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IN THE HIGH COURT OF CHANCERY
BETWEEN
Claim No. HC-2012-000165
(1) BANK ST PETERSBURG OJSC
(2) ALEXANDER SAVELYEV
Claimants / Part 20 Defendants
– v –
(1) VITALY ARKHANGELSKY
(2) JULIA ARKHANGELSKAYA
Defendants / Part 20 Claimants
– and –
(3) OSLO MARINE GROUP PORTS LLC
_______________________________________________________________________
Part 20 Claimant
SKELETON ARGUMENT
ON BEHALF OF THE DEFEDANTS AND OMGP
_______________________________________________________________________
(references in square brackets are to the trial bundle [volume/tab/page])
Introduction
1.
The Court is well aware of the reasons why this trial will be extremely difficult
for the Defendants & OMG Ports, for those who have volunteered to assist
them, and for the Court itself. There are not many examples of trials at this
scale where the inequality of arms was ever so great. The only comparable
example that comes to mind is McDonalds v Steel libel case, which eventually
1
was found by ECHR to have been in breach of Article 6. The Defendants and
OMGP earnestly hope that the present litigation may have a happier ending.
2.
The Court has made it clear that the fairness of the trial will be subject to a
‘continuous review’ during the trial; and that specific safeguards of fairness will
be imposed. In particular, the Claimants were ordered to file an old-fashioned
‘impartial’ written opening which identifies issues “straight down the middle”.
At the PTR on 14 December, Hildyard J said about the Claimants’ opening (p.
66, lines 18-21): “I will be disappointed – and I am sure that I will not suffer
this, but I would be disappointed if he were to explain the matter in a
prejudicial way, which would be his right in the ordinary course”. That
direction (as the Defendants understand it) was intended to ensure fairness to
litigants in person facing opponents with a very strong legal representation.
3. With respect, the only feature of the Claimants’ 246-page-long skeleton
argument which seems to echo that direction is that it seeks to avoid
counterproductively excessive rhetoric. This is no more than good advocacy.
This is an effective way to argue the Claimants’ case, but nothing like an
‘impartial’ opening which might have helped to ensure fairness to the
Defendants. With all its virtues, the Claimants’ opening is a partisan argument.
4. While it was originally anticipated that the Defendants and OMGP will only
need to provide a brief document commenting on such points in the Claimants’
‘fair and impartial’ opening with which they disagree, that is now impractical.
Due to the length of that skeleton (246 pages), it is impossible to comment on it
point by point; and due to its partisan nature, virtually every point needs an
answer. The Defendants and OMGP make no admissions as to the accuracy, let
alone fairness, of various assertions and arguments advanced against them in
that document.
5.
For these reasons, it is considered that the Court would be better assisted by a
full and proper opening submission from the Defendants and OMGP which
identifies the key issues for the trial. That submission is made in Part I of this
skeleton argument.
2
6.
Part II addresses the fairness of the trial, which the Court has indicated will be
kept under a ‘continuous review’. It highlights various issues which threaten the
fairness of the trial, including, but not limited to, the partiality and unfairness of
the Claimants’ skeleton. It includes submissions as to the possible parameters
of the Court’s ‘continuous review’ of fairness, and the appropriate course of
action in the event that review ultimately produces a ‘negative’ result.
PART I: THE ISSUES
7.
It is no more than a procedural incident of the topsy-turvy history of these
proceedings that the Bank and Mr. Savelyev are known as Claimants and Mr. &
Mrs. Arkhangelsky as Defendants. This case is, and has always been,
principally about the allegations made by Mr. & Mrs. Arkhangelsky and OMG
Ports in the Counterclaim.
8. Accordingly, the Counterclaim (and the corresponding issues in the Claimants’
claim for negative declarations) will be addressed first. The issues in the Bank’s
claims (a) against Mr. Arkhangelsky and (b) against Mrs. Arkhangelsky are
straightforward and are discussed in the end of this part.
The Counterclaim
9.
The primary Counterclaim is brought under Article 1064 of the Russian Civil
Code. This is the general tort law provision which provides that persons who
cause harm to other persons are liable to pay compensation. As the parties’
Russian law experts agree:
A party is liable under Article 1064 of the Civil Code, which is a
general rule for compensation of harm. If harm is caused by a breach
of a contract (or other obligation), Article 393, as well as related
articles, such as 401, apply. The elements to establish are the fact of
3
harm, unlawfulness, a causal link between the defendant’s action (or
omission) and the harm, culpability of the tortfeasor1.
10. The elements of a claim under Article 1064 were summarised as follows by
Andrew Smith J in Fiona Trust v. Privalov [2010] EWHC 3199 (a case in
which the Bank’s expert, Professor Maggs, gave evidence) at [94]-[95]:
“[L]iability under article 1064 requires (i) harm, (ii) causation, (iii) fault
and (iv) unlawfulness… There is no significant issue about what
constitutes fault or unlawfulness for the purposes of article 1064. The
defendants pointed out, and I accept, that, while intentional actions that
cause harm are unlawful (unless permitted by a legal provision),
payments made in legitimate business transactions are not unlawful, and
a person cannot be said to be at fault on that account. However, it is not
disputed that the requirements of fault and unlawfulness would be
satisfied if the claimants succeeded in establishing dishonesty, the sole
basis upon which they pursue the claims. The significant issues about
article 1064, if Russian law applies, concern the requirements of harm
and causation.”
11. The burden of proof is on the Part 20 Claimants to show that they suffered harm
as a result of the Bank’s and/or Mr. Savelyev’s acts or omissions. Once the
harm and causation are proven, the burden shifts to the Bank and Mr. Savelyev
to show that their actions were (a) innocent and/or (b) lawful. In practice, like in
Fiona Trust case, the question of liability under Article 1064 turns mainly on
the issue of honesty or dishonesty of the Bank’s and Mr. Savelyev’s actions.2
12. This much is common ground between the Russian law experts. If the
Defendants and OMGP succeed in proving their factual case as to the dishonest
conspiracy to steal their assets, the liability under Article 1064 is established.
There are a number of disputes between the Russian law experts; but all those
disputes either (a) affect only quantum (e.g. a specific head of loss) and not
1 Joint Memorandum of Experts on Russian Law, paragraph 31
2 In theory, negligence (as opposed to intent) is a sufficient form of ‘fault’ under Article 1064; but given the
way each party has formulated its case, a finding of negligence is unlikely.
4
liability, (b) only become material if the Court makes ‘mixed’ factual findings
rather than accepts the substance of either party’s factual case.
13. The latter category includes disputes concerning several alternative legal bases
of the Counterclaim; and whether the Defendants and OMGP are permitted by
Russian law to bring contractual claims in alternative to a claim in tort.
However, that would only be material if the Court makes certain ‘mixed’
factual findings, for example that the Bank and Mr. Savelyev acted honestly
and lawfully at all times, but nevertheless breached a legally binding contract
for a Moratorium on all payments; or procured the transfer of shares in OMG
companies pursuant to an unlawful and void contract.
14. Subject to that, the Counterclaim under Article 1064 turns simply on the facts.
It is therefore not proposed to address the very voluminous expert evidence on
Russian law in this skeleton, save as may be necessary in relation to specific
issues below.
15. As to the inherent probabilities, the courts are increasingly familiar with the
realities of Russian commercial life, in general, and the phenomenon of
“raiding”
in particular. As Mann J noted
in JSC Mezhdunarodniy
Promyshlenniy Bank v. Pugachev [2014] EWHC 4336 (Ch) at [110], “there is
an apparently respectable body of opinion which considers that the state and
individuals are capable of manipulating the system in a corrupt fashion.” This
means that, although the allegations against the Bank are serious and might be
viewed sceptically in a western context, it cannot be said that they are
implausible. On the contrary, the allegations fall squarely within a standard fact
pattern for “raids” identified in the academic literature, whereby politically
powerful or well-connected people engineer the take-over of valuable
businesses for their own benefit by unlawful means (see below).
16. The factual issues in the Counterclaim can be broken down as follows:
(1) Financial position and prospects of Oslo Marine Group in 2008-2009
(2)
‘Repo’ agreement
5
(3) Alleged Moratorium
(4) Alleged default
(5)
‘Seizure’ of Western Terminal and Scan
(6)
‘Transfers’ of assets from Western Terminal and Scan to Renord et al.,
and between different Renord/SKIF companies
(7) Valuations
(8) Renord Group
(9) The criminal case against Mr. Arkhangelsky
(10) The role of Mrs. Irina Malysheva
17. These issues are discussed in turns below. It is not proposed to discuss the
issues of quantum in this skeleton, as it remains an open question whether
quantum can be fairly determined at this trial (see further below).3
Financial position and prospects of Oslo Marine Group in 2008-2009
18.
It is common ground that, as a result of the global financial crisis towards the
end of 2008, OMG was in considerable financial difficulties, to the extent of
being unable to meet the deadlines for current payments due to its creditors
(including the Bank) without a restructuring and/or refinancing of its
indebtedness. The dispute is focusing on two points: (a) the nature and causes
of those difficulties and (b) what OMG represented to the Bank about its
position at the time.
19. The Bank says that ‘Mr. Arkhangelsky’s business empire was built on sand’ in
the first place, that its business projects were not viable, that following the
global crisis, the OMG’s default on its debts and its ultimate collapse were
3 The Claimants’ skeleton now argues that both the claim and the counterclaim must be assessed in Russian
roubles. That is significant, as the Rouble has plunged since the events giving rise to the Counterlcaim. To
the best of the Defendants’ recollection, this is the first time when a suggestion that damages may only be
awarded in roubles has been made. Using currency depreciation to diminish the value of a claim contradicts
the principle of ‘full compensation’ under Article 1064 of Russian Civil Code; the Defendants and OMGP
will submit that damages must be assessed in sterling.
6
inevitable, and accordingly, ‘there was nothing to raid’. Crucially, the Bank
maintains that, as of late 2008 – early 2009, the Group’s liabilities were well in
excess of its existing assets.
20. The Defendants and OMGP acknowledge the financial difficulties of the Group
at the time, but deny that they were either structural or insurmountable. There
were good prospects of obtaining refinancing for the Group’s major projects
from Western and/or Russian banks; and negotiations to obtain it were at quite
an advanced stage. To complete those negotiations (or, as a last resort, to
restructure its businesses and sell parts of its assets) the Group needed a
moratorium on all repayments of debts for at least 6 months; the Defendant
maintain that such a moratorium was agreed with both of its principal lenders –
the V-Bank and Bank St. Petersburg. In any event, and crucially, the
Defendants and OMGP say that the Group’s existing assets were significantly
in excess of its liabilities. There was something to raid, and it was raided.
21. Further, the Bank maintains that OMG misrepresented its position to the Bank
at the time. The Bank was allegedly assured that OMG’s cash-flow difficulties
were very short-term, and due to a delayed payment from a particular client for
the delivery of one container of timber.
22. The Defendants and OMGP say that they were candid with the Bank as to the
Group’s difficulties and prospects. Indeed, it was on that basis that the
Moratorium was requested and agreed.
23. Key witnesses:
Defendants’: Mr. Arkhangelsky, Mr. Bromley-Martin;
Claimants’: Mr. Belykh, Ms. Mironova, Ms. Volodina
Experts: business valuation, asset valuation.
‘Repo’
7
24.
In late December 2008 Mr Arkhangelsky had a meeting with Mr Savelyev at
which they agreed a restructuring of the Group’s debts to the Bank. The exact
terms of that restructuring are in dispute (see below). Whatever they were, in
exchange for that restructuring, the shares in Western Terminal and Scan would
be temporarily transferred, for nominal consideration, to companies nominated
by the Bank (“the December 2008 Agreement”).
25. The terms of the December 2008 Agreement were partly (but not fully, and
notably not including the contentious terms of debt restructuring) set out in a
document called the Memorandum which Mr Arkhangelsky and Mr Savelyev
signed [D107/1537]. The Memorandum included the following provisions:
1. In order to secure the loans granted to the Group listed in item 1.1
of
this Memorandum, special companies (the Purchasers)
purchase shares in the following Group companies:
– Western Terminal LLC (100% of shares);
– Scandinavia Insurance Company LLC (100% of shares)
For prices specified in the relevant sale and purchase contracts.
2. After the complete fulfilment of the Group’s obligations to the
Bank, sale and purchase transactions in reverse will be carried out
for prices specified in reverse sale and purchase contracts which
will be signed between the Purchasers and the current owners of
Western Terminal LLC and Scandinavia Insurance Company LLC
(“the Sellers”) simultaneously with the direct sale and purchase
contracts.
3. The Purchasers undertake:
Not to interfere in everyday commercial activities of the
purchased companies on condition that the Group fulfils its
obligations to the Bank under the said contacts on time and
entirely
8
Not to dispose in any way of the shares of the purchased
Group companies before the date of the repurchase
contract on condition that the Group fulfils its obligations
to the Bank under the said contracts on time and entirely
4. The sellers and the management of the companies on sale
undertake:
Not to sell or transfer to anyone these companies’ assets,
Not to stop their activities, or
Not to worse in any other way the material and financial
situation of the companies.
5. The Bank undertakes:
Not to increase the interest rates on the loans granted to
the Group on condition that the Group fulfils its obligations
to the Bank under the said contracts on time and in its
entirety;
Not to claim early repayment of the loan specified in item
1.1 of this Memorandum on condition that the Group fulfils
its obligations to the Bank under the said contracts on time
and entirely.
26.
It is now clear, from the evidence and the admissions made by the Claimants,
that at least 5 out of the 7 Original Purchasers were companies of the so-called
Renord Group. The Renord Group includes a large number of companies,
mainly controlled through offshore entities and/or individual nominees, whose
structure of ownership frequently changes. The Claimants say that all Renord
companies are ultimately owned and controlled by Mr. Mikhail Smirnov, a
former employee of the Bank. Most of other key individuals at Renord are also
known to be former top managers of the Bank, or close relatives of the current
top managers of the Bank.
9
27. The other two Original Purchasers are said by the Claimants to be owned and
controlled, through nominees, by a Mr. Leonid Zelyenov.
28. The Claimants’ evidence, which the Defendants accept, is that the arrangements
with Mr. Smirnov and Mr. Zelyenov were made on behalf of the Bank by its
Vice President, Mrs. Irina Malysheva. Her husband, Mr. Vladimir Malyshev,
was a co-founder and a 75% beneficial owner of Renord-Invest. There is a
dispute between the parties as to whether Mr. Malyshev continued to have an
interest in Renord-Invest at the time. It is not in dispute that Mr. Smirnov is a
family friend of the Malyshevs. The issues in relation to Renord Group are
discussed further below.
29. These arrangements between (a) the Bank, (b) the OMG and (c) the Original
Purchasers had the following unusual features:
(1) At least in legitimate banking practices (in contrast to the known patterns
of fraudulent raiding – see further below), a Repo arrangement, used as a
form of additional security, usually involves a temporary transfer of assets
to the bank or its fully owned subsidiary. It is unusual for a transfer to be
made to third parties.
(2) The ‘Repo’ sale was for a purely nominal consideration, rather than the
usual ‘repo’ sale for the market price with an agreed haircut.
(3) On the Bank’s evidence, its arrangement with the Original Purchasers was
made by a purely oral agreement between Mrs. Malysheva, Mr. Smirnov
and Mr. Zelyenov. Nothing whatsoever was recorded in writing, and no
documents whatsoever have been disclosed.
(4) The agreement between the Bank and OMG was not recorded (a) in full in
a single document and (b) in a formal contract.
(5) ‘Repo’ agreements are typically used by Russian banks as a form of
additional security where a loan is only secured by a pledge of shares, so
there is a risk of ‘asset tunnelling’ which would reduce the value of the
shares. In such cases, a ‘repo’ sale of the real estate may be used as
10
security in addition to the pledge of shares. In the present case, the usual
arrangement was turned ‘upside down’: in addition to the registered
pledges of real estate (which are considered the most reliable form of loan
security), the Bank required a ‘Repo’ of the shareholding of the companies
which held that real estate.
30. The Bank’s original case was that this Repo arrangement was “conventional
and commonly used” in Russia at the time. In support of that, the Bank relied on
the expert report of Mr. Mikhail Matovnikov to discharge the Freezing Order
made against Mr. Savelyev in BVI, and to obtain a Freezing Order against the
Defendants in these proceedings. Since then, however, that part of the
Claimants’ case has been significantly watered down.
31.
It is now common ground between the parties’ banking experts that at least the
matters specified in para 22 (1)-(3) above were unusual. The differences
between the banking experts are mainly confined to matters of fine detail and
emphasis: Professor Guriev describes the arrangement as “not only irregular,
but clearly improper” (para 25); Mr. Turetsky uses the phrase “unusual
features” and explains the possible reasons for them. In substance, however, the
experts agree that the arrangement was unusual. It is fair to say that both
experts faced some difficulties in reconciling the facts of this case with the
usual and legitimate commercial practice of ‘repo’ contracts.
32. There is, however, an alternative explanation which covers those facts without
difficulty. The ‘repo’ arrangement and subsequent events fit perfectly into the
known patterns of fraudulent ‘raiding’ in Russia. The Defendants and OMGP
rely on the works of reputable experts and NGOs served as hearsay evidence in
these proceedings, and in particular, invite the Court to read two articles:
(1) Armed Injustice: Abuse of Law and Complex Crime in post-Soviet Russia
by Thomas Firestone, the US Department of Justice resident legal advisor
11
in US Embassy in Moscow [D139/2334].4 The Court is invited to read the
following parts of the article:
I. Introduction (p.p. 555-556)
A. Commissioned prosecutions (p.p. 556-557 only)
C. Corporate Raiding (“Reiderstvo”) (p.p. 563-567)
D. Collusive Litigation (p.p. 567-571)
(2) Domination of banking raiding as a tendency of seizure and redistribution
of property in Russia in 2009-2011, a report by National Anticorruption
Committee (NACC), a reputable Russian NGO, co-edited by several
eminent figures including the present Federal Human Rights Ombudsman,
Ella Panfilova.5 The English translation is enclosed herewith as Appendix
1.
33.
In particular the NACC report, on the basis of studying dozens of cases of
‘raiding’, identifies the four most typical ‘schemes’, and explains how they
apply in cases involving banks. ‘Scheme 4’ is particularly relevant:
Scheme 4 (Manufacturing of rights under a REPO contract)
1.
A large loan is given to a representative of a successfully operating big or
medium-size business
2.
Securities are formalized:
– pledges of assets which constitute the business;
– personal guarantees of the business proprietors;
– guarantees of companies involved in the business and having significant assets or
trading turnover.
3.
REPO contracts are made for the shares (at least the controlling shareholding) of
the companies controlling the business, on the following terms:
4Document 9 in Defendants’ hearsay notice and document 660 in Defendants’ disclosure
5Document 11 in Defendants’ hearsay notice and document 662 in Defendants’ disclosure. The original
Russian report is at [D153/2566]
12
- usually, at a nominal price;
– repurchase is subject to the condition of repayment of the entire loan;
– always with a counterpart who is not formally affiliated with the bank;
4.
The lender bank declares that the debt is overdue. Like in Scheme 2, the lender
bank may deliberately create the conditions for an overdue indebtedness to emerge.
5.
A demand to repay the debt at a short notice in connection with a breach of the
contract;
6.
The Bank declares there have been a breach of the loan agreement (the clause on
early repayment of the loan) and a breach of REPO contract.
7.
Since a company controlled by lender bank is the controlling shareholder of the
companies which control the borrower’s business, that company is entitled to initiate a
shareholders’ conference to replace the company’s director-general and to approve any
transactions with the company’s assets.
8.
A replacement of director-general, seizure of management in the borrower’s
company, failure to service the loan, dissipation of assets.
9.
An assignment of the principal loan obligation to a third company, along with all
the securities for the loan agreement except REPO.
10.
Recovery of the debt from the debtor and guarantors/pledgers without giving
credit for the assets removed from the borrowers’ control using the REPO contracts.
34.
It will be noted that those very features of the present case which the banking
experts describe as unusual for legitimate banking practices (e.g. the nominal
price, and involvement of third parties ‘not formally affiliated with the bank’)
are singled out as characteristic elements of that raiding scheme.
35. Against this background, the key issue is what the intentions of the parties were
in this particular case. It is now common ground that the Original Purchasers
held the shares “on behalf of the Bank” and to the Bank’s instructions (see eg
Smirnov, paras 29, 33, 34). According to Mr. Savelyev, the purpose of ‘Repo’
was for the Bank to “obtain an interest in certain OMG companies” through the
13
Original Purchasers (Savelyev, para 25). The implications for a wider analysis
of the relationship between the Claimants and Renord are discussed further
below.
36. The Bank says that the ultimate purpose of the ‘Repo’ arrangement was to
protect its legitimate interests against any potential dishonest attempts to resist
the realisation of pledges; that it intended to return the shares to OMG after its
obligations would be fulfilled; and that the only reason why the shares were not
returned is that the pledges were insufficient to cover the outstanding
indebtedness.
37. The Defendant and OMGP will invite the Court to find, in summary, that the
purpose was fraudulent, namely, to appropriate the two valuable companies
and/or their assets for the benefit of the Claimants and/or Renord; that the
market value of the shares was well in excess of the indebtedness; and that
neither the Bank nor Mr. Savelyev had any genuine intention of returning the
shares to OMG.
38. Key witnesses:
Defendants’: Mr. Arkhangelsky
Claimants’: Mr. Savelyev, Mrs. Malysheva, Mr. Smirnov, Mr.
Sklyarevsky
Experts: Russian banking practice and procedure.
Alleged Moratorium
39. The terms of the agreement which are recorded in the Memorandum are
common ground. However, it is much more difficult to ascertain, and is in
dispute between the parties, what it was that the OMG obtained in consideration
for transferring the two companies’ shares to the Original Purchasers nominated
by the Bank. In other words, what were the obligations of the Bank in relation
to loan restructuring?
14
40. The Claimants deny that any specific terms of the restructuring were agreed at
the meeting. The Claimants’ case is that such terms were only agreed with
individual corporate borrowers some time after the meeting, and after the
transfer of the shares to ‘Original Purchasers’. As Mr. Savelyev puts it in para
29 of his statement, “At the meeting the Bank was prepared, subject to
obtaining the necessary internal approvals, to see what it could do to consider
restructuring OMG’s debts”. Other than that, the Bank denies undertaking any
specific obligations as to restructuring.
41. The Defendants say that it was expressly agreed at the meeting that all
payments due from the Group companies to the Bank, including interest
payments and capital repayments, would be subject to a general six-months
Moratorium until the end of June 2009. On the Defendants’ case, that was the
only reason why Mr. Arkhangelsky sought a meeting with Mr. Savelyev in the
first place; that the ‘repo’ arrangement was only proposed as a condition of the
Moratorium; and that Mr. Savelyev’s promise of the Moratorium was the
reason why Mr. Arkhangelsky agreed to transfer the shares.
42. There is very considerable circumstantial evidence to the effect that, throughout
December, January and February, the parties proceeded on the basis of an
agreed Moratorium until the end of June 2009. A few of the addenda appear to
be inconsistent in that they only roll up the interest payments to the respective
maturity dates in March-May, rather than to the end of June. The Defendants
and OMGP say it was intended that further addenda would be prepared and
signed in due course. The issue will need to be explored in some detail in cross-
examination of both parties’ witnesses.
43. Further, contemporaneous documents show that after the alleged default in
March 2009, Mr Arkhangelsky and OMG proceeded on the basis that, by
demanding repayment of loans at that time, the Bank had breached the terms of
December 2009 Agreement:
15
(1) By an email of 7 April 2009,6 Mr Arkhangelsky responded to Mr.
Belykh’s proposal for a meeting: “What is the point – the Bank is
oppressing us – contrary to the agreements reached, and to the human
values!!!”. [D117/1763]
(2) An
internal OMG email dated 21 April 20097 shows Mr
Arkhangelsky’s reaction to being informed about the Bank’s demand to
Vyborg Shipping for repayment of a loan: “Perhaps we should use our
agreement (of the end of last year) and write to them about this?”
[D118/1810]
(3) In June 2009, an OMG in-house lawyer, Mr. Maslov, advised that the
Bank’s claims against Vyborg Shipping could be resisted on the
grounds of “bad faith” on the part of the Bank, in light of the Bank’s
failure to extend the repayment date.8
44.
If there was an oral agreement on the Moratorium, there is a dispute between
the experts as to whether it was legally binding under the Russian law.
Ultimately, that dispute is unlikely to be significant for the outcome of the case:
(1) If the agreement was a binding contract, the Bank is liable for breach of
contract under Article 393 of the Russian Civil Code.
6 Document K287 in the Bank’s disclosure.
7 Document N225 in the Bank’s disclosure.
8 Document N248 in the Bank’s disclosure. The provenance of the documents listed as (2) and (3) is
curious. A large number of OMG’s internal documents, including legally privileged ones, were obtained by
the Bank from Olga Krygina, the former Director-General of Vyborg Shipping Co, obviously in breach of
confidence; and disclosed in these proceedings. Ms. Krygina’s e-mail to Ms. Mironova and Mr.
Kolpachkov dated 2 December 2011 (Document M234 in the Claimants’ disclosure) makes it clear (using a
lot of foul language, especially to refer to Mr. Arkhangelsky) that she was prepared to give the Claimants
any assistance. In particular, she writes: “A request: because of my flood, I moved the archive to my
favourite garage and to the neighbours. Give me tasks in advance, and I’ll get whatever you need”.
It is noteworthy that the Claimants are not calling Ms. Krygina to give evidence.
The Defendants and OMGP rely on the documents listed as (2) and (3) herein, and therefore waive
privilege over Mr. Maslov’s legal advice in relation to the Bank’s claim in rem against OMG Kolpino. That
waiver does not extend to any other privileged documents obtained from Ms. Krygina, whether or not
included in the trial bundle.
16
(2) However, if the agreement was not binding in law, but the Claimants
misled Mr. Arkhangelsky to believe that it was, and/or that the Bank
would extend the repayment dates at least till the end of June 2009 in
exchange for the transfer of shares under the Repo agreement, that would
mean that the transfer of shares was procured by deceit. Accordingly, the
Bank would be liable in tort under Article 1064 of the Russian Civil Code.
45.
It follows that, on true analysis, the issue of Moratorium is primarily an issue of
fact. If the Defendants and OMGP prove that the Moratorium was in fact
promised to them, they are entitled to succeed on liability regardless of the legal
analysis of that promise.
46.
If, on the other hand, the Court accepts the Claimants’ version of the events,
that would be fatal to the alternative counterclaim for a breach of contract, but
strengthen the further alternative counterclaim to set aside the transfer of shares
as a ‘one-sided deal’ under Article 179 of the Russian Civil Code (roughly
analogous to the doctrine of duress under the English law). If the OMG was in
fact induced to transfer the shares of Scan and Western Terminal to the
companies nominated by the Claimants for no more than the Bank’s promise
“subject to obtaining the necessary internal approvals, to see what it could do
to consider restructuring OMG’s debts”, the Court would need to consider the
lawfulness of such a deal under the relevant Russian law.
47. A factual finding in favour of the Claimant would not be fatal to the
counterclaim in tort under Article 1064. Regardless of the findings on
Moratorium, the Court would still need to consider the Claimants’ actions
before and after the alleged ‘default’, in the light of the allegations of fraud.
48. Assuming that the Defendants and OMGP can properly pursue these three
alternative counterclaims for (a) fraud, (b) invalidity of contract and (c)
alternatively, breach of contract9, the Bank’s only realistic defence is to prove
9 As to the Russian law experts’ dispute in relation to the alleged rule on ‘competition of claims’, see the
Joint Statement of Dr. Gladyshev and Professor Maggs at [E4/15/7], paras 39-44. In the event Professor
Maggs’s view is to be preferred, the Court will also need to consider whether the rule against ‘competition
17
its case that the shares were worthless. That obviously depends on the expert
valuation evidence in relation to the two companies’ businesses and assets,
discussed further below.
49. Key witnesses:
Defendants’: Mr. Arkhaneglsky
Claimants’: Mr. Savelyev, Ms. Mironova, Ms. Volodina, Mr. Guz
Experts: Russian law.
Alleged default
50. On 4 March 2009, the Bank’s Management Board resolved to refuse an
extension of the loan due from one of OMG borrowers, Petroles. The next day
the loan matured and the Bank demanded repayment. On 23 March, the Bank
similarly refused an application by Vyborg Shipping for an extension of the 1st
Vyborg loan. In April, the Bank relied on the alleged default under the 1st
Vyborg loan to demand an early repayment of all other Vyborg Shipping loans.
By June 2009, the Bank had demanded early repayment of virtually all OMG
loans (‘cross-default’). Each demand for repayment was followed by claims for
recovery brought in Russian courts.
51.
If the Court finds that the parties had agreed a general 6-month Moratorium, the
Bank was clearly in breach of the December 2008 Agreement.
52. Whether or not there was a Moratorium, however, it remains the Defendants’
and OMGP’s case that the Bank acted pursuant to a fraudulent conspiracy to
‘raid’ Western Terminal and Scan and/or appropriate their assets. In the event
the Defendants’ case on fraud is accepted, the Court will need to consider what
would be the likeliest development if not for the fraudulent scheme which the
Bank was pursuing; in particular, whether (on the balance of probabilities) the
Bank would have called a default (not merely whether it had a right to do so).
of claims’ is substantive of procedural law. In alternative to their reliance on Dr. Gladyshev’s view, the
Defendants and OMGP will submit that any such rule is procedural and does not apply.
18
Therefore, the circumstances and reasoning of the Bank’s decision will need to
be investigated in any event.
53. The parties’ banking experts are broadly agreed as to the standard practice in a
situation of this kind, i.e. where a bank has to make a choice between a default
of a major borrower or a further restructuring of its debt.10 The banks make that
choice on the basis of a commercial judgement as to the borrower’s prospects
of restoring solvency. There seems to be a minor disagreement (possibly just a
misunderstanding) between the experts as to where exactly they draw the fine
line between (a) the standard practice to exercise a commercial judgement and
(b) the substance of that commercial judgement, which by definition, cannot be
a matter of standard practice. If there is any substantive disagreement between
the experts, it is unlikely to be significant. The real issue is whether, as a matter
of fact, the Bank made its decision on the basis of commercial considerations
(in which case, it matters not whether its decision was wise or stupid, harsh or
benevolent) or for the purpose of a fraud against the Defendants and OMGP.
The Bank says it was the former; the Defendants say it was the latter.
54. The Banks’ explanation of its decision is that between December and March, it
discovered two matters which caused a loss of trust in Mr. Arkhangelsky and
OMG:
(1) That in 2006, Mr. Arkhangelsky had been subject to a criminal
investigation for alleged tax evasion. It is common ground that no charges
were brought.
(2) In December 2008 a Vyborg Shipping vessel, OMG Tosno, was arrested in
Tallinn pursuant to a claim by a bunkering company. The vessel had been
pledged to the Bank under one of the Vyborg loans. The Claimants allege
that OMG failed to inform them of the arrest of OMG Tosno, and thus
misrepresented the seriousness of its financial difficulties.
10Compare paras 63-64 of Professor Guriev’s report at [E2/10/22] and paras 5.1-5.3 of Mr. Turetsky’s
supplemental report at [E2/9/6]
19
55. The Defendants and OMGP say that explanation is false, and the Bank had
been well aware of both those matters for a long time. Mr. Arkhangelsky’s
evidence (Arkhangelsky 16th, para 159) is that:
(1) The tax investigation was fabricated by the head of St. Petersburg police,
Gen. Piotrovsky, in the circumstances described in Arkhangelsky 16th,
paras 61-68 as part of an attempted extortion racket against OMG. Not
only was Mr. Savelyev informed of it, but it was Mr. Savelyev who used
his influence to protect Mr. Arkhangelsky from Gen. Piotrovsky.
(2) Mr. Arkhangelsky discussed the arrest of OMG Tosno with at least three
employees of the Bank: Ms. Borisova, Ms. Prokhor, and Mr. Platonov.
The Bank is not calling any of them to rebut Mr. Arkhangelsky’s
evidence. He also thinks he discussed the arrest of the vessel at the
meeting with Mr. Savelyev.
56. Key witnesses:
Defendants’: Mr. Arkhangelsky
Claimants’: Ms. Mironova, Ms. Volodina
Experts: Russian banking practice and procedure
‘Seizure’ of Western Terminal and Scan
57.
In parallel to the events of the ‘cross-default’, the following important events
took place in March-April 2009:
(1) The Bank instructed the Original Purchasers of Scan to ‘sell’ the
shareholding to six other companies (‘Subsequent Purchasers’), for the
same nominal price as in the original ‘Repo’ contract;
(2) SKIF LLC and its director, Mr. Sklyarevsky, became involved in “the
project” as one of the ‘Subsequent Purchasers’ but also in other roles (see
his witness statement);
20
(3) Mr. Zelenov was unwilling to continue to participate in the arrangement,
and withdrew from it.
(4) The Bank instructed the Original Purchasers to replace the management of
Western Terminal and Scan;
58. The circumstances of each of those events, and the purposes pursued by the key
actors, will need to be explored in some detail. In each case, the crucial issues
are whether the Bank acted (a) honestly and (b) otherwise lawfully.
59. As regards the onward ‘sale’ of Scan to the ‘Subsequent Purchasers’, Mr.
Sklyarevsky admits in para 33 that “the key motivation” was to frustrate any
potential legal claim by OMG to set aside the ‘Repo’ arrangement. This issue is
whether such a purpose was honest and lawful.
60. As regards the replacement of management, the Claimants rely on the
evidence of Mr. Sklyarevsky, who explains in para 42 that the Bank’s purpose
was to “protect the Bank’s security and… force Mr Arkhangelsky to the
negotiating table”. The Defendants and OMGP will invite a finding that the
management was replaced pursuant to the fraudulent scheme to ‘raid’ the two
companies and/or their assets. In particular, the new management would
cooperate with the Claimants in arranging such transfers or sham ‘sales’ of their
assets to different Renord companies as subsequently occurred (see below).
61. Key witnesses:
Defendants’: Mr. Arkhangelsky
Claimants’: Mr. Sklyarevsky, Mr. Smirnov
Subsequent transfers of assets
62. The subsequent history of transfers of assets from Western Terminal and Scan
to Renord, and between different Renord/SKIF companies, is rather opaque.
The Claimants have given virtually no disclosure in relation to those
transactions. The requests made to Mr. Smirnov, Mr. Sklyarevsky and their
21
respective companies pursuant to the Court’s disclosure order of 23 October
2015 [J1/20] have also yielded no material results. Nor did the Claimants
disclose any substantial material in response to the Court’s order for specific
searches for documents relevant to each of the known transactions.
63. The Defendants and OMGP have only been able to reconstruct the sequence of
events (which is not necessarily a complete sequence) from sketchy Russian
media reports and very limited hints found in the Claimants’ existing
disclosure.
64.
It is convenient to follow the structure of Schedule C to the Court’s specific
disclosure order of 23 September 2015 [J1/20/12] in dividing these transfers
into two categories (a) Scan/Onega transfers and (b) Western Terminal
transfers. However, the parallels between the both sequences of transfers are
evidentially significant and should not be ignored.
Scan/Onega transfers
65. The land at Onega Terminal was partly owned by Scan, and partly by another
OMG company, LPK Scandinavia. Both halves were leased to yet another
OMG company, Onega LLC, which operated the terminal. Both parts of Onega
Terminal, as well as some (but not all) of the other real estate owned by Scan,
were pledged to the Bank. All those assets were ‘sold’ or ‘transferred’ to the
Renord Group, whether as part of the purported realisation of pledges to the
Bank or otherwise:
66. At the ‘public auction’ on 26 October 2009, Scan land at Onega Terminal and
in Sestroretzk was sold to a Renord company, Solo LLC. The Claimants’
evidence confirms that the only other bidder (Kiperort LLC) was also a Renord
company.
67. Claimants’ Disclosure Nos. RPC20002787 and RPC20002793 indicate that
Scan land at Onega Terminal and in Sestroretzk may have been transferred to
22
another Renord company, Naziya CJSC (one of the Subsequent Purchasers of
Scan)
68. Scan land in Tsvelodubovo, which had not been pledged to the Bank, was
‘sold’ to a company called Meridian LLC on 26 December 2009 (the legal basis
of that sale is not clear from the disclosure), and then to Evgeny Kalinin on 27
August 2012. Mr Kalinin is the Financial Director of Renord-Invest CJSC, and
held the land on behalf of Renord as a nominee. The land is now identified on
Renord-Invest’s website as one of the company’s real estate development
projects.
69.
In January 2011, the LPK land at Onega Terminal (a 3.4 Ha plot) was sold for
RUB 99,000 to Mercury LLC, a company then legally owned by Mr.
Sklyarevsky. It is not known what was the legal basis of the sale, which
apparently was not intended to be a realisation of the pledge to the Bank.
70.
In April 2011, Mr. Sklyarevsky ‘sold’ Mercury LLC to Renord (Sklyarevsky
para 53 and Smirnov para 72)
71.
In June 2011, the Bank assigned the loans secured on the 3.4ha plot to Mercury
LLC, and the pledge was automatically released.
72. Mr. Smirnov’s witness statement states in para 72 that “Renord Invest sold
Mercury to ROK No. 1-Prichaly CJSC”, without any further detail or
explanation. It appears from documentary evidence that, around the same time,
the other half of Onega Terminal (previously bought by Solo LLC) was also
sold to ROK No. 1 Prichaly CJSC; and that it was the Bank who lent ROK the
money for the purchase.
73. The Claimants’ evidence and disclosure do not adequately explain the purposes
of most those transactions, which will need to be explored in cross-examination
of the relevant witnesses. It appears that the Bank gave formal consent to each
transaction, and lent the money for some of the ‘purchases’. In all cases, the
Defendants and OMGP say that the transactions were fraudulent collusive deals
between connected parties, at gross undervalue, and ultimately aimed at
23
appropriating the Onega Terminal without paying full and proper consideration.
The Claimants maintain that all their actions were aimed at maximising the
recovery of debts due from OMG companies. As regards the ‘intermediate’
transfers other than purported ‘realisation of security’, it appears to be the
Claimants’ argument that they are irrelevant to the Counterclaim.
Western Terminal transfers
74. The real estate assets of Western Terminal can be divided into the following
three categories:
(1) Berth SV-15 and the land at the Terminal (‘SV-15 et al’) were pledged to
the Bank.
(2) Berth SV-16 and two railway tracks (‘SV-16 et al’) were unencumbered.
Under the Russian cadastral rules, those assets were registered separately
from the land they were located in, which was registered as a single plot
and pledged to the Bank. Berth SV-16 and the railway tracks would
significantly increase the capacity of any business operating the Terminal,
if owned by the same business as SV-15 et al.
(3) A valuable plot of agricultural land at Seleznevo (‘Seleznevo’), was
owned by Western Terminal LLC but otherwise was not connected to its
business. It was unencumbered.
75.
In 2010-2011 Sevzapalians (the Original Purchaser of Western Terminal) took
the following actions affecting both SV-15 et al and SV-16 et al:
(1) Between July 2009 and December 2010, Sevzapalians filed a claim in a
Russian court against Western Terminal LLC pursuant to the assigned
creditors’ rights under a loan from Morskoy Bank to Western Terminal.
The writ of execution was issued on 3 December 2010. (Claimants’
Disclosure No E182).
(2) In February 2011, Sevzapalians transferred the Western Terminal
shareholding to an offshore entity called Ultriva Limited.
24
(3) On 26 December 2011, there was a purported ‘public auction’ to enforce
the writ of execution against Western Terminal LLC. A company called
Avrora LLC sold both SV-15 et al and SV-16 et al to Nefte-Oil CJSC, for
the nominal price of RUB 161,000. preserving the pledge to the Bank
(Claimants’ Disclosure, No. E184)
76. As regards SV-15 et al, i. e. the pledge to the Bank, the following transactions
took place:
(1) On 20 August 2009, Western Terminal apparently leased SV-15 et al to a
BVI company called Gunard Enterprises Ltd., which appears to be part of
Renord Group. The terms of the lease were US$20,000 rent per month,
with the entire rent payable at the end of the term (49 years, later reduced
to 30 when the Bank gave consent to the lease in November 2009). In
view of the uncommercial terms of the lease, the purpose of the lease
appears to have been to lower the value of the land artificially.11
(2) On 6 June 2012, Nefte-Oil ‘sold’ SV-15 et al to another Renord company,
Vektor-Invest LLC, for RUB 2,300,000.
(3) On 20 August 2012, the Bank and Vektor-Invest apparently entered into a
settlement agreement whereby the Bank would sell its right to enforce the
pledge to Vektor-Invest for RUB 1,210,000,000. However, Vektor-Invest
apparently failed to pay the money by the agreed date 28 August 2012 (i.e.
one week after the agreement), and the Bank terminated the agreement.
(4) On 29 September 2012, SV-15 et al was sold at a ‘public auction’ as
realisation of the Bank’s pledge. According to the documents initially
disclosed by the Bank, the only bidder appeared to be Kontur LLC;
however, other documents subsequently disclosed by the Claimants
suggest that there was another bidder, Globus-Invest. Kontur LLC bought
11The Claimants point out (para 668 of the skeleton argument) that Mr. Millard took no account of the
Gunard lease agreement in his valuation of the assets – see his report at [E6/23/51]. This is correct, but does
not explain (a) the purpose of the transaction in the first place and (b) less importantly, why the Claimants
provided the lease agreement to Mr. Millard with his instructions, apparently without instructing him to
disregard it in his valuation.
25
SV-15 et al for RUB 674,500,000. It appears that both Kontur and Globus-
Invest were companies controlled by Renord.
77. Both SV-15 et al and SV-16 et al are now known to be part of a profitable
business operated by Baltic Fuel Company LLC.
78. As regards Seleznevo, the Claimants have disclosed no information or
documents whatsoever regarding the fate of that asset. However, the publicly
available land registry records [D192/2918.2/124-126] show that since 29
November 2010, the land has been owned by Mercury LLC.
79.
It appears that the Bank gave formal consent to each transaction. Like in the
case of Scan/Onega transfers, that complex series of transactions is not
adequately explained in the Claimants’ disclosure or in evidence. It will need to
be investigated in some detail in cross-examination of the relevant witnesses.
The Defendants and OMGP will invite a finding that the ultimate purpose of
those transactions was to appropriate Western Terminal at gross undervalue,
and to disguise the fraud against them as legitimate business deals. However,
the Claimants seem to argue that, except the purported realisation of the pledge
to the Bank, all those transactions are irrelevant.
‘Realisation of security’
80. Amidst those complex series of purportedly public or unquestionably private
‘sales’, the Bank purportedly realised the pledges under its loans to OMG
companies. It is common ground that all pledged assets were sold to connected
parties: Renord companies and (on fewer occasions) SKIF companies. Mr.
Smirnov’s evidence is that, having initially held the shares on behalf of the
Bank, Renord became interested in the assets for its own purposes, and bought
them at public auctions for a fair market price.
81. A mortgagee who sells to a connected party is under “a heavy onus… to show
that in all respects he acted fairly to the borrower and used his best endeavours
to obtain the best price reasonably obtainable”: Tse Kwong Lam v. Wong Chit
26
Sen [1983] 1 WLR 1349, 1355G). The desire to obtain the best price must be
given “absolute preference over any desire that an associate should obtain a
good bargain” (Meretz Investments NV v. ACP Ltd [2007] Ch 197 at [271]-
[272]). There are non-controversial evidential principles, based on the obvious
inherent probabilities of commercial life. They remain applicable to a claim
governed by Russian law as much as they would be to an English claim. In any
event, there is no evidence that the Russian law on that point is different.
82. Key witnesses: Mr. Smirnov, Mr. Sklyarevsky, Mrs. Kosova
Valuations
83.
It is fairly clear from the above that if any single issue is the crux of the case,
that is the valuation of the relevant OMG assets, be that businesses or real
estate. The disparity between the values put by the parties’ respective experts
on the most substantial of the relevant assets is striking. In particular:
Western Terminal is valued by Mrs. Simonova at almost $144 m. and by
Mr. Millard at just over $21 m.
Onega Terminal is valued by Mrs. Simonova at around $200 m. and by
Mr. Millard at just under $4 m.
84. Clearly, one of the two experts is very seriously mistaken.12 There are disputes
in relation to other real estate as well, but it is, on any view, much smaller in
value than the two Terminals. The value of the Terminals is therefore central to
the issue of liability. If Mr. Millard is right, the Counterclaim is likely to be
wiped out completely; but if Mrs. Simonova is right, it follows that:
(1) The shares in Western Terminal and Scan had very substantial value
reflecting (if nothing else) the value of their real estate assets;
12The disparity of the parties’ respective valuations of businesses is even greater, but the Defendants and
OMGP are not in a position to discuss it at this stage. Their business valuation expert, Mr. Steadman, has
not (at least as yet) volunteered to assist them or to attend the trial pro bono; it is difficult to criticise him as
that was not the basis on which he has been engaged. It is therefore possible that the final determination of
quantum will need to be split off from the trial of liability.
27
(2) The Claimants’ fundamental contentions that the Group’s liabilities far
exceeded its assets, that it had hardly any prospect of restoring solvency,
and that ‘there was nothing to raid’ all fall to the ground;
(3) All the collusive ‘sales’ of assets between different Renord companies, at
‘public auctions’ or otherwise as outlined above, were at gross undervalue;
(4) The fact of harm is proven for the purposes of Article 1064 of the Russian
Civil Code, and it is for the Claimants to show that they acted honestly at
all times;
(5) It is unlikely in the extreme that the Claimants could have undervalued the
assets as a result of an honest mistake – not at such a scale, not for so
many times over a number of years, not in relation to so many assets, and
not in the face of the correct valuations by a reputable Russian valuer,
Lair, on which the Claimants had relied at the time they accepted the
pledges. Such an extraordinary series of honest mistakes leading to such a
profitable result is hardly more than a purely theoretical possibility.
85. The Counterclaim thus in substance boils down to the dispute between
valuation experts over the value of the two Terminals; and that in turn boils
down to the issue of correct methodology.
86. The key difference between the approaches adopted by the experts is that Ms
Simonova treats a terminal as “trade related property” and as a complex of
income-generating assets with synergistic value. She therefore applies an
income-based approach and discounted cash flow methodology to ascertain its
value. Her valuation is predicated on the concept of “highest and best use”
provided for by IVS and RICS standards. She undertakes analyses of current
and potential operations on the land.
87. By contrast Mr Millard treats the land as vacant and uses a “sales and offer”
comparable approach. He takes no account of the “highest and best use”
analysis and performs no analysis of the commercial operations carried out on
the land. Rather, Mr. Millard has valued the land by reference to the average
28
price of “normal industrial/warehouse land” in Leningrad Region (in the case of
Western Terminal, with a 100% premium for the presence of the berths,
calculated by comparison to berths in Southampton).
88.
It is not proposed to recite the substance of the experts’ respective reports (and
supplemental reports with their respective mutual criticisms) in this skeleton.
The Court is simply invited to read the expert reports and supplemental reports
in full, at least insofar as they concern the two Terminals:
Experts’ joint statement at [E8/29]
Mr. Millard’s report at [E6/23];
Mrs. Simonova’s at [E8/26];
Mrs. Simonova’s valuation of Western Terminal [E8/27]
Mr. Millard’s supplemental report at [E7/24]
Mr. Millard’s supplemental report on Western Terminal at [E7/25]
Mrs. Simonova’s supplemental report at [E8/28]
89. Whereas the Claimants’ opening contains a very detailed argument inviting the
Court to prefer their valuations, the Defendants and OMGP shall for the present
confine themselves to making the following basic points:
90. Both the ‘income approach’ and the ‘comparable approach’ are universally
recognised methods of valuation which cannot sensibly be questioned in
principle. If those methods were correctly applied, they were bound to produce
the same result: no asset may have more than one market value at a time. One
of the experts has made a fundamental error in the application of his/her chosen
method. The question is, which expert and which method.
91. The Defendants submit that the ‘comparables’ used by Mr. Millard are not
legitimate comparables at all. There is all the difference in the world between a
sea-port Terminal and a plot of ‘industrial land’ elsewhere. It is sufficient to
look at the globe to see Mr. Millard’s error. Russia occupies 1/8th of the
world’s land mass; but its Baltic shoreline is very short. The difference in
29
supply is therefore enormous: Russian market of industrial land is more or less
infinite, whereas the Big Port of St. Petersburg is a small dot on the map where
mainland Russia touches the Baltic Sea. It is not proposed to recite all the epic
poems composed over the centuries to glorify it as Russia’s ‘window to
Europe’. Rather bloody wars have been fought in Russian history for access to
the Baltics; and St. Petersburg itself was built (rightly or wrongly) for that very
reason.
92. The terminals in the Big Port and the industrial land outside the Big Port are
two very different markets which never overlap. No potential buyer or investor
who is interested in the Port would consider, as an alternative, a plot of
industrial land even half a mile inland from it. It is precisely because the land in
the Big Seaport is in such short supply and at such high demand that any sales
of it are extremely rare and there is no publicly available information about the
prices paid for it. The terminals cannot be properly valued on the basis of
‘comparable approach’ simply because there are no comparables on the market.
93. As regards the ‘income approach’, the issue between the experts is whether or
not seaport terminals can properly be categorised as ‘trade-related property’
(TRP). In that respect, both experts rely on the definition set out (in identical
terms)
in International Valuation Standards (IVS) published by
the
International Valuation Standards Council, and Valuation – Professional
Standards published by the Royal Institute of Chartered Surveyors (RICS). A
trade-related property is
“any type of real property designed for a specific type of business
where the property value reflects the trading potential for that
business.”
94. Mrs. Simonova says that a seaport terminal fits perfectly into that description.
However, Mr. Millard further points out the following passage from section 6
of RICS standards (“RICS global valuation practice guidance – applications
(VPGA’s)”), which describes TRPs as
30
“Certain properties… normally bought and sold on the basis of their
trading potential. Examples
include hotels, pubs and bars,
restaurants, nightclubs, casinos and theatres and various other forms
of leisure properties”
95.
It will be observed that this passage does not purport to give a definition, but
rather a guidance on the application of a method defined elsewhere; and that the
“examples” given in it do not purport to be an exhaustive list. Mrs. Simonova
writes in her supplemental report:
Although trade related properties do indeed include the examples of hotels, pubs and
bars, this is no way disqualifies the Onega international trading Terminal for
classification as what it is: trade related property. The Guidance Notes are intended to
be helpful to appraisers in applying the RICS Standards. The reason they focus on hotels,
pubs, bars, restaurants, night clubs, casinos, theaters and various other forms of leisure
properties as examples of trade related property – is because there are a great many
more hotels, theaters, cafes and casinos than there are trading terminals.
In my opinion, a purchaser of a restaurant, hotel or other ‘leisure property’ would adopt
the same basic economic approach when considering the value of a target asset as a
purchaser of the land at Onega Terminal: both purchasers would want to know how
much annual net income the business is likely to generate. This would be based on, for
example, the ‘price per night charged to rent a room’ in relation to the hotel, or the
‘tariff charged to unload a container or the tariff charged per day for storage of the
container’ in relation to the terminal. In my experience, appraisers recognize and value
assets as trade related property whether they need to appraise hotels, restaurants, gas
stations or terminals, because there is no other more reasonable approach than to use a
discounted cash flow (‘DCF’) approach for these type of income-generating assets.
It should be noted that, if performed correctly, the valuation result for an asset using the
income approach (DCF model) and the valuation result using the comparable approach
should yield similar results. The reason they do not in this case is that Mr. Millard has
not used appropriate comparable land plots and has made inappropriate adjustments to
them.
31
96. Such is the principal dispute between the valuation experts. It is submitted that
Mrs. Simonova’s analysis is correct, and her valuation must be preferred to that
of Mr. Millard.
97. There are further disputes in relation to other properties, and the Court is
respectfully invited to read the valuation reports [E6-E8].
Renord Group
98.
It is now belatedly admitted by the Claimants that nearly all companies who
acted as ‘Original Purchasers’, ‘Subsequent Purchasers’, various ‘intermediary’
purchasers of former assets of Western Terminal and Scan, the ‘ultimate
purchasers’ of pledges at ‘public auctions’ and ‘unsuccessful bidders’ at those
auctions have all been controlled by one company (Renord) and/or one
individual (Mikhail Smirnov). Collectively, all such companies are referred to
as ‘Renord Group’.
99. On a number of recent occasions the Claimants sought to argue that the
Counterclaim, as now advanced, is materially different from the pleaded one,
because the allegations of fraud are now made against Renord rather than the
Bank. With all due respect, this argument is disingenuous and misleading.
100. Until recently, the very existence of Renord Group was not admitted by the
Claimants. The Defendants and OMGP had to plead their case by reference to
dozens of individual companies, and also to plead and to prove their
connections with each other and with the Claimants. Accordingly, the pleaded
Counterclaim separately addressed (a) the Original Purchasers of shares, (b) the
Subsequent Purchasers of shares, and (c) the ultimate purchasers of assets; the
interconnections between them and also the Claimants; and inferences as to
their respective roles in the alleged conspiracy.
101. The development of pleadings in this case was notoriously long and
complicated; in part, it began from the BVI proceedings, and continued through
32
the Claimants’ claim for negative declarations into the Counterclaim. The
pleadings therefore require a careful analysis.
102. In relation to the Original and Subsequent Purchasers, the Counterclaim is
virtually identical with the BVI claim. Relevantly, it is pleaded:
[122…] As further pleaded below, it is strongly to be inferred from the Memorandum,
and in particular clauses 2 and 3 thereof and the fact that the Bank and/or Mr Savelyev
were able to and did make promises about and on behalf of each of the Original
Purchasers in the Memorandum, and were able to and did procure the Original
Purchasers to enter into the various sale and purchase agreements, that the Original
Purchasers were wholly directed and controlled by the Bank and/or Mr Savelyev and that
the Bank and/or Mr Savelyev were their directing minds and wills. […]
103. Following the pleadings as to the transfer of shares from the Original to
Subsequent Purchasers, it is averred:
[130] Given that these sales took place at the same price as the original purchases
(which had always been intended to be at a nominal price rather than one reflecting the
actual value of the shares), the proximity of the dates of these sales and the connections
between many of these companies in terms of actual or previous shareholders/directors,
the Counterclaimants will contend that these were not arms’ length commercial
transactions but transactions at a gross undervalue between connected parties which
were aware of and involved in the fraudulent conspiracy to seize ownership and control
of Western Terminal LLC and Scandinavia Insurance LLC. Accordingly these sales were
also shams, in the sense that they were a cloak for the Bank’s and/or Mr Savelyev’s
wrongdoing and that the real owners and controllers of the shares remained the Bank
and/or Mr Savelyev
104. Most of the ‘public auction sales’ only became known (and in some cases, only
occurred) after the BVI claim was made. The case in relation to the ultimate
purchasers of assets at ‘public auctions’ was therefore not pleaded in BVI; but
is pleaded in the Counterclaim as follows:
Subsequent dissipation of assets
33
[150] Many or all assets of Scan, Western Terminal, and other assets ultimately owned
by the Counterclaimants have since been fraudulently dissipated. The transactions were
conducted without informing the Counterclaimants. It is averred that all such
transactions were sham and/or that the ultimate beneficiaries of those transactions were
the Bank, Mr Savelyev, their other co-conspirators, and/or those connected with them.
[151] It is averred that the purported ‘public auction sales’ of the seized assets were
conducted not in accordance with the Russian law, but as fraudulent insider dealings,
and/or fraudulently at a gross undervalue. For example, and without limitation:
[152] The prima facie purchasers of the assets at public auctions, including Solo LLC,
Mercury LLC and Kontur LLC as pleaded below, are closely connected with the
Clamaints and/or ‘Original Purchasers’ and/or ‘Subsequent Purchasers’ through the
‘Renord’ group of companies. The Renord Group includes:
a. Renord-Invest CJSC (‘Renord-Invest’), a company trading from the
Bank’s office at 15A Ispolkomskaya ul., St. Petersburg. 75% shareholder
of Renord-Invest is Vladimir Malyshev, the husband of Vice President of
the Bank Irina Malysheva. 25% shareholder and CEO of Renord-Invest is
Mikhail Smirnov, a former employee of the Bank and the nominal owner
of ‘Original Purchasers’ SPVs. The management of Renord-Invest
consists of persons closely connected with the Bank and/or ‘Original
Purchasers’ and/or ‘Subsequent Purchasers’, including:
(i)
Svetlana Guz (sister of deputy chairman of the Bank
Vladislav Guz),
(ii)
Elena Goncharuk (a representative of the Bank, and the
nominal owner and director of a ‘Subsequent Purchaser’,
Khoritza LLC),
(iii) Konstantin Solovyev (ultimate owner and/or controller of
‘Original Purchasers’ Medinvest LLC and/or Akva-Ladoga
LLC),
34
(iv)
Evgeny Kalinin (50% shareholder of ‘Subsequent Purchaser’
SKIF LLC),
(v)
Dmitry Gubko (former owner of ‘Original Purchaser’
Medinvest LLC),
(vi)
Igor Kolmakov (director of Razvitie Sankt-Peterburga LLC,
the parent company of ‘Subsequent Purchaser’ Dom na
Moloy Moyke LLC).
b. Baltic Fuel Company LLC, advertised by Renord-Invest as one of its
‘business projects’. The present and former shareholders and ultimate
owners/controllers of Baltic Fuel Company include the following persons
and entities:
(i)
Sredni 44 LLC. Sredni 44 is or was owned by Razvitie Sankt
Peterburga LLC,
the parent company of ‘subsequent
purchsser’ Dom na Maloy Moike LLC. A former director of
Sredni 44 is Mr Andrey Shevchenko, who is also a former
director of ‘original purchasers’ SPVs Akva-Ladoga LLC;
Graham Bell LLC and Severo-Zapadnaya Agrarnaya
Kompaniya LLC
(ii)
Stanislav Korneev
(iii) Neva Oil LLC
(iv)
Igor Vladimirovich Malyshev – the son of Vice President of
the Bank Irina Malysheva
(v)
IK Renord CJSC,
(vi) Mikhail Smirnov
c. IK Renord CJSC – former controlling shareholder of Baltic Fuel Company
105. The specific ‘sales’ alleged
to be collusive and fraudulent are
then
particularised in paras 153-164. That included the particulars of the alleged
connections between the ultimate purchasers (Solo, Mercury and Kontur
35
respectively) on the one hand and the Claimants, Original Purchasers,
Subsequent Purchasers and/or Renord Group on the other.
106. The BVI claim was brought not only against the Bank and Mr. Savelyev, but
also against each of the Original and Subsequent Purchasers and their nominal
corporate shareholders (one of whom was a BVI company and the ‘anchor
defendant’). The BVI proceedings were stayed before any defence was pleaded.
107. However, the Bank and Mr. Savelyev responded to the allegations in their
present claim for negative declarations. Their Particulars of Claim read in para
67.6: “The Original Purchasers were not owned and/or controlled by the Bank
or by Mr. Savelyev but were companies controlled by well-established clients of
the Bank who were prepared to assist the Bank in ensuring that its security was
effective, namely Mr. Mikhail Smirnov and Mr. Leonid Zelyenov”. The
Subsequent Purchasers are pleaded in para 67.12 to be “also owned by
established clients of the Bank who were willing to assist the Bank… namely
Mr. Smirnov and Mr. Sklyarevsky”. Finally, it is pleaded in para 69: “it is to be
inferred that Mr. Arkhangelsky was aware of the true ownership, business and
date of incorporation of the Original Purchasers and Subsequent Purchasers,
as these are matters of public record”.
108. In the light of Claimants’ admissions made in their response to the RFI over
three years later, the assertion that “the true ownership” of the Original and
Subsequent Purchasers was a “matter of public record” was plainly untrue.
With the possible exception of SKIF, it is now admitted that all ‘shareholders’
of all those companies, as they appear from public records, are mere nominees.
None of them is either Mr. Smirnov or Mr. Zelyenov. Most of the nominal
shareholders are now admitted to be nominees of Renord/Smirnov.
109. As for the Defendants’ and OMGP’s pleadings in relation to the ultimate
purchasers of assets, the Claimants responded by generally worded denials of
the allegation that the ‘realisation of pledges’ was fraudulent or at gross
undervalue, but their pleadings are silent as to the ownership or control of the
‘ultimate purchasers’ of assets (Solo, Mercury and Kontur). It was only in the
36
Claimants’ witness evidence that those companies (as well as some other
participants of ‘auctions’, i.e. ‘sellers’, ‘pledgors’ and ‘unsuccessful bidders’)
were admitted to be companies in the Renord Group.
110. Accordingly, on the strictest view of the pleadings, four broad issues arise:
(a) whether the Original Purchasers were “wholly directed and
controlled by the Bank and/or Mr Savelyev” (para 122 of
RADCC);
(b) whether the Bank and/or Mr Savelyev remained “the real
owners and controllers of
the shares”
through
the
Subsequent Purchasers (para 130);
(c) various ‘connections’ between the ‘ultimate purchasers of
assets’ (e.g. Solo, Mercury and Kontur) on the one hand
and the Claimants on the other. That issue is collateral to
whether the relevant ‘public auctions’ were collusive and
fraudulent.
(d) Whether (as expressly alleged
in para 177 of
the
Counterclaim) all those companies were involved in a
conspiracy with the Claimants to steal the Defendants’
assets.
111. The admissions now made by the Claimants in relation to Renord effectively
concede issues (a), (b) and (c). Those are matters from which (among others)
the Defendants and OMGP seek to infer (d) (which is effectively the ultimate
issue of this case).
112. In particular, the Claimants now admit that:
(1) Renord and (to a more limited extent) Mr Sklyarevsky, between
themselves, owned and controlled:
i. Most of the original and subsequent purchasers of shares;
37
ii. the ultimate purchasers of the assets at public auctions (e.g. Solo,
Mercury and Kontur);
iii. various intermediary purchasers of those assets such as Nefte-Oil,
Vektor-Invest, etc.
(2) The Original and Subsequent Purchasers of the shares in Western
Terminal and Scan held the shares ‘on behalf of the Bank’ and subject to
the Bank’s instructions (eg Smirnov paras 29, 33, 34). The arrangement
was that, through those companies, ‘the Bank would obtain an interest in
certain OMG companies’ (Savelyev, para 25)
(3) The transfer of shares from the Original to Subsequent Purchasers took
place on the Bank’s instructions (Sklyarevsky, para 33)
(4) Subsequently, Renord became interested in the assets for its own purposes,
and ensured that those assets were sold by Renord companies to other
Renord companies at public auctions. (Smirnov, paras 53 and subsequent
paragraphs).
113. Given those admissions, it is now much more convenient to refer to ‘Renord’
rather than to the dozens of companies named in the pleadings, and the
connections between those companies as pleaded. That does not amount to a
substantive change of the pleaded Counterclaim. It may be said that ‘Renord
Group’ is simply a shorthand reference to the substantial part of the pleaded
case on conspiracy which has now been finally admitted (as it should have been
admitted years ago).
114. Further, the Defendants and OMGP will seek to prove at the trial that, even
now, the Claimants fail to admit the whole truth. The Defendants will say that
the Claimants’ latest attempt to distance themselves from Renord Group and
SKIF is simply an attempt to distance themselves from their own fraud. The
Defendants will seek to demonstrate that the connections between the Bank and
Renord are so close and so numerous that it should be inferred that they are
controlled by the same group of people and/or members of the same conspiracy,
38
to the extent that, for all practical purposes, it is unnecessary to distinguish
between them.
115. The Claimants, however, are adamant that Renord, SKIF and Mr. Zelyenov
were no more than the Bank’s well-established clients and independent parties.
116. Two broad issues remain in dispute and will need to be explored at the trial.
Firstly, in what sense did various Renord companies (and companies
performing similar roles which are denied to be part of Renord, e.g. SKIF) act
“on behalf of the Bank”? That issue was previously considered by the Court in
the context of ‘control’ for the purposes of a disclosure application, and
presented some difficulties: see paras 33-38 of the judgement of 23 October
2015 [K1/11] In response to a direct question from the Court, the Claimants,
through their Counsel, firmly denied any suggestion that Renord, or individual
Renord companies, acted as the Bank’s agents or nominees. Their case on that
point remains unclear. The description of those companies as “clients” who
“assisted” the Bank hardly amounts to a legal analysis of their relationship
whereby Renord companies held shares “on behalf of the Bank” and to the
Bank’s instructions, which is undoubtedly relevant to the Counterclaim.
117. Secondly, there is a broader issue of whether Renord and SKIF were genuine
‘clients’ dealing with the Bank at arms length, or effectively parts of the same
business, owned and operated by the same people. In this context, a complex
factual picture of (a) corporate structures, (b) nomineeships, (c) shared business
addresses, (d) migration of top managers between companies and (e) family
relations between directors and shareholders will need to be explored. Three
examples out of dozens may be briefly recalled:
(1) Mrs. Malysheva’s husband, Vladimir Malyshev, was a co-founder of
Renord-Invest CJSC (with Mr. Smirnov), and its 75% shareholder at least
until March 2008. Whether and when his involvement ceased is one of the
matters which need to be explored.
(2) Mrs. Malysheva’s son, Igor Malyshev, held and may continue to hold an
interest in companies which became direct or indirect owners of Western
39
Terminal assets, namely Kontur LLC [D/2918.1T/1551], Kontur SPB
LLC [D/2918.1T/1625], Neva Oil LLC [D/2918.1T/1823] and Baltic Fuel
Company LLC [D/2918.1T/1907].
(3) Renord-Invest traded, at all material times until 2010, from one of the
Bank ‘s offices at 15 Ispolkomskaya St. (the ‘Olymp Office’). It was
initially denied in evidence that the Bank had an office at that address.
However, when confronted with the evidence, the Claimants admitted that
its Olymp Office had operated from that address. Further assertions were
then made to the effect that (a) Olymp was only a ‘branch’ of the Bank
dealing with customers, and not one of its central offices housing any of
its central departments; and (b) that all its documents have now been
“archived and destroyed”. Both those assertions have now been admitted
to be incorrect.
118. Many more examples might be given, but may as well be saved for cross-
examination of relevant witnesses.
119. As the Court will recall, at the time the Defendants and OMGP were legally
represented and had some funds, they commissioned an investigation by FTI of
the links between various alleged conspirators. Unfortunately, that investigation
was never finished. Such matters as have been established are graphically
presented in the draft charts prepared by FTI, and disclosed in these
proceedings pursuant to the Claimants’ successful application for specific
disclosure. The FTI draft charts are now enclosed to this skeleton as
Appendices 3 to 9.13 Of course, the Defendants and OMGP cannot rely on
those charts as evidence of the matters graphically presented in them; those will
need to be demonstrated by other evidence and put to the relevant witnesses in
cross-examination. However, the charts give a convenient roadmap through the
complex evidential picture the Defendants will seek to present at the trial. At
the very least, they will hopefully assist the Court in identification of the
relevance of questions put to various witnesses.
13Defendants’ disclosure Nos 1118 to 1124 respectively
40
120. It will be observed that the general issue of relationship between the Claimants
and Renord does not in itself determine the Counterclaim one way or the other.
It is perfectly possible that the Bank and Renord were independent parties and
still jointly defrauded the Defendants and OMGP. Similarly, it is possible that
they are part of the same business controlled by the same people, and still
innocent. However, the issue remains highly relevant in two ways:
121. Firstly, if those parties were a part of the same business, the inherent probability
of the conspiracy is much higher. Even now, the Claimants seek to ridicule the
Counterclaim by implicit suggestions that allegations of a conspiracy involving
such a long list of parties are implausible. In fact, of course, the majority of the
alleged conspirators are now admitted to be Renord companies or Renord
employees, directed (on the Claimants’ case) by one man, Mr. Smirnov.
Essentially, all the Defendants and OMGP now need to show is a conspiracy
between the Bank and Mr. Smirnov. If the Bank and Renord were part of the
same business in the same sense as the various Renord companies are part of
the same business, such a conspiracy is even likelier.
122. Secondly, if the Defendants and OMGP succeed in demonstrating the falsity of
the Claimants’ present case (the description of Renord as a client dealing with
the Bank at arms length, and the denial of any closer connection), the Court will
need to consider their motive for advancing an untrue case. The Defendants and
OMGP will say that the motive was to conceal the fraud.
The criminal proceedings against Mr. Arkhangelsky
123. In February or March 2009, Mr. Arkhangelsky procured Western Terminal
LLC to take a relatively small loan (RUB 56.5 m.) from a different bank,
Morskoy Bank. Under the Russian corporate governance regulations, such a
transaction required a consent of the shareholders of Western Terminal. Such a
consent was obtained from OMGP, but not from the relevant Original
Purchaser, Sevzapalians.
41
124. Mr. Arkhangelky’s evidence (Arkhangelsky 19th) is that Sevzapalians’s consent
was not required, as it was not a genuine shareholder but merely a ‘special
company’ holding the shares on trust, subject to the undertakings recorded in
the Memorandum, including:
– The undertaking of the ‘Original Purchasers’ not to
interfere with the day-to-day commercial activities of the
companies; and
– The undertaking of the OMGP and Western Terminal not
to stop its commercial activities or otherwise worsen its
economic position.
125. However, the Claimants’ evidence seems to suggest that the Claimants will
invite a finding that Mr. Arkhangelsky’s actions were dishonest.
126. Following the replacement of the management of Western Terminal, the new
Director-General appointed by Renord, Mr. Maslennikov, made a criminal
complaint against Mr. Arkhangelsky, alleging fraud [TB/D129/2085]. Criminal
proceedings were initiated. The Investigator took evidence (subject to the
criminal liability for the Russian offence analogous to perjury) from, inter alia:
(1) Mr. Savelyev [D138/2305]
(2) Mrs. Malysheva [D137/2278]
(3) Mrs. Stalevskaya [D137/2279]
(4) Mr. Gavrilov, a Renord employee and the director-general of Sevzapalians
[D135/2224]
(5) Mr. Maslennikov, a Renord employee appointed as the new director-
general of Western Terminal [D132/2167]
(6) Mr. Chernobrovkin, a Renord employee appointed as the new deputy
director-general of Western Terminal [D134/2218]
127. All six witnesses gave evidence as to the circumstances of the ‘sale’ of Western
Terminal from OMGP
to Sevzapalians. All six
testimonies perfectly
42
corroborate each other and give substantively the same version of events, which
is, in summary, as follows:
(1) In December 2008, Mr. Arkhangelsky decided to sell Western Terminal
and approached the Bank asking for help in finding a buyer.
(2) Mrs. Malysheva, as a favour to him, put him in touch with Mr. Gavrilov.
(3) There followed a genuine sale from OMGP to Sevzapalians at the fair
market price of RUB 10,000.
(4) Other than that, the Bank had no involvement in the deal. It had no interest
in the sale other than helping its borrower.
128. Each witness testimony only occupies 2-3 pages, and the Court is respectfully
invited to read all six. The Defendants will invite the following important
inferences:
(1) A perjury by six witnesses telling substantively the same lie can only
result from a collusion.
(2) The only purpose of that perjury was to conceal the so-called ‘Repo’
arrangement.
(3) The reason for concealing it was because it was fraudulent.
(4) Three different employees of the Bank gave the same false evidence
because the Bank was responsible for that fraud.
(5) Three different employees of Renord gave the same false evidence
because Renord was also responsible for that fraud.
(6) A conspiracy involving, at least, the Bank, Renord, and the six individuals
is, by far, the most probable explanation.
129. Mr. Savelyev gives the following explanation in his witness statement:
46.3. I have also been shown minutes of a witness interview of me by Sub-Colonel
Levitskaya, the Chief Investigation Officer of the 7th Division of Investigation Part on
Investigation of the Organised Criminal Activity of the Main Investigation Department by
43
GUVD in St Petersburg and Leningrad District, in connection with a criminal
investigation into the activities of Mr Arkhangelsky and the Oslo Marine Group [106-
112]. While I cannot now be certain, I believe that I only met Ms Levitskaya briefly since
she needed evidence from me as the Chairman of the Bank and that after that, she dealt
mainly with my subordinates in this regard (I do not now recall who). While I
acknowledge that I signed these “minutes”, I have no recollection of these minutes being
prepared and do not now know who did so. I cannot recall whether I read the document
before signing it.
47. In the course of preparing this witness statement, I have realised that there were
some errors in the previous accounts which I gave in the other proceedings referred to
above, in terms of my knowledge of and dealings with Mr Arkhangelsky and OMG.
[…]
50. As regards the minutes of my interview with Ms Levitskaya, not only is this incorrect
as regards the timing and number of my meetings with Mr Arkhangelsky, it is also
incorrect as regards discussions at our 25 December 2008 meeting. I have not been able
to identify now, given the long passage of time, why these errors were made and why I
did not notice them at the time. I acknowledge that I signed this document but I could not
have read it carefully at the time. I did not give the interview my full attention or properly
explain what happened. I apologise for any confusion caused by these errors.
130. Ms. Stalevskaya gives the following explanation:
43. I previously gave an interview on 26 March 2010 to the Russian prosecutor, Lt-Col
Levitskaya, as part of criminal proceedings into Mr Arkhangelsky [148-153]. I note that
in this interview I made reference to OMG selling one of the corporations owned by the
group. I do not know now why I made reference in this interview to selling shares since
this did not reflect the complete nature of the transaction that I have explained in the
statement above.
44. I do not think that I was properly paying attention at the time and wanted to get
through the interview quickly. I had not reviewed the documents as I have now done so.
44
131. It should also be noted that the false evidence of those six witnesses was (and
still is) crucial for the continuation of the criminal case. Whether or not Mr.
Arkhangelsky’s analysis as to the implications of the Memorandum for the
rights of Sevzapalians as the ‘shareholder’ was legally correct (and it is
submitted that it plainly was), the criminal case on fraud could only proceed so
long as there was evidential basis for an allegation of dishonesty; i.e. that he
knew Sevzapalians was a genuine shareholder but misrepresented the position
to Morskoy Bank. There is no such basis save for the false evidence of the six
witnesses.
132. It was on the basis of that very criminal case that Russia issued an Interpol ‘red
notice’ against Mr. Arkhangelsky (see the International Arrest Warrant at
[TB/D/2293]); and applied for his extradition from France. That extradition
request, ultimately unsuccessful, nevertheless resulted in his arrest and two
weeks’ imprisonment until the bail was paid. The Bank was active in the
extradition proceedings through its French lawyers, and sought to arrest the bail
money pursuant to the Russian judgements.
133. The criminal file was disclosed to the Bank in 2013. None of the six witnesses
is known to have taken any steps to inform the Russian authorities that their
evidence had been untrue and should not be relied on. The criminal charges,
and the Interpol ‘red notice’, remain in place. It is for that reason that Mr.
Arkhangelsky cannot be present at this trial.
Irina Malysheva
134. It will take some weeks for the Court to hear all the witness evidence in this
case. However, it will take no time at all to note what is undoubtedly the fact of
greater evidential significance than anything any of them may say – the fact that
Mrs. Irina Malysheva is not here.
135. Mrs. Malysheva was, at all material times, Vice President of the Bank. She was
personally in charge of handling all the arrangements with Renord, Mr.
45
Zelyenov and Mr. Sklyarevsky on behalf of the Bank. Her BVI witness
statement is at [B2/14]. The Court is invited to read it. It is submitted that the
statement invites what might have been a very interesting cross-examination.
136. As a Vice President of the Bank, Mrs. Malysheva was personally responsible
for most of the Bank’s actions which, on the Defendants’ case, implemented the
fraudulent scheme against them. As mentioned above, there is evidence that
members of her family were among the beneficiaries of the fraud through their
interest in Renord and in Baltic Fuel Company. She was also one of the six
perjurers in Morskoy Bank criminal case.
137. Tellingly, when Mr. Pasko sought to interview Mr. Savelyev as part of his
investigation of the dispute between the Bank and Mr. Arkhangesky, Mr.
Savelyev referred him to Mrs. Malysheva as the person who dealt with that
issue on behalf of the Bank (Pasko, para 11 [C1/5/3]).
138. An audio-recording of Mrs. Malysheva’s interview with Mr. Pasko is the
Defendants’ disclosure document 459. The English transcript is appended to
this skeleton as Appendix 2, and the Court is respectfully invited to read it in
full. Alas, this is the closest the Court will ever get to a cross-examination of
the Bank’s most important witness; but in that respect, it is very illuminating.
The Bank’s executive, who had the most involvement in the events giving rise
to the Counterclaim, puts the Bank’s case against Mr. Arkhangelsky
intelligently and persuasively. Yet, when she does so in her own words and not
through the lawyers, the falsity of that case is obvious.
139. The evidence of Mrs. Malysheva’s dishonesty is overwhelming. All that
evidence was duly disclosed in these proceedings. By the time Mrs. Malysheva
allegedly refused to give evidence for the Claimants, she knew everything there
was to know about the serious allegations made against her personally. She
chose not to respond. In the circumstances, this is as good as an admission.
140. It is, perhaps, with this in mind that the Claimants now take a further ‘pleading
point’. After Mrs. Malysheva’s apparent disappearance in 2015, it has been
suggested for the first time, after years of litigation, that the Bank is not liable
46
for her actions as its Vice President. In support of that argument, the Claimants
rely on the following passage in para 177 of the pleaded Counterclaim:
The Counterclaimants contend that at least the following entities were party to the
conspiracy and that their roles in the execution of the conspiracy were (without limitation
and to the best the Counterclaimants’ knowledge at the time of pleading) as follows:
a. The Bank: the Bank (acting primarily through Mr Savelyev, its Chairman)
had the following roles to play in the execution of the conspiracy […]
[Emphasis added]
141. It is now said that such pleadings do not leave it open to the Defendants and
OMGP to impute liability to the Bank for Mrs. Malysheva’s actions on its
behalf. All allegations that the Bank acted by Mrs. Malysheva are now
characterised as a ‘new’ and ‘unpleaded’ case based on vicarious liability. It is
further asserted that Mrs. Malysheva’s fraud was “(on the Defendants’ case)
against the employer”, i.e. the Bank. See further paras 418-421 of the
Claimants’ skeleton argument.
142. This argument is both unfair and incorrect.
143. Firstly, it is not and has never been the Defendants’ case that the Bank was a
victim of a fraud by Mrs. Malysheva or any of its other executives. It has
always been the Defendants’ case that the Bank, acting by its executives, and/or
jointly with its executives, including Mrs. Malysheva, has defrauded the
Defendants and OMGP. Most importantly, it has always been common ground
that Mrs. Malysheva et al were acting on behalf of the Bank vis-à-vis various
third parties, with apparent and actual authority to do so. Until very recently,
the Bank always accepted full responsibility for all the relevant acts done
through its executives. Its defence was to deny that those actions were
fraudulent. It is the Bank, not the Defendants, who is now trying to run a new
and unpleaded defence.
144. The only suggestion that the Bank may have been defrauded by its executives
comes from the expert report of the Defendants’ and OMGP’s banking expert,
47
Professor Guriev. Asked whether the ‘Repo’ was a ‘conventional and
commonly used arrangement’ in Russian banking, the expert says that it was
highly unusual, to the extent that the circumstances of the transaction would
inevitably lead the Board of Directors and the banking regulator to suspect that
the Bank was defrauded by its executives. This is not either party’s pleaded
case, but an opinion of an independent expert. Moreover, the question put to the
expert was not whether there was a fraud, or who was the victim of the fraud.
The question was whether the Bank’s admitted actions, which the Bank defends
as ‘conventional and commonly used’, were in fact conventional and commonly
used. The answer is no. The rest is the reason why not. That is not even
evidence of fact.
145. After the expert report was served, Mr. Stroilov suggested in passing [L8/39/79,
line 20 on p. 78 to line 17 on p.79] that the 1st and 2nd Claimants might now
wish to obtain separate legal representation and see whether the Bank might
want to run a defence based on an assertion that it was itself a victim of fraud
by its executives. No doubt, that possibility was carefully considered by the
Bank and its legal advisors in any event. Nevertheless, the Bank’s pleaded case
remains what it is: it is based on a denial that its actions through Mrs.
Malysheva were fraudulent. The present attempt to run a new and unpleaded
defence is a very late afterthought and should not be permitted.
146. Secondly, the Defendants’ and OMGP’s pleadings must be considered as a
whole. The central allegations of the Counterclaim have always been that the
Repo arrangement, the onward sale of Scan from the Original Purchasers to
Subsequent Purchasers, the replacement of management and seizure of the two
companies, were all fraudulent acts, and that the Bank was behind them all. It
then became known, from the Claimants’ own evidence, that the Bank did all
those acts through its Vice President, Mrs. Malysheva.
147. It is in the nature of any conspiracy claim that a plaintiff cannot know all the
internal workings of the conspiracy; or which particular executive within a
corporation was personally in charge of a particular act done by or on behalf of
48
that corporation. The allegations were pleaded against the Bank; the Bank has
admitted them in substance, but denied fraud. The fact that it was acting by a
particular Vice President is evidentially significant, but does not alter the
fundamental issue between the Claimants and Defendants.
148. Thirdly, the ‘allocation of roles’ within the conspiracy was pleaded expressly
“without limitation and to the best the Counterclaimants’ knowledge at the time
of pleading”. The Bank was pleaded to have been acting “primarily” through
Mr. Savelyev. Such indicative pleadings cannot be taken to exclude any of the
Bank’s actions taken through another executive, even though those actions have
been duly pleaded elsewhere.
149. Fourthly, where it is pleaded that there was a conspiracy, and the conspirators
were
(a) The Bank (acting primarily through Mr. Savelyev);
(b) Mr. Savelyev, President of the Bank;
(c) Mrs. Malysheva, Vice President of the Bank;
(d) Other senior employees of the Bank;
it would be an unfairly technical approach to interpret this as meaning that all
executives except Mr. Savelyev were acting in their individual capacities and
the Bank is only liable for Mr. Savelyev’s actions. The Bank could have been in
no doubt as to what was alleged against it in substance, whether or not the form
of the pleadings is quite correct.
150. A corporate liability for fraud is always, in one sense, a ‘vicarious’ liability. In
the strictest sense of the words, ‘the Bank’ can never be dishonest because it
has no mind or conscience of its own. The Bank is dishonest where its
executives, acting on its behalf, do so dishonestly. It is implicit in an allegation
of fraud against the Bank that the dishonesty of its executives must be imputed
to the Bank.
49
Claimants’ disclosure
151. The Court is aware of the Defendants’ concerns over the inadequacy of the
Claimants’ disclosure. Two matters are of particular concern:
152. Firstly, it has transpired that throughout this litigation, as well as the earlier
litigation between the parties in various jurisdictions, the Claimants were
destroying potentially disclosable documents at a massive scale, purportedly
under their usual policy on retention/destruction of documents: see the
Defendants’ submission to the Court dated 6 November 2015. At the hearing of
6 November, Mr. Justice Hildyard required the Claimants to provide
information as to what directions were given within the Bank in relation to
retention/destruction policies. The Claimants responded by the 6th witness
statement of Mr. McGregor. They refused to provide the required information
and referred to legal professional privilege. The Defendants and OMGP make
two comments about that:
(1) Legal professional privilege should of course be respected; but inferences
should be drawn on such information as is available. The Claimants were
advised by English solicitors (Baker and MacKenzie) at least since March
2010. It should be inferred that the Claimants were fully aware of the need
to introduce a ‘litigation hold’ and disapply the usual retention/destruction
policies; but have wilfully chosen to destroy the potentially disclosable
documents.
(2) It is understood that the information required by Mr. Justice Hildyard was
not privileged legal advice, but any internal instructions given by the Bank
to its staff in relation to non-destruction of documents (or destruction of
documents, as the case may be). No such information has been provided.
It follows that either (a) no such instructions were given or (b) the contents
of those instructions were such that the Bank is now unwilling to reveal
them to the Court.
153. Secondly, the Claimants’ disclosure in relation to the key events of the
Counterclaim, listed in Schedule C to the Order of 21 October and discussed
50
above in this skeleton, has been negligible. In substance, the Claimants have
simply ignored their obligations of standard disclosure on those issues, and
most of the headings of specific disclosure in the order of 21 October.
The Bank’s claim against Mr. Arkhangelsky
154. In substance, little can be said about the issue of alleged forgery by way of
opening the case. Either Mr. Arkhangelsky signed the disputed documents or he
did not. The evidential analysis should take into account (a) inherent
probabilities, (b) handwriting expert evidence and (c) factual witness evidence.
155. The Defendants acknowledge the hurdle they need to overcome in terms of
inherent probability. A large bank has admittedly been lending to a group of
companies and seeks to recover an alleged debt from the former owner of those
companies. His response is a denial of ‘his’ signature under the guarantees. As
a starting point, scepticism of that defence is no more than a matter of common
sense. As a rule, banking business consists in lending and recovering debts, not
in manufacturing bogus debts. To deny a signature is a hopeless, childish, but
typical defence of a defaulting debtor. The Defendants will need to displace
these stereotypical assumptions by demonstrating that:
(1) This dispute takes place in the context of a much larger fraud committed
by the Bank against Mr. Arkhangelsky, and an ‘all-out war’ waged by the
Bank against him by most dishonest and unlawful means; and/or
(2) Fabrication of documents is well within the Bank’s arsenal of means used
in its dispute with Mr. Arkhangelsky and the OMG. What is inherently
improbable is that a large bank would indulge in fabrication of documents
at all. However, if it is proven to have fabricated various other documents,
it is a fairly trivial issue of fact whether certain alleged guarantees should
be added to the list of its forgeries.
156. The hopes that the handwriting expert evidence would give a conclusive
answer to that question are now gone:
51
(1) Where the experts used the agreed set of comparators, the conclusions are
mainly ‘inconclusive’, except one or two documents where there is ‘weak’
evidence of authenticity.
(2) With the exception of a few signatures, the Claimants’ expert report finds
substantial evidence of authenticity on the basis of a disputed set of
comparators. The Claimants refused to engage in an effort to obtain
comparators from independent third parties, and insisted on using
documents held by the Bank, selected at one time by Mr. Browne using an
admittedly incorrect methodology. All experts (Dr. Giles, Mr. Radley and
Mr. Browne himself) share the view that methodology was flawed; so
there is no proper basis for using those comparators.
(3) The experts agree that (a) there is positive evidence that most of Mrs.
Arkhangelsky’s signatures had been forged, but (b) cannot rule out a
possibility that they were forged by Mr. Arkhangelsky. The latter sounds
sensational; but is not positive evidence. It is merely a possibility, one of
perhaps a thousand of other possibilities. The experts do not venture into
assessing its probability (which would require a similar comparison with
handwriting of any other potential forger). All it means is that: (i) if, and
only if, other positive evidence proves that Mr. Arkhangelsky forged his
wife’s signature, the experts have nothing to say to contradict that; and (ii)
while Mrs. Arkhangelsky’s signature has clearly been forged, the
inference that it was forged by the Bank does not follow automatically
without other evidence supporting it.
157. In the end of the day, the handwriting expert evidence lends little support to
either party’s case, is consistent with either party’s case, and is therefore
ultimately unhelpful. The issue will have to be resolved on the basis of cross-
examination of factual witnesses.
158. Further, what ultimately matters are the witnesses’ factual recollections, not
their opinions, nor the strength with which those opinions are held. The strength
of Mr. Arkhangelsky’s opinion on the issue of forgeries has admittedly
52
changed. His factual evidence, now as before, is that (a) he had expressly
agreed with Mr. Savelyev that no personal guarantees would be required and
(b) he has no recollection of signing any of the disputed documents. On both
points, he is contradicted by several of the Claimants’ witnesses. It is cross-
examination of the witnesses on both sides that is likely to be determinative of
this issue.
PART II: FAIR TRIAL
159. The Court is well aware of the difficulties arising out of the fact that the
Defendants and OMG Ports are impecunious litigants in person whereas the
Claimants enjoy very powerful legal representation. In the judgement of 27
November 2015, the Court held in para 36 “that though the circumstances are
imperfect and regrettable, a fair trial should be possible, even if the question
whether it continues to be so must be kept under continuous review”
(emphasis added).
160. In reaching that conclusion as to the possibility of a fair trial, the Court
emphasised (para 32) two crucial requirements: (a) extra reading time and (b)
“the greatest possible assistance” of the Claimants in identification of the
issues “as fairly and fully as possible” in an old-fashioned ‘dispassionate’
opening. Mr. Justice Hildyard held in para 32:
There will be obvious and formidable difficulties, and even though I have had the benefit
of having had the conduct of this case from its inception, I will require very great
assistance and constructive contribution, as well as more reading time, to seek to put
myself in a position which achieves the difficult tightrope trick of both assisting the
litigant in person and also not descending into the arena. It seems to me that that
necessitates the judge being afforded more than usual opportunity to acquire a
comprehensive grasp of the case from the inception of the trial and for the Court to be
given the greatest possible assistance by the party most able to do it, that is to say the
Claimants who have the benefit of powerful legal representation, in identifying the issues
both factual and legal and any issues with regard to the experts, upfront and as fairly as
53
fully as possible. I shall also require a clear and comprehensive and dispassionate
opening, and a careful and comprehensive written identification of the factual issues and
the findings respectively sought, and of the points in issue between the various experts.
The nature of the assistance required was, I hope, made clear to the Claimants and their
legal counsel during the course of the hearing.
161. The judgement reiterates in para 41 that the decision to proceed with the trial is
made “with the reserved right that if at any time I considered that the trial
could not proceed fairly or had to be sliced up or dealt with in some other way,
then despite the costs I would feel free to do so.”
162. In refusing leave to appeal that judgement, Hildyard J re-iterated that fairness of
the trial “must be kept under constant review”. In the Court of Appeal, Elias LJ
also relied heavily on that indication in refusing leave.
163. Since then, further practical difficulties have become apparent. Worryingly,
some difficulties arise in relation to those very matters on which the Court
relied most heavily in its “earnest hope” that a fair trial was possible.
The Claimants’ opening
164. As indicated above, the Defendants and OMGP do not accept that the
Claimants’ 246-page-long skeleton argument identifies issues “old style straight
down the middle”, impartially, or fairly, as directed by the Court.
165. The Claimants were required to produce an opening that identifies the issues
impartially; and because it would be impartial, it was allowed to be
‘comprehensive’, rather than limited to 20 pages as provided for in the
Chancery Guide. The practical result is a 246-page-long partisan argument,
presenting the Claimants’ case with such force and skill as could be expected
from two eminent QCs and one experienced junior. That aggravates, not
mitigates, the Defendants’ disadvantage. The Defendants could have, with
some difficulty, answered a 20-page skeleton argument. It is utterly unrealistic
to expect that they can adequately answer a 246-page one.
54
166. The points made below are not intended as a comprehensive response to the
Claimants’ skeleton, but rather (with all due respect to its learned authors) as an
illustration of its partiality and unfairness.
Style and tone
167. Time and again, contentious factual assertions of the Claimants are made in the
text of the submission as background facts, whose truth the Counsel are
seemingly prepared to certify by their signatures. To take one random example
out of a hundred, it states in para 255: “Further, Mr Arkhangelsky’s allegation
that Mr Savelyev told him the Bank would not insist on personal guarantees is
untrue.” Quotations from witness statements are typically introduced in such
terms as “Mr. Arkhangelsky claims”, “Mr. Arkhaneglsky alleges”, “Mr.
Savelyev explains”, or “Ms. Volodina recalls”. The Claimants’ witnesses never
‘allege’ anything; the Defendants’ witnesses never ‘recall’ anything.
168. In introducing the parties’ witnesses in paras 198-221, the Claimants describe
their own witnesses by reciting their contentious evidence, e.g. “She sent to Mr.
Arkhangelsky the various notices of demand under the guarantees” (para 207).
By contrast, Defendants’ witnesses are introduced in demonstratively sceptical
terms, e.g. “Mr Grigory Pasko is a Russian investigative journalist who says he
is a former political prisoner. He says he has been involved in investigating Mr
Arkhangelsky’s case” (para 220).
169. Whether or not the Claimants agree with Mr. Pasko’s evidence, he is a well-
known public figure whose background is readily verifiable. Mr. Pasko was
infamously imprisoned by the FSB for his investigation of environmental
abuses by the Russian Navy, such as dumping of nuclear waste into the Pacific.
He was universally recognised as a prisoner of conscience (including by
Amnesty International, which is acknowledged to be the highest authority on
such matters). Mr. Pasko’s evidence about his investigation in relation to the
dispute between the Bank and Mr. Arkhangelsky (including interviews with
Mrs. Malysheva, Mrs. Shabalina, and attempts to interview Mr. Savelyev) has
55
not been contradicted. The Claimants are entitled to challenge his evidence, but
his background can be non-controversially described as heroic, his name stands
for everything that is worthy and honourable in journalism, and deserves some
respect.
170. In introducing the parties (as if they needed any introduction to this Court),
Claimants’
introduce
the Bank
in
two advertisement-style paragraphs,
succinctly boasting of its size, clientele, and notable foreign shareholders (paras
24-25). There is no mention of the Bank’s and Mr. Savelyev’s alleged political
links, and the Defendants’ pleaded assertion that the Bank’s rapid success in
2000s was due to the influence of Mr. Savelyev’s friend, Mrs. Valentina
Matviyenko, who was the governor of St. Petersburg in that period.
171. Of Mr. Arkhangelsky and Oslo Marine Group, however, it was thought
necessary to say (by way of introduction): “The Claimants’ business valuation
expert (…) observed (…) that ‘considerable effort was made to disguise the
origin of incoming funds (port and lumber businesses) as well as certain
underlying investments (in the form of land and real estate developments).”
(para 27). Para 28 then seeks to insinuate a link between Mr. Arkhangelsky and
Mrs. Matvienko. That 3-page long introduction concludes in para 34: “OMG’s
businesses, its financial structures, prospects, and relationships with various
financial institutions, will be the subject of investigation at trial”.
“Factual background”
172. The first 66 pages of the skeleton are devoted to an introduction and
‘background’. By a rough calculation, the assertion that Mr. Arkhangelsky
signed the personal guarantees is repeated approximately 20 times in that
section (prior to the actual discussion of the issue at p.p. 80-106).
Commendably, the Court is left in doubt as to what the Claimants’ case on that
point is.
56
173. This said, the skeleton does not set out the background facts of real importance,
such as the circumstances in which Western Terminal assets were pledged to
the Bank:
(1) It was originally intended and agreed, at the time the Bank opened the
credit line for Vyborg Shipping, that each loan would be secured by a
pledge of a vessel operated by that company.
(2) My mid-2008, Vyborg Shipping run into difficulties, and the vessel
intended as a pledge for the 4th loan was not delivered in time.
(3) Western Terminal assets were offered as a substitute pledge ad hoc and at
a very short notice.
(4) It was clearly understood between the parties, and reflected in the Bank’s
internal documents, that the amount of the loan was no more than 38 per
cent of the value of the pledge.
(5) Under the Russian cadastral rules, Western Terminal being designated as a
single land plot, it was only possible to pledge it as a whole and with
virtually all its infrastructure (despite its being described simply as a ‘land
plot’).
(6) It was envisaged and agreed between the parties that (a) the OMG would
take steps to divide the Terminal into several land plots for cadastral
purposes and (b) the part of the Terminal relating to Berth 16 would then
be released from the pledge.
(7) It is therefore clear that the Terminal was only pledged to the Bank ad
hoc, that the intention of the parties was that only a part of it should be
pledged, it was only due to an incident of cadastral rules that the whole
Terminal was formally pledged, and that the parties recognised at the time
that such a pledge was excessive.14
174. While the Bank now argues that 2008 valuations were erroneous, these
circumstances are of some importance as background to the events of the
14Claimants’ disclosure document K169 at [TB/D93/1166/6]
57
Counterclaim. They should have been disclosed to the Court in the Claimants’
‘impartial’ opening.
175. The document then proceeds to argue, repeatedly and emphatically, that all
OMG assets of value had already been pledged to the Bank or other creditors,
and there was nothing to ‘raid’.
Comments on the draft investigation report by FTI
176. In para 402, the Claimants’ skeleton comments on the draft FTI report as
follows:
The Claimants say that the draft FTI report does not advance the ‘conspiracy’ case. In
particular, it does not show that the Bank ‘owns’ or ‘controls’ the Renord-Invest group,
which is as the Claimants understand it, the centre of the conspiracy case. The draft also
notes:
‘We cannot presently confirm the following:
…
That Alexander Savelyev owns and operates the Baltic Fuel Group.’
The Claimants will say that, if anything, the draft FTI report disposes of the ‘conspiracy’
allegations.
177. Even as a partisan argument, this is misleading in several ways:
(1) The relevant page in the draft FTI presentation [TB/D173/1895.1/15] is
headed ‘Unconfirmed links’. It is evidently intended not as a summary of
factual conclusions, but as an aide memoire listing matters which need to
be further investigated. The alleged link between Mr. Savelyev and Baltic
Fuel is listed among a number of other alleged ‘links’, many of which
have since been admitted by the Claimants. For example, FTI also could
not “presently confirm”:
that Vector Invest LLC (INN 7842367080) as owned by Andrey
Belogolov and Valeriy Rudoy is a relevant company;
58
that Igor Malyshev is the son and Vladmir Malyshev the husband
of Irina Malysheva
that Svetlana Guz is the sister of Vladislav Guz
that BSPB and IC Renord-Invest shared offices on Ispolkomskaya
Street
All these matters have now been admitted.
(2) It may well be the case that Mr. Savelyev ultimately owns or operates
Baltic Fuel Company; that would no doubt be a relevant fact; it was right
to ask FTI to investigate that possibility; but it has never been part of the
Defendants’ or OMGP’s pleaded case, let alone “the centre” of it. The
closest the pleadings come to that alleged averment is in para 177(h),
where Baltic Fuel Company is listed among 21 companies and individuals
averred to be “vehicles for the ultimate beneficial ownership of other co-
conspirators by
the Bank and/or Mr Savelyev and/or other co-
conspirators, and for the concealment of such ownership and control”.
This is a much wider case than is represented in the Claimants’ skeleton.
(3) By the very definition of a conspiracy, allegations that one conspirator
owns or controls another can hardly be crucial to a conspiracy case. A
conspiracy is an agreement between different parties; one party’s
ownership and/or control of another is nearly always relevant and hardly
ever crucial. Ultimately, the issue is what the two parties (e.g. Bank and
Renord) agreed to do; who exactly owns and controls them is no more
than a relevant collateral fact.
(4) The Claimants’ repeated pretence not to understand the case advanced
against them in relation to their conspiracy with Renord is disingenuous
and false. The Claimants seek to cause confusion by playing on the
complex structure of Renord Group (whose very existence they sought to
conceal for years) and the reflection of that complexity in the Defendants’
pleadings – see above.
59
Reliance on comments of Bannister J
178. In para 357, the Claimants’ skeleton quotes the comments of Bannister J from
the judgement of BVI High Court dated July 2011, expressing his scepticism of
the Defendants’ case on Moratorium. This might have been a legitimate
makeweight for a partisan argument, but for one thing: the skeleton omits to
mention that the judgement was then overturned by the Eastern Caribbean
Court of Appeal, on the grounds that Bannister J inappropriately conducted a
‘mini-trial’ of the claim.
179. In these circumstances, (a) with respect, the comments of Bannister J carry little
or no weight and (b) it is misleading to rely on those comments without
disclosing the fact that the judgement was overturned on appeal.
Comments on ‘Onega claim’
180. The Court will recall that in July 2015, the Defendants and OMGP amended
their counterclaim to introduce the loss of the business of Onega LLC as a new
head of loss. The business was lost as a result of the takeover of Scan, who
owned approximately half of Onega Terminal and leased it to Onega LLC. The
Claimants say the claim for the loss of Onega is a new claim, and as such, is
limitation-barred.
181. The issue is introduced in the Claimants’ skeleton in these words (para 703):
In February 2014, the Claimants served their valuation evidence, from which the
Claimants say it was clear that there was no value in the businesses of Western Terminal
or Scan. Accordingly, Defendants and OMGP needed to search for some other OMG
business which they could say had some value. On 17 July 2015, in one of the many
iterations of their draft Re-Amended Defence and Counterclaim, the Defendants and
OMGP sought to make a claim for the value of OMGP’s shares in Onega LLC
60
182. The skeleton then proceeds to make a partisan argument as to the alleged
difficulties of the alleged new claim in terms of limitation and causation. It is
silent as to the Defendants’ side of the argument.
Mr. Berezin
183. An argument repeatedly made in the Claimants’ skeleton is to take a particular
allegation out of the overall context of the Counterclaim, characterise it as a
‘new case’ advanced by the Defendants and OMGP, and attack it as
‘unpleaded’. As discussed above, such criticism is even made against some of
the central allegations of the Counterclaim, such as those concerning the role of
Irina Malysheva.
184. Some other criticisms are even more far-fetched:
185. In his witness statement for the trial, Mr. Sklyarevsky describes his contacts in
2009 with Mr. Alexey Berezin, OMG financial director (with whom Mr.
Sklyarevsky had shared a dormitory in university), and asserts that he was
seeking to negotiate an amicable settlement between the Bank and OMG. In his
witness statement in response (Arkhangelsky 19th at [C1/9]), Mr. Arkhangelsky
responds to Mr. Sklyarevsky’s evidence in some detail, including in para 37:
Mr. Sklyarevsky’ s evidence about his contacts with Mr. Berezin in the spring of 2009
reinforces my suspicion that Mr. Berezin had been his ‘ spy’ in the OMG for some time,
possibly ever since his employment in 2007. It would not be surprising for a professional
raider to infiltrate various businesses with such ‘ spies’, in case he may later wish to raid
those businesses. Mr. Berezin gave evidence for the Bank in BVI proceedings. At the time
I employed him, I did not know about his friendship with the “notorious raider” Mr.
Sklyarevsky.
186. The Claimants’ skeleton argument reads in para 424: “it appears that Mr
Arkhangelsky may now seek to make another (unpleaded) case, alleging that
Mr Sklyarevsky, whom he describes as a ‘professional raider’ may have
‘infiltrated’ the various OMG businesses by way of OMG’s finance manager,
61
Mr Berezin, ‘ever since [Mr Berezin’s] employment in 2007’. This second new
case also contradicts the ‘conspiracy’ claim currently advanced.”.
187. This comment is unfair in a number of ways:
(1) It is perfectly appropriate for a reply witness statement to comment on the
opposition’s witness evidence, to contradict it, and/or to offer an
alternative interpretation of the events described in it.
(2) The Claimants relied on Mr. Berezin’s witness statement in BVI and in the
application for a freezing order in these proceedings. He was also listed as
one of their witnesses for the trial in the Allocation Questionnaire. The
fact that they are not calling him is in itself noteworthy, and raises
questions as to his true role in the relevant events.
(3) The suggestion that Mr. Berezin may have been a ‘spy’ inside the OMG is
not new. For example, in his 2nd affidavit of 20 June 2012 [G1/20], Mr.
Arkhangelsky says in para 78: “I believe the Bank has pressured and/or
induced Mr. Berezin to give that false evidence (and possibly also to assist
them secretly while he still worked for Oslo Marine Group). In Russia,
where the Bank and its friends enjoy almost unlimited power and
resources, it would not be difficult to do that”. [emphasis added]
(4) It has always been the Defendants’ and OMGP’s pleaded case that Mr.
Sklyarevsky is “a well-known raider” who assisted the Claimants in their
fraud against the Group.
(5) Therefore, the allegations against Messrs. Sklyarevsky and Berezin are
anything but new allegations.
(6) Even if those were new allegations, it is impossible to see how they can be
fairly described as a new “unpleaded case”.
(7) It is also impossible to see how those allegations contradict (rather than
support) the pleaded Counterclaim.
62
Chattels
188. On 21 December 2011, as part of the Bank’s purported recovery under Mr.
Arkhangelsky’s alleged guarantees, the Defendants’ chattels from their
apartment in St. Petersburg were sold at a purported public auction for RUB
22,000 (approx. £440 by the then exchange rate). That auction is duly pleaded
as one of the allegedly fraudulent auctions where the Defendants’ assets were
allegedly sold at gross undervalue (para 160). The list of chattels is set out in
Appendix 3 to RADCC [A1/2/77].
189. The matter has been discussed previously in Court. Thus, the transcript of the
hearing on 20 December 2013 reads in part [L4/25/7]:
MR JUSTICE HILDYARD: It is a very arresting business, the chattels list.
MR MARSHALL: Yes, I recognise the fact –
MR JUSTICE HILDYARD: Very arresting.
MR MARSHALL: — the figures –
MR JUSTICE HILDYARD: Something of a window, I think, in prospect has
discomforted me very much to see the values thought to be attributed to assets
which one would expect to be of substantial as opposed to nominal value.
MR MARSHALL: Yes.
MR JUSTICE HILDYARD: For the purpose of it is a (inaudible) application, I do not
say that this would be the result in the end, but for the purpose of it is a (inaudible)
application suggests enforcement proceedings which are less than one might
expect in terms of fairness.
MR MARSHALL: My Lord, I hear what your Lordship says. Our answer in relation to
it was this. The process of realisation of those assets was one conducted by an
official, a bailiff appointed by the court.
MR JUSTICE HILDYARD: Yes, so much the worse because at an interlocutory stage
without the most secure evidence that works of art, Jacuzzis, assets of substantial
apparent value should go for these derisory figures and it be conducted in an
apparently official way is very very uncomfortable. I say no more than that. It is
(inaudible) observations the smell may be dispelled, but there is a smell.
190. There is, perhaps understandably, no further evidence in relation to that issue.
The chattels are gone, and at least the Defendants are not in a position to find
out to whom they were ‘sold’. They cannot be traced and cannot be shown to a
valuer. Nor have the Claimants adduced any evidence on this point to ‘dispel
the smell’.
63
191. It is now suggested in the Claimants’ skeleton (para 553(3)) that, since no
valuation evidence has been adduced in relation to chattels, “it is assumed that
in those circumstances there is no live dispute as to the sale price”. With
respect, this is a nice try to sweep an unhelpful fact under the carpet.
192. It is submitted to be a fact capable of judicial notice that £19 for a jacuzzi is a
rather good bargain, and that even the most extraordinary level of asceticism
does not quite explain a sale of the entire contents of a multi-millionaire’s
dwelling for less than £500.
193. It is not suggested that the Defendants should recover the value of the chattels
on top of the value of the other assets. However, as the Learned Judge has said,
this is a small window from which a large view opens. There is no dispute as to
the sum for which the credit was given, and the Defendants and OMGP will
invite inferences from that agreed fact as to the lawfulness of the Bank’s
‘recovery’ as a whole.
Other concerns
194. The Defendants and OMG Ports highlight the following concerns in relation to
the practicalities and fairness of the trial:
195. Firstly, as submitted above, the Claimants have failed to provide a fair and
impartial opening submission which the Court required and relied on as a
safeguard of fairness.
196. Secondly, as regards judicial reading, it has transpired that most of the
disclosure documents included in the trial bundle are not accompanied by
reliable or intelligible English translations. The Court is invited to read the
inter-party correspondence on that issue [I20/22/2] and [I20/23/3-5, 42, 54-55].
The Claimants do not deny that they have only provided ‘human translations’
for the documents on which they seek to rely as supporting their own case. As
for any other documents, the Claimants take the view that it is for the
Defendants to arrange for translations. [I20/23/54-55]. That is obviously
64
something the Defendants cannot afford; the lack of funds for disbursements
such as these was the reason why the Defendants previously submitted that a
fair trial is not possible without some funds being made available.
197. The Defendants are assisted by one pro bono translator, whose capabilities are
obviously limited. The Claimants have demanded that, if any such translations
are to be added to the trial bundle, they must be identified and disclosed to them
“on the rolling basis”. When pressed, the Claimants’ solicitors did not deny that
at least one of their purposes in making that demand was to alert their witnesses
about the documents which would be put to them in cross-examination
[I20/23/55].
198. Thirdly, even ignoring the problem of translation, the Defendants’ and OMGP’s
resources are wholly insufficient to prepare an adequate cross-examination of
the Claimants’ witnesses. There are thousands of documents which need to be
reviewed to select those which need to be put to witnesses. The available time
is insufficient for adequate preparation.
199. Fourthly, very serious deficiencies in the Claimants’ disclosure, briefly
summarised above, also undermine the fairness of this trial. Especially in the
Defendants’ position, having
to prepare and conduct complex cross-
examinations as litigants in person, it is vital to have all relevant documents
available. Where disclosure is deficient, facts which should have been clear
from the relevant documents must instead be investigated through indirect clues
scattered over numerous documents on other issues. This is an impossible task
for the Defendants.
200. Ultimately, all that can be done about disclosure failures is inviting inferences
at the trial. However, given the limitations of the Defendants’ ability to review
the Claimants’ disclosure without professional assistance, identification of and
reliance on absence of documents is even more difficult than finding and using
any relevant documents.
201. Fifthly, the Claimants now firmly object to any further involvement of Pavel
Stroilov in these proceedings. The substance of those objections is without
65
merit, and the Claimants’ motive for making them is unfortunately quite
obvious.
202. Sixthly, the Claimants continue to take purely technical pleading points against
the Defendants. When the Defendants proposed to amend the pleadings to
avoid any further argument, the Claimants simply refused to engage with that in
correspondence, and indicated they would only consider the proposed
amendments if an application supported by evidence is made. The application
has been duly made, and the Claimants then made it clear that they intend to
fight to the end over every comma (McGregor 8th).
203. Seventhly, the revised trial timetable proposed by the Claimants does not
divide the time fairly between the parties. 10 days (including reading but
excluding travel) are allocated for cross-examination of the Defendants’
witnesses; 18 days (including reading) are allocated for cross-examination of
the Claimants’ witnesses. This is proportionate to the respective volume of the
parties’ witness evidence, but ignores (a) the fact that nearly all Defendants’
evidence will be given in English, while the cross-examination of the
Claimants’ witnesses would be delayed by simultaneous translations; and (b)
the disadvantage of the Defendants acting as litigants in person. Beyond all
doubt, the Claimants’ Counsel team will use the time available to them with
infinitely greater efficiency.
204. Eighthly, The Defendants’ still have not received any confirmation from their
business valuation expert, Mr. Steadman, that he is prepared to attend the trial
and give evidence pro bono. It is not unlikely that his silence means ‘no’.
Unless any reassurance from him is forthcoming, the Defendants will have no
choice but to ask the Court to split off the trial on quantum, but to order an
interim payment following the trial on liability. The new point taken on behalf
of the Claimants as to the currency of the claim and the counterclaim (see fn 3
above) also suggests that may be necessary.
205. Likewise, the Defendants’ handwriting expert, Mr. Radley, has not confirmed
his preparedness to attend pro bono. The Defendants sought to agree with the
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Claimants (in line with what had been suggested in Court by their own
Counsel) that the handwriting experts need not give oral evidence. The
difference in their conclusions is due to being instructed to use different sets of
comparators. What needs to be considered at the trial is the adequacy of their
respective instructions, not of their opinions, and that can be done without
cross-examination. However, the Claimants refused, on the grounds that there is
a difference of opinion in relation to one document, where the experts used the
same comparators, Mr. Radley said the evidence was ‘inconclusive’, an Dr
Giles found ‘weak evidence’ of authenticity. It is submitted that requiring a
cross-examination of the experts to resolve this minor issue is completely
disproportionate, especially given the Defendants’ financial difficulties.
The Claimants’ non-compliance with a duty of fairness
206. It will be observed that (a) the list of difficulties has grown considerably since
the last time the issue was before the Court and (b) most of those difficulties
could have been removed or mitigated by constructive cooperation between the
parties.
207. It is submitted that, if a fair trial is possible at all in present circumstances, one
of the fundamental preconditions is that the parties cooperate in good faith to
make it happen and to find pragmatic solutions to such numerous difficulties as
will arise. Unfortunately, the Claimants’ approach has been the opposite of that.
208. Overall, the Claimants and their legal team are litigating this case without any
special consideration of the fact that their opponents are litigants in person.
Indeed, they have been candid throughout the recent months about the stance
they take. They do not accept, as a matter of fact, that their opponents are
litigants in person. They act upon an assumption that there is a secret team of
professionals equal to themselves, who assists the Defendants behind the
scenes. On that basis, they do not consider themselves to be under any special
duty of fairness towards the unrepresented Defendants, and litigate this case in
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the usual adversarial way. They hardly make any secret of the fact that they feel
free to ‘play hardball’.
209. This is unacceptable. The Claimants are under a duty to assist the Court to
further the overriding objective: CPR 1.3. The overriding objective includes
“ensuring that the parties are on equal footing” (CPR 1.1(2)(a)) and “dealing
with the case in ways which are proportionate… to the financial position of
each party” (CPR 1.1(2)(c)(iv)). Those provisions would be of no substance if a
party was free to assert unilaterally that the parties are already on equal footings
and that the financial position of their opponents is not as black as it is painted.
210. Given the guidance given by the Court in its judgement of 27 November as to
the parameters of the trial and ensuring its fairness, the Defendants are
determined to do their best to assist the Court at the trial. However, whether or
not a fair trial is possible in present circumstances, it is certainly not possible
without an effort from the Claimants’ side aimed at achieving it. The approach
evidently taken by the Claimants in recent weeks indicates that their objective
is the very opposite: to avoid a fair trial, but only to go through the form of a
trial to obtain what is in substance a default judgement.
Reliance on ‘continuous review’, and the potential remedies of unfairness
211. Such duties as conducting litigation fairly, reasonably, and/or in good faith are
notoriously hard to enforce. The Defendants’ only remedy is to rely on the
Court’s ‘continuous review’ of the fairness of the trial. Unless the Claimants’
approach undergoes a dramatic change before long, it is likely that a time will
come when that review will produce a ‘negative’ result.
212. This being so, it is not inappropriate to briefly address what should happen
then.
213. The judgement of 27 November envisaged that, if the Court eventually finds
that the trial cannot proceed fairly, it may need to be “sliced up or dealt with in
some other way” (para 41). The possibility of a split trial has been examined by
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the Court at December PTR, and found to be impractical. The remaining
remedy is ‘some other way’.
214. It is submitted that, in such a case, the Defendants should be permitted to
restore their application for an advance costs order, refused on 27 November.
At that juncture, the Court found that it had jurisdiction to make such an order;
that was un unlikely order in a case without a ‘common pot’ or its equivalent,
but it was “always dangerous to say never”; and the application was refused
because the Defendants failed to prove that a fair trial was impossible without
such an order.
215. It is submitted that, if the Court later finds that the trial cannot proceed fairly,
and especially if that is due to the Claimants’ unreasonable tactics, that would
be a material change of circumstances which should trigger a reconsideration of
that issue. Further:
(1) The conduct of the parties is a matter which the Court is bound to take into
account in the exercise of its discretion as to costs (which, it has been held,
goes far enough to order advance costs where that is in the interests of
justice).
(2) In the ordinary course of events, it would be but a triviality for a party to
be penalised in costs for its unreasonable or unfair conduct of litigation.
This case is being litigated by the Claimants without any such risk, which
impairs the Court’s ability to control their conduct of litigation. In such
circumstances, it is not a step too far to penalise them by ordering a
comparable amount to be paid in advance costs rather than retrospective
costs; especially if the consequences of their misconduct are as grave as
making a fair trial impossible.
(3) The Claimants have refused to try resolving this case at a mediation,
where the Defendants would be assisted by professional lawyers. A failure
to engage in ADR must have adverse consequences in costs: PGF II SA v
OMFS Company 1 Ltd [2013] EWCA Civ 1288; Halsey v Milton Keynes
General NHS Trust [2004] EWCA Civ 576. While that did not warrant
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advance costs to be ordered in November, that refusal should continue to
weigh against the Claimants in any future exercise of costs discretion,
and/or remains a relevant factor in the ‘continuous review’ of fairness.
(4) If the trial proceeds as far as the cross-examination of Mr. Savelyev, the
Court will be in a position to make findings as to the Claimants’
responsibility for the Interpol ‘red notice’ being issued against Mr.
Arkhangelsky as a result of their false evidence in the Russian criminal
case against him. That would mean that Mr. Arkhangelsky is unable to
attend his own trial as a result of the Claimants’ crime against him. That is
another ‘conduct’ issue which affects the exercise of costs discretion; and
such extraordinary misconduct as a perjury measures the extraordinary
penalty of an advance costs order.
216. Finally, given the Court’s findings as to the impracticality of a split trial, the
only alternative solution (in the event the ‘continuous review’ produces a
‘negative’ result) seems to be an adjournment sine die. That would be a very
serious interference with both parties’ rights to access to justice. The
Defendants did not ask for it in November and will not ask for it now or in the
future. The Claimants also say that they are opposed to it.
217. It may look like an attractively ‘softer’ option, compared to an advance costs
order, to make the provision of funds a condition of a continuation of the
proceedings. However, in a case with mutual allegations of dishonesty, both
parties are likely to say that they want a fair trial to take place, but only one is
likely to be telling to truth. Having repeatedly assured the Court that they want
a trial, having falsely accused the Defendants of putting off the evil day, the
Claimants should not be allowed to choose whether a trial is to take place. They
must be held to their assurances that they want it; and made to put their money
where their mouth has been.
218. The Defendants say that the Claimants’ pretended impatience for a trial has
been pure hypocrisy. The Claimants have insisted on an immediate trial for the
same reason as why the Defendants opposed it: because both parties thought
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that such a trial cannot be fair. Now that the Defendants are seeking to agree
practical ways to proceed despite all the difficulties, the Claimants’ reaction is
obstructive. One can sense panics in the Claimants camp at the prospect of
getting the trial they had been hypocritically asking for not so long ago.
CONCLUSION
219. Civilised men are accustomed to take the rule of law for granted. When told
about the daily life of a country deprived of it, the mind may accept that as a
logical consequence of lawless dictatorship, but at the same time, resists
accepting it as a reality of modern life. References to shareholders, investment
projects, and bankruptcy administrators seem to imply some kind of
civilisation. It is difficult to reconcile with the fact that nobody’s life, liberty
and property are safe there – that the friends of the Governor may at any time
help themselves to any enterprise in the city, and prosecute the lawful
proprietor on trumped up charges.
220. At the PTR on 26 November 2015, the Claimants’ Counsel characterised the
events which ruined Oslo Marine Group and give rise to this Counterclaim as
no more than “a typical and perhaps rather sad story about a business that
went bust in the credit crunch” (p. 155, lines 22-24). True it is that the sad
story of OMG’s death is typical for Russia; but the credit crunch was no more
than a background to it.
221. The unlawful ‘raiding’ of private businesses by corrupt officials and oligarchs
is endemic in modern Russia. It is estimated that no fewer than 70,000 Russian
businesses have been taken over in this way, often resulting in the
imprisonment or death of lawful owners. About 15% of all Russian
entrepreneurs have been subjected to criminal prosecution between 2000 and
2012. A judge of Russian Constitutional Court, Tamara Morschakova, has
famously compared that purge against an entire social class to Stalin’s genocide
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of Russian peasantry in 1930s.15 Whatever else Mr. Arkhangelsky may or may
not be, he is a survivor of a national disaster; and as such, his testimony
deserves a fair hearing.
222. To any Russian, fair trial is a rarer and more precious commodity than even the
land in the Big Port of St. Petersburg. It is a treasure as sacred and miraculous
as the Holy Grail, only ever attained by the chosen few through a series of
incredible adventures.
223. More is at stake at this trial than money; or even than the reputation of
businessmen involved in it. To many people who will follow the course of this
trial from a remote and unhappy land, the very possibility of a fair trial between
anyone in the position of Mr. Savelyev and anyone in the position of Mr.
Arkhangelsky will be a distant flicker of hope. Not only for the sake of justice
between the parties, but also for the sake of thousands of people who will never
come to tell their grievances before an independent and impartial tribunal
established by law, justice must be seen to be done.
Pavel Stroilov (on behalf of the Defendants and OMGP)
18 January 2016
Appendices:
Appendix 1: Domination of banking raiding as a tendency of seizure and redistribution
of property in Russia in 2009-2011, a report by National Anticorruption Committee
(NACC)
Appendix 2: Irina Malysheva’s interview with Grigory Pasko
Appendices 3-8: FTI draft charts
Appendix 9: FTI draft master chart
15 Quoted in Pasko, para 7, at [TB/C1/5]
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