Bankruptcy trustees’ claims over frozen assets

Niall Hearty of Rahman Ravelli details a case where the court considered the issue of protecting assets that are subject to a proprietary claim.

A High Court ruling regarding frozen assets can be seen as a positive outcome for both the claimant and potential claimants in future such cases.

The ruling has shown that the courts will be robust when it comes to protecting assets over which a proprietary claim is being made.

Case Background

Vneshprombank (VPB) is a Russian bank (now in liquidation) that brought a £1.35 billion fraud claim against the Russian fugitive Georgy Bedzhamov and his sister Larisa Marku. Marku, who had been VPB’s president, was jailed after pleading guilty to fraud and embezzlement. Bedzhamov had sought asylum in the UK and currently resides in London.

Bankruptcy proceedings were brought against Bedzhamov in Russia. These proceedings led to a Russian insolvency practitioner Ms Lyubov Kireeva, (the trustee) being appointed to realise and liquidate Bedzhamov’s assets.

In 2019, after VPB brought the fraud claim, it then obtained a worldwide freezing order. The Court of Appeal recently increased Bedzhamov’s monthly allowance from £80,000 to £240,000 so that he could pay for rental costs, security for himself and his family, private school fees, medical bills and other living expenses. This allowance was not, however, enough for him to be able to pay the £5 million in legal fees he owed his previous solicitors or the £500,000 bill he has run up with his current solicitors.

In February 2022, Bedzhamov applied to the High Court to vary the existing order to allow him to enter into a transaction with a third-party lender and developer to sell his Belgravia property to settle his past and future legal fees and meet his ongoing living expenses.

The Ruling

Following consideration of submissions and references made to Kea Investments Ltd v Watson [2020] EWHC 472 (Ch), Mrs Justice Fulk ruled that the correct approach would be “to proceed on the basis that the [bankruptcy] Trustee would have an arguable proprietary claim against the proceeds of sale of the Property.”

It is important to note however that the proceeds of the sale of the property could only be used to settle “reasonable sums” for legal advice and living expenses incurred up until February 2021, when the trustee applied to intervene in the English court proceedings.

The significance of this ruling lies in the fact that it proposes the use of assets which are subject to a proprietary claim. The court has shown itself willing to adopt a robust approach to protect assets over which there is an arguable proprietary claim. This differs somewhat from the aforementioned case of Kea v Watson in that while a pragmatic approach is adopted by the court to strike a balance between the parties’ conflicting positions and to prevent prejudicing either party, there is now seemingly something of a “swing’’ in the claimant’s favour in this regard.

Conclusion

In such cases, there are opposing interests that have to be assessed. Consideration has to be given to whether the possible injustice to the defendant (in denying access to proprietary assets) would outweigh the potential injustice to the claimant of the assets being used. This case is a positive indicator as to the court’s approach regarding potential claimants in civil fraud matters.