged risk of dissipation in the making the WFO Application, Henshaw J was not ultimately persuaded by any of the arguments. The Judge also added that:

  • It had been clear to the Respondents since at least March 2018, when proceedings were bought by AMUSA before the Minnesota State court, that AMUSA held them responsible for a conspiracy to strip ESL of its assets in order to defeat AMUSA’s claims. It was not until almost two years later that AMUSA made its application for the worldwide freezing order, during which time the Respondents had a long-standing opportunity to divest themselves of their own assets if they had wished to.
  • As was recognised by AMUSA when the application was made, dissipation of assets by EGFL would not have been at all easy because (i) in order to dissipate, it would have to move assets out of the group (something which it is not alleged ever to have done), (ii) the nature of the assets held are such that they cannot easily or secretly be marketed, and (iii) VTB has both a strong interest in preventing that and has the tools to do so.
  • AMUSA had put forward no evidence at all of any dissipation or attempted dissipation by Ravi or Prashant Ruia of their own assets, whether in the form of their interest in the Essar group or otherwise.It was noted that the fact that those interests are held via companies and trusts does not per se point in favour of a risk of dissipation.

Just and convenient in all the circumstances

In considering the final limb, the Court considered arguments made by the parties in relation to (i) the likely impact of a worldwide freezing order on the respondents, (ii) the likely impact of the worldwide freezing order on third party funder, VTB, and (iii) delay.

In relation to the latter point, delay, the procedural history which preceded service of the WFO Application and underlying documents in the conspiracy claim on 30 December 2019 (in the middle of the Christmas vacation period) is relevant:

  • 29 May 2019: at a hearing before the Cayman Islands’ Court, leading counsel for AMUSA referred to a “conspiracy claim that AMUSA will bring against members of the Essar group”.
  • 4 November 2019: AMUSA issue an application for permission to serve the Claim Form and Particulars out of the jurisdiction (and append a copy of the draft Claim Form and Particulars of Claim to the application);
  • 8 November 2019: permission to serve out is granted;
  • 21 November 2019: AMUSA issue an application for permission to serve the WFO Application by alternative means and for time to be abridged (and append a copy of the draft WFO Application and supporting evidence to the application);
  • 3 December 2019: permission to serve the WFO Application by alternative means is granted, and time is abridged. The Court also directed that (i) AMUSA shall give the Respondents no less than 14 days’ notice of the hearing of the WFO Application, and that (ii) each of the Respondents shall file and serve any evidence in answer to the WFO Application within 9 days after the date on which the WFO Application was served on them.
  • 30 December 2019: Claim Form, Particulars of Claim and the WFO Application are served on the Defendants/Respondents.

Predictably, it was not possible for the Respondents to respond to the WFO Application within the very tight timetable imposed upon them. It was therefore agreed that, in return for the provision of certain limited undertakings on behalf of the Respondents not to deal with assets pending the determination of the WFO Application (and without prejudice to the Respondents’ position in relation to the merits of the WFO Application more generally, the “Undertakings”) the timetable be extended and the hearing relisted to a later date.

In drawing the various strands together, Henshaw J found that it would not be just and convenient to grant a worldwide freezing order against any of the Respondents because:

  • AMUSA had not shown a good arguable case on the merits of the substantive claim, or that it has a good arguable case that it has a claim in or approximating to the amount claimed, or any other specific amount;
  • There is no solid evidence of a risk of dissipation by any of the Respondents;
  • The order sought would be gravely detrimental to the business of the Essar group and to VTB;
  • There has been a delay in making the application; and
  • The freezing order is sought against persons out of the jurisdiction, in respect of assets out of the jurisdiction, and in relation to matters with relatively limited links with England and Wales.  In such circumstances, it is appropriate for the Court to proceed with particular caution.

The Judge’s decision

The WFO Application was dismissed accordingly. In light of the Court’s findings, AMUSA is to serve amended particulars which, if not agreed, will require the Court’s permission to proceed.

Finally, for the reasons set out in his Judgment, Henshaw J dismissed AMUSA’s application for permission to appeal. It was however agreed that the Undertakings (which had previously been offered voluntarily and without prejudice by the Respondents so as to enable an orderly hearing of the WFO Application) should continue for a period of 21 days, i.e. so as to allow sufficient time for AMUSA to make its application for permission to appeal and any related interim injunctive relief from the Court of Appeal.

Whilst the Judgment provides a strong basis upon which it may be said that the Undertakings be released, ultimately Henshaw J concluded that “what persuades me that I should grant some interim relief is the pragmatic consideration that in view of the current Covid-19 difficulties, there are practical problems in putting matters before the Court of Appeal… and I do have some concern that if I were not to grant a short period of 21 days’ further protection, then there would be a mad scramble to get an interim relief application before the Court of Appeal, which may be damaging from the point of view of the parties and the Court of Appeal itself.

The Court of Appeal

AMUSA filed its application for permission to appeal on 14 April 2020, together an application for a continuation of the interim injunctive relief pending determination of the appeal.  In light of Henshaw J’s comments in relation to the practical difficulties currently being faced by the Court, the Respondents agreed to the continuation of the Undertakings pending the Court’s determination of AMUSA’s application for permission to appeal.

On 20 April 2020, AMUSA’s application for permission to appeal was dismissed by the Rt. Hon. Lord Justice Newey, on the basis that the appeal had no real prospect of success and that there was no other compelling reason for the appeal to be heard. The Undertakings were released immediately.

Conclusion and next steps

AMUSA’s amended pleading is awaited.  In light of the extensive judicial criticism that AMUSA’s conspiracy claim has garnered over recent months, it remains to be seen what will be left of the claim after the proposed amendments are made. What does though seem certain, however, is that AMUSA will need to very carefully revisit each and every aspect of the alleged conspiracy, and consider whether, and, if so, how, each of the alleged acts in actual fact formed part of the ultimate conspiracy in the terms alleged.

In the meantime, the Judgment provides helpful guidance on various topics which will be of interest to practitioners in the field of fraud, asset recovery and injunctive relief. In particular:

  • The Judgment serves as a helpful reminder of the importance of acting promptly in circumstances where a freezing order may be sought in support of underlying proceedings. In circumstances where it was known by both the Applicant and the Respondents for many months that the conspiracy proceedings would be brought before the proceedings were in fact brought and there is no evidence of actual dissipation, it will be very difficult to establish that there is in fact any risk that assets will be dissipated at all.
  • Where related proceedings are brought in various jurisdictions, it is very important that all arguments made in each of those proceedings are made consistently, and with due regard to the overall strategy of each of the multiple strands of litigation.  Where inconsistent approaches are taken, it will allow further questions to be asked, and may potentially undermine other, otherwise valid, arguments.
  • The Court will take into account the current resourcing difficulties faced by the Court in processing appeals and other applications as a consequence of the Covid-19 pandemic and will, in appropriate cases, grant interim relief so as to avoid prejudice to the parties, but also to avoid practical difficulties for the Court during this period when Court resources are limited and the majority of Court staff are working remotely.

Stephenson Harwood LLP acted for the First and Second Respondents in the WFO Application, and continue to act for the First, Second, Third and Sixth Defendants in the underlying proceedings.

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