The Deposit Guarantee Fund for Individuals v. Bank Frick & Co. A.G. & Anor

The Deposit Guarantee Fund for Individuals (“DGF”) brought a claim in its stated capacity as liquidator of the National Credit Bank of Ukraine (in liquidation) (“NCB”). The claim arose from a fraud perpetrated on the Bank by two of its own officers, Messrs Onistrat and Klymenko (together, “the Directors”). The Directors approached Bank Frick & Co. A.G. (“Bank Frick”), a Lichtenstein Bank, in 2013 to arrange the opening of a correspondent bank account with Bank Frick. The account, to be held by NCB with Bank Frick, was intended to hold deposits so that they could be pledged to secure borrowing on other accounts.

Later in 2013, the Directors introduced three entities to Bank Frick, including Eastmond LLP (the Second Defendant), each of which opened an account with Bank Frick. Each of the three entities borrowed money from Bank Frick which was secured by a pledge of monies (under pledge agreements) to NCB’s correspondent account. Between 2013 and 2015, some US$40m was deposited in Bank Frick’s correspondent account.

Bank Frick’s loans to the three entities were never repaid; and so Bank Frick exercised its rights under the pledge agreements to obtain the money deposited in NCB’s correspondent account. On the DGF’s pleaded case, this was a fraud conceived and executed by the Directors for their own personal benefit – with the three entities who had borrowed from Bank Frick being ‘shell companies’ owned and controlled by the Directors.

DGF issued proceedings against Bank Frick in June 2021, seeking relied under s.423 IA. S.423 provides the Court with powers to set aside (and make further orders) a transaction entered into at an undervalue. However, pursuant to s.423(3), the following statutory purpose(s) must be made out:

“In the case of a person entering into such a transaction [a transaction at an undervalue], an order shall only be made if the court is satisfied that it was entered into by him for the purpose—

(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or

(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.”

Bank Frick applied to strike out DGF’s claim (alternatively, for reverse summary judgment) on the basis that, on the facts asserted by DGF, the s.423 purpose (“the Avoidance Purpose”) could not possibly be made out. DGF’s position was that, as a necessary part of the Directors’ plan, they would have had to deprive NCB of assets that would otherwise be used to satisfy debts owed to creditors; and that, accordingly, an inference could properly be drawn that the Directors necessarily acted with the Avoidance Purpose.

In order to resolve the application, Sir Anthony Mann was required to consider the case law on the Avoidance Purpose.

At paragraph 42, the Judge noted that, “the word “purpose” connotes a subjective state of mind, and is to be judged accordingly.  As will appear, that is borne out by recent Court of Appeal authorities on the section.  It is to be contrasted with the objectivity which is associated with intention.” Citing Re M C Bacon [1990] BCC 78, a case concerning s.239 IA, the Judge equated the word “purpose” (in s.423) with the use of “desire” (in s.239). The Judge approved the following passage from Re M C Bacon, which outlined the distinction between intention and desire (or purpose) as follows:

A man is taken to intend the necessary consequences of his actions, so that an intention to grant a security to a creditor necessarily involves an intention to prefer that creditor in the event of insolvency. The need to establish that such intention was dominant was essential under the old law to prevent perfectly proper transactions from being struck down. With the abolition of that requirement intention could not remain the relevant test. Desire has been substituted. That is a very different matter. Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.

It is not, however, sufficient to establish a desire to make the payment or grant the security which it is sought to avoid. There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor's position in the event of an insolvent liquidation.   A man is not to be taken as desiring all the necessary consequences of his actions. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages.

The Judge also considered recent case law, such as JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176, which confirm that – for the purpose of the s.423(3) enquiry – purpose is not to be equated with consequence. See paragraph 47 of the Judgment, at which the Judge cited the following example given by Leggatt LJ at paragraph 15 of Ablyazov:

“[A] commander may order a missile strike on a military target knowing that it will almost certainly cause some civilian casualties. But this does not mean that the missile strike is being carried out for the purpose of causing such casualties.”

At paragraph 53, the Judge provided a useful distillation of the essential principles to be applied when considering the Avoidance Purpose:

“i)        The Avoidance Purpose, if it is to be found, has to be actually found, and is not presumed.

ii)         Its existence is a matter to be determined from the evidence.  Inference is obviously possible, but the inference still has to be drawn out from the evidence.

iii)        The fact that a transaction has, as a consequence or by-product, the statutory effect of prejudicing creditors is not, by itself sufficient.  It may be part of the material for drawing an inference, and is capable of supporting an inference, but is not enough by itself.

iv)        (iii) remains the case even if the disponor knew of the effect.

v)         The purpose must be a positive purpose, but it does not have to be substantial.

vi)        The fact that the disponor would have done the transaction anyway, ie irrespective of its effect on creditors, is a relevant factor.”

The Judge then summarised the key facts asserted and relied upon by DGF – from which DGF asserted the Avoidance Purpose could be inferred – in the following terms at paragraph 61ii):

“a)       The dishonest acts of the directors in applying bank moneys for their own purposes via the pledges and the loans.

b)         Concealment of those facts.

c)         Dishonest concealment of the whole transaction from the bank itself by the directors.

d)         Inevitable prejudice to the creditors of the bank, because the pledge inevitably reduced the bank’s available funds to a level below that necessary to repay creditors.

e)         Knowledge of (d) on the part of the directors.”

In that context, DGF had asserted that the gain to the Directors and the loss to the creditors of DGF were ‘two sides of the same coin’.

However, the Judge concluded that, on the basis of those asserted facts (assumed to be true for the purposes of the strike out application), there was no proper basis for the Avoidance Purpose to be inferred.

At paragraphs 64-65, the Judge rejected the ‘two sides of the same coin’ analysis:

“If the claimant is right about the nature of the activity in this case, this is a case in which the directors clearly intended to benefit themselves from the transactions they undertook.  They pledged the money to back loans which they then appropriated, at the expense of their bank via the pledges.  That was clearly their first purpose.  If it matters (which it does not, save for the purposes of analysis) it can probably be said that it was also their purpose, within section 423, to damage NCB itself (by misappropriating the bank’s money).  That was the other side of the coin, in OBG terms.  Their gain was the bank’s loss and vice versa; the money they misappropriated was the bank’s money.  Those two elements were clearly two aspects of the same thing.

However, going one step further, as a matter of inference of a further purpose, is a step too far on the pleaded case.  The claimant says that because, on the facts relating to the financial state of NCB it was rendered insolvent and it was inevitable that creditors would suffer, to the knowledge of the directors, then the prejudice to creditors was therefore a purpose of the directors.  The claimant relies on the directors’ foresight of the inevitable consequence of the transaction as justifying the inference of purpose. That logic does not follow in this case.  It might have been an appropriate conclusion (not inference) if the question was one of intention on the footing that a person is taken to intend the consequences of his acts, but the question is not one of intention in that sense, but of purpose, which the authorities clearly show to be a subjective consideration.”

In rejecting DGF’s claim, the Judge also reached the following important conclusions:

1.       It was insufficient for DGF to point out the foreseeability of the consequence to creditors: “The effect on creditors could be a starting point for considering whether the purpose was to affect creditors, but the fact that there was that inevitable effect is not necessarily sufficient.” (paragraph 67)

2.       It was irrelevant that the Directors had acted dishonestly. Dishonesty in the form of committing a fraud against their principal could not support an inference that they had acted with the Avoidance purpose (paragraph 68i)).

3.       The ‘two sides of the same coin’ analogy was inapplicable. At paragraph 71:

“This was obviously (as pleaded) a fraud perpetrated for the directors’ personal gain.  That was a purpose.  It was obviously at the expense of the bank, whose funds were purloined.  If it mattered the directors would not be able to say that they did not have damage to the bank as a purpose, because that damage was a necessary counterpart to the gain to them.  Those two elements are two sides of the same coin.  However, the damage to the creditors is not necessarily part of that purpose merely because it was a further consequence of damage to the bank.”

4.       The authorities concerning the tort of inducement of breach of contract (such as OBG Ltd v Allan [2008] 1 AC 1) did not assist DGF because that tort is concerned with “intention” and is to be distinguished from “purpose”: see paragraphs 69-72.

5.       In summary, “what this case demonstrates is a theft of bank money and no more; or in the words of Marcus Smith J [in New Media Distribution Company v Kagalovsky [2019] BIPR 170] it looks like a theft and does not look like an attempt to do down creditors.  Doing down creditors was a by-product.” (paragraph 80).

Andreas Gledhill QC and Luka Krsljanin acted for Bank Frick.

Please see the judgment here.