Rights & Wrongs? Standard of proof in dishonesty cases considered by the Court of Appeal

Bank St Petersburg PJSC & Anor v Arkhangelsky & Anor [2020] EWCA Civ 408

The standard of proof in dishonesty cases: simple to state, difficult to apply.  In Bank St Petersburg PJSC v Arkhangelsky [2020] EWCA Civ 408 the difficulty led the Court of Appeal to reverse an experienced High Court judge’s dismissal of a counterclaim.  The matter was remitted after a 46 day trial spread over 6 months in 2016, 22 months waiting for a 388 page judgment and nearly 2 years waiting for the Court of Appeal decision on 18 March 2020.  Jack Dillon and Amy Held consider the implications.

Background

This was an extremely complicated factual case, eliciting lengthy judgments at both first instance (Hildyard J) and in the Court of Appeal (Vos C, Patten and Males LJJ).  This article does not seek to be comprehensive; rather the aim is to focus upon proving dishonesty.  The opposing sides in the proceedings will be referred to as the ‘Bank’ and ‘Arkhangelsky’ for the sake of simplicity.

Arkhangelsky took a loan from the Bank but fell into financial difficulties in late 2008.  The Bank agreed to extend repayment.  The terms of the extension were described as the “repo agreements,” which gave shares (the ‘repo shares’) in Arkhangelsky to a third party as a form of protection for the Bank.  Arkhangelsky was unable to take advantage of the extension.  The Bank enforced the loan and claimed the shortfall, about £16.5m after offsetting sums realised against Arkhangelsky’s assets.  Arkhangelsky counterclaimed, alleging that the Bank unlawfully caused harm under Article 1064 of the Russian Civil Code.  Dishonesty was a live issue because, as Vos C put it, the Bank “was at liberty [in Russian law] to cause harm by enforcing its contractual rights honestly, but not … dishonestly.”  Akhangelsky alleged that the repo agreement and enforcement was all part of a dishonest raid of its assets by the Bank and its associates.  The difference between the true value of the assets and the sums realised, Arkhangelsky alleged, ran to hundreds of millions of US dollars.

Standard of Proof

In Re B (Children) 2009 AC 11, Lady Hale “announce[d] loud and clear” that the proper standard of proof “is the simple balance of probabilities, neither more nor less.”  This straightforward formulation remains among the most authoritative statements on the standard of proof in dishonesty claims.  The simple statement, however, obscures the difficulties in its application.  Dishonesty is, in most cases, to be inferred from primary facts.  But, if the primary facts could be consistent either with dishonesty or innocence, how readily should the inference be drawn?

Earlier comments, taken in isolation, are capable of being misapplied. These include:

• Lord Nicholls’ comment in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 that “the more serious the allegation, the more cogent the evidence needed to prove it”, and
• Lord Millett’s comment in Three Rivers District Council v. Bank of England [2001] UKHL 16; [2003] 2 AC 1 that “fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient.”

These should not be seen as hard and fast rules.  As Lady Hale explained, “[n]either the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies. … [T]here is no logical or necessary connection between seriousness and probability.”

Lord Millet’s comment similarly must be read in its proper context: as Bryan J said, citing and approving a previous statement of Flaux J in the same case (Bank of Moscow v. Kekhman [2018] EWHC 791 (Comm)): “[t]he correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence ….  As Lord Millet put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty.” 

The case in dishonesty

Neither side emerged from trial with reputations wholly intact: Hildyard J found that both had acted dishonestly and both had lied to the court.  Many findings made against Arkhangelsky were not appealed.  On appeal, however, the focus was narrow.  It centred on 16 key factual findings, some of which gave rise to a suspicion and potential inference of dishonesty (listed at [16]).  For example:  

• The repo agreement contained a curious, “egregious” feature that effectively handed the Bank “the keys to [Arkhangelsky’s] empire.” It failed to provide for Arkhangelsky to repurchase the repo shares in the event of default.   Any surplus after satisfying Arkhangelsky’s liability to the Bank would enure to the repo shareholder.
• In the enforcement Arkhangelsky’s assets were bought and sold by parties connected to the Bank at auctions arranged to realise money against Arkhangelsky’s debt. Not a single independent person participated in the auctions.  The assets were bought at prices that were possibly well below market value.  Most of the entities that ultimately acquired Arkhangelsky’s assets were “almost certainly owned or controlled” by the Bank.

Many of the primary facts might have been explained by innocence or dishonesty: examples of legitimate enforcement steps taken, or a dishonest design, abusing the Bank’s rights to acquire assets far beyond the value of Arkhangelsky’s debt.  How should the judge have decided where the balance lay?

Standard of proof

The judge found that there was no dishonesty.  There were, however, warning signs that he found the case uncomfortable.  He expressly held that he did not consider the counterclaim a “fiction dishonestly contrived.”  He described a “nagging doubt” that “in Russia … what seems improbable … may yet have occurred.”  While he dismissed Arkhangelsky’s counterclaim he also refused to grant the declaration sought by the Bank as to the absence of dishonesty, and listed ten features of the case that “fomented my misgivings” and “almost inevitably excited suspicion.”

The Court of Appeal found that the judge had misdirected himself to apply “too exacting” or a “heightened standard” of proof.  He had wrongly considered that a dishonesty finding was impermissible where a primary fact was consistent with honesty.  This misdirection was expressed in various ways through the course of the judgment, such as:

• “a burden of proof that could only be discharged by showing the facts to be incapable of innocent explanation”
• “whether the long train of events following default … reveals a pattern of conduct as well as an ultimate result consistent only with a pre-conceived and coordinated ‘raid’.”
• “whether the auctions were abnormally conducted with features and results having no plausible innocent explanation such as to support an inference of conspiracy”
• “unanswered questions and surprising indifference is not proof of impropriety if there are any benign explanations which are not implausible”

While the primary findings were able to stand, the evaluation of and inferences to be drawn from those facts required reconsideration against the true standard of proof.

Lessons

To re-quote Lady Hale, the standard of proof in dishonesty cases is the “simple balance of probabilities, neither more nor less.”  Care must be taken not to elevate other statements into proposition that are at odds.

• A potential innocent explanation does not mandate a finding of no dishonesty.
• It is right that, as a general starting point, fraud and dishonesty require cogent proof because, as Males LJ said in a concurring judgment, “other things being equal, people do not usually act dishonestly.” But this is not a hard and fast rule.  In particular, where someone has lied to the court or has acted dishonestly, the inherent improbability of the allegation against them is diminished.
• More suspicious facts might make a dishonesty finding more likely. The court was criticised for considering each allegation in isolation, failing to “consider how the extraordinary facts … at one stage affected the likelihood of the [Arkhangelsky’s] allegations at a later stage.”
• Inherent improbabilities are just one matter to be weighed in the round. The seriousness of the allegation alone ought not to dissuade a judge.   The idea that more serious allegations are less likely to have occurred and require stronger evidence is a factor, as Lord Nicholls said in Re H, that the court will have in mind “to whatever extent is appropriate in the particular case.”  After quoting this dictum, Lord Hoffman said in Re B that “[c]ommon sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.”

Above all, this is a valuable lesson as to the difficulty of applying a proposition that is so easily stated.

Jack wrote this article in conjunction with Hardwicke researcher, Amy Held.

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