ZUZANA KAPOVA v MILOSLAV MAKOVINI [2023] DIFC CA 004 — Appeal concerning security for costs and adverse inferences (12 January 2024)

This Court of Appeal judgment clarifies the threshold for ordering security for costs under RDC 25.102(6), affirming that the DIFC Courts may draw adverse inferences against a claimant who deliberately obscures their asset position in the face of evidence suggesting the dissipation of funds.

What were the specific allegations of asset dissipation that led Miloslav Makovini and Pharm Trade Holding to seek security for costs against Zuzana Kapova?

The dispute centers on a claim for EUR 2,000,000 brought by Zuzana Kapova against Miloslav Makovini and Pharm Trade Holding, alleging breach of fiduciary duties arising from a failed tax optimization scheme. The Respondents sought security for costs, arguing that the Appellant had engaged in suspicious financial maneuvers that threatened their ability to recover costs should they prevail. The Respondents pointed to specific, large-scale transfers of funds and shareholdings that suggested an attempt to move assets out of reach of the DIFC jurisdiction.

The Respondents’ application was grounded in the assertion that the Appellant had actively restructured her holdings to avoid potential enforcement. As noted in the judgment:

In addition, in May 2021, the Claimant transferred EUR 945,000 from the bank account of the Second Defendant to her companies in Slovakia and Czech Republic.

Furthermore, the Respondents highlighted the transfer of a 90 per cent shareholding in a Slovakian company previously owned by the Second Defendant. These actions formed the evidentiary basis for the Respondents' contention that the Appellant was taking steps to make the enforcement of a future costs order difficult, thereby triggering the requirements of RDC 25.102(6).

Which judges presided over the appeal of the CFI order issued by H.E. Justice Nassir Al Nasser?

The appeal was heard by a panel of the DIFC Court of Appeal comprising H.E. Justice Shamlan Al Sawalehi, Justice Rene Le Miere, and Justice Sir Peter Gross. The hearing took place on 21 December 2023, with the final judgment issued on 12 January 2024. The panel reviewed the original order made by H.E. Justice Nassir Al Nasser on 1 August 2023, which had initially set the security for costs at USD 270,000.

What legal arguments did Dr John Turner and Mr Salah Mattoo advance regarding the Appellant’s duty to disclose assets?

Dr John Turner, representing the Appellant, argued that the CFI had erred in its application of the rules regarding security for costs, suggesting that the evidence of asset dissipation was insufficient to meet the high threshold required for such an order. The Appellant maintained that the transfers were legitimate business transactions and that the court should not have drawn negative conclusions from her reticence to provide a comprehensive disclosure of her personal assets.

Conversely, Mr Salah Mattoo, appearing for the Respondents, contended that the Appellant’s failure to provide any meaningful evidence in response to the application justified the court’s skepticism. He argued that the burden of proof regarding the risk to enforcement had been met by the evidence of the EUR 945,000 transfer and the shareholding shift. The Respondents emphasized that the Appellant had been given ample opportunity to clarify her financial position but had chosen to remain silent. As the court noted:

However, the Defendants add that the Claimant provided no evidence in response to the Application accompanying her witness statement.

What was the precise doctrinal issue the Court of Appeal had to determine regarding the drawing of adverse inferences in security for costs applications?

The Court of Appeal was tasked with determining whether a judge at first instance is entitled to draw an adverse inference against a claimant who, when faced with a credible application for security for costs based on asset dissipation, deliberately chooses not to disclose their financial position. The doctrinal issue was whether the "objective" test under RDC 25.102(6) allows the court to bridge evidentiary gaps by inferring that a claimant’s silence is a tacit admission that their assets have been moved to avoid enforcement.

How did the Court of Appeal apply the test for adverse inferences to the Appellant’s conduct?

The Court of Appeal held that the CFI was well within its discretion to draw an adverse inference. The panel reasoned that once the Respondents had presented a prima facie case of asset movement, the evidentiary burden shifted to the Appellant to provide a satisfactory explanation. Her failure to do so, despite having the opportunity, allowed the court to conclude that the assets were indeed being moved to frustrate potential enforcement. The Court affirmed the principle that silence in the face of a specific challenge regarding asset location is a factor the court may weigh heavily.

The Court’s reasoning was summarized as follows:

Provided that the question of the Appellant’s assets has been squarely put in issue and the Appellant has had every opportunity to respond, then an adverse inference is capable of being drawn.

The Court further noted that the act of moving assets through corporate entities in different jurisdictions, when coupled with a lack of transparency, satisfies the requirements of the rule. As the court stated:

Causing a company in which the claimant holds shares to transfer assets to another jurisdiction is manifestly capable of amounting to steps in relation to her assets that would make it difficult to enforce an order for costs against her.

Which specific RDC rules and statutory provisions were applied to determine the validity of the security for costs order?

The Court relied heavily on the Rules of the DIFC Courts (RDC), specifically Part 25. The primary provision at issue was RDC 25.102(6), which allows the court to order security for costs if a claimant has taken steps in relation to their assets that would make it difficult to enforce an order for costs. The court also referenced RDC 25.101, 25.109, 25.110, and 25.111, which govern the procedural requirements for such applications. The court emphasized that the applicant bears the burden of proof, as stipulated in the RDC:

The RDC address, in two places, the requirement that the applicant for security for costs, upon whom the burden of proof rests, must adduce evidence in support of the application.

Furthermore, the court clarified the scope of the court's power:

It follows that the Court can only make an order for security for costs if the applicant comes within one or more of the conditions in Rule 25.102.

How did the Court of Appeal utilize the precedents of Frontline Development Partners v Asif Hakim Adil and Damac Park Towers v Youssef Issa Ward?

The Court of Appeal utilized Frontline Development Partners v Asif Hakim Adil [2015] CA 005 to reinforce the objective nature of the test under RDC 25.102(6). It held that the focus is on the effect of the claimant's actions rather than their subjective intent; if the steps taken objectively make enforcement difficult, the condition is satisfied.

Additionally, the court cited Damac Park Towers v Youssef Issa Ward [2015] DIFC CA 006 to reiterate the importance of the principle that an appellant should not be permitted to introduce new points on appeal that were not properly ventilated at the CFI level. This served to limit the Appellant’s ability to re-litigate the factual findings regarding her asset transfers.

What was the final disposition of the appeal and the specific orders regarding the security amount and costs?

The Court of Appeal dismissed the appeal but granted a minor modification to the security amount. While the CFI had ordered USD 270,000, the Court of Appeal adjusted this to USD 200,000, to be paid into court within 14 days or held in an approved escrow arrangement. The Appellant was ordered to pay 85% of the Respondents’ costs of the appeal. The court also took the opportunity to criticize the quality of the evidence provided by the Respondents regarding their costs, noting:

A detailed costs breakdown does not consist merely of listing the names of individual fee earners working on the matter and their total hours expended, as the applicant has done in this case.

What are the wider implications of this judgment for practitioners handling security for costs applications in the DIFC?

This judgment serves as a stern warning to claimants who attempt to obfuscate their financial position during litigation. It establishes that the DIFC Courts will not hesitate to draw adverse inferences when a claimant fails to respond to evidence of asset dissipation. Practitioners must advise clients that silence is not a neutral strategy; if a respondent presents evidence of suspicious asset transfers, the claimant must provide a robust, evidence-based rebuttal. Furthermore, the court’s comments on costs breakdowns indicate that applicants must provide granular, transparent evidence of their legal expenses to succeed in a security for costs application, as generic lists of hours will be viewed with disfavor.

Where can I read the full judgment in Zuzana Kapova v (1) Miloslav Makovini (2) Pharm Trade Holding Ltd [2023] DIFC CA 004?

The full judgment is available on the official DIFC Courts website: https://www.difccourts.ae/rules-decisions/judgments-orders/court-appeal/zuzana-kapova-v-1-miloslav-makovini-2-pharm-trade-holding-ltd-2023-difc-ca-004

Cases referred to in this judgment:

Legislation referenced:

• DIFC Law of Obligations
• Rules of the DIFC Courts (RDC): 25.101, 25.102, 25.102(6), 25.109, 25.110, 25.111