04/05/2021
Judgment on DBAs, disclosure orders and enforcement of proprietary claims
Tonstate Group Limited v Wojakovski and others [2021] EWHC 1122 (Ch)
In the latest judgment in the Tonstate Group Limited v Wojakovski litigation, the court has determined important issues relating to DBAs, disclosure orders ancillary to freezing injunctions and the enforcement of proprietary claims.
The litigation itself is principally comprised of claims (including on a derivative and double-derivative basis) brought by various companies in the Tonstate Group to recover at least £16 million which was unlawfully extracted from the claimant companies by a former director, Mr Wojakovski.
In October 2019, the claimants obtained the striking out of Mr Wojakovski’s defence to the claim in respect of his unlawful extractions on the basis that any defence based on the Duomatic principle was not available to him ([2019] EWHC 3605). Since then, the claimants have obtained a proprietary injunction ([2020] EWHC 325 (Ch)), a debarring order ([2020] EWHC 1004 (Ch)), security for costs ([2020] EWHC 1738 (Ch)), a worldwide freezing order, an asset disclosure order, a receivership order and a bankruptcy order ([2020] EWHC 2737 (Ch)).
In the latest judgment, Mr Justice Zacaroli determined three separate applications. The headline points are:
- The court confirmed for the first time that DBAs cannot be used by defendants who do not bring any counterclaim seeking a recovery from the claimant.
- The court made an order against Mr Wojakovski and (notably) directly against his solicitors for disclosure of information regarding his sources of funding for legal expenses. As to the order against his solicitors, the court relied on the jurisdiction in JSC BTA Bank v Solodchenko (No.3) [2011] EWHC 2163 (Ch), which was not opposed by the solicitors at the hearing. The court rejected the claimants’ argument based on the Supreme Court decision in JSC BTA Bank v Ablyazov (No.10) [2015] UKSC 64 that funds held on account by solicitors are caught by the extended definition of assets in a freezing order on the basis that they are held in accordance with the respondent’s “direct or indirect instructions”.
- The court made an order and associated declarations requiring the transfer to the claimants of the legal titles to millions of pounds of real property which had been purchased by Mr Wojakovski with extracted funds and which were held on constructive trust for the claimants (including by various offshore vehicles).
The s73 application
Mr Wojakovski’s former solicitors (“Candey”) sought a legal charge under s.73 Solicitors Act 1974 over Mr Wojakovski’s 12.5% shareholding in the First Claimant (“the Shares”). The charge was sought as security for c.£2.4million said to be due from Mr Wojakovski pursuant to a DBA. Mr Wojakovski had previously held 50% of the shares in the First Claimant but as part of a May 2020 settlement of related proceedings had agreed to relinquish 75% of his shareholding, leaving him with only 12.5%.
Zacaroli J determined that: (1) on the proper interpretation of the DBA, Candey were only entitled to payment if Mr Wojakovski recovered something from the litigation (and the retention of some of his pre-existing shareholding was not a recovery); and (2) as a point of more general importance, a DBA will only be enforceable to the extent it provides that “payment to the representative is a proportion of the amount recovered by the client in the proceedings”. The judgment therefore confirms for the first time that DBAs cannot be used by defendants (or at least by defendants who do not bring any counterclaim seeking a recovery from the claimant).
The funding disclosure application
The claimants sought disclosure of Mr Wojakovski’s source/s of funding for his legal expenses. The claimants also joined two firms of solicitors, ‘Keidan Harrison’ and ‘Raydens’, who had been instructed by Mr Wojakovski in respect of bankruptcy and matrimonial proceedings respectively, as respondents to the application. The order sought required the firms to disclose the relevant information about sources of funding if and to the extent that Mr Wojakovski had first failed to do so.
The judge accepted, on the basis of Mr Wojakovski’s track record and the evidence before the court, that there was “a real risk that the ongoing funding of [Mr Wojakovski’s] legal expenses may be in breach of the WFO or the proprietary injunction”. Accordingly, he made a new order for further disclosure from Mr Wojakovski as to the source of funding for his legal expenses. The judge also made an order directly against Keidan Harrison (whose stated position was that they did not oppose the order), but did not make any order against Raydens (on the basis that the firm had made voluntary disclosure to the claimants’ solicitors shortly before the hearing which they confirmed at the hearing to be complete).
In making a disclosure order against Mr Wojakovski’s solicitors, the court relied on the rarely exercised jurisdiction to order disclosure in support of a freezing order from a respondent’s solicitors (see JSC BTA Bank v Solodchenko (No.3) [2011] EWHC 2163 (Ch), per Henderson J at [26]).
However, the court rejected the claimants’ argument that they were entitled to the disclosure from Mr Wojakovski even in the absence of a fresh order. The claimants’ argument had been that money held on account by Mr Wojakovski’s solicitors was already caught by the existing WFO on the basis that it was to be regarded as being held by a third party (the solicitors) “in accordance with [the respondent’s] direct or indirect instructions”. The claimants argued that by giving instructions to his solicitors as to what work to undertake and therefore how the funds on account were spent, Mr Wojakovski was for the purposes of the WFO treating the money as though it were his own. The court distinguished the Supreme Court’s decision in JSC BTA Bank v Ablyazov (No.10) [2015] UKSC 64 on the grounds that, unlike the loan agreement considered in Ablyazov, the funds held in the relevant client account could not be used “for any purpose at all” but solely for the purpose of legal expenses.
The property transfer application
A third application was for the transfer of the legal titles to millions of pounds of real property which had been purchased by Mr Wojakovski with extracted funds and which were held on constructive trust for the claimants. Whilst Mr Wojakovski had offered to return most of these properties in early 2020, most had remained tied up in offshore corporate vehicles. Following a review of the evidence produced by the claimants as to the source of funds for these properties, the holders of the legal title did not oppose the relief sought by the claimants but required a Court order before making any transfer in order to protect their positions. This was therefore a good illustration of the principle that “the central tool at the court’s disposal to ensure that trust property is put into the right hands is the grant of a final injunction” (see Grant and Mumford, Civil Fraud, 23-060).
Andrew Fulton QC and Sam Goodman were instructed by Rechtschaffen Law for the claimants. Andrew Dinsmore acted for Keidan Harrison LLP, the respondents to the disclosure application.
Read the full judgment
