Business Control (Schweiz) AG v Shibalova
[2022] NZHC 484
•17 March 2022
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2021-488-000001
[2022] NZHC 484
BETWEEN BUSINESS CONTROL (SCHWEIZ) AG
Plaintiff
AND
INNA SHIBALOVA
Defendant
Hearing: 23 February 2022 Appearances:
S Wroe for the Plaintiff
M Phillipps for the Defendant
Judgment:
17 March 2022
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 17 March 2022 at 10.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Sandford & Partners, Rotorua
Vicki Ammundsen Trust Law Limited, Auckland
BUSINESS CONTROL (SCHWEIZ) AG v SHIBALOVA [2022] NZHC 484 [17 March 2022]
Introduction
[1] In February 2012, the defendant’s former partner, Andrey Ivanov, was convicted by a court in Italy of embezzling almost USD 10 million from the defendant. The plaintiff, through its former director Philip Ryffel, was part of the team of investigators working to secure a conviction against Mr Ivanov and recover the funds. The money was traced to a bank in Italy, and EUR 7,038,072 was frozen pending conclusion of the criminal and civil proceedings against Mr Ivanov and his wife. Following Mr Ivanov’s conviction and an unsuccessful appeal in 2015, restitution orders were made for the return of the confiscated amounts to the defendant.
[2] The plaintiff is claiming commission on the recovered funds. It relies on an assignment of the written contract between the defendant and the lead Australian firm of investigators, MPOL Group Pty Ltd (the Contract). That Contract provided that 35% of all monies collected on the defendant’s behalf which were returned to her directly or indirectly to a family member or bank account would be payable as a fee (the Commission).
[3] On 24 November 2020, the plaintiff, through its solicitors, served an invoice on the defendant requesting payment of the Commission of EUR 2,864,938.61 (approximately USD 3,360,000), being 35% of the recovered sum.
[4] The defendant denies liability for the Commission. She says that there was an additional oral term to the Contract which provided that if the money went to a family member, she would only be liable for the Commission if it was able to be deducted from the collected amount before it was paid to the family member. She says that she did not receive, either directly or indirectly, any of the funds recovered, and that the funds were received by her father, Alexander Shibalov.
[5] Furthermore, the defendant denies that the Contract was validly assigned by MPOL to the plaintiff, maintaining that the purported assignment is a fiction and never took place.
[6]This judgment concerns two interlocutory applications:
(a)An application by the plaintiff under r 8.19 of the High Court Rules 2016 for orders for particular discovery of categories of documents relating to the defendant’s financial records and the source of her assets.
(b)An application by the defendant for security for costs.
Application for discovery
[7] Under r 8.19, a Court may make an order for particular discovery after the proceeding has commenced where:
…it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered…
[8] The starting point is that a document or class of documents will only be discoverable if relevant to the matters at issue before the Court. Only then can it be said that, in terms of the rule, they “should have been discovered”.1
[9] The Court usually follows a four-stage approach in considering applications under r 8.19.2 First, are the documents relevant to issues before the Court, and if so, how important will they be? Second, are there grounds for believing that the documents exist? This will often be a matter of inference. Third, would the time and cost of discovery be proportionate to its potential value? Fourth, weighing and balancing these matters, in the Court’s discretion, is an order appropriate?
[10] This Court has previously observed that relevance is to be assessed according to the pleadings.3 In determining relevance, it is the case of the party seeking discovery that must be assumed to be true, not the party from whom discovery is sought. Further, the party seeking particular discovery has the onus of establishing that the party from whom discovery is sought is in control of document that should have been discovered under standard discovery.4
1 Robert v Foxton Equities Ltd [2014] NZHC 726, [2015] NZAR 1351 at [8](a).
2 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600 at [14]; and McGechan on Procedure (online ed, Thomson Reuters) at [HR8.19.03].
3 Robert v Foxton Equities Ltd, above n 1, at [8](b).
4 At [8](c).
[11]I will consider each of the questions in the four-stage approach in turn.
Are the documents sought relevant, and if so, how important will they be?
[12]The applicant seeks particular discovery of these documents:
(a)bank statements for the period 3 February 2012 to 14 February 2020 (the relevant period) for every bank account for which the defendant is a named account holder, whether in New Zealand or overseas;
(b)bank statements from the relevant period in relation to other bank accounts in New Zealand or overseas where the defendant is a signatory, or beneficially entitled to the money held in that account;
(c)documents that relate to the source of any funds the defendant contributed (directly or indirectly through family members or their related entities) to:
(i)the purchase of 74 Ocean View Road, Record of Title NA994/74, including financial records showing payments to vendor, and statements of trust account of the solicitor acting on conveyance, showing debit into the trust account;
(ii)any lump sum payments on the mortgage to ASB Bank Unlimited registered against title NA994/74;
(iii)the purchase of 31 Taipa Point Road, Taipa, record of title NA1016/154.
[13] The plaintiff submits that the documents are relevant to the issue of whether the funds were returned to the defendant and when. The plaintiff claims that this issue is of central importance to the case.
[14] The defendant submits that whether she received the money is not an issue because her position is that the money has been paid out to a member of her family and therefore the Commission “triggered”. It is only an issue in relation to the defendant’s affirmative position that there was an additional oral term that the Commission was only payable if it was able to be deducted from the collected amount before it was paid to a family member. The defendant contends that the main issue in the case is whether MPOL assigned the Contract to the plaintiff. The documents sought are not directly relevant to that issue.
[15] I do not accept the defendant’s submission. The defendant’s case is that she is not liable to pay the Commission if neither she nor a family member received the recovered funds; or if a family member received it without the Commission first being deducted. Thus, whether she received the funds or not is an issue in the proceeding.
[16] If the documents reveal that the defendant did receive some of the recovered funds, that will confirm that the Contract was fulfilled, and she is liable to pay the Commission. The key issue will then be whether it is payable to the plaintiff under the purported assignment. That will turn on whether the assignment is valid.
[17] If the documents show no evidence of money being received by the defendant, and the Court ultimately accepts her evidence that she did not receive any funds, the focus will be on interpretation of the Contract and whether the defendant can rely on the asserted oral term that the Commission was only payable on the funds being paid to a family member if the Commission was first deducted.
[18] Thus, I do not accept that defendant’s characterisation of the assignment issue as the only or main issue in the case. Certainly, the issue of whether the assignment is genuine and valid at law is critical to whether the plaintiff is entitled to claim the Commission (as opposed to the original counterparty to the Contract, MPOL, understood to be in liquidation). But the issue of whether the defendant received any of the recovered money is relevant to whether she is liable to pay the Commission.
Are there grounds for believing that the documents sought exist?
[19] The plaintiff has adduced evidence that the defendant was an account holder or signatory to bank accounts around the world in 2007 in reliance on an affidavit sworn by her and a more fulsome draft unsworn affidavit.5 The defendant also lived in the EU and Switzerland.6
[20] In her affidavit in support of her opposition to the discovery application, the defendant does not deny that she has bank statements for the relevant period. She asserts that they are not relevant and/or it would be unduly onerous and expensive to discover them.
[21] I conclude that there are grounds for believing that the bank records sought exist. Obviously, the defendant is only required to discover bank statements for the relevant period for bank accounts for which she is the named accountholder, or beneficially entitled to the money held in the account, insofar as such accounts and records exist.
[22] In terms of documents showing the source of any funds she contributed to the purchase of two properties and payments towards the mortgage over one of those properties, the defendant admits in her affidavit that she used the proceeds of the sale of a property in Australia to purchase the Northcote property. She deposes that there have been no lump sum payments to reduce the mortgage on that property. She deposes that she did not contribute any funds towards the Taipa property.
[23] Thus, there are grounds to believe that documents exist concerning the source of funds for her purchase of the Northcote property. In respect of the mortgage and Taipa property, it is implicit from the defendant’s response that no such documents exist. She should specifically depose to this in an affidavit of documents.
5 Affidavit of Glenn Birrell affirmed 1 February 2022, exhibits GB1 and GB2.
6 Affidavit of Philip Ryffel affirmed 19 November 2021 at 6; affidavit of Inna Shibalova dated 24 January 2022 at [62](b).
Is discovery proportionate?
[24] This is the defendant’s main ground for opposing the application. The defendant submits that the discovery will be costly and time-consuming. She states that she cannot electronically access bank statements prior to January 2015 and has not kept hard copy bank statements. She states that it will cost an estimated $4,500 in legal fees to redact her bank records for the period sought. She deposes that she did not directly or indirectly receive any funds from the Court in Catania, Italy, and that therefore this is a fishing expedition.
[25] I do not accept that this is a fishing expedition. In 2012 and 2015, the Court of Catania ordered the money to be returned to her, or in the case of the second restitution order, to the bank applying on her behalf – Unicredit S.p.A.7 She says she did not receive it. Her financial records will either prove or disprove this. They are plainly relevant. Her deposition that she did not receive the money does not displace her obligation to discover all documents in her control relevant to issues in dispute.
[26] In relation to the proportionality of discovery of the bank records, this is a high-value claim for USD 3,360,000. The issue of whether she received the recovered monies, and when, is important. An order requiring the defendant to download available electronic bank statements and request access to older records held by the bank(s) is reasonable and proportionate.
[27] Furthermore, the defendant’s estimated legal fees of $4,500 to redact the records, plus any bank fees and time spent by the defendant, is proportionate.
[28] An order for records relating to the acquisition of two properties and mortgage payments on one of those properties is also proportionate. It will not be unduly onerous or expensive to acquire and provide these records as they relate to only two property transactions and mortgage payments relating to one property, from 2015.
7 See the affidavit of Ben Sandford affirmed 13 December 2021 at exhibits A and B.
Decision
[29] Weighing and balancing these matters, I conclude that an order for discovery of the documents sought is appropriate, with some refinement to the categories to better specify the documents concerned. This refinement was discussed with counsel during the hearing. An order follows at the conclusion of this judgment.
Application for security for costs
[30] The defendant applies for an order for security for costs of $146,512.50. This figure represents 2B scale costs for the remaining steps in the proceeding with an uplift of 50%, and an allowance of $30,000 for expert evidence.
[31] The plaintiff has already paid into Court, by agreement, security of $20,000 in relation to the early steps in the proceeding, up to and including inspection of documents.
[32] Rule 5.45 of the High Court Rules provides that a Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs by a corporation incorporated outside New Zealand.
[33] In principle, the plaintiff, who is incorporated outside New Zealand, agrees to provide security. However, the plaintiff proposes additional staged payments of
$20,000, so that a total of $40,000 will be held as security.
[34] The issue for determination is therefore not whether an order should be made, but what is an appropriate amount of security, and when should it be paid?
[35] The defendant’s claimed 2B costs include steps involved in these two interlocutory applications. At the hearing, Mr Phillipps conceded that these costs will be fixed once the applications are determined and payable when they are fixed.8 I therefore exclude these costs from my consideration.
8 High Court Rules 2016, r 14.8.
[36]As a result, there remain two areas of disagreement:
(a)the claimed $30,000 allowance for expert witnesses;
(b)the amount for legal costs, for which the defendant claims scale 2B costs of $66,429 based on a seven day trial, plus a 50% uplift, amounting to $99,634.50 (excluding costs attributable to these two interlocutory applications).
[37] I will briefly consider the relevant legal principles before turning to each area of disagreement between the parties.
Legal principles
[38] As the plaintiff is a corporation incorporated outside of New Zealand, the threshold in r 5.45(1)(a)(ii) is met and the Court’s discretion to order the giving of security under r 5.45(2) is engaged. It may exercise its discretion if it considers it is just in all the circumstances.
[39] In McLachlan Ltd v MEL Network Ltd, the Court of Appeal considered the following factors relevant to the assessment of whether an order is “just in all the circumstances”:9
(a)the interests of both the plaintiff and the defendant;
(b)whether the plaintiff’s action has reasonable prospects of success;
(c)any aspect of delay in applying for security for costs.
9 McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA), cited recently in Yao v Shen [2022] NZHC 221 at [19].
[40] As with whether to make an order, the question of the quantum of security ordered is discretionary.10 It is an assessment in the round rather than a mathematical determination.11 As a general rule, the Court must not fetter its discretion under r 5.45 by constructing ‘principles’ from the facts of previous cases; it must instead carefully examine the circumstances of the particular case and make the order that it sees fit.12 Those circumstances include:13
(a)the amount or nature of the relief claimed;
(b)the nature of the proceeding, including the complexity and novelty of the issues (and therefore the likely extent of interlocutories);
(c)the estimated duration of the trial; and
(d)the probable costs payable if the plaintiff is unsuccessful, and perhaps also the defendant’s estimated actual (i.e. solicitor and client) costs.
Allowance for expert witnesses
[41] The defendant submits that there are interjurisdictional aspects to the claim which are likely to require expert evidence from legal experts overseas. Further, it is expected that evidence relating to the MPOL companies and their principal Mark Grover in Australia needs to be gathered and presented.
[42] At the hearing, Mr Phillipps proposed an alternative — that security for possible expert costs could be put to one side and addressed before trial, when there is greater clarity about whether and to what extent expert evidence will be required.
[43] The plaintiff accepts that it is possible that an expert on Swiss law may be required if there is dispute over the law applicable to the assignment. The plaintiff does not accept that expert evidence on Australian law is necessary. Furthermore, the
10 At [13].
11 Sharp v Pillay [2017] NZHC 647; Red 9 Ltd v The Learning Ladder Ltd (in liq) [2021] NZCA 284 at [30].
12 McLachlan Ltd v MEL Network Ltd, above n 9, at [13]–[14].
13 Andrew Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR5.45.07].
plaintiff does not accept that expert evidence is required on the position of the MPOL companies in Australia. This is a factual matter and it should be possible to agree the relevant facts.
[44] Further, the plaintiff submits that there is no expectation that a defendant will have full security for all the costs, including disbursements, it might incur.
[45]I will return to this issue after considering security claimed for legal costs.
Legal costs
[46] The defendant advances two arguments for an order for security of an amount greater than 2B costs. First, the possibility that some steps may be more appropriately categorised as 2C than 2B. Mr Phillipps points to the substantial damages claimed of USD 3,360,000 plus interest and costs, submitting that it is a potentially ruinous sum for a private individual. He submits that it is appropriate for the defendant to take a rigorous, and inevitably more costly, approach to defending the claim.
[47] Second, the probability that the Court will award a substantial uplift on 2B costs because the plaintiff’s claim, on its own documents, is without merit. Specifically, the defendant’s case is that the assignment of the Contract is a fiction.
The defendant poses in her affidavit that:14
a key issue in the proceeding is therefore whether the document dated 4 September 2010, purporting to record the assignment of the 2007 contract between myself and MPOL was created recently to avoid the consequence of MPOL’s liquidation, and enable a claim to be made against me. I consider that the plaintiff’s claim has no merit and there is a likelihood of increased or indemnity costs being awarded to me, such that an order should be made giving security for costs on an increased basis.
[48] In support of this position, Mr Phillipps took me through documents discovered by the plaintiff, which he submitted demonstrate unequivocally that the assignment is not genuine. These include the Contract between the defendant and MPOL dated 30 July 2007, the contract between MPOL and the plaintiff dated 4 April 2008, the assignment document relied on by the plaintiff dated 4 September 2010,
14 Affidavit of Inna Shibalova, above n 6, at [25].
correspondence between Mr Ryffel of the plaintiff and Mark Grover of MPOL on 6 October 2010, an agreement between MPOL and Gosh Solutions Pty Ltd dated 4 February 2011 and an incomplete agreement between MPOL, the defendant, her father and Gosh Solutions Pty Ltd dated 19 March 2013. He also relies on Mr Ryffel’s answer to the defendant’s interrogatories, specifically concerning the circumstances surrounding the assignment.15
[49] Mr Ryffel and Mr Grover have both deposed that the assignment did take place.16 There is no direct evidence contradicting Mr Ryffel and Mr Grover. I agree with the defendant that the documents identified raise questions about the assignment, including why the assignment is not acknowledged in subsequent correspondence and documents between the various parties. However, there may be answers to these questions that will emerge at trial. I note that the defendant’s affidavit in which she alleges that the assignment was fabricated was served after Mr Ryffel and Mr Grover had sworn and filed their affidavits. Mr Ryffel and Mr Grover may be able to explain.
[50] The defendant’s argument that the likely outcome in this proceeding will be an order for increased costs in her favour relies on a finding that Mr Ryffel and Mr Grover are lying and the assignment is a fabrication. I am quite unable to assess the credibility of these individuals and reach such a finding at this summary hearing.
[51] Therefore, I decline to consider increased costs for the remaining steps in the proceeding as an appropriate reference point.
[52] Nor do I consider that the proceeding is especially complex or involves novel issues. Therefore, I do not consider it likely that an award will be made for any step based on Band C.
[53] Mindful that an amount of security is not necessarily to be fixed with reference to a likely costs award, I nevertheless consider that scale 2B costs provide a useful guide as to what the eventual cost award will be.
15 Affidavit of Philip Ryffel, above n 6.
16 See the affidavit of Philip Ryffel, above n 6, at [5.3]–[5.9] and the affidavit of Mark Grover affirmed 19 January 2022 at [2] and exhibit MG1.
[54] On that basis, and balancing the fact that a defendant cannot expect full security for all her potential costs, against the fact that there is no evidence that the plaintiff is unable to pay an order for security for costs, together with the fact that the plaintiff has already paid security of $20,000, I consider that further security of $40,000 is just in all the circumstances. I do not make any additional allowance for expert costs as it is uncertain whether and to what extent these costs will be incurred. In any case, I consider overall security of $60,000 (including the $20,000 already paid) to be fair and just.
Result
[55]I order that:
(a)the defendant is to file and serve an affidavit stating whether documents within these categories are or have been in her control:
(i)bank statements for the period from 3 February 2012 to 14 February 2020 (the relevant period), for every bank account for which the defendant is a named account holder, whether in New Zealand or overseas;
(ii)bank statements for the relevant period for any other bank accounts in New Zealand or overseas where the defendant is a signatory or beneficially entitled to the money held in the account(s);
(iii)documents that show the source of any funds the defendant contributed (directly or indirectly through family members or their related entities) to:
1. the purchase of 74 Ocean View Road, record of title NA994\74;
2. any lump sum payments on the mortgage to ASB Bank Unlimited registered against title NA994\74;
3. the purchase of 31 Taipa Point Road, Taipa, record of title NA1016\154.
(b)if any of the documents in the above categories have been but are no longer in her control, her best knowledge and belief as to when the documents ceased to be in her control, and who now has control of them;
(c)if the documents or any of them are in the defendant’s control, to make those documents available for inspection, in accordance with r 8.27, to the plaintiff.
[56]I further order that:
(a)the plaintiff is to pay into Court security for costs in the total sum of
$40,000;
(b)the security is to be paid on a staged basis as follows:
(i)$10,000 within 10 working days;
(ii)$10,000 when the plaintiff serves its briefs of evidence;
(iii)$10,000 within five working days of the defendant serving her briefs of evidence;
(iv)$10,000 10 working days before the trial.
[57] The plaintiff has been successful in its application for discovery and should be paid its costs on a 2B basis. I expect that counsel will be able to agree the amount for the purposes of an order.
[58] The defendant has been successful in her application for security for costs, but the amount of the cost award lies closer to what the plaintiff had offered than to what the defendant sought. Accordingly, costs in relation to this application will lie where they fall.
Associate Judge Gardiner
6
0