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Neutral Citation Number: [2011] EWHC 3107 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Case No: HC10C04611
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 29 November 2011
Before :
THE HON MR JUSTICE ARNOLD
– – – – – – – – – – – – – – – – – – – – –
Between :
VTB CAPITAL PLC
– and –
(1) NUTRITEK INTERNATIONAL CORP
(2) MARSHALL CAPITAL HOLDINGS
LIMITED
(3) MARSHALL CAPITAL LLC
(4) KONSTANTIN MALOFEEV
– – – – – – – – – – – – – – – – – – – – –
– – – – – – – – – – – – – – – – – – – – –
Claimant
Defendants
Clive Freedman QC, Paul McGrath QC, Stuart Ritchie, Iain Pester and David Peters
(instructed by PCB Litigation LLP) for the Claimant
Daniel Toledano QC, Jamie Goldsmith and Alexander Brown (instructed by Weil, Gotshal
& Manges) for the First Defendant
Michael Lazarus and Christopher Burdin (instructed by SJ Berwin LLP) for the Second
Defendant
Stephen Rubin QC, Cyril Kinsky QC, Edward Brown and James McClelland (instructed by
SJ Berwin LLP) for the Fourth Defendant
Hearing dates: 2-4, 7-9 November 2011
– – – – – – – – – – – – – – – – – – – – –
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this
Judgment and that copies of this version as handed down may be treated as authentic.
………………………..
THE HON MR JUSTICE ARNOLD
THE HON MR JUSTICE ARNOLD
Approved Judgment
MR JUSTICE ARNOLD :
Contents
Topic
Introduction
Factual Background
The parties
RAP
The negotiations
The agreements
The Facility Agreement
The SPA
The ISA
The Participation Agreement
Drawdown of the loan
Default
VTB’s claims
Service out of the jurisdiction: general principles
VTB’s application to amend the Particulars of Claim
Piercing the corporate veil
Article 23(1) of the Brussels Regulation
The rule in Parker v Schuller
Necessary or proper party
Conclusion
The Defendants’ application to set aside permission to serve out
Applicable law
Section 11(2)(c)
Section 12
Serious issue to be tried
(1) No loss
(2) No joint liability of MarCap BVI
(3) No joint liability of Mr Malofeev
The gateway
Forum non conveniens
Stage 1
Stage 2
Competition of claims and the need for the contract to be
invalidated first
The need for a criminal prosecution first
Uncertainty
Conclusion
The WFO
Good arguable case
Risk of dissipation of assets
Material non-disclosure
Failure to disclose details of the loan transaction
Failure to disclose that information had been obtained in breach
of confidence etc
VTB v Nutritek
Paragraphs
1-3
4-56
5-9
10
11-41
42-46
47
48-49
50-51
52
53-54
55-56
57-63
64
65-117
69-102
103-110
111-114
115-116
117
118-223
119-143
122-135
136-143
144-183
145-169
170-176
177-183
184
185-222
186-195
196-206
207-213
214-220
221-222
223
224-253
226
227-243
244-254
248-252
253
THE HON MR JUSTICE ARNOLD
Approved Judgment
Should the injunction be continued or re-granted?
Result
Introduction
VTB v Nutritek
254
255
1.
2.
3.
In these proceedings the Claimant (“VTB”) contends that it has been defrauded by the
Defendants. On 23 November 2007 VTB entered into a facility agreement (“the
Facility Agreement”) under which it lent some US$225 million to Russagroprom LLC
(“RAP”) to fund the acquisition of six Russian dairy plants and three associated
companies (“the Dairy Companies”) from the First Defendant (“Nutritek”). RAP
subsequently defaulted on the loan. VTB has recovered less than US$40 million from
the security provided. VTB alleges that it was induced to enter into the Facility
Agreement by fraudulent misrepresentations made by Nutritek for which the other
Defendants are jointly liable. VTB relies upon two alleged misrepresentations: first,
that RAP was not under common control with Nutritek, contrary to the fact; and
secondly, that the value of the Dairy Companies was much greater than they were in
fact worth.
On 11 May 2011 Chief Master Winegarten granted VTB permission to serve the
proceedings out of the jurisdiction on each of the Defendants. On 5 August 2011 Roth
J made a worldwide freezing order (“WFO”) against the Fourth Defendant (“Mr
Malofeev”) freezing his assets up to US$200 million. The following applications are
now before the court:
i)
ii)
iii)
iv)
v)
Applications by Nutritek, the Second Defendant (“MarCap BVI”) and Mr
Malofeev to set aside permission to serve out. (The Third Defendant (“MarCap
Moscow”) has not yet been served.)
An application by VTB to amend its Particulars of Claim to add a claim in
contract against MarCap BVI, MarCap Moscow and Mr Malofeev.
An application by VTB to continue the WFO until trial.
An application by Mr Malofeev to discharge the WFO.
An application by VTB for further disclosure of Mr Malofeev’s assets.
It was agreed between counsel that argument on the last application listed above
should be deferred until after I had given judgment on the other applications. Despite
this, and despite the fact that counsel for the Defendants sensibly divided the issues
between themselves so as to avoid repetition, argument on the other applications
lasted a full six days (one more than originally estimated) after two days’ pre-reading.
There were 27 bundles of procedural documents, written evidence and exhibits, not
including a bundle of skeleton arguments and one of transcripts. The written evidence
was added to on a daily basis during the course of the hearing. One of the witnesses
has made no less than twelve witness statements. In addition, I was supplied with 14
bundles of authorities, although there was some duplication between these, and again
these were added to on a daily basis. As will appear, a key reason (although not the
only reason) for this volume of materials and the time taken by the hearing is the
number and complexity of the issues raised. It follows that this judgment is
regrettably long, but even so I cannot possibly discuss all the evidence, authorities and
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
arguments I have read and heard. I have attempted, however, to take everything into
account.
Factual background
4.
The following account of the factual background is based on the evidence presently
before the court. This evidence is incomplete, untested and in some respects highly
controversial. It follows that my account is necessarily a provisional one. It is also
selective, in that I shall concentrate on matters which are relevant to the applications
before me. As I shall explain below, this account includes references to certain
matters which were not referred to by VTB in its evidence either when applying for
permission to serve out or when applying for the WFO.
The parties
5.
6.
7.
8.
9.
VTB is a company incorporated in England and Wales. It carries on business as a
bank. It is a member of the London Stock Exchange, and it is authorised and regulated
by the Financial Services Authority for the conduct of investment business in the UK.
VTB is majority owned by JSC VTB Bank (“VTB Moscow”). VTB Moscow is a
state-owned Russian bank and is the second largest bank in Russia. JSC VTB Debt
Centre (“VTBDC”) is a wholly-owned Russian subsidiary of VTB Moscow.
Nutritek is a company incorporated in the British Virgin Islands (“BVI”). It is owned
and operated from Russia. Nutritek was formerly the owner of the Dairy Companies.
The primary purpose of the Facility Agreement was to fund the acquisition of the
Dairy Companies by RAP from Nutritek through the purchase of the shares in a BVI
special purpose vehicle called Newblade Ltd (“Newblade”), which was incorporated
shortly before and for the purpose of the transaction.
MarCap BVI is a company incorporated in the BVI on 12 November 2004. It is a
holding company which has no employees or operations of its own. VTB’s evidence
is that, at the time of the Facility Agreement, MarCap BVI owned Marshall Milk
Investments Limited, a company incorporated in Cyprus, which in turn indirectly
owned around 43% of OJSC Nutrinvestholding, which in turn indirectly owned
Nutritek.
MarCap Moscow is a company incorporated in Russia. VTB’s evidence is that, at the
time of the Facility Agreement, MarCap Moscow was wholly owned by MarCap BVI
and that Mr Malofeev and Georgy Sazhinov were business partners in MarCap
Moscow.
Mr Malofeev is a Russian citizen resident in Moscow. He was formerly Head of
Corporate Finance in the investment banking department of MDM Bank, a leading
non-state bank in Russia at that time. In 2005 he left to set up Marshall Capital
Partners, which is said to be a leading private equity house in Russia. He is alleged by
VTB to be the principal beneficial owner and controller of Nutritek, MarCap BVI,
MarCap Moscow and RAP.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
RAP
10.
RAP was incorporated in Russia on 21 May 2007. In November 2007 its parent
company was Migifa Holdings Ltd (“Migifa”), a company incorporated in Cyprus.
Migifa’s parent company was Brentville Ltd (“Brentville”), a company incorporated
in the BVI.
The negotiations
11.
12.
13.
At the relevant time Konstantin Tulupov was employed by VTB Moscow as a
Director with its Investment Business Acquisition and Leverage Finance Team in
Moscow. His role was to act as the Project Manager in relation to projects assigned to
him by his Managing Director, at that time Konstantin Ryzhkov. The negotiations
leading to the Facility Agreement was one such project. During the course of the
negotiations Mr Ryzhkov also became the Head of Investment Business Acquisition
and Leverage Finance Team of VTB.
In the summer of 2007, before 19 July 2007, Mr Tulupov and Mr Ryzhkov met Mr
Malofeev and Alexander Provotorov for lunch. Mr Tulupov’s evidence is that Mr
Malofeev led the discussions and was the person in charge. Mr Malofeev explained
that he had founded “Marshall Capital”, which was a family of funds. In context, this
would appear to be a reference to MarCap Moscow. MarCap Moscow controlled
Nutritek, a dairy and baby food producer. MarCap Moscow wanted to sell Nutritek’s
dairy business, but retain its baby food business. A potential buyer for the dairy
business had been found, and MarCap Moscow was looking to create a package
which included finance for a purchaser to buy the business. Mr Malofeev wanted to
know what facilities VTB Moscow might be able to offer and what its requirements
would be. He was looking to raise finance in the region of US$200 million. Mr
Tulupov outlined the bank’s requirements, including for an independent valuation of
the business showing that there was sufficient equity in the business over and above
the sum being lent and for due diligence of the borrower. The potential buyer was not
identified, but Mr Tulupov says that he assumed it was an independent third party
since the discussions were about the sale of the business.
On about 18 July 2007 Mr Tulupov instructed the London office of Dewey, LeBoeuf,
Greene & MacRae (“DLGM”) in relation to the proposed transaction. On 18 July
2007 various emails were exchanged setting up a conference call between
representatives of VTB Moscow, VTB (Marina Bragina, who was a Director of
Investment Business Acquisition and Leverage Finance Team in London), MarCap
Moscow (Mr Provotorov and Yury Leonov) and DLGM on 19 July 2007. After the
conference call, Bruce Johnston of DLGM sent Mr Tulupov an email asking “Who
controls the borrower? I need to do conflict searches etc”. Mr Tulupov replied the
same day “Marshall Capital controls Nutritek, and the potential purchaser is
controlled by a group of individuals with whom, MarCap assures, you can’t have any
conflict of interest.” Mr Johnston replied that that was an evasive answer, and said
that VTB would need to do a KYC (know your client) clearance on the borrower.
14.
It appears that there was a meeting attended by Mr Tulupov on behalf of VTB
Moscow and Mr Provotorov and Mr Leonov on behalf of MarCap Moscow, and
possibly others, in Moscow on 24 July 2007. On 25 July 2007 Mr Tulupov sent a draft
term sheet to Mr Provotorov and Mr Leonov by email, with copies to Mr Malofeev,
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
Mr Ryzhkov, Maxim Belousov of VTB Moscow and Ms Bragina. The draft term
sheet provided for “VTB Group”, specifically either VTB Moscow or VTB, to lend
up to US$220 million to “the Borrower”, a special purpose vehicle or one of the Dairy
Companies; for MarCap Moscow (described as “the Beneficiary”) to provide US$50
million to the Borrower as its own contribution; for the Borrower to purchase the
shares in the Dairy Companies for US$250 million; for the Borrower to pay VTB
Group an arrangement fee of US$5 million; and for the Beneficiary to ensure that
“additional commission (equity fee)” was paid to VTB Group in the form of shares or
an instrument tied to shares in an amount equivalent to 30% of the shares in the
Borrower or the Dairy Companies. Among the conditions precedent listed were
financial and legal due diligence of the Dairy Companies, the shares to be acquired
and the transaction by VTB Group.
On 30 July 2007 Mr Tulupov emailed a second draft term sheet to Mr Malofeev, Mr
Provotorov and Mr Leonov, with copies to Mr Ryzhkov, Mr Belousov and Ms
Bragina. The main differences from the first draft term sheet were that it provided for
finance of up to US$222 million and an “additional commission (equity fee)” of 15%.
It appears that there was another meeting between Mr Tulupov on behalf of VTB
Moscow and Mr Malofeev, Mr Provotorov and possibly Mr Leonov on behalf of
MarCap Moscow in about early October 2007. Mr Tulupov’s evidence is that at this
meeting Mr Malofeev said that RAP, a new company, had agreed to buy the Dairy
Companies. It was a friendly transaction, many of Nutritek’s senior management
would move to the new company, and MarCap Moscow and Nutritek would assist
RAP while it established itself. Although it occurred to Mr Tulupov that the beneficial
owners of the parties might know each other, there was no indication that Nutritek
and RAP were under the common control of MarCap Moscow. There was also further
discussion about the bank’s requirements.
On 8 October 2007 Mr Tulupov emailed a third draft term sheet to Mr Malofeev, Mr
Provotorov and Mr Leonov, with copies to Mr Ryzhkov and Mr Belousov (but not Ms
Bragina). The main differences between this draft and the second draft were as
follows: it identified the lender as VTB; it identified the Borrower as RAP; it did not
identify the Beneficiary as MarCap Moscow; it provided for an increased arrangement
fee of US$8.5 million; the finance was to be provided in two tranches of up to
US$208.5 million and up to US$13.5 million; the “additional commission (equity
fee)” was to be paid in the form of a derivative instrument (option/warrant) tied to the
shares; and VTB Group would enter into appropriate derivative instruments in order
to hedge interest rate and currency risks.
By this stage it appears to have been decided that VTB would be the “Lender of
Record” on the proposed transaction, and that VTB Moscow would enter into a
participation agreement with VTB under which VTB Moscow funded 100% of the
loan. Mr Tulupov’s evidence is that it was common practice for VTB to be the Lender
of Record in these types of transaction since (i) VTB was able to offer more
sophisticated lending structures than VTB Moscow and (ii) English law offers more
protection in the case of default.
In addition, it was agreed at about this time that VTB would enter into an interest rate
swap agreement with RAP to enable RAP to hedge the interest risk under the Facility
Agreement.
15.
16.
17.
18.
19.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
20.
It appears that it was around this time that work started in earnest on preparing the
documentation to give effect to the proposed transaction. Mr Tulupov’s evidence is
that, as Project Manager, he was primarily responsible for obtaining information from
MarCap Moscow (where his principal contact was Mr Leonov), Nutritek (where his
principal contact was a Mr Skuratov) and RAP (where his principal contacts were
Evgenia Kremneva, RAP’s General Director, and later Nikolai Pankov, its in-house
lawyer) and then distributing the information to the relevant departments within VTB
Moscow and to Ms Bragina at VTB. Mr Tulupov says that Mr Leonov and Mr
Skuratov were careful to give him the impression that RAP was an independent third
party purchaser.
21. Mr Tulupov was also responsible for drafting the decision to approve the proposed
transaction for VTB Moscow’s Credit Committee.
22.
23.
24.
25.
26.
27.
On 22 October Mr Leonov sent Ms Bragina a description of Nutritek’s dairy business
in English, saying that it was the basis for the information provided to VTB
Moscow’s Credit Committee.
On 23 October 2007 Mr Tulupov sent DLGM, Ms Bragina and others an email
informing DLGM that “this is a very friendly transaction and we expect full co-
operation and sufficient flexibility on the part of the Seller in terms of both agreeing
the conditions for share transfer most favourable for both parties and undertaking any
and all corporate actions necessary to give effect to the security arrangements under
the facility”.
On the same day DLGM circulated revised drafts of an approval of the transaction by
VTB Moscow’s Credit Committee and of the Facility Agreement and the participation
agreement. (It is not clear when drafts were first circulated.) The approval appears to
have been drafted by Mr Tulupov in Russian, while the agreements were drafted by
DLGM in English. Other documents were drafted by Dewey & LeBoeuf’s Moscow
office.
Also on about 23 October 2007 Ms Kremneva on behalf of RAP engaged Clifford
Chance CIS Ltd to act for it in relation to the proposed transaction.
On 31 October 2007 VTB Moscow’s Credit Committee approved the proposed
transaction, and in particular VTB Moscow’s participation in the provision of credit
by VTB to RAP, at a meeting attended by Mr Tulupov and Mr Ryzhkov among
others. The minutes of the meeting record the Committee’s decision “[t]aking into
consideration a good financial situation [sic] of the Borrower, [to] classify the
Borrower’s credit debt … as Quality Category 1”.
On 1 November 2007 Dalford Consultants Ltd (“Dalford”), a company incorporated
in Belize, entered into a consultancy agreement with RAP under which Dalford
agreed to provide various financial advisory services for a retainer fee of US$3.5
million and a success fee in the form of a derivative instrument linked to 10% of
shares in the Dairy Companies. It is accepted by VTB that Dalford was controlled by
VTB Moscow; that no services were provided or intended to be provided by Dalford
pursuant to the agreement; and that the true purpose of the agreement was to avoid
tax. I will discuss the significance of this below.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
28.
29.
On 2 November 2007 a trainee solicitor at DLGM circulated a Nutritek contacts list.
This listed Mr Provotorov, Mr Leonov and Colin Magee (actually VTB’s General
Counsel) as contacts for RAP. Less than two hours later the same trainee circulated an
amended contacts list which listed Mr Provotorov and Mr Leonov as contacts for
MarCap Moscow, Mr Magee as a contact for VTB and “info@russagroprom.ru” as
the sole contact for RAP. Unlike counsel for Mr Malofeev, I attach no significance to
the errors in the original list. Nor does the contact information for RAP strike me as
significant given Mr Tulupov’s evidence about his contacts at RAP.
On 6 and 8 November 2007 Ms Bragina sent two emails which are central to VTB’s
first misrepresentation claim. The email dated 6 November 2007 was to Peter Yates,
Peter Manning and Hugh Parsons of VTB, with copies to Mr Ryzhkov and Mr
Tulupov, and read as follows:
“Just wanted to let you know in addition to information
supplied in ACF [presumably Application for Credit Facility]
that:
•
•
[sic] was
incorporated on
OOO Rusagroprom
21.05.2002 [sic – this should read 2007] as an SPV with
the purpose of a Nutritek DD [Dairy Division]
acquisition and has no other operations;
OOO Rusagroprom’s beneficiary
is Mr Vladimir
(Ivanovich) Alginin, who was up until recently the head
of the Agro division of OAO Vimm-Bill-Dann Food
largest Russian Milk and Juice
Products
producer). Before that Mr Alginin was the first vice-
president
corporation
federal
the Deputy Minister of
Roskhlebprodukt
Agriculture.”
contract
(The
and
the
of
There is nothing in the email to indicate Ms Bragina’s source for this information.
VTB’s case is that it must have come from Nutritek or MarCap Moscow.
30.
The email dated 8 November 2007 was to Mr Yates and Juliet Wool of VTB, with
copies to Mr Ryzhkov, Mr Tulupov, Mr Magee and Boris Lvov (I assume of VTB
Moscow). It appears to be a partial response to a list of questions she had been sent
previously. It includes the following passages:
“Following my conversation with Juliet this morning, below
are the remaining pieces of information that we need to supply
you with for Nutritek transaction. We will endeavour to answer
all of them towards the end of the day. For the sake of time I
will be sending you the answers as I have them. Some of the
answers you will find in blue below. Please let me known if in
your view the other info is outstanding.
1.
Confirm that OOO Russagroprom is 100% owned by
Alginin. As per the info just received from Nutritek
in
management, Mr Alginin has a 90% share
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
Russagroprom, the remaining 10% share belongs to the
management team.
Sub-participation confirmation/participation agreement
with VTB [i.e. VTB Moscow]. The VTB/VTBE [i.e.
VTB Moscow/VTB] participation agreement signing is
a CP [condition precedent] to Utilization of the Facility
(see Schedule 2 of the Facility Agreement). Please let
me know if anything else is needed, otherwise I assume
this matter is closed.
…
4.
… ”
VTB relies on the fact that the email states the information about Mr Alginin had
come from Nutritek management, while counsel for Mr Malofeev points to the
absence of any other documentary evidence to support this statement.
On 7 November 2007 the Moscow office of Ernst & Young Valuation LLC (“Ernst &
Young”) sent the final version of a valuation report on the Dairy Companies dated 5
September 2007 (“the 2007 E&Y Valuation”) by email to Mr Leonov and to RAP. On
8 November 2007 RAP forwarded it to Mr Tulupov. Mr Tulupov’s evidence is that he
had first received the 2007 E&Y Valuation prior to this, and had submitted it to the
VTB Moscow Credit Committee for its meeting on 31 October 2007. I have not seen
any documentary support for this, but it seems probable that one or more drafts of the
2007 E&Y Valuation would have been circulated prior to 7 November 2007. The
2007 E&Y Valuation valued the Dairy Companies at around US $366 million. This
valuation was based on information provided by Nutritek’s management. The 2007
E&Y Valuation is central to VTB’s second misrepresentation claim.
On 9 November 2007 DLGM circulated a revised draft of the Facility Agreement. On
12 November 2007 Mr Magee sent Ms Bragina, with copies to three other VTB
personnel, an email setting out comments on the revised draft. Later the same day he
also sent comments to DLGM.
Also on 12 November 2007 Mr Tulupov circulated the 2007 E&Y Valuation (albeit in
Russian) to Ms Bragina and Mr Magee among others.
Also on 12 November 2007 VTB sent RAP a fee letter reciting RAP’s agreement to
pay the arrangement fee of US$5 million and a mandate to arrange the loan. The latter
refers to a (fourth) draft term sheet. This differs from the third draft in various
respects, including the following: it provides for a total facility of US$230 million in
two tranches of up to US$208.7 million and up to US$21.3 million; it provides for an
arrangement fee of US$5 million; and it provides for an equity fee of 5%.
On 13 November 2007 VTB Moscow’s Management Board approved the proposed
transaction.
An “Application for Credit Facilities” dated 13 November 2007 prepared by VTB,
and signed off by Ms Bragina and Steve Thunem (Head of Debt Capital Markets) of
31.
32.
33.
34.
35.
36.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
VTB, in respect of the Facility Agreement states under the heading “Business
Proposal/Rationale”:
“VTB [i.e. VTB Moscow] Funding Participation and No Credit
Risk for VTBE [i.e. VTB]. A Participation Agreement between
VTB and VTBE provides that VTB fully funds the facility
before any draw-downs are made against it. This makes the
transaction possible under the current liquidity situation in the
market and helps to circumvent the per customer lending limit
of VTBE. Also, the Participation Agreement ensures that in the
event of default VTB takes responsibility for all the amounts
due from the Borrower, thus eliminating the credit risk
exposure for VTBE for the main credit facility.”
37.
A similar document dated 15 November 2007 prepared by VTB, and signed off by Ms
Wool (a credit risk analyst), Peter Yates (Head of Credit Risk) and Peter Manning
(Chief Risk Officer) of VTB, in respect of the interest rate swap specifically as well as
the overall transaction more generally includes the following passages:
“Business Proposal/Rationale
VTB [i.e. VTB Moscow] Funding Participation and no Credit
Risk for VTBE [i.e. VTB]: The participation agreement
between VTB and VTBE provides that VTB fully funds the
facility before any draw-downs are made against it. Further,
VTB takes responsibility for all the amounts due from the
Borrower, eliminating any credit risk faced by VTBE.
…
Risk Comments and Recommendation
… The total value of the transaction is US$280M, with
Russagroprom contributing US$50M equity. The ultimate
beneficiary of Russagroprom appears to be Mr Vladimir
Alginin, who has held a number of government posts in the
agricultural sector, however, IB [Investment Branch]
is
required to confirm this as a CP [Condition Precedent]
…
US$5M 2 year interest swap line supported, subject to:
…
–
Confirmation by VTBE Legal that the participation
agreement with VTB is in compliance with FSA
requirements ensuring that no credit risk is reportable
on VTBE balance sheet (C/P).
Risk Summary
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
Structure Risk
Potentially High but Acceptable
…
–
…
–
…
The structure risk is potentially high, as Credits
considers the transaction to be unsecured; the security
package is of little tangible value. The pledge of shares
by the Borrower for the subsidiaries is for 100% of the
capital owned by the Borrower….
The Facility structure includes guarantees from the
Borrower’s intermediate holding companies (Brentville,
the parent company of Migifa,
the parent of
Russagroprom). We have no financial visibility of
Brentville, and we are not aware whether it has any
other subsidiaries besides Migifa, or who the parent of
Brentville
the ultimate
beneficial owner is Mr Vladimir Alginin. Consequently,
we consider the Brentville/Migifa guarantees as having
minimal tangible value.
is, besides being advised
Financial Risk
High
–
…
–
Credit has limited visibility to financial information on
all parties involved in this transaction. Russagroprom is
newly formed and subsequently has no historical
to
information. We have no financial visibility
Brentville, Migifa (borrower holding companies), or Mr
Alginin, however the Business Information Report
(BIR) states that Migifa is not listed as a parent
company
entity besides
Russagroprom….
any other
legal
for
The historical balance sheets (unaudited management
figures) will be key operating subsidiaries indicate that
the price being paid for the company appears to be at a
level significantly above the book value of the assets….
Legal/Documentation Risk
Medium
–
As VTB Moscow are participating 100% in this loan,
while VTBE are to the Lender of Record, under FSA
guidelines we will be required to ensure that the VTB
have approved and are committed to this transaction.
Therefore as a condition precedent to drawdown, we
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
will require a signed copy of the credit approval from
VTB Moscow.
…”
38.
39.
40.
41.
It is not clear from the evidence presently available what, if any, due diligence was
carried out by or on behalf of either VTB Moscow or VTB to verify the assertion by
Nutritek that the ultimate beneficial owner of 90% of RAP was Mr Alginin.
On 18 November 2007 a representative of Clifford Chance sent an email to a long list
of recipients asking that Natalia Tyurina from MarCap Moscow be copied in all
emails since she was dealing with the condition precedents under the Facility
Agreement and it was crucial that she received all the drafts and instructions. After
the transaction had been completed, Ms Tyurina was involved in assisting RAP to
answer queries from VTB.
The transaction was completed over the period 23-28 November 2007, during which a
number of agreements were entered into by the various parties.
Subsequently, on 3 December 2007, VTB entered into an associated hedging
agreement with Dresdner Kleinwort AG.
The agreements
42.
The principal agreements entered into as part of the overall transaction were as
follows:
i)
ii)
iii)
iv)
the Facility Agreement;
a share purchase agreement between RAP, Nutritek and Newblade dated 27
November 2007 (“the SPA”);
an interest rate swap agreement between VTB and RAP dated 28 November
2007 (“the ISA”);
a participation agreement between VTB and VTB Moscow dated 28
November 2007 (“the Participation Agreement”).
43.
In addition, however, there were a series of other agreements or apparent agreements
including the following:
i)
ii)
iii)
A share charge executed by RAP in favour of VTB in respect of the shares in
Newblade dated 23 November 2007.
A share warrant deed between Migifa, VTB, Brentville and RAP dated 23
November 2007 under which VTB held five 1% warrants for RAP shares.
An undated share warrant deed between Migifa, Dalford, Brentville and RAP
apparently executed on 28 November 2007 under which Dalford held ten 1%
warrants for RAP shares.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
iv)
v)
vi)
A loan facility agreement between Migifa as lender and RAP as borrower
dated 23 November 2007 for a facility not to exceed US$30.5 million.
A loan agreement between Migifa as lender and RAP as borrower dated 26
November 2007 in respect of promissory notes totalling a little over 573
million roubles.
A loan facility agreement between Leskata Finance SA (“Leskata”, a company
incorporated in the BVI) as lender and Migifa as borrower dated 26 November
2007 for a facility not to exceed US$30.5 million.
vii) An undated loan agreement between Leskata as lender and RAP in respect of
promissory notes totalling nearly 473 million roubles.
I referred to “apparent agreements” in the preceding paragraph because there are
question marks over at least three of the agreements listed. So far as the share warrant
dated 23 November 2007 is concerned, this appears to bear the signature of Ms
Kremneva on behalf of Migifa and RAP; but she has given evidence that she did not
sign it. On the other hand, VTB has adduced evidence tending to show that it was
duly executed on behalf of Migifa and RAP. Obviously, I cannot resolve this issue.
So far as the undated share warrant is concerned, it appears to be common ground that
this was duly executed. Nevertheless, the following points should be noted about this.
First, this warrant is in same format as the one dated 23 November 2007 except that
the latter bears Dewey & LeBoeuf’s logo on the cover page while the former does not.
There has been no explanation for this. Secondly, when Mr Tulupov sent a draft of
this warrant to Mr Leonov by email on 27 November 2007, the subject line included
the instruction “Please delete immediately upon receipt”. Mr Tulupov’s evidence is
that he did this because he was not aware of the precise nature of the relationship
between VTB and Dalford, he considered that the information might be sensitive and
thus that he should be cautious.
44.
45.
46.
So far as the undated loan agreement is concerned, this has been executed on behalf of
Migifa but not Leskata.
The Facility Agreement
47.
The parties to the Facility Agreement are RAP (“Company”), VTB (“Lender”),
Migifa and Brentville (“the Original Guarantors”). It includes the following terms:
“1.
DEFINITIONS AND INTERPRETATION
1.1
Definitions
In this Agreement:
…
‘Acquisition Agreement’ means
the sale and purchase
agreements to be entered into relating to the sale and purchase
of the Target Shares …
THE HON MR JUSTICE ARNOLD
Approved Judgment
…
VTB v Nutritek
‘Buyer’s Account’ shall mean the blocked bank account in the
name of the Company with the London officer of the Lender
with account number 1001632020.
…
‘Fee Letter’ means the letter dated on or about the date of this
Agreement between the Lender and the Company in respect of
the arrangement fee.
…
‘Obligor’ means each of the Company, the Guarantors and the
Production Companies.
…
‘Participant’ means [VTB Moscow] in its capacity as
participant under the Participation Agreement.
‘Participation Agreement’ means the Terms and Conditions
of the funded participation agreement dated or on about the
date hereof between the Lender as grantor and the Participant
…
‘Party’ means a Party to this Agreement.
…
‘Pledged Shares’ means the Production Company Shares, the
Company Participatory Interest, the Target Shares and the
Migifa Shares.
…
‘Production Companies’ means [the Dairy Companies].
…
‘Repeating Representations’ means
the
representations set out in Clause 18 (Representations) other
than Clauses 18.9 (No Filing or Stamp Taxes) and 18.29 (Sales
Contracts).
each
of
…
‘Seller’ means [Nutritek].
‘Seller’s Acquisition Account’ means the account at the
offices of the Lender with account number 1001622020.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
…
‘Target’ means [Newblade].
…
‘Target Shares’ means 49,001 shares (being 100% of the
issued and outstanding shares) in the Target purchased by the
Company pursuant to the Acquisition Agreement
…
‘Tranche A Commitment’ means two hundred eight million
seven hundred thousand Dollars ($208,700,000).
…
‘Tranche B Commitment’ means twenty-one million three
hundred thousand Dollars ($21,300,000).
…
1.3 Contracts (Rights of Third Parties) Act 1999
A person who is not a Party has no right under the Contracts
(Rights of Third Parties) Act 1999 to enforce or enjoy the
benefit of any term of this Agreement.
…
2.
THE FACILITY
2.1
The Facility
Subject to the terms of this Agreement, the Lender makes
available to the Company:
2.1.1 a US Dollar term loan facility in an aggregate amount
equal to the Tranche A Commitment (‘Tranche A’);
and
2.1.2 a US Dollar term loan facility in an aggregate amount
equal to the Tranche B Commitment (‘Tranche B’),
together, the ‘Facility’.
…
3.
PURPOSE
3.1
Purpose
The Company shall apply all amounts borrowed by it:
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
the Target Shares under
3.1.1 under Tranche A, towards partial payment of the
purchase price for
the
Acquisition Agreement, payment of the Acquisition
Costs, (other than periodic fees), payment of financing
and other transactional costs (including legal fees)
incurred in connection with the Finance Documents, or
for the general corporate purposes of the company; and
3.1.2 under Tranche B,
towards
the general corporate
purposes of the Company.
3.2
Direction to Pay
3.2.1 The Company directs the Lender to deposit into the
Buyer’s Account (and such monies shall be thereafter
immediately transferred into the Seller’s Acquisition
Account in accordance with the irrevocable instructions
referred to in Schedule 2, Part 1 Clause 4.17) on the
date of first Utilisation of Tranche a, part of the
proceeds of the first Utilisation of Tranche A equal to
the purchase price (howsoever defined) under the
Acquisition Agreement to be paid by the Company less
the Reserved Amount.
…
4.
CONDITIONS OF UTILISATION
4.1
Initial Conditions Precedent
4.1.1 The company may not deliver a Utilisation Request in
respect of Tranche A unless the Lender has received all
of the documents and other evidence listed in Part 1 of
Schedule 2 (Conditions Precedent)
in form and
substance
(acting
to
satisfactory
reasonably). The Lender shall notify the Company
promptly upon being so satisfied. The first drawdown
of Tranche A shall comply with Clause 3.2 above.
the Lender
…
4.2
Further conditions precedent
Subject to Clause 4.1 (Initial Conditions Precedent), the
Lender will only be required to comply with Clause 5.3
(Lender’s Funding), if on the date of the Utilisation Request
and on the proposed Utilisation Date:
4.2.1 no Default is continuing or would result from the
proposed Loan;
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
4.2.2
the Repeating Representations to be made by each
Obligor are true in all material respects; and
4.2.3
the Participant has credited the Receiving Account of
the Lender with the funding for that Loan in accordance
with the terms of the Participation Agreement.
…
11.
FEES
11.1 Arrangement Fee
The Company shall pay to the Lender an arrangement fee in
the amount and manner specified in the Fee Letter.
REPRESENTATIONS, UNDERTAKINGS AND EVENTS
OF DEFAULT
…
18.
…
18.11 No Misleading Information
Save as disclosed in writing to the Lender prior to the date of
this Agreement:
18.11.1 any factual information (including in relation to the
Acquisition and the Group) provided to the Lender was
true and accurate in all material respects as at the date it
was provided;
18.11.2 any financial projection or forecast (including in
relation to the Acquisition and the Group) provided to
the Lender has been prepared on the basis of recent
historical information and on the basis of reasonable
assumptions and was fair (as at the date it was
provided) and arrived at after careful consideration;
18.11.3 the expressions of opinion or intention provided by or
on behalf of an Obligor to the Lender were made after
careful consideration and (as at the date of the relevant
report or document containing the expression of
opinion or intention) were fair and based on reasonable
grounds; and
18.11.4 no event or circumstance has occurred or arisen and no
information has been omitted from the information
provided to the Lender pursuant to paragraphs 18.11.1
to 18.11.3 above and no information has been given or
withheld that results in the information, opinions,
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
intentions, forecasts or projections contained in the
information provided
to
the Lender pursuant
paragraphs 18.11.1
to 18.11.3 being untrue or
misleading in any material respect.
to
…
34.
GOVERNING LAW
This Agreement is governed by English law.
35.
ENFORCEMENT
35.1
Jurisdiction of English Courts
35.1.1 Subject to Clause 35.3 (Arbitration) below, the courts
of England have nonexclusive jurisdiction to settle any
dispute arising out of or in connection with this
Agreement
the
existence, validity or termination of this Agreement) (a
‘Dispute’).
(including a Dispute
regarding
35.1.2 The Parties agree that the courts of England are the
most appropriate and convenient courts to settle
Disputes and accordingly no Party will argue to the
contrary.
35.1.3 This Clause 35.1 is for the benefit of the Lender only.
As a result, the Lender shall not be prevented from
taking proceedings relating to a Dispute in any other
courts with jurisdiction. To the extent allowed by law,
the Lender may take concurrent proceedings in any
number of jurisdictions.
…
35.3 Arbitration
In addition to Clause 35.1 (Jurisdiction of English Courts)
above, the Lender shall have the right to refer any dispute
which may arise out of or in connection with this Agreement to
final and binding arbitration in London, England, pursuant to
the arbitration rules of LCIA (the ‘LCIA Rules’). The
language of the arbitration proceedings shall be English. Such
arbitration shall be conducted in accordance with LCIA Rules.
The seat or legal place of arbitration shall be deemed to be
England, and accordingly the substantive laws of England shall
be applicable for
the arbitration. The
the purposes of
procedural law for any reference to arbitration shall be English
law. …
…
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
Schedule 2
Conditions Precedent
Part I
Conditions Precedent Utilisation of Tranche A
The Lender shall have received (in form and substance satisfactory to
the Lender) each of the following:
…
2.
Finance Documents
The following original Finance Documents each duly executed by each
of the parties to it:
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
this Agreement;
the Participation Agreement (and confirmation thereto);
the Transaction Security Documents;
the Hedging Documents;
the Production Company Guarantees (other
Penzensky);
than MK
the Fee Letter; and
an Accession Letter from the Target.
3.
Transaction Security
A financial report of an independent valuer acceptable to the
Lender regarding the determination of the market value of the
Pledged Shares (other than the shares in Molkombinat and the
participatory interests in Aktiv).
3.1
…”
The SPA
48.
The purchase price under the SPA was US$250 million less the “Indebtedness” as
defined in clause 3.2 and determined under Annex 1 of the SPA. It was to be paid in
two instalments: on the Closing Date, US$50 million less the “Indebtedness” was to
be paid by RAP to Nutritek, whereupon the shares in Newblade were to be transferred
to RAP (clause 3.3.2); and within two days thereafter, a further US$200 million (less
US$5 million which was to be retained by RAP pending performance by one of the
Nutritek group companies of a particular obligation (clause 19.6)) was to be paid
(clause 3.3.5).
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
49.
The SPA is governed by English law (clause 17.1) and provides that any dispute
arising out of or in connection with it shall be referred to arbitration under LCIA rules
(clause 18.1).
The ISA
50.
51.
The ISA takes the form of a Confirmation supplemental to an International Swap and
Derivative Association Master Agreement between VTB and RAP dated 23
November 2007. The purpose of the ISA was to hedge against an increase in the
interest paid by RAP pursuant to the Facility Agreement which was to be calculated
by reference to, amongst other matters, LIBOR. The dates and spreads under the
Facility Agreement and the ISA were matched. The ISA benefited from the same
security as the Facility Agreement.
The ISA is governed by English law and provides that any dispute arising out of or in
connection with it shall be referred to arbitration under the LCIA rules (Part 5 (g)).
The Participation Agreement
52.
The Participation Agreement includes the following terms:
“1.
APPLICABILITY AND INTERPRETATION
…
1.2
Interpretation
In these Terms and Conditions words and expressions shall (unless
otherwise expressly defined in these Terms and Conditions) have the
meaning given to them in the Facility Agreement and:
…
‘Enforcement Proceeds’ means, following an Enforcement Event, all
receipts and recoveries by the Lender (or by any person which are
properly paid over to the Lender):
(a)
(b)
pursuant to, upon enforcement of or in connection with the
Transaction Security; and
without prejudice to subclause (a) above, in respect of all
representations, warranties, covenants, guarantees, indemnities
and other contractual rights of the Lender made or granted in
or pursuant to any Finance Document.
…
2.
PARTICIPANT’S PAYMENT OBLIGATIONS
2.1
Sums Due Under the Relevant Finance Documents
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
If at any time on or after the date of the Confirmation a sum falls due
from the Grantor under the Relevant Finance Documents and the sum
is, in the Grantor’s reasonable opinion, attributable in whole or in part
to any Loan or Participated Tranche, then the Participant shall pay to
the Grantor amount equal to such sum.
2.2
Payment of sums due
The Participant shall make each payment required under Clause 2.1
(Sums Due Under the Relevant Finance Documents) in the currency
and funds and in the place and time at which the Grantor is required to
make the payment under the Relevant Finance Documents.
3.
PAYMENTS
3.1
Receipts
The Grantor is entitled to receive, recover and retain all principal,
interest and other money payable under the Relevant Finance
Documents in relation to each Participated Tranche.
3.2
Payments
Subject to compliance by the Participant with its payment obligations
under the Participation, on and after the date of the Confirmation the
Grantor shall, upon applying any amount actually received by it in
respect of any Loan or Commitment (whether by way of actual
receipt, the exercise of any right of set-off or otherwise), pay to the
Participant:
if that amount is applied in respect of the principal of a Loan,
an amount equal to the amount so applied by the Grantor;
(a)
..
4.
PAYMENTS ADMINISTRATION
4.1
Place
All payments or deposits by either Party to, or with, the other under
the Participation shall be made to the Receiving Account of that other
Party. Each Party may designate a different account as its Receiving
Account for payment by giving the other not less than five Business
Days notice before the due date for payment.
…
4.5
Failure to remit
The Grantor shall not be:
…
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
(b)
liable to remit to the Participant any amount greater than the
amount it received from any Obligor in respect of any
Participated Tranche or Loan.
6.
STATUS OF PARTICIPATION
6.1
Status of Participation
The Grantor does not transfer or assign any rights or
obligations under the Relevant Finance Documents and,
subject to Clause 6.3 (Assignment Following Event of Default)
the Participant will have no proprietary interest in the benefit
of the Relevant Finance Documents or in any monies received
by the Grantor under or in relation to the Relevant Finance
Documents.
The relationship between the Grantor and the Participant is
that of debtor and creditor with the right of the Participant to
received monies from the Grantor restricted to the extent of an
amount equal to the relevant portion of any monies received by
the Grantor from any Obligor.
The Participant shall not be subrogated to or substituted in
respect of the Grantor’s claims by virtue of any payment under
the Participation and the Participant shall have no direct
contractual relationship with or rights against any Obligor.
Nothing in the Participation constitutes the Grantor as agent,
fiduciary or trustee for the Participant.
(a)
(b)
(c)
(d)
…
6.3
Assignment Following Event of Default
At any time following an Event of Default and while such Event of
Default is continuing, the Participant may (at its election and in its
sole discretion):
(a)
(b)
require the Grantor to assign and/or novate all of its rights and
interest in the Facility Agreement and other Relevant Finance
Documents to the Participant; and/or
to
instruct the Grantor to procure that all amounts payable by the
the Relevant Finance
Obligors
the Grantor under
Documents be paid by such Obligors directly
the
Participant, at such account as the Participant may inform the
Grantor,
to
and the Grantor shall so comply.
6.4
Enforcement Event
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
Notwithstanding any other provision of these Terms and Conditions
the Parties hereby agree that, subject to Clause 6.3 (Assignment
Following Event of Default) above, following the occurrence of an
Early Termination Date, the Grantor shall apply all Enforcement
Proceeds in the following manner:
(a)
first, in payment of costs, charges, expenses and liabilities
incurred by on or behalf of the Grantor and any receiver,
attorney or agent in connection with exercising its powers of
enforcement under
the
remuneration of every receiver, attorney or agent under or in
connection with the Finance Documents;
the Finance Documents and
(b)
second in pro rata payment of:
(i)
amounts due to the Participant under the Participation;
and
(ii)
amounts due under the Hedging Documents;
…
9.2
No obligation to support losses
(a)
The Grantor notifies the Participant and the Participant
acknowledges that the Grantor shall have no obligation to
repurchase or reacquire all or any part of the Participation from
the Participant or to support any losses directly or indirectly
sustained or incurred by the Participant for any reason
whatsoever, including the non-performance by any Obligor
under the Relevant Finance Documents of its obligations
thereunder (other than any loss caused by the gross negligence
or wilful default of the Grantor in performing its obligations
under the Participation).
(b)
Any rescheduling or renegotiation of Participation shall be for
the account of, and the responsibility of, the Participant, who
will be subject to the rescheduled or renegotiated terms.
…
16.
GOVERNING LAW AND JURISDICTION
16.1 Governing Law
These Terms and Conditions and the Participation are governed by
English law.
16.2
Jurisdiction
The parties submit to the non-exclusive jurisdiction of the English
courts.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
…
16.4 Convenient Forum
Save as provided below, the Parties agree that the courts of England
are the most appropriate and convenient courts to determine and settle
any dispute arising relation to the Agreement (including any question
as to its existence, validity or termination) (a “Dispute”) between them
and accordingly no party shall raise any arguments based on forum
non convenience.
…
16.7 Arbitration
Notwithstanding the submission by the Parties to the jurisdiction of
the English courts in Clause 16.2 (Jurisdiction), either Party refer any
Dispute to be finally resolved by arbitration under the Rules of the
London Court of International Arbitration in London, England. There
will be 3 arbitrators, one of whom will be nominated by each of the
claimant and the defendant, and the third to be agreed by the 2
arbitrators so appointed and in default thereof shall be appointed by
the President of the London Court of International Arbitration. If there
is more than one claimant or defendant they will jointly nominate one
arbitrator. The arbitration will be conducted in English and any
judgment rendered shall be final and binding on the Parties.
…”
Drawdown of the loan
53.
54.
On 28 November 2007 VTB Moscow paid VTB US$208.5 million (all of Tranche A).
On the same day VTB credited the same amount to RAP’s US$ account at VTB. Of
that sum, and in accordance with the Facility Agreement, US$195 million was
immediately transferred by RAP to Nutritek. In addition, US$5 million was paid by
RAP to VTB in respect of the arrangement fee and US$3.5 million was paid by RAP
to Dalford.
Tranche B was paid by VTB as follows: US$5.325 million credited by VTB to RAP’s
account on 7 April 2008; US$5.325 million was paid to a BVI company called
Madinter Associates Ltd (“Madinter”) on 21 May 2008 and US$5.7 million was paid
to Madinter on 5 September 2008. VTB’s evidence is that Tranche B was used to
make a payment of interest due to VTB in respect of the loan of Tranche A.
Default
55.
On 24 November 2008 RAP failed to pay an interest payment of approximately
US$4.27 million due under the Facility Agreement. Since then RAP has made no
payments of interest or principal. VTB sent a first notice of default under the Facility
Agreement on 15 December 2008 and a second notice of default on 14 January 2009.
At a meeting between Martin Pasek and Evgeniy Agenshin of VTB, Svetlana
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
Tolkacheva of VTB Moscow, Gennadiy Popov of RAP and Mr Leonov of MarCap
Moscow to discuss the situation on 23 January 2009, Mr Leonov indicated that
MarCap Moscow had an informal agreement to support RAP. In February 2009 VTB
and VTB Moscow were told that the ultimate owner of RAP was “Marshall Estate
Ltd”.
56.
For various reasons, it was not until August 2009 that the VTB Group began to
enforce its security. In due course VTBDC took control of Newblade, Migifa, and
eventually RAP itself. VTB’s evidence is that the present value of all the various
assets (including the assets of the Dairy Companies) available to VTB for the
purposes of recouping the loan is substantially less than the amounts advanced, even
without taking account of accruing interest. Determining the current value is not a
straightforward exercise and in any event is subject to a margin of error, but VTB says
that it is less than US$40 million and probably no more than US$35 million.
VTB’s claims
57.
58.
59.
60.
As indicated above, VTB claims that it was induced to enter into the Facility
Agreement and the ISA, and to advance sums totalling US$225,050,000 to RAP, by
two fraudulent misrepresentations.
First, VTB claims that both VTB Moscow and itself relied on representations made
primarily by Nutritek to the effect that the SPA was a sale between companies that
were under separate control. VTB contends that these representations were false and
must have been known by Nutritek to be false when made. VTB knew at the time that
Mr Malofeev through MarCap Moscow had de facto control of Nutritek. What it says
it did not know at the time, but has since discovered, is that Mr Malofeev through
MarCap BVI also controlled RAP. Thus RAP and Nutritek were under common
control at the date of the Facility Agreement and of the SPA, and it was not therefore
a commercial transaction carried on at arm’s length.
It is not necessary to go into detail concerning the basis of VTB’s contention that Mr
Malofeev ultimately controlled RAP as well as Nutritek, since it has not been the
subject of challenge before me. (Indeed, VTB contends that Mr Malofeev’s evidence
as to his assets given pursuant to the WFO supports the contention.) It is sufficient for
present purposes to note that it involves an 83% owned subsidiary of MarCap BVI
called Marshall Estates Ltd, a company registered in the Cayman Islands.
Secondly, VTB claims that both VTB Moscow and itself relied upon the 2007 E&Y
Valuation and that that valuation was based on false financial figures and
unsupportable forecasts provided to Ernst & Young by Nutritek. In this regard, VTB
relies upon an opinion obtained from Deloitte LLP dated 11 April 2011, which
analysed the figures provided by Nutritek to Ernst & Young and compared them with
the financial information provided by the Dairy Companies from their own
accounting records, which represents the true trading position, as well as information
from other sources. It is apparent from Deloitte’s opinion that Nutritek very
substantially overstated the true performance figures for the Dairy Companies. It is
VTB’s case that the extent of the overstatement is such that it could only have been
deliberate.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
61.
62.
63.
The false representations are alleged to have been made principally by Nutritek. It is
VTB’s case that they were made pursuant to a conspiracy between a number of
persons including MarCap BVI, MarCap Moscow and Mr Malofeev. Given the
significant role they played in introducing the business opportunity to VTB and the
conduct of the negotiations, VTB says that Mr Malofeev and MarCap Moscow were
the prime movers in the conspiracy to deceive VTB.
In its original Particulars of Claim VTB pleaded causes of action against the
Defendants in deceit and unlawful means conspiracy, the unlawful means being the
fraudulent misrepresentations. So far as the claim in deceit is concerned, VTB’s case
against MarCap BVI, MarCap Moscow and Mr Malofeev is they are jointly liable
with Nutritek on the basis that the misrepresentations were made pursuant to a
common design between them.
In addition to the tortious claims already made against the Defendants for deceit
and/or conspiracy, VTB now seeks to amend its claim to bring a contractual claim
against MarCap BVI, MarCap Moscow and Mr Malofeev.
Service out of the jurisdiction: general principles
64.
The general principles governing service out of the jurisdiction were recently re-stated
by Lord Collins of Mapesbury LSC delivering the advice of the Privy Council in AK
Investment CJSC v Kyrgyz Mobile Tel Ltd [2011] UKPC 7, 1 CLC 205 as follows:
“71. On an application for permission to serve a foreign defendant
… out of the jurisdiction, the claimant … has to satisfy three
requirements: Seaconsar Far East Ltd. v Bank Markazi
Jomhouri Islami Iran [1994] 1 AC 438, 453-457. First, the
claimant must satisfy the court that in relation to the foreign
defendant there is a serious issue to be tried on the merits, i.e. a
substantial question of fact or law, or both. The current practice
in England is that this is the same test as for summary
judgment, namely whether there is a real (as opposed to a
fanciful) prospect of success: e.g. Carvill America Inc v
Camperdown UK Ltd [2005] EWCA Civ 645, [2005] 2 Lloyd’s
Rep 457, at [24]. Second, the claimant must satisfy the court
that there is a good arguable case that the claim falls within one
or more classes of case in which permission to serve out may
be given. In this context ‘good arguable case’ connotes that one
side has a much better argument than the other: see Canada
Trust Co v Stolzenberg (No 2) [1998] 1 WLR 547, 555-7 per
Waller LJ, affd [2002] 1 AC 1; Bols Distilleries BV v Superior
Yacht Services [2006] UKPC 45, [2007] 1 WLR 12, [26]-[28].
Third, the claimant must satisfy the court that in all the
circumstances [England] is clearly or distinctly the appropriate
forum for the trial of the dispute, and that in all the
circumstances the court ought to exercise its discretion to
permit service of the proceedings out of the jurisdiction.
…
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
81. A question of law can arise on an application in connection
with service out of the jurisdiction, and, if the question of law
goes to the existence of jurisdiction, the court will normally
decide it, rather than treating it as a question of whether there is
a good arguable case: Hutton (EF) & Co (London) Ltd. v
Mofarrij [1989] 1 WLR 488, 495 (CA); Chellaram v
Chellaram (No 2) [2002] EWHC 632 (Ch), [2002] 3 All ER
17, [136].
…
88.
The principles governing the exercise of discretion set out by
Lord Goff of Chieveley in Spiliada Maritime Corp v Cansulex
Ltd [1987] AC 460, at 475-484, are familiar, and it is only
necessary to re-state these points: first, in both stay cases and
in service out of the jurisdiction cases, the task of the court is
to identify the forum in which the case can be suitably tried for
the interests of all the parties and for the ends of justice;
second, in service out of the jurisdiction cases the burden is on
the claimant to persuade the court that England (in this case, of
course, the Isle of Man) is clearly the appropriate forum; …”
VTB’s application to amend the Particulars of Claim
65.
The core allegations which VTB seeks to add to its Particulars of Claim by the
amendment are as follows:
“71.
72.
Further and in any event, VTB is entitled and seeks to ‘pierce
the corporate veil’ and to hold Marcap BVI, Marcap Moscow
and Mr Malofeev jointly and severally liable with RAP on the
Facility Agreement (and the associated [ISA]) in respect of
VTB’s losses.
The reason for this is by reason of the control which each of
Marcap BVI, Marcap Moscow and/or Mr Malofeev exercised
over RAP, together with the connected impropriety, that is, the
use of the corporate structure of RAP to conceal their
wrongdoing, and the accompanying misrepresentations about
control and the trading performance and value of the Dairy
Companies. As regards control, as set out in paragraphs 55 and
56 above, and contrary to the representations that they were
under separate control, RAP was at all material times
controlled by each of Marcap BVI, Marcap Moscow and/or Mr
Malofeev. As regards impropriety, the use of RAP as the
corporate vehicle to enter into the Facility Agreement (and the
accompanying [ISA]) and to obtain thereby the sums of
US$225,050,000 from VTB involved the fraudulent misuse of
the company structure. This was an improper use of the
company structure of RAP, which was used as a device or
façade to conceal the wrongdoing of each of Marcap BVI,
Marcap Moscow and Mr Malofeev.”
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VTB v Nutritek
66.
67.
68.
Particulars are given in support of these allegations, some of which recycle matters
already pleaded in support of the tort claims and some of which are new, but which
could equally be relied upon to support the tort claims.
VTB makes no bones about the fact that its primary motive in seeking to make this
amendment is to provide an alternative basis for establishing the jurisdiction of this
court for a claim against the Defendants. In short, VTB contends that, if the
amendment is allowed, this court has mandatory jurisdiction in respect of the contract
claim against MarCap BVI, MarCap Moscow and Mr Malofeev pursuant to Article
23(1) of the Brussels Regulation and that Nutritek is a necessary or proper party to
that claim.
It should be noted, however, that the amendment would also have the effect of
enabling VTB to claim damages according to the contractual measure. Paragraph 77
of the draft Amended Particulars of Claim pleads as losses claimed by VTB the
principal under the Facility Agreement, accrued unpaid interest, additional interest on
the principal at the default rate, additional interest on outstanding interest at the
default rate and amounts due under the ISA in the total sum of over US$346 million.
It is clear that this is substantially more than the loss which VTB can claim in tort.
Piercing the corporate veil
69.
70.
71.
72.
73.
The application to amend the Particulars of Claim gives rise to a number of issues.
The first is that the Defendants resist the amendment on the ground that, even
assuming that all the factual allegations pleaded are true, VTB’s contract claim is
unsustainable as a matter of law. It is therefore necessary to consider the law with
regard to “piercing the corporate veil”.
As counsel for VTB observed, it is important to distinguish between cases in which
the courts have pieced the corporate veil and cases in which it has been held that a
particular transaction was a sham, that is to say, a transaction which was never
intended by the parties to it to have the legal effect which it appeared to have: see
Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802 (Diplock
LJ). As counsel for VTB made clear, it is not VTB’s case that the Facility Agreement
was a sham in that sense. On the contrary, VTB accepts that the Facility Agreement
was intended to have the legal effect which it appeared to have. VTB’s case is that the
Facility Agreement should be enforced against persons who were not party to it.
As counsel for the Defendants observed, the expression “piercing the corporate veil”
is a convenient label which is used to identify cases in which the courts have granted
relief which involves, or perhaps more accurately appears at first blush to involve,
disregarding the separate legal personality of a company from the person or persons
who control it. It is not a substitute for analysing the legal basis for such relief.
Two decisions in which such relief was granted that are central to the debate in the
present case are Gilford Motor Company Ltd v Horne [1933] Ch 935 and Jones v
Lipman [1962] 1 WLR 832.
In Gilford v Horne, Mr Horne was the managing director of Gilford. He entered into a
covenant not to solicit Gilford’s clients after ceasing to be managing director. He left
his employment and formed a new company, J.M. Horne and Co Ltd, the shares in
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
which were held by his wife and a friend, to carry on a competing business and to
solicit his former employer’s customers. Gilford brought proceedings contending that
Mr Horne was in breach of his covenant and seeking relief on that ground against
both Mr Horne and J.M. Horne and Co Ltd. The main issue in the proceedings was
the enforceability of the covenant. Farwell J held that it was unenforceable, but he
was reversed by the Court of Appeal. The Court of Appeal granted an injunction
against both Mr Horne and the company on the basis that, as Lord Hanworth MR put
it at 962, “the company was ‘a mere cloak or sham’ … a mere device for enabling Mr
E.B. Horne to continue to commit breaches of [the covenant]” (see Lawrence LJ at
965 and Romer LJ at 969 to similar effect). It should be noted that there was no claim
for damages.
74.
In Jones v Lipman, Mr Lipman contracted to sell land to Mr and Mrs Jones. He then
conveyed the land to Alamed Ltd, a company which had been purchased for the
purpose by his solicitors and which he controlled, in order to defeat Mr and Mrs
Jones’ right to specific performance. Russell J granted an order for specific
performance against both Mr Lipman and the company. Having cited passages from
all three judgments in Gilford v Horne, he said at 836-837:
“Those comments on the relationship between the individual
and the company apply even more forcibly to the present case.
The defendant company is the creature of the first defendant, a
device and a sham, a mask which he holds before his face in an
attempt to avoid recognition by the eye of equity. The case
cited illustrates that an equitable remedy is rightly to be granted
directly against the creature in such circumstances.”
Although there was a claim for damages in that case, there is nothing to suggest that
Russell J awarded damages against the company.
75.
There has been much subsequent discussion as to the true basis for the relief granted
by the courts against the companies in Gilford v Horne and Jones v Lipman. I agree
with counsel for the Defendants that it is crucial to note that the remedies granted in
those cases were equitable remedies: an injunction and order for specific performance
(which can be regarded as a species of mandatory injunction).
76. What is now section 37(1) of the Senior Courts Act 1981 gives the High Court power
to grant injunction “in all cases in which it appears to be just and convenient to do
so”. The ambit of this power has been much contested (see L’Oréal SA v eBay
International AG [2009] EWHC 1094, [2009] RPC 21 at [449]-[454] and the cases
and commentary cited there). It is firmly established, however, that the power extends
at least to the two situations described by Lord Brandon of Oakbrook (with whom the
other members of the House of Lords agreed on this point) in South Carolina
Insurance Co Ltd v Assurantie Maatschappij De Zeven Provincien NV [1987] AC 24 at
40C-D:
“Situation (1) is where one party to an action can show that the
other party has invaded, or threatens to invade, a legal or
equitable right of the former for the enforcement of which the
latter is amenable to the jurisdiction of the court. Situation (2)
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VTB v Nutritek
77.
78.
79.
is where one party to an action has behaved, or threatens to
behave, in a manner which is unconscionable.”
Counsel for the Defendants argued that Gilford v Horne and Jones v Lipman were
examples of situation (2): injunctive relief was granted against the companies because
the companies had behaved in a manner which, in the light of the knowledge and
intentions of the individuals who controlled the companies, was unconscionable. I
accept this analysis, which is supported by the treatment of those cases as examples of
equitable fraud by Meagher, Gummow & Lehane, Equity: Doctrines and Remedies
(4th ed) at §12-140.
Equitable remedies are, of course, not confined to injunctions. In Trustor AB v
Smallbone (No 2) [2001] 1 WLR 1177, simplifying slightly, the facts were as follows.
Mr Smallbone, in breach of his fiduciary duty as managing director of Trustor,
transferred substantial sums belonging to it to an account with Barclays Bank of
which he was a signatory. This money was later paid out to Mr Smallbone and a
company he owned, Introcom. Trustor obtained summary judgment against Mr
Smallbone and Introcom for the sums they had respectively received on the grounds
of knowing receipt of trust property. Trustor then sought summary judgment against
Mr Smallbone as being jointly and severally liable in respect of the sums received by
Introcom, and argued that it was entitled to pierce the veil.
Sir Andrew Morritt V-C pointed out at [12] that “the claim for summary judgment is
necessarily advanced on a restitutionary basis only”. For the reasons he explained, the
only pleaded basis open to Trustor having regard to the previous history of the
litigation was knowing receipt. He went to say at [17] that “The issue is whether the
court is entitled to treat the receipt by Introcom as the receipt by Mr Smallbone”.
Having reviewed the authorities, he made what has come to be recognised as the
classic statement of the relevant principle at [23]:
“In my judgment the court is entitled to ‘pierce the corporate
veil’ and recognise the receipt of the company as that of the
individual(s) in control of it if the company was used as a
device or facade to conceal the true facts thereby avoiding or
concealing any liability of those individual(s). …”
80.
Applying this principle to the facts, he held at [25] that Mr Smallbone was liable in
knowing receipt for the following reasons:
“In my view these conclusions are such as to entitle the court to
recognise the receipt of the money of Trustor by Introcom as
the receipt by Mr Smallbone too. Introcom was a device or
facade in that it was used as the vehicle for the receipt of the
money of Trustor. Its use was improper as it was the means by
which Mr Smallbone committed unauthorised and inexcusable
breaches of his duty as a director of Trustor….”
81.
Counsel for VTB submitted that Trustor v Smallbone was authority for the
proposition that, in order to pierce the corporate veil, it was necessary and sufficient
to establish (i) control of the company by the wrongdoer and (ii) impropriety
consisting of misuse of the company as a device or façade to conceal his wrongdoing.
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VTB v Nutritek
I do not accept that submission. In my judgment Trustor v Smallbone is authority for
the proposition that, in a claim for knowing receipt of trust property, the court will
treat the receipt by a company as the receipt of the individual who controls it if those
conditions are satisfied; but it goes no further than that. The most I think one can say,
if Trustor v Smallbone is taken together with Gilford v Hone and Jones v Lipman, is
that equitable remedies (in particular, injunctions and accounts) may be granted
against a company in respect of legal or equitable wrongdoing committed by an
individual who controls the company where those conditions are satisfied. It does not
follow that the individual can be held liable for breach of a contract entered into by
the company.
82.
In my view, this analysis is supported by the next four decisions to which I shall refer.
In Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia (No 2)
[1998] 1 WLR 294 Yukong sought to pierce the veil so as to hold the wrongdoer (Mr
Yamvrias) liable for repudiation of a charterparty entered into by his company
(Rendsberg) in circumstances where Rendsburg had repudiated the contract and Mr
Yamvrias had then transferred all of its assets to another company he controlled,
Ladidi, so as to put them beyond the reach of Yukong. Toulson J rejected this claim,
holding at 308D-G:
“The present case differs from Jones v. Lipman [1962] 1
W.L.R. 832 and Gilford Motor Co. Ltd. v. Horne [1933] Ch.
935, where equitable relief was granted against the company
being used to perpetrate a continuing breach of contract by its
controller, of which the company had full knowledge. If either
Mr. Horne’s wife or Mr. Lipman’s wife (assuming their
existence) had agreed to act in a similar role to that of
company, no doubt similar equitable relief would have been
granted against the lady concerned. Salomon’s case [1897] A.C.
22 would have been irrelevant. In the same way, the fact that
the company had separate legal personality was no bar to the
court granting relief against it as well as the contract breaker.
That is quite different from awarding damages against it for
some antecedent breach of duty by the contracting party (for
example, some breach by Mr. Horne of his employment
contract prior to its termination or some misrepresentation by
Mr. Lipman in answers to inquiries before contract) on the
basis that the company was to be put in the shoes of the
contract breaker. Mr. Gross submitted that this was the logical
result of such cases and was sound in principle. I do not agree. I
do not see why in logic or in principle the company should
have been liable for damages in such a situation, any more than
Mrs. Lipman, if the land had been conveyed to her, should
thereby have become liable for any and every breach by Mr.
Lipman of his contract with Mr. Jones. I do not therefore regard
those cases as establishing a principle enabling Mr. Yamvrias
to be treated as the charterer and so liable to Yukong for
damages for wrongful repudiation of the charterparty.”
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VTB v Nutritek
83.
In Dadourian Group International Inc v Simms [2006] EWHC 2973 (Ch) Dadourian
contended that the defendants (Jack and Helga) had fraudulently misrepresented that
they were mere intermediaries in a contract between Dadourian and a company
(Charlton). In fact, Jack and Helga owned Charlton. If Dadourian had known this,
then it would not have entered into the contract. Dadourian claimed in deceit and also
sought to pierce the veil and hold Jack and Helga liable under the contract. Warren J
accepted the former claim, but rejected the latter claim. As he explained:
“682. In all of the cases where the court has been willing to pierce the
corporate veil, it has been necessary or convenient to do so to
provide the claimant with an effective remedy to deal with the
wrong which has been done to him and where the interposition
of a company would, if effective, deprive him of that remedy
against him. It seems to me that the veil, if it is to be lifted at
all, is to be lifted for the purposes of the relevant transaction. It
must surely be doubtful at least that the ex-employee in Gilford
Motor Co v Horne would have been liable for the company’s
electricity bill simply because he was using the company as
device and sham to avoid a covenant binding on him
personally; and the same goes for the vendor of the property in
Jones v Lipman.
683.
It is not permissible to lift the veil simply because a company
has been involved in wrong-doing, in particular simply because
it is in breach of contract. And whilst it is clear that the veil can
be lifted where the company is a sham or façade or, to use
different language, where it is a mask to conceal the true facts,
it is, in my judgement, correct to do so only in order to provide
a remedy for the wrong which those controlling the company
have done. Charlton was not being used to conceal the
purchase of the Tooling and General Equipment [i.e. the
subject matter of the contact]; what it was being used for was
to hide Jack and Helga’s involvement in that purchase.
684. However, Mr Freedman submits that it [is] no answer to a
claim that the corporate veil should be lifted that there are
concurrent liabilities or remedies in tort and that DGI must
proceed by the tortious route. He relies on Trustor where he
says that the court proceeded on the basis of lifting the veil but
could have proceeded on a restitutionary basis. I am not sure
that the position in relation to a restitutionary claim is as clear
as Mr Freedman suggests. But even if it were, there would be
no overlap between the two claims and to put forward different
ways of recovering the same compensation/loss/property is
perfectly acceptable. It seems to me, in contrast, that whilst a
person committing the tort of deceit should be liable for all the
loss which flows from his misrepresentation, it would be
unprincipled to impose a liability on him for the loss of bargain
suffered by a misrepresentee in respect of a contract with a
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VTB v Nutritek
685.
686.
third party with whom he had been induced to contract by the
misrepresentation.
In relation to that point, Mr Freedman says that it is no answer
to say that the loss of bargain damages claimed are by
reference to a bargain which was not desired – an innocent
party entering into a contract owing to a fraud is not restricted
to a claim for reliance loss. Now, it may well be that where A
contracts with B as a result of B’s fraudulent misrepresentation
and the contract has been completed (so that questions of
rescission and adoption of the contract with knowledge of the
fraud to do not arise), A is able to claim (a) damages for loss of
bargain as a result of B’s breach of contract and (b) reliance
loss, although he could not obtain double recovery. It does not
follow that B should be liable for contractual damages to A
where the contract which he procured was one between A and
C, even where C is the creature of B. To put the point another
way, where in that example the principle of corporate
separation exemplified in Salomon v A Salomon & Co Ltd
[1897] AC 22 would apply absent a misrepresentation by the
person controlling the company, there is no need, and it would
be inappropriate, to lift the veil in order to provide A with a
contractual remedy against B; A recovers all his loss arising as
a result of the misrepresentation by his tortious claim in deceit.
If that is correct, the question arises whether it is necessary in
the present case to lift the veil of Charlton and perhaps Ancon
as well in order to provide the Claimants with the remedy to
which they are entitled. In my judgment, it is not. Charlton, if it
was being used as a device at all, was being used to hide the
involvement of Jack and Helga and, if that concealment had
not taken place, the Option Agreement would not have been
entered into. The Claimants have their remedy against Jack and
Helga in the form of an action for fraudulent misrepresentation.
There is simply no need, in order to give the Claimants redress
for that misrepresentation, to lift the veil at all: indeed, to do so
would achieve nothing in relation to that wrong.”
84.
In Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam), [2009] 1 FLR 115 Munby J
(as he then was) extracted the following principles from the authorities as they then
stood:
“159. In the first place, ownership and control of a company are not
of themselves sufficient to justify piercing the veil. This is, of
course, the very essence of the principle in Salomon v A
Salomon & Co Ltd [1897] AC 22 , but clear statements to this
effect are to be found in Mubarak at page 682 per Bodey J and
Dadourian at para [679] per Warren J. Control may be a
necessary but it is not a sufficient condition (see below). As
Bodey J said in Mubarak at page 682 (and, dare I say it, this
reference requires emphasis, particularly, perhaps, in this
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VTB v Nutritek
Division): ‘it is quite certain that company law does not
recognise any exception to the separate entity principle based
simply on a spouse’s having sole ownership and control.’
160. Secondly, the court cannot pierce the corporate veil, even
where there is no unconnected third party involved, merely
because it is thought to be necessary in the interests of justice.
In common with both Toulson J in Yukong Line Ltd of Korea v
Rendsberg Investments Corporation of Liberia (No 2) [1998] 1
WLR 294 at page 305 and Sir Andrew Morritt VC in Trustor at
para [21], I take the view that the dicta to that effect of
Cumming-Bruce LJ in In re a Company [1985] BCLC 333 at
pages 337-338, have not survived what the Court of Appeal
said in Cape at page 536:
‘[Counsel for Adams] described the theme of all these
cases as being that where legal technicalities would
produce injustice in cases involving members of a
group of companies, such technicalities should not be
allowed to prevail. We do not think that the cases relied
on go nearly so far as this. As [counsel for Cape]
submitted, save in cases which turn on the wording of
particular statutes or contracts, the court is not free to
disregard the principle of Salomon v Salomon & Co Ltd
[1897] AC 22 merely because it considers that justice
so requires. Our law, for better or worse, recognises the
creation of subsidiary companies, which though in one
sense the creatures of their parent companies, will
nevertheless under the general law fall to be treated as
separate legal entities with all the rights and liabilities
which would normally attach to separate legal entities.’
161. Thirdly, the corporate veil can be pierced only if there is some
‘impropriety’: see Cape at page 544 and, more particularly,
Ord at page 457 where Hobhouse LJ said:
‘it is clear … that there must be some impropriety
before the corporate veil can be pierced.’
162. Fourthly, the court cannot, on the other hand, pierce the
corporate veil merely because the company is involved in some
impropriety. The impropriety must be linked to the use of the
company structure to avoid or conceal liability. As Sir Andrew
Morritt VC said in Trustor at para [22]:
‘Companies are often involved in improprieties. Indeed
there was some suggestion to that effect in Salomon v A
Salomon & Co Ltd [1897] AC 22. But it would make
undue inroads into the principle of Salomon’s case if an
impropriety not linked to the use of the company
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
structure
impropriety was enough.’
to avoid or conceal
liability for
that
163. Fifthly, it follows from all this that if the court is to pierce the
veil it is necessary to show both control of the company by the
wrongdoer(s) and impropriety, that is, (mis)use of the company
by them as a device or façade to conceal their wrongdoing. As
the Vice Chancellor said in Trustor at para [23]:
‘the court is entitled to “pierce the corporate veil” and
recognise the receipt of the company as that of the
individual(s) in control of it if the company was used as
a device or facade to conceal the true facts thereby
avoiding or concealing any
those
individual(s).’
liability of
And in this connection, as the Court of Appeal pointed out in
Cape at page 542, the motive of the wrongdoer may be highly
relevant.
164. Finally, and flowing from all this, a company can be a façade
even though it was not originally incorporated with any
deceptive intent. The question is whether it is being used as a
façade at the time of the relevant transaction(s). And the court
will pierce the veil only so far as is necessary to provide a
remedy for the particular wrong which those controlling the
company have done. In other words, the fact that the court
pierces the veil for one purpose does not mean that it will
necessarily be pierced for all purposes.”
85.
He went on at [199] to say this:
“The common theme running through all the cases in which the
court has been willing to pierce the veil is that the company
was being used by its controller in an attempt to immunise
himself from liability for some wrongdoing which existed
entirely dehors the company. It is therefore necessary to
identify the relevant wrongdoing – in Gilford and Jones v
Lipman it was a breach of contract which, itself, had nothing to
do with the company, in Gencor and Trustor it was a
misappropriation of someone else’s money which again, in
itself, had nothing to do with the company – before proceeding
to demonstrate the wrongful misuse or involvement of the
corporate structure. But in the present case there is no anterior
or independent wrongdoing. All that the husband is doing, in
the circumstances with which he is now faced – the wife’s
claim for ancillary relief – is to take advantage, in my judgment
legitimately to take advantage, of the existing corporate
structure and, if one chooses to put it this way, to take
advantage of the principle in Salomon.”
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86.
In Lindsay v O’Loughnane [2010] EWHC 529 (QB) Mr Lindsay contended that Mr
O’Loughnane had misrepresented his company’s activities, which induced Mr
Lindsay to enter into contracts with the company. Mr Lindsay claimed in deceit and
also sought to pierce the veil and hold Mr O’Loughnane liable under the contracts.
Flaux J concluded that the claim in deceit succeeded, but rejected the claim to pierce
the corporate veil. As he explained:
“130. Given that I have found that the claim in deceit succeeds, it is
not strictly necessary to decide whether this is an appropriate
case in which to pierce the corporate veil and permit a claim
which should otherwise be pursued against the company to be
pursued against the defendant. Indeed, in Dadourian Group
International Inc v Simms [2006] EWHC 2973 (Ch), at
paragraphs 684 and 685, Warren J held that where a claim in
deceit succeeded against the person controlling the company, it
would be inappropriate to permit the veil to be lifted to enable
the claimant to pursue a contractual claim against that person.
As he put it the claimant ‘recovers all his loss arising as a result
of the misrepresentation by his tortious claim in deceit’
(paragraph 685). This point was not addressed in the Court of
Appeal.
131.
I can deal relatively briefly with the question whether I would
have permitted the corporate veil to be lifted if the claim in
deceit had not succeeded. Clearly if the claim in deceit had
failed because I had concluded that there had been no
fraudulent misrepresentations made, there being no other
impropriety pleaded, there would be no basis for piercing the
corporate veil.
132. The position would have been more difficult if I had concluded
that fraudulent misrepresentations had been made, but that they
were unenforceable by virtue of section 6 of the Statute of
Frauds (Amendment) Act 1828. In that case there would have
been impropriety by the defendant….
137. This is not an easy point, but on reflection I consider that
[counsel for the defendant] is right in his submission that the
cases where it is appropriate to pierce the corporate veil are all
concerned with the defendant who controlled the relevant
to disguise his
the corporate structure
company using
wrongdoing, which had nothing to do with the company. As
Munby J put it [in Ben Hashem], the wrongdoing was ‘entirely
dehors the company’.
138. The pleaded case here is that the defendant used Global FX
and/or FX Solutions as a façade for his fraudulent trading. The
relevant fraudulent trading is defined in paragraph 7 of the
Particulars of Claim as, inter alia, accepting payments from
customers pursuant to currency exchange contracts and then
using the money for other purposes including the payment of
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VTB v Nutritek
the company’s expenses, payments to himself and associates
and paying money to other customers to give the appearance of
legitimate trading. That is not wrongdoing which has nothing
to do with the company or companies. It is wrongdoing at the
heart of the actual business of the company.
…
140.
In my judgment, this would not be an appropriate case in
which to pierce the corporate veil. …”
87.
The authority on which counsel for VTB principally relied in support of VTB’s
contract claim was the recent decision of Burton J in Antonio Gramsci Shipping Corp
v Stepanovs [2011] EWHC 333 (Comm), [2011] 1 Lloyds Rep 617. In that case, the
claimants were 30 “one ship” companies in common ultimate beneficial ownership of
LSC. In earlier proceedings the claimants had brought proceedings against five
companies registered in the BVI and Gibraltar (“the Corporate Defendants”). The
claimants’ case was that, in order dishonestly to siphon out substantial profits from
the chartering business of LSC and the claimants, instead of the claimant companies
chartering out their vessels to arms-length commercial charterers, the Corporate
Defendants were interposed, so that in the case of 63 charterparties they became the
charterers, and the arms-length third parties were caused to be sub-charterers at
substantially higher rates than in the head charters. On the claimants’ application for
summary judgment, Gross J granted permission to defend conditional upon payment
into court. The Corporate Defendants failed to comply with the condition, and
judgment was entered against them. In his judgment Gross J held that the five
individuals who were the beneficial owners of the Corporate Defendants had master-
minded a scheme which exposed themselves to a real and cogent case of dishonesty.
The claimants then brought proceedings against Mr Stepanovs, one of the beneficial
owners of the Corporate Defendants. In order to establish jurisdiction, the claimants
relied upon the English jurisdiction clause in the charterparties between the claimants
and the Corporate Defendants. The claimants argued that the corporate veil should be
pierced and Mr Stepanovs treated as a party to these charterparties and thus bound by
the jurisdiction clause. Mr Stepanovs applied to set aside service of the claim form on
him. Burton J acceded to the claimants’ argument, and dismissed the application to set
aside service.
88.
The Defendants contend that Gramsci v Stepanovs was wrongly decided and should
not be followed. It is therefore necessary for me to set out Burton J’s reasoning in
some detail. He began at [13] by saying that the “seminal passage” on piercing the
veil was the statement of Morritt V-C in Trustor v Smallbone at [23] which I have
quoted above. He then observed at [14] that it was “quite clear that that is exactly
what (on the claimants’ case) occurred” here. He went on:
“The only apparent limitation that has been placed on the
doctrine, given the necessary requirement that the trigger for it
is not simply fraudulent dealing by a company but the
fraudulent misuse of the company structure, as Morritt VC
made clear, is that, using the gallicised words of Munby J in
Ben Hashem at para 199 (referred to by Flaux J in Lindsay v
O’Loughnane [2010] EWHC 529 (QB) at para 134) the wrong-
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doing must not be ‘dehors the company’, i.e. something outside
the ordinary business of the company. Whether the phrase
‘dehors the company’ is ever a very helpful or meaningful
expression, I do not know, but consideration of it is clearly
inappropriate on the facts of this case, when the Corporate
Defendants had, on the claimants’ case, no independent or non-
fraudulent existence. The fraud was plainly ‘dedans’ the
company, but that was because the company was set up for that
very purpose, in order to abuse the company’s structure.”
89.
Next, Burton J held at [16]-[17] that it was not necessary for the claimants to show
that Mr Stepanovs had been in sole control of the Corporate Defendants. He then
turned to consider the submission made by counsel for Mr Stepanovs, in reliance in
particular on Dadourian v Simms and Lindsay v O’Loughnane, that the corporate veil
could not be pierced unless it was necessary to provide the claimants with a remedy
because they had no other remedy. Burton J rejected that submission for reasons
which he expressed as follows:
in order
to disguise
“18. … What Warren J said [in Dadourian v Simms at [682]] seems
to me plainly not to be the case. As will be seen, in Gilford Mr
Horne was under a restrictive covenant preventing competition
(clause 9) in his contract of employment, and he set up a
the existence of such
company
competition. There would not have been any difficulty in
putting the case, and seeking or granting a remedy, by
reference to a claim against the company for knowing
procurement of Mr Horne’s breach of contract, or simply
relying upon agency, by granting an injunction against Mr
Horne restraining breaches by himself his servants or agents,
which would plainly have included his company: but this was
neither done nor addressed. Similarly in Jones v Lipman [1962]
1 WLR 832 where Mr Lipman personally entered into a
contract for sale of a property to the plaintiff, and then sold on
to his puppet company (as found), there could have been relief
and remedy, as Mr Millett himself pointed out by virtue of his
researches in Snell’s Equity, by the grant of an order in equity
for specific performance by reference to the estate contract,
against the puppet company as being a third party purchaser
with notice: but again this was not addressed or considered at
all, and specific performance was granted only by reference to
Gilford and the piercing of the veil. In Trustor too, it is plain
that there could have been a claim against the puppeteer for
equitable compensation for breach of fiduciary duty.
…
20.
It is in [the circumstances explained in Dadourian v Simms at
[684]-[686]] that, at the end of a lengthy trial and a lengthy
judgment, Warren J did not think it was necessary to consider
piercing the veil. So too, in not dissimilar circumstances, Flaux
J said in Lindsay:
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‘130. Given that I have found that the claim in deceit
succeeds, it is not strictly necessary to decide whether
this is an appropriate case in which to pierce the
corporate veil and permit a claim which would
otherwise be pursued against the company to be
pursued against the defendant.’
and he refers to Warren J’s conclusion in para 685 of
Dadourian that the claimant ‘recovers all his loss arising as a
result of the misrepresentation by his tortious claim in deceit’.
It is wholly clear to me that the fact that a trial judge may
conclude in his judgment that it is not necessary on the facts of
a particular case (particularly where the defendant sought to be
made liable as alter ego has already been found personally
liable, and by reference to an inconsistent measure of
damages), to pierce the veil, in no way supports the proposition
that a claim at the outset of proceedings is demurrable unless it
is shown to be necessary. The concept of necessity is not a
fetter upon such a claim. It does not need to be pleaded or
proved in limine. …”
21.
90.
Burton J then went on to consider the claimants’ case that, as a result of piercing the
corporate veil, Mr Stepanovs could be held jointly and severally liable for the
Corporate Defendants’ breaches of the charterparties, beginning at [23]:
“Mr Rainey accepts that there is no reported case in which the
veil has been pierced so as to place the puppeteer into the
puppet’s contract, but he submits not only that there is nothing
in the decided cases to cast doubt upon his proposition, but that
support can be gained from them:
(i)
In Gilford, the puppet company was not in existence at
the date when Mr Horne entered the restrictive
covenants. The remedy that was granted, and upheld on
appeal, was an injunction restraining breach of clause 9
against both Mr Horne and his company. Mr Rainey
submitted that the company was treated as party to the
contract – no other jurisdiction to grant the injunction
against Mr Horne and the company was relied upon. Mr
Millett submitted that it was a question of remedy only,
but Lord Hanworth MR at 956 did expressly refer to
breaches of the covenant by Mr Horne and his
company, which
to support Mr Rainey’s
submission. It is a case in which, if such is what
occurred, the puppet was liable under the puppeteer’s
contract, but, submits Mr Rainey, there is nothing to
prevent the puppeteer being made liable under the
puppet’s contract and he would be if, for example, a
contract for sale by Gilford to the puppet company (in
tends
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(ii)
(iii)
breach of a similar obligation on non-competition) were
sought to be enforced against the puppeteer.
In Jones the puppet company was probably in existence
at the date of the sale contract by Lipman (though still
on the shelf). Although, as Mr Millett says (see
paragraph 18 above), the cause of action could have
been put on a different basis, it was not. Specific
performance of the contract of purchase was ordered
both against puppeteer and puppet, by express reference
to Gilford and piercing of the veil. Again in the reverse
situation the same result could have occurred if it had
been, for example, a sale by the puppet company, and
the sale on had been to the puppeteer; on exactly the
same basis the contract could have been enforced
against both.
In Dadourian, the decision of Warren J was not to lift
the corporate veil so as to render ‘Jack and Helga’ liable
in contract, though to an extent the decision could be
said to have been obiter, or at any rate less significant,
as he concluded that he would not have lifted the
corporate veil anyway (paras 690 to 693) and that he
would not have found that the fraud was dehors the
company: ‘the fraud….was the misrepresentation not
the use of a company’ (at 692). …”
91.
After further consideration of Dadourian v Simms and Lindsay v O’Loughnane, he
concluded:
“26.
I am satisfied that both Warren J in Dadourian and Flaux J in
Lindsay were only ruling out the course of finding the
puppeteer liable for breach of contract because in neither case
was it appropriate to do so in the event, since a remedy of
finding the puppeteer personally liable (as tortfeasor) had
already been granted which was, certainly in the case of
Dadourian, inconsistent with taking the contractual route.
None of the reasons which Warren J put forward argues against
a conclusion, depending on how the facts fall out at trial, that
in this case the puppeteer should be held party to the puppet
company’s contract. There is in my judgment no good reason
of principle or jurisprudence why the victim cannot enforce the
agreement against both the puppet company and the puppet
who, all the time, was pulling the strings. The claimants seek to
enforce the contract against both puppeteer and the puppet
company (as in Gilford and Jones). …
27.
Two matters remain to be dealt with:
(i)
I accept the force of Mr Rainey’s case that the puppeteer
can be made liable, as a party to the contract, but that as
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a matter of public policy he cannot enforce the contract.
This is, to an extent, the obverse of the case where, if a
third party can establish that an agreement was entered
into for its benefit, he can enforce, but not be sued
under, that contract by reference to the Contracts
(Rights of Third Parties) Act 1999 (see eg WPP
Holdings Italy SRL v Benatti [2006] 2 CLC 142). Mr
Millett raised what he said was an anomaly, if such a
submission were accepted, whereby, if the victim
wanted to keep alive a contract after discovery of the
existence of the puppeteer, e.g. in this case to continue
with a charterparty, the puppeteer, though liable under
the contract, would not be able to enforce it, so as, for
example, to obtain sums due under it, but that is of
course not a problem, as in such an unlikely event the
puppet company could still enforce the contract, and
recover any monies due.
(ii) Mr Rainey did run an alternative case that the puppeteer
could be said to have become a party by succession,
although recognising the difficulties that it is only the
obligations and not the rights under the contract to
which the puppeteer would be said to have succeeded:
Gilford, where the company was not in existence at the
time of the contract, could only be explained on that
the course of
basis. He recognised however,
argument, that in reality his claim in this case is put
forward not by reference
to any reliance upon
succession, but firmly on the basis that at the date of the
contract the puppeteer was, and then remained, an
original party to the contract.”
in
92.
Before considering this reasoning, it is first necessary to refer to another recent
decision. In Linsen International Ltd v Humpuss Sea Transport PTE Ltd [2011]
EWHC 2339 (Comm) the claimants entered into charterparties with the Humpuss
group. The first vessel was chartered to the first defendant but the market collapsed
and the first defendant refused to pay. The first defendant transferred assets to the
other defendants as part of a restructuring. The claimants obtained an arbitral award
against the first defendant and then sought to pierce the veil and hold the third to
thirteenth defendants liable under the charterparties.
93.
Having cited Ben Hashem at [159]-[166] and [199] and Gramsci v Stepanovs at [18]-
[19], Flaux J held:
“18.
It seems to me, on reflection that, at least in a case (of which
Gramsci was an egregious example) where the whole purpose
of the corporate structure is to perpetrate fraud, it cannot be
correct that the ability to pierce the corporate veil is limited by
the need that the wrongdoing is dehors the company. However
the point does not matter in the present case since, on analysis,
the relevant wrongdoing here (for reasons I will come to) was
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19.
the transfer of assets from the first defendant to the third
defendant with a view to frustrating enforcement against the
first defendant. Thus the relevant wrongdoing was dehors the
companies in respect of which the claimants seek to pierce the
corporate veil.
For the purposes of the present case, the critical principle
identified by Munby J (which is the one particularly recognised
and applied in other cases to which my attention was drawn in
submissions) is the fourth one that: ‘if the court is to pierce the
veil it is necessary to show both control of the company by the
wrongdoer(s) and impropriety, that is, (mis)use of the company
by them as a device or façade to conceal their wrongdoing.’ In
other words it is not enough to show that a company or a group
of companies is closely controlled by an individual or a family
or by a holding company. If the element of control were
sufficient in itself, the English courts would have accepted the
concept of the ‘single economic unit’ which, as I will
demonstrate later in this judgment, has been consistently
rejected by our courts. The claimant who wishes to pierce the
corporate veil must show not only control but also impropriety,
in the sense of misuse of the company or the corporate
structure to conceal wrongdoing.”
94.
Flaux J went on to distinguish Gramsci v Stepanovs for the following reasons:
“139. Superficially there is thus some similarity between the basis
upon which the claimants put their case in Gramsci and the
way in which the claimants here put their case against the third
to thirteenth defendants. However, the fundamental difference
is that that was a case where, (as will be clear from the
summary of the facts set out above), the claimants had a good
arguable case that the whole purpose of the corporate structure
was to perpetrate the relevant fraud and both the chartering
companies and the charterparties themselves were effectively a
sham or façade from the outset: see paragraph 2 of the
judgment where Burton J summarised the conclusions of Gross
J and paragraphs 13 to 15 of Burton J’s judgment at the end of
which he said: ‘The fraud was plainly “dedans” the company,
but that was because the company was set up for that very
purpose, in order to abuse the company’s structure.’
140. That is the context in which Burton J reached the conclusion
which he did at paragraph 26 of his judgment that the claimants
had a good arguable case that the defendant as ‘puppeteer’
could be made liable under the puppet company’s contract: …
141. Clearly the basis of that reasoning was that the contract (the
charterparty) was in reality one made by the puppeteer using
the puppet to disguise the fact that the contract was part of a
the claimants. The critical
fraud being perpetrated on
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there was nothing untoward about either
difference in the present case is that, as I have already held
above,
the
charterparties or the guarantees when they were made. The
charterparties were all genuine contracts made with the first
defendant, performance by which was guaranteed by the
second defendant. There was and is no basis for piercing the
corporate veil at the time the contracts were made. Nothing in
Gramsci is dealing with such a case and there is nothing in
Burton J’s reasoning to support the claimants’ proposition that
abuse of the corporate structure, long after the relevant
contracts were made, can lead to the corporate veil being
pierced to make companies in the group or Mr Tommy Suharto
liable as if they had been or had become parties to those
charterparties and guarantees.”
95.
96.
97.
98.
The claimants applied to the Court of Appeal for permission to appeal against Flaux
J’s decision. Curiously, the application was heard before the judge had delivered his
reasoned judgment. The Court of Appeal dismissed the application ([2011] EWCA
Civ 1042). Lord Neuberger of Abbotsbury MR, with whom Stanley Burnton LJ
agreed, held at [11]-[12] that the claimants’ case based on piercing the veil was
unsustainable. The fact that the third defendants had knowingly received assets from
the first defendant for the purpose of avoiding the first defendant’s liability under a
contract already entered into and breached by the first defendant could not justify
effectively treating the third defendant liable as a contractual party. He went on at
[13]:
“In that connection, it seems to me that the reasoning of
Toulson J in Yukong Line Ltd of Korea v Rendsberg
Investments Corporation of Liberia (No 2) [1998] 1 WLR 294
in this connection was correct. Furthermore, I note that Munby
J in Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam) held
that piercing the corporate veil was a course which the court
should take if no other remedy was possible and if certain
requirements were satisfied. The requirements in this case are
not satisfied and, if they are, an appropriate remedy is
available, namely following the assets.”
Returning to Gramsci v Stepanovs, counsel for MarCap BVI criticised the decision on
a number of grounds, while counsel for VTB supported it. Rather than rehearse all the
arguments on each side, I will set out my conclusions. With respect to Burton J, I am
unable to agree with his reasoning or the result to which it leads. My reasons are as
follows.
First, for the reasons explained above, I do not agree with Burton J’s premise at [13]
that the corporate veil can be pierced whenever the conditions identified by Morritt V-
C in Trustor v Smallbone at [23] are satisfied. In particular, I do not agree that there
can be a common law claim for damages, as distinct from an equitable remedy,
whenever those conditions are satisfied.
Secondly, again for the reasons explained above, I agree with Munby J in Ben
Hashem at [199] and Flaux J in Lindsay v O’Loughnane at [137] that the true basis
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upon which the courts have pierced the corporate veil is that “the company was being
used by its controller in an attempt to immunise himself from liability for some
wrongdoing which existed entirely dehors the company”. The expression “dehors the
company” seems to have caused Burton J some difficulty, but as Munby J explained
later in the same paragraph, what he meant by this is that there must be some “anterior
or independent wrongdoing” by the controller. (Incidentally, counsel for the
Defendants pointed out that Burton J had misquoted Munby J when the former said
“the wrongdoing must not be ‘dehors the company’ [emphasis added]”, but I think
that that was just a typographical error.) In both Gilford v Horne and Jones v Lipman
the company was being used to attempt to avoid liability for an independent wrong
committed by its controller, and equitable relief against the company was granted to
provide a remedy to prevent that.
99.
Thirdly, I agree with Toulson J in Yukong v Rendsburg at 308, Munby J in Ben
Hashem at [164], Warren J in Dadourian v Simms at [682]-[685] and Flaux J in
Lindsay v O’Loughnane at [130] that, where a claim of wrongdoing is made against
the person controlling the company, it is (to use Flaux J’s word) inappropriate to
permit the corporate veil to be lifted to enable the claimant to pursue a contractual
claim against that person. Counsel for VTB distinguished Gramsci v Stepanovs and
the present case from Yukong v Rendsburg and Linsen v Humpuss on the ground that
the latter cases involved wrongdoing after the relevant contracts had been entered
into. It is not clear to me why that should be a relevant consideration. After all, in
Gilford v Horne the company did not exist at the time that the contract was entered
into and in Jones v Lipman the company was acquired by Mr Lipman after the
contract was entered into, but that did not stop the courts from granting relief. In any
event, Gramsci v Stepanovs and the present case cannot be distinguished from
Dadourian v Simms and Lindsay v O’Loughnane on that basis. Counsel for VTB
distinguished Gramsci v Stepanovs and the present case from Dadourian v Simms and
Lindsay v O’Loughnane on the basis that the latter cases were decisions at trial. He
supported the reasoning of Burton J that the corporate veil had not been pierced in
Dadourian v Simms and Lindsay v O’Loughnane because it was an alternative remedy
which was not needed once the claimants succeeded in their claims for deceit, and
that was something that could only be decided at that point. He also supported the
reasoning of Burton J that necessity could not be a pre-requisite for piercing the veil,
because potential alternative remedies had existed in Gilford v Horne, Jones v Lipman
and Trustor v Smallbone. For my part, despite the Master of the Rolls’ apparent
endorsement of the proposition in Linsen v Humpuss, I am prepared to accept that it
may not be a pre-requisite to piercing the veil that it be necessary in the sense that no
other remedy is available. It seems to me, however, that the real point made in
particular by Warren J is that conferring a remedy consisting of damages for breach of
contract is fundamentally inconsistent with a claim for fraud. That is particularly so
where, as in Dadourian v Simms and in the present case, it is the claimant’s case that
it was
the fraudulent
the contract
misrepresentation.
in question by
to enter
induced
into
100. Fourthly, the reasoning in Gramsci v Stepanovs turns on the use of the company as a
façade to conceal the involvement of the wrongdoer behind it. This leads to the
following anomaly: if the wrongdoer conceals his involvement in the company, then
the corporate veil can be pierced; but if the wrongdoer does not conceal his
involvement in the company, for example where he is a duly appointed director of the
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company, then the victim will have a claim against the wrongdoer in tort (either on
the basis of his own deceit or on the basis of joint liability for the company’s deceit),
but it will not be possible to pierce the corporate veil. Counsel for VTB sought to
justify this on the basis that the vice to which piercing the veil was directed was abuse
of the corporate structure, but a director of a company who causes the company to
commit a fraud also abuses the corporate structure. Furthermore, I can see no
justification for awarding the contractual measure of damages in the former case, but
only the tortious measure in the latter case.
101. Fifthly, it seems to me that the decision in Gramsci v Stepanovs is not so much a
decision to pierce the corporate veil as a decision to ignore privity of contract. Burton
J accepted the argument he set out at [23] that there was no difference in principle
between making the puppet liable under the puppeteer’s contract, as in Gilford v
Horne and Jones v Lipman, and making the puppeteer liable under the puppet’s
contract. For the reasons I have explained, however, I consider that this argument
starts from a false premise. Neither in Gilford v Horne nor in Jones v Lipman were
damages awarded against the puppet for breach of the puppeteer’s contract. Rather,
equitable relief was granted against the puppet to stop the puppeteer evading his own
contractual liability. Thus the puppet was not treated as being party to the puppeteer’s
contract. Furthermore, attempting to make the puppeteer liable on the puppet’s
contract gives rise to other problems. In particular, Burton J accepted at [27(i)] that
the puppeteer could not enforce the contract “as a matter of public policy”, but did not
explain why this was so. Counsel for VTB accepted that the puppeteer should be
entitled to rely upon defences arising under the contract, such as those provided by
exclusion or limitation clauses or time bars. But if so, why can the puppeteer not
enforce the contract? What if, for example, the puppet has a set off or cross claim for
unpaid sums due under the contract? Why should the puppeteer not be able to enforce
that set off or cross claim if he is going to be treated as a party to the contract? I do
not see the relevance to this of the Contract (Rights of Third Parties) Act 1999, which
is a limited statutory incursion into the doctrine of privity of contract which otherwise
left it intact.
102. For these reasons I decline to follow Gramsci v Stepanovs, and I hold that VTB’s
contract claim is unsustainable as a matter of law. This makes it strictly unnecessary
to consider the next three issues, but I shall do so in case the conclusion I have just
expressed is wrong.
Article 23(1) of the Brussels Regulation
103. Article 23(1) of Council Regulation 44/2001/EC of 22 December 2000 on jurisdiction
and the recognition and enforcement of judgments in civil and commercial matters
(“the Brussels Regulation”) provides inter alia as follows
“If the parties, one or more of whom is domiciled in a Member
State, have agreed that a court or the courts of a Member State
are to have jurisdiction to settle any disputes which have arisen
or which may arise in connection with a particular legal
relationship, that court or those courts shall have jurisdiction.
Such jurisdiction shall be exclusive unless the parties have
agreed otherwise. Such an agreement conferring jurisdiction
shall be either:
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(a)
in writing or evidenced in writing; or
…”
104. VTB contends that, if it is entitled to pierce the corporate veil so as to treat MarCap
BVI, MarCap Moscow and Mr Malofeev as if they were parties to the Facility
Agreement, then it follows that VTB can rely upon clause 35 of the Facility
Agreement as conferring jurisdiction on the English courts pursuant to Article 23(1).
Furthermore, it also follows that VTB does not require permission to serve the Claim
Form out of the jurisdiction because “the defendant[s] [are]… party to an agreement
conferring jurisdiction within article 23 of the Judgments Regulation” (see CPR r.
6.33(2)(b)(iii)), and it is not open to this court to decline jurisdiction on a
discretionary basis applying the concept of forum non conveniens. In support of this
contention, VTB again relies upon the decision of Burton J in Gramsci v Stepanovs.
105. Burton J recorded at [31]-[32] that it was common ground that national law (i.e.
English law) governed the existence and interpretation of a jurisdiction clause while
European law governed formality and consensus, but there was an issue before him as
to which law governed the identity of the parties to the contract. On that issue, he held
at [32]-[46] and [61] that English law governed this question. This conclusion has not
been challenged before me.
106. Burton J then went on to consider the question of consensus, and stated the test to be
applied as follows:
“47.
It is common ground that the issue of consensus is decided by
EU law. The European Court at paragraph 14 of its judgment
in Partenreederei MS Tilly Russ v V Haven & Vervoerbedrijf
Nova (The Tilly Russ) Case 71/83 [2984] ECR 2417, [1985]
QB 931 stated that ‘the purpose of Article [23] is to ensure that
the parties have actually consented to such a clause, which
derogates from the ordinary jurisdiction rules laid down in
Articles 2, 5 and 6 of the Convention, and that their consent is
clearly and precisely demonstrated.’
48.
The question thus is whether, once English law has identified
the parties to this contract (including the jurisdiction clause) as
being the Claimants, the puppet companies and the puppeteer,
such test is established in relation to them …”
107. He expressed his conclusion on this question as follows:
“62. EU law then falls to be considered to consider the question as
to whether there was consensus between the parties so
identified. There are two formulations which I have found
helpful. In Bank of Tokyo at paragraph 192 Lawrence Collins J
stated:
‘Whether there has been a sufficient consensus so as to
satisfy Article 23 as predominantly a question of fact
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for the court seised and it is to be answered without
recourse to rules of national law.’
This was expanded by Hamblen J in Polskie, expressly by
reference to Lawrence Collins J wearing his academic hat in
the 14th Edition of Dicey, Morris and Collins at 12-108,
namely:
‘As to the need for agreement – the claimant must show
that both the parties “clearly and precisely” consented
to the alleged jurisdictional agreement. In a case, such
as this, where a party alleges that it never accepted the
clause, the task of the court is to determine if there was
sufficient consensus between the parties as a question
of fact, without recourse to any rules of national law.’
63.
I am satisfied that this question is a mixed question of law and
fact, and that there is a good arguable case, in the sense
referred to above, that the Claimants will establish such
consensus by and between the Claimants and the Defendant as
puppeteer.”
108. Counsel for Nutritek drew it to my attention that in Bols Distilleries BV v Superior
Yachts Services Ltd [2006] UKPC 45, [2007] 1 WLR 12, a case which was cited by
Burton J elsewhere in his judgment, Lord Rodger of Earlsferry delivering judgment of
the Privy Council held at [28] that:
“In the present case, as the case law of the Court of Justice
emphasises, in order to establish that the usual rule in article
2(1) is ousted by article 23(1), the claimants must demonstrate
‘clearly and precisely’ that the clause conferring jurisdiction on
the court was in fact the subject of consensus between the
parties.”
Burton J’s approach appears to me to be consistent with this statement.
109. Counsel for Nutritek submitted that VTB could not demonstrate consensus in
circumstances where: (a) VTB did not know it was contracting with MarCap BVI,
MarCap Moscow or Mr Malofeev; and (b) MarCap BVI, MarCap Moscow or Mr
Malofeev did not know they were a party to the Facility Agreement. In my judgment
this submission is answered by the reasoning of Burton J. If, as a matter of English
law, there is a good arguable case that MarCap BVI, MarCap Moscow and Mr
Malofeev are to be treated as parties to the Facility Agreement, then it follows that
there is also a good arguable case that they consented to the jurisdiction clause
contained in that agreement.
110. Whether there is a good arguable case that MarCap BVI, MarCap Moscow and Mr
Malofeev are to be treated as parties to the Facility Agreement depends in part on the
correctness of Burton J’s decision with regard to piercing the corporate veil as a
matter of law. It also depends, however, on the facts. Assuming for the moment that
Burton J was right as a matter of law, and that I am wrong to decline to follow him, I
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consider that on the evidence presently before the court VTB has a good arguable case
on the facts as against MarCap Moscow and Mr Malofeev, but not as against MarCap
BVI. My reasons for reaching this conclusion are set out below in the context of my
consideration of whether there is a serious issue to be tried in relation to VTB’s tort
claims. I should make it clear in saying this that I am not ignoring the higher threshold
which VTB must overcome for the purposes of Article 23(1).
The rule in Parker v Schuller
111. The Defendants contend that this court remains bound by the rule in Parker v Schuller
(1901) 17 TLR 299, even though it was disapproved by the Supreme Court in NML
Capital Ltd v Republic of Argentina [2011] UKSC 31, [2011] 3 WLR 273, and that in
consequence VTB cannot rely upon its claim in contract to sustain the order for
service out of the jurisdiction. This point only arises if (a) the court concludes that
VTB has a good arguable case in contract, but nevertheless (b) is not entitled to rely
upon Article 23(1) of the Brussels Regulation. In that event VTB would seek to rely
upon paragraph 3.1(6) of Practice Direction 6B to found jurisdiction against MarCap
BVI, Marcap Moscow and Mr Malofeev. Since I have decided that (a) VTB does not
have a good arguable case in contract, but if it did (b) it would be entitled to rely upon
Article 23(1) at least against MarCap Moscow and Mr Malofeev, I shall deal with the
point briefly.
112. The leading authority on the rule is Metall and Rohstoff AG v Donaldson Lufkin and
Jenrette [1990] 1 QB 391, where the plaintiff sought to rely on alternative causes of
action to sustain an order for service out of jurisdiction in addition to the causes of
action it had relied upon to obtain leave (though based on the same facts). Slade LJ
giving the judgment of the Court of Appeal said at 436D-E:
“In our judgment, if the draftsman of a pleading intended to be
served out of the jurisdiction under Ord.11, r.1(1)(f) (or indeed
under any other sub-paragraph) can be reasonably understood
as presenting a particular head of claim on one specific legal
basis only, the plaintiff cannot thereafter, for the purpose of
justifying his application under Ord. 11, r.1(1)(f), be permitted
to contend that that head of claim can also be justified on
another legal basis (unless, perhaps, the alternative basis has
been specifically referred to in his affidavit evidence, which it
was not in the present case). With this possible exception, if he
specifically states in his pleading the legal result of what he has
pleaded, he is in our judgment limited to what he has pleaded,
for the purpose of an Order 11 application.”
113.
It is common ground that all the members of the Supreme Court in NML v Argentina
disapproved of this rule, but that their disapproval was strictly obiter since they also
held (albeit for different reasons) that it did not apply to the situation before the Court.
Counsel for VTB nevertheless submitted that it was open to this court to give effect to
the Supreme Court’s disapproval of the rule. Counsel for Nutritek disputed this. In my
judgment, counsel for VTB is correct for the following reasons.
114. The CPR are a new procedural code: CPR r. 1.1(1). It follows that cases decided
under the RSC are not strictly binding with regard to the CPR, although they are
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VTB v Nutritek
generally of considerable persuasive force if there is no material difference in the
wording of the respective provisions. In E D & F Man Sugar Ltd v Lendoudis [2007]
EWHC 2268 (Comm), Christopher Clarke J held at [27]-[28] that Metal und Rohstoff
remained good law under the CPR. His decision was referred to with approval by the
Court of Appeal in Pacific International Sports Clubs Ltd v Surkis [2010] EWCA Civ
753 at [58] (Mummery LJ). In my judgment the Court of Appeal’s approval of E D &
F v Lendoudis in Pacific v Surkis was obiter, however. I am therefore not bound by
Pacific v Surkis, which means that I am free to rely upon the superior source of
persuasive authority represented by NML v Argentina. Accordingly, I decline to
follow E D & F v Lendoudis.
Necessary or proper party
115.
If (a) VTB has a good arguable case that MarCap BVI, MarCap Moscow and Mr
Malofeev are to be treated as parties to the Facility Agreement so that either (b) VTB
can rely upon Article 23(1) of the Brussels Regulation as against them or (c) VTB can
rely upon paragraph 3.1(6) of Practice Direction 6B as against them, the final question
to be addressed in this section of the judgment is whether VTB can rely upon
paragraph 3.1(3) of Practice Direction 6B to found jurisdiction against Nutritek.
116. Counsel for Nutritek argued that VTB’s contract claim could only succeed if its claim
in tort against MarCap BVI, MarCap Moscow and Mr Malofeev failed. If its claim in
tort against those parties failed, however, then it necessarily followed that VTB’s
claim against Nutritek would fail. Accordingly, Nutritek was not a necessary or
proper party. This argument proceeds from a premise which, in considering the law
with regard to the piercing the corporate veil, I have not accepted. I therefore do not
accept this argument either.
Conclusion
117. For the reasons given above, I shall refuse VTB permission to amend the Particulars
of Claim to plead its contract claim against MarCap BVI, MarCap Moscow and Mr
Malofeev.
The Defendants’ application to set aside permission to serve out
118.
I turn to consider the Defendants’ applications to set aside Chief Master Winegarten’s
order granting VTB permission to serve the proceedings on them out of the
jurisdiction. Since I have refused the application to amend, this involves consideration
of VTB’s claim as it was originally framed, namely in tort.
Applicable law
119. At the time of the hearing before me, there was controversy between the parties as to
whether the applicable law fell to be determined in accordance with the European
Parliament and Council Regulation 864/2007/EC of 31 July 2007 on the law
applicable to non-contractual regulations (“the Rome II Regulation”) or the Private
International Law (Miscellaneous Provisions) Act 1995. This is because the claim
relates to damage which occurred after 20 August 2007, but before 11 January 2009,
and it was unclear whether the Rome II Regulation applied to such claims. This
question has now been settled by the judgment of the Court of Justice of the European
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Union given on 17 November 2011 in Case C-412/100 Homawoo v GMF Assurances
SA, in which the Court ruled:
“Articles 31 and 32 of Regulation (EC) No 864/2007 of the
European Parliament and of the Council of 11 July 2007 on the
law applicable to non-contractual obligations (‘Rome II’), read
in conjunction with Article 297 TFEU, must be interpreted as
requiring a national court to apply the Regulation only to events
giving rise to damage occurring after 11 January 2009 and that
the date on which the proceedings seeking compensation for
damage were brought or the date on which the applicable law
was determined by the court seised have no bearing on
determining the scope ratione temporis of the Regulation.”
120.
It follows that the applicable law must be determined in accordance with the 1995
Act, sections 11 and 12 of which provide as follows:
“Choice of applicable law: the general rule.
11.(1) The general rule is that the applicable law is the law of the
country in which the events constituting the tort or delict in
question occur.
(2) Where elements of those events occur in different countries,
the applicable law under the general rule is to be taken as
being:
(a)
(b)
(c)
for a cause of action in respect of personal injury
caused to an individual or death resulting from personal
injury, the law of the country where the individual was
when he sustained the injury;
for a cause of action in respect of damage to property,
the law of the country where the property was when it
was damaged; and
in any other case, the law of the country in which the
most significant element or elements of those events
occurred.
(3)
In this section ‘personal injury’ includes disease or any
impairment of physical or mental condition.
Choice of applicable law: displacement of general rule.
12.(1) If it appears, in all the circumstances, from a comparison of:
(a)
the significance of the factors which connect a tort or
delict with the country whose law would be the
applicable law under the general rule; and
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VTB v Nutritek
(b)
the significance of any factors connecting the tort or
delict with another country, that it is substantially more
appropriate for the applicable law for determining the
issues arising in the case, or any of those issues, to be
the law of the other country, the general rule is
displaced and the applicable law for determining those
issues or that issue (as the case may be) is the law of
that other country.
(2)
The factors that may be taken into account as connecting a tort
or delict with a country for the purposes of this section include,
in particular, factors relating to the parties, to any of the events
which constitute the tort or delict in question or to any of the
circumstances or consequences of those events.”
121. VTB contends that English law is the applicable law either under section 11(2)(c) or
under section 12. The Defendants contend that Russian law is the applicable law.
122. Section 11(2)(c). My attention was drawn to four authorities on the application of
section 11(2)(c). The first is Morin v Bonhams & Brooks Ltd [2003] EWCA Civ 1802,
[2004] 1 Lloyd’s Rep 702. In that case, the defendant (a Monegasque company) sent
the claimant a catalogue for an auction which was to take place in Monaco. That
brochure included an inaccurate description of a particular vintage motor car. The
claimant went to Monaco and bid successfully for the car. Once he had bought the
car, the claimant discovered that it suffered from defects which were inconsistent with
its description in the brochure. The question for the court was where the most
significant elements of the relevant tort (negligent misstatement) had occurred in
circumstances where (a) the relevant representations were made to the claimant in
England, (b) the initial reliance on those statements was made in England and (c) the
specific transaction which caused the claimant to suffer his loss (namely his agreeing
to purchase the car at the relevant auction) occurred in Monaco. The Court of Appeal
concluded that Monegasque law was the applicable law of the tort under section
11(2)(c).
123. The reasons for this conclusion given by Mance LJ (as he then was) were as follows:
S.11 of the 1995 Act adopts a geographical test. … In any
other case, it selects the law of the country ‘in which the most
significant element or elements of those events [i.e. those
constituting the tort] occurred.’ What is required is an analysis
of all the elements constituting the tort as a matter of law, and a
value judgment regarding their ‘significance’, in order to
identify the country in which there is either one element or
several elements, which taken alone or together, outweighs or
outweigh in significance any element or elements to be found
in any other country. The governing law under s.11(2)(c) will
be the law of that country
“16.
…
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19.
In the present case, elements constituting the alleged tort
occurred both in England and in Monaco. But I agree with the
Judge that the most significant elements occurred in Monaco.
The making by [the defendant] through its catalogue in
England of a negligent misstatement is of course one essential
element. But the element of reliance was present in the form of
a continuum of activity, starting in England, but having by far
its most significant aspect in the form of [the claimant’s]
presence and successful bidding in Monaco. By the same
token, although some loss was caused in England, the
successful bid involved [the claimant] entering into a contract
in Monaco, under which he bought and received the car there
and became liable to pay there the price and auction premium,
which he met by remittance from the Bahamas. It is his
decision on the spot when making his successful bid, and his
resulting commitment to buy the car and pay that price and
premium, which represent by far the major elements of his
reliance and of the loss caused and claimed in this case. The
entering into of an adverse contractual commitment involves
on its face an actionable loss, even prior to any actual financial
expenditure pursuant to it (see e.g. Forster v. Outred [1982] 1
WLR 86, 97B-C).”
124. The second authority is Dornoch Ltd v Mauritius Union Assurance Co Ltd. In that
case MCB was a Mauritian bank which had been the victim of large scale fraud
resulting in the misappropriation of large sums of Mauritian rupees over some 11
years. MUA was a Mauritian insurance company which insured MCB. The claimants
were English re-insurers of MUA. MCB claimed against MCB under its insurance
policy in respect of the fraud, and MUA claimed against the claimants on the re-
insurance policies. The claimants brought proceedings in England against MUA and
MCB seeking declarations that the reinsurance policies had been avoided for
misrepresentation and non-disclosure and that the claims even if proved fell outside
the scope of the reinsurance, damages for misrepresentation against MUA and
damages for deceit against MCB. The claimants obtained permission to serve the
proceedings out of the jurisdiction, and the defendants applied to set that permission
aside. One of the issues was whether the applicable law was English law or Mauritian
law.
125. At first instance ([2005] EWHC 1887 (Comm), [2006] Lloyd’s Rep IR 127) Aikens J
(as he then was) held as follows:
“105. It seems to me that there are six significant elements that make
up the torts alleged in this case, ie. deceit and fraudulent or
negligent misrepresentation. First there is the situation in MCB
during the period 1991 to 2002 as it actually existed; were
there irregularities and failures in regulation and did officers
and directors of MCB know of them? That element is
connected to Mauritius. Secondly, there is the completion of
the Proposal Form by the directors and officers of MCB, which
is said to have been done fraudulently. That was all done in
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VTB v Nutritek
to
Mauritius. Thirdly, there is the transmission of the Proposal
Form to City Brokers Ltd in Mauritius and then to BRS in
England, with the implication that MCB were content that the
answers given should be used for presentation
the
Reinsurers. That continuing representation took place in both
Mauritius and England. Fourthly, there is the presentation of
the Proposal Form by BRS to the Reinsurers as part of the
renewal programme for 2002, with the continued implication
that MCB continued to stand by the statements made in the
Proposal Form. The presentation took place in England.
Fifthly, there is the reliance by the Reinsurers (so it is said) on
the Proposal Form, so as to conclude the Excess Reinsurance.
That took place in England. Sixthly, there is any loss that the
Reinsurers have suffered or will suffer as a consequence of the
alleged deceit. If loss is suffered, it will be in England.
106. What is the proper ‘value judgment’ regarding the significance
of those six elements? In considering this I think I must assume
for the present that the alleged torts did occur; I cannot see how
one can proceed otherwise. That is not to say that I must reach
a concluded view on the law applicable to the torts; other facts
may come to light at a trial which change the analysis. But, in
my view the most significant elements of the torts of deceit or
fraudulent misstatement are those which concern making the
untrue statements in the Proposal Form (knowing them to be
so), presenting the untrue statements to the other person with
the intent that he should rely on it and then the actual reliance
by that person on the untrue statement to his loss. Although the
first of these elements starts in Mauritius, it is continued in
England, because the Proposal Form, with the MCB signatures,
comes to England and MCB continues to make the fraudulent
misrepresentations here. The intention that the Reinsurers
should rely on them continues to operate here in England
where the Reinsurers receive the Proposal Form. The reliance,
which is the most significant element of all, in my view, takes
place in England.
107. The antecedent facts concerning the true situation in MCB are
important, but it is what is done with those facts that really
matters so far as the tort of fraudulent misrepresentation or
deceit is concerned. In short, it is (on the assumptions I have
made) MCB’s decision not to tell the facts as they are and to
continue to mislead that matters most, not the true facts
themselves.
108. On this basis the proper law of the torts alleged will be English
law, applying section 11(2)(c) of PILA.”
126. This assessment was upheld by the Court of Appeal: [2006] EWCA Civ 389, [2006] 2
Lloyd’s Rep 475 at [45]-[47] (Tuckey LJ).
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127. The third authority is Trafigura Beheer BV v Kookmin Bank Co [2006] EWHC 1450
(Comm), [2006] 2 Lloyd’s Rep 455, another decision of Aikens J. In that case,
Kookmin was a Korean bank which had issued a letter of credit in favour of
Trafigura, a Dutch company, which sold a cargo of oil to a Korean buyer. The oil was
delivered without bills of lading being produced. Subsequently, the buyer became
insolvent and failed to reimburse Kookmin. Kookmin brought proceedings against
Trafigura in South Korea under Korean law. Trafigura commenced proceedings in
England seeking a declaration of non-liability and an anti-suit injunction. A
preliminary issue was ordered as to the law applicable to the question of whether
Trafigura was liable to Kookmin on the claims advanced by the latter in the Korean
proceedings. Although Kookmin advanced two main claims in Korea, it only relied on
one in England, referred to as the “security” claim, which Aikens J held was a claim
in tort. Trafigura contended that English law was applicable to that tort, while
Kookmin contended for Korean law. Aikens J concluded that the most significant
events relating to the security claim concerned the surrender by Trafigura of the
original bills of lading and the acceptance by it of a second, claused set, which were
useless as security for the cargo, which it put into the banking chain. These events had
occurred in Singapore. Accordingly, under section 11(2)(c) the applicable law was the
law of Singapore.
128. The fourth authority is Fiona Trust & Holding Corp v Privalov [2010] EWHC 3199
(Comm). That involved four actions. In the two Fiona actions Sovcomflot, a Russian
ship-owning and ship-operating company, and subsidiaries of Sovcomflot alleged that
Dmitri Skarga, a former Director-General of Sovcomflot, and Yuri Nikitin embarked
on a course of dishonest conduct between about the end of 2000 and 2004, whereby
companies in the Sovcomflot group entered into transactions which benefited Mr
Nikitin and companies associated with him and were against the interests of the
Sovcomflot group. They said that among those who were engaged with Mr Nikitin
and Mr Skarga in this conduct were Yuri Privalov, the Managing Director of FML, an
English company which was the second claimant in the Fiona action, and from some
time in 2002 Mr Igor Borisenko, then the Executive Vice-President and Chief
Financial Officer of Sovcomflot. Sovcomflot contended that the defendants had
engaged in a number of schemes each of which constituted a conspiracy by unlawful
means.
129. As Andrew Smith J explained at [163]:
“… The defendants first submitted that the thrust of the
allegation against them is that the transactions in the various
schemes were all undertaken pursuant to a single overarching
conspiracy by which bribes were paid or promised by or on
behalf of Mr. Nikitin in order to bring about uncommercial
transactions which would benefit him and his companies at the
expense of the Sovcomflot group. The claims in conspiracy,
and the other claims, should all be regarded as manifestations
of this single scheme, and they are governed by the law of
Russia, where the events most significant to the scheme
occurred. It was a conspiracy which originated in Russia, which
was targeted at a group controlled by a Russian company,
which was for the benefit of a Russian businessman and which
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VTB v Nutritek
depended on and was characterised by the corruption of the
Director-General of Sovcomflot, who worked from the group’s
headquarters in Moscow.”
130. Andrew Smith J rejected the argument that the various schemes should be regarded as
part of a single conspiracy, but continued at [167]:
“As I have said, in my view it is right to consider separately the
elements of the tort of conspiracy in relation to each scheme.
However, the defendants are able to identify elements relating
to the agreement or collusion which are common to all the parts
of the claimants’ conspiracy claims in so far as they allege that
Mr. Skarga was party to the collusion against Sovcomflot. …
The central thrust of the claimants’ allegations in relation to
each scheme is that Mr. Nikitin was dishonestly working with
Sovcomflot’s Director-General, Mr. Skarga, and their Chief
Financial Officer, Mr. Borisenko, to secure the group’s
agreement to transactions and arrangements which favoured
him. I conclude that generally Mr. Nikitin would have had any
discussions with Mr. Skarga and Mr. Borisenko in Russia,
although I accept that on occasions there will have been some
discussions outside Russia, such as when Mr. Nikitin and Mr.
Skarga were on holiday together in September 2004. Further, in
so far as Mr. Skarga or indeed Mr. Borisenko implemented an
agreed scheme by ensuring that Sovcomflot or one of the
companies in the group entered into the transactions, they
generally did so when they were in Russia. For example, all the
meetings of the Sovcomflot Executive Board which decided
upon, approved or ratified transactions took place in Russia,
and minutes of meetings of the Fiona board were signed in
Russia by Mr. Skarga, Mr. Borisenko and others. Mr. Privalov,
as the claimants allege, was party to the schemes (other than the
Sovcomflot time charters scheme), and, working from London,
provided important assistance to implement them, but the
defendants pointed out that, according to Mr. Privalov’s own
evidence, his discussions with Mr. Nikitin, Mr. Skarga and Mr.
Borisenko took place sometimes in Russia and on other
occasions in London or elsewhere. In any event, it seems to me
that, if, as the claimants allege, Mr. Skarga was party to the
schemes, Mr. Nikitin’s collusion with him as Sovcomflot’s most
senior executive is of greater significance than Mr. Privalov’s
relatively junior participation in them, and Mr. Skarga’s role in
implementing them by way of ensuring that Sovcomflot agreed
to transactions designed to benefit Mr. Nikitin and his
companies at Sovcomflot’s expense was, in terms of identifying
the wrongful acts that caused Sovcomflot damage, of greater
significance than the arrangements that Mr. Privalov made in
the London market in order to implement the transactions. In
substance the impact of the financial damage was suffered by
Sovcomflot in Russia.”
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131. At [168] Andrew Smith J set out a series of eight factors which the claimants relied on
as showing that the most significant elements of the torts occurred in England, and
hence English law was the applicable law under section 11(2)(c). Andrew Smith J
held, however, that the most significant elements of the torts occurred in Russia, and
therefore Russian law was the applicable law, for the following reasons:
“170. I consider that some of the matters upon which the claimants
relied are not elements of the events that constitute a
conspiracy relating to the scheme in question or to a
transaction under it, and the conspiracies are the focus of the
claimants’ allegations. Although lawyers’ documentation was
required in order to carry out the schemes, I do not regard the
drafting work of Lawrence Graham and Mr. Wettern as an
event constituting the tort of conspiracy. In the case of the
newbuildings scheme, the Supplemental Agreement was drawn
up after any tort had been completed. In any event, I would not
consider these matters to be significant events for the purpose
of deciding where the tort is to be regarded as having occurred.
I have explained why I consider the part played in London by
Mr. Privalov in carrying out the schemes to be less significant
than the events in Russia. The same applies to the part played
in Switzerland by Sovchart in carrying out the Sovcomflot time
charters scheme and the ‘Romea Champion’ commission
scheme.
171. The claimants’ arguments are strongest, as it seems to me, in
relation to the other commissions schemes, because of the role
played by the brokers in London and because Clarkson were
engaged to act for Sovcomflot and the Clarkson arrangements
with Mr. Gale were made in London. But here too, on balance,
I accept the defendants’ submission that, if Mr. Skarga was a
participant in the schemes, the most significant elements of the
conspiracy in relation to them occurred in Russia. It was there
that the crucial arrangements in relation to the schemes would
have been made between Mr. Nikitin and the senior conspirator
in the Sovcomflot organisation, the originating steps to carry
them out were taken in Russia, and the events in London
flowed from what occurred in Russia. In my judgment,
therefore, if the general rule under the 1995 Act is applied to
the claims of conspiracy in relation to the various Sovcomflot
schemes, the applicable law is Russian.”
132. Turning to the present case, VTB’s claims have been pleaded in accordance with
English law. While it is obviously necessary to be cautious about using the manner in
which one system of law analyses the elements of a claim when deciding whether that
law or a different law should be applied to the claim, both sides were content to argue
this issue by reference to the analysis in English law. VTB’s main claim is in deceit.
The elements of this tort are (i) the making of fraudulent misrepresentations to a
person, (ii) reliance by that person on the misrepresentations and (iii) resultant loss by
that person. In addition, VTB claims in conspiracy, which adds the element of
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VTB v Nutritek
combination between the conspirators. As indicated by Aikens J in Dornoch, for this
purpose I shall assume that the facts alleged by VTB are true.
133. Counsel for VTB argued that the most significant elements of the deceit took place in
England because: (i) irrespective of where the misrepresentations were made or to
whom they were made directly, it was intended that they would be transmitted to
VTB in England, and that it would rely upon them in England; (ii) VTB did rely upon
the representations by crediting the relevant amount to RAP’s English bank account
with VTB; and (iii) accordingly the loss was suffered in England. So far as conspiracy
was concerned, he argued that the unlawful means relied on was the fraudulent
misrepresentations, and so again the most significant elements of the tort took place in
England.
134. Counsel for the Defendants argued that the most significant elements of the deceit
took place in Russia because: (i) the misrepresentations were made in Russia; (ii) for
the most part the misrepresentations were received in Russia; (iii) although the
misrepresentations were later relied upon in England by VTB, the most significant
aspect of reliance was the approval of the loan transaction by VTB Moscow’s Credit
Committee; and (iv) those factors ought not to be displaced by the fact that, if VTB
suffered any damage, this occurred in England. As for conspiracy, counsel for the
Defendants argued that the present case was very similar to Fiona Trust v Privalov:
(v) the combination to injure originated and was carried out in Russia through the
driving force of MarCap Moscow and Mr Malofeev; (vi) the primary target of the
alleged conspiracy must be regarded as VTB Moscow (to which company the
misrepresentations were made and which was known by the alleged conspirators as
being the company providing the funds), even if it was also intended to injure VTB;
(vii) the unlawful means took place in Russia where the misrepresentations were
made; and (viii) any damage in London flowed from what occurred in Russia, which
was also where the ultimate financial impact was felt.
135.
I find the arguments of counsel for the Defendants more persuasive. There is little
dispute that the misrepresentations were made and mainly received in Russia. In my
view they were primarily relied on in Russia, since it was VTB Moscow’s Credit
Committee and Management Board which made the essential decision to enter into
the proposed transaction in reliance upon those representations. VTB’s reliance was
wholly secondary. While the loss suffered by VTB was sustained in England, the loss
was sustained because of the inadequate security provided by assets in Russia which
were the subject of the misrepresentations. Furthermore, as I shall discuss below,
while the loss has been suffered in the first instance by VTB, the ultimate economic
impact is felt by VTB Moscow to which VTB must account for its recoveries. Finally,
it seems to me that counsel for the Defendants are right to say that the conspiracy,
which seems clearly to have been hatched in Russia, is an important aspect of VTB’s
claims because it founds not just VTB’s claim in conspiracy itself, but also its claims
against MarCap Moscow and Mr Malofeev as joint tortfeasors in respect of the deceit.
Accordingly, I consider that the most significant elements of the events constituting
both torts occurred in Russia. It follows that the applicable law under the general rule
is Russian law.
136. Section 12. Section 12 was also considered in each of the authorities discussed above.
In Morin v Bonhams Mance LJ observed:
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“21. … significance under s.11 directs attention to the intrinsic
nature of the element(s) of the tort — and not to the nature or
closeness of any tie between those elements and the country
where they occurred. The nature or closeness of any tie can,
however, be very relevant on an issue arising under s.12, when
considering ‘factors which connect a tort’ with one or another
country. The embrace of ‘factors connecting’ a tort with a
country extends potentially much wider than the “elements
constituting the tort.
…
23.
The next question arising in relation to the application of s.12
would have been whether the concept of “factors which
connect a tort” with a country embraces the parties’ choice of
the law of a particular country. In general terms, it would seem
odd, if an express choice of law were not at least relevant to the
governing law of a tort. But Adrian Briggs, in an article ‘On
drafting agreements on choice of law’ in [2003] LMCLQ 389,
points out the difficulty of the language of s.12 – adding
however that ‘it may not be impossible’ to overcome its ‘anti-
commercial cast’. The law of a country is after all a feature of
the country. Further, one should not forget that clause 9.1 [of
the contract of sale] not only deals with governing law, but
provides for submission to the non-exclusive jurisdiction of the
Monegasque courts. It may be open to argument that that itself
constitutes a ‘factor connecting the tort’ to Monaco. The judge
did not decide any points relating to s.12, and, since we do not
have to do so either, I prefer to leave them all open.”
137. Professor Briggs’ article was also the subject of comment by Aikens J in Trafigura v
Kookmin (omitting footnotes):
“103. With respect to Professor Briggs, in my view he adopts too
narrow a construction of section 12(1) and (2). In section 12(1)
the court is invited to make a comparison of the significance of
the factors which connect a tort with the country whose law
would be the applicable law under the ‘general rule’ and “the
significance of any factors connecting the tort … with another
country’. I would emphasise the use of the words ‘any factors’
in section 12(1). In my view Professor Briggs’ comments also
do not give adequate scope to the breadth of section 12(2). As I
have already commented, it is inclusive, not exclusive in its
terms. But it does state that the court can take into account
‘…in particular, factors relating to the parties’ as factors that
might connect the tort with ‘another country’ for the purposes
of section 12. It seems to me that the phrase ‘factor relating to
the parties’ is broad. The factor only has to ‘relate to the
parties’. I would hold that the phrase can include the fact of a
pre–existing
the parties, whether
contractual or otherwise. Another factor ‘relating to the parties’
relationship between
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
must be, in my view, the law that the parties have expressly or
impliedly chosen to govern their pre–existing contractual
relationship. If that pre–existing relationship is said to give rise
to events constituting the alleged tort in question, then it seems
to me that the factual and contractual context in which the
events took place and the law governing any related contracts
must be within the phrase in section 12(2): ‘… relating to …
any of the events which constitute the tort … in question or to
any of the circumstances or consequences of those events’.
104. For my part I see no difficulty in the idea that if the governing
law of a contract, or a chosen jurisdiction provision in a
contract is that of country A, that may be a factor that connects
the alleged tort under consideration with country A. An
analogous exercise is carried out every time the court considers
the impact of the applicable law of a contract when deciding
whether England is the appropriate jurisdiction in a ‘forum non
conveniens’ case. So in my view the contractual ‘matrix’ in
which it is said the alleged tort constituting the ‘security claim’
occurred is a potential ‘factor’ for consideration under section
12.”
138. On the facts of the case he went on to conclude that English law displaced Singapore
law under section 12 for the following reasons:
that
identifies,
“106. To my mind the first connecting factor which [counsel for
the L/C contract between
is,
Trafigura]
Trafigura as beneficiary and Kookmin as issuing bank, is by far
the most important …. The existence of the L/C contract is the
reason for any kind of connection between Trafigura and
Kookmin at all. The L/C was the pre–existing relationship
which, at least in contract, governs the rights and obligations of
Trafigura and Kookmin as, respectively, beneficiary and
issuing bank under the L/C. Cooke J held that the L/C contract,
as between Trafigura and Kookmin, is governed by English
law …. That conclusion has not been challenged before me by
Kookmin. Nor has Kookmin challenged the conclusions of
Cooke J that Kookmin would have no claim against Trafigura
under the L/C as a matter of contract and that the English law
contracts leave no room for a claim in tort where the contracts
are fulfilled …
….
112. Therefore it seems to me that the second important factor for
the purposes of section 12 is that all but one of the relevant
contractual relationships between the parties – that between the
sellers (Trafigura) and buyers of the cargo; that between the
sellers and the carriers; that between the issuing bank and the
beneficiary under the L/C; and that between the sellers and the
buyers in the LOI contract – are all governed by English law.
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
All those parties’ contractual rights and obligations are
therefore connected with England, because, as Mance LJ said
in paragraph 23 of the Morin case, ‘…the law of a country is a
feature of the country’.
…
118. Ultimately I have concluded that it is substantially more
appropriate that the applicable law governing the contractual
relationship between Trafigura and Kookmin for issues relating
to tort should be the same as that governing their contractual
relationship: viz. the law of England. That conclusion is
supported by the fact, as I have stated, that all but one of the
other contractual relationships between all relevant parties are
governed by English law. I repeat: it would seem bizarre for all
those parties’ contractual relations to be governed by one
applicable law, yet hold that the law of another country is to
determine non – contractual rights and obligations.”
139. By contrast, in Dornoch v MUA Aikens J held at [109]:
“Mr Kealey appeared to rely on the fact that, as he submitted,
the Excess Reinsurance is governed by Mauritius law, in order
to invoke section 12 of PILA. I have held, provisionally, that
the proper law of the Excess Reinsurance is English law. But
even if I had concluded to the contrary, that would not help him
establish that the law applicable to the torts of MCB is
Mauritius law. I must confess to finding section 12(1) difficult
to apply in relation to all the issues in this case. Section 12(1)
appears to say that, if having considered the matter under
section 11(2(c) you decide that the most significant elements
lead to the proper law of the tort being that of country A,
nevertheless, you may consider it more appropriate to conclude
that the proper law should be that of country B (‘the other
country’), bearing in mind the factors set out in section 12(2).
But, in this case at least, that involves considering precisely the
same elements all over again. In any event, the fact that the
fraudulent misrepresentations were made in order to induce the
Reinsurers to enter the Excess Reinsurance whose proper law
would be that of Mauritius seems to me to have nothing to do
with the tort in question. Nor does the fact that the Proposal
Form was also used in respect of the direct insurance, which is
governed by Mauritius law.”
140.
In Fiona Trust v Privalov Andrew Smith J held as follows:
“172. The claimants submitted that, nevertheless, the issues relating
to the conspiracy claims are to be determined by English law
because the general rule is displaced by the secondary rule in
section 12 of the 1995 Act; that is to say, that it is apparent that
it is substantially more appropriate for the issues to be
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
determined by English law if the significance of the factors that
connect the tort with Russia are compared with the significance
of the factors that connect the tort with England. The factors
that may be considered in applying the secondary rule are not
limited to where events constituting the tort occurred. The
claimants relied not only upon the considerations that they
invoked in relation to the general rule but also upon the fact
that the contracts and arrangements with yards, purchasers of
vessels, charterers and other third parties whereby the various
schemes were implemented were governed by English law
through the parties’ express choice and in many cases had
jurisdiction or English or London arbitration
English
provisions.
In my
judgment,
173. The law indicated by the general rule is not displaced simply
because on balance, when all factors relating to a tort are
considered, those that connect the tort with a different country
prevail. That would emasculate the general rule. The secondary
rule is applied only if it indicates that another law is
substantially more appropriate.
the
considerations identified by the claimants, including the terms
of the contracts implementing the schemes, are not sufficient to
displace the general rule so as to have any issues relating to the
conspiracy claims in the Fiona actions determined by English
law. On the contrary, when the secondary rule is considered,
the defendants for their part are entitled to invoke “factors
relating to the parties” (see section 12(2) of the 1995 Act), and
so they rely upon the facts that Sovcomflot is the parent
company of a nationalised Russian group of strategic
importance and that the defendants are for the most part
Russian individuals or companies said to be owned or
controlled by Russians. These factors seem to me of more
importance than the terms of the agreements with third parties
through which the schemes were implemented, and, had I not
concluded that the general rule requires the application of
Russian law, I would have accepted the defendants’ submission
that the secondary rule applies and that English or any other
law is displaced in favour of Russian law.
174.
It is true that the schemes said to have been devised by the
conspirators were played out on the international stage. They
implemented their schemes in different countries according to
the business and activity involved. They used companies
incorporated in the BVI and elsewhere. They carried on their
banking and conducted their financial dealings through Swiss
banks. They dealt with sales and purchases of ships and ship
financing transactions through London. Sovcomflot dealt with
charters in Switzerland. Because many of the schemes
concerned sales and purchases and ship financing, much of the
business about which the claimants complain was done through
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
the schemes concerned shipping,
the
London. Because
contractual arrangements by which they were conducted were
governed by English law, as is commonly chosen by the parties
to contracts of this kind. However, the focus of the conspiracy
remained Russian and the collusion was based in Russia
although the schemes were played out elsewhere.”
141. Counsel for VTB relied on the fact that the Facility Agreement, the ISA and the SPA
all contained English law (and English jurisdiction or arbitration) clauses as showing
that, analogously with Trafigura v Kookmin, it was substantially more appropriate for
English law to apply than Russian law.
142. Counsel for the Defendants argued that there was no analogy between Trafigura v
Kookmin and the present case. In Trafigura v Kookmin the letter of credit was central
to the whole case, it meant that there was a direct and pre-existing contractual
relationship between the parties and it formed part of a network of contracts all bar
one of which were subject to English law. In the present case, by contrast, there was
no pre-existing contractual relationship at all. None of the Defendants became party to
the Facility Agreement, the ISA or the Participation Agreement. While Nutritek
became party to the SPA, VTB did not. (Consequently VTB makes no claim either in
contract or in tort concerning that agreement.) In addition, MarCap Moscow and Mr
Malofeev are Russian, while Nutritek and MarCap BVI are BVI companies which
VTB contends are controlled by Mr Malofeev. Accordingly, counsel for the
Defendants submitted that the present case was much closer to Dornoch v MUA and
Fiona Trust v Privalov.
143. Again I find the arguments of counsel for the Defendants more persuasive. While it is
true that, as a result of the deceit and conspiracy, VTB was induced to enter into the
Facility Agreement and the ISA which contained English law clauses, I do not see
that makes it substantially more appropriate to apply English law than Russian law to
the deceit and conspiracy.
Serious issue to be tried
144.
145.
In case I am wrong that Russian law is the applicable law, I must go on to consider
whether, if English law is the applicable law, VTB’s Particulars of Claim and
supporting evidence establish that VTB has a real prospect of success in its claims for
deceit and conspiracy and thus that there is a serious issue to be tried. Save in three
specific respects, the Defendants do not dispute that this is so. I shall consider the
three points of dispute in turn.
(1) No loss. The first point, which is taken by all three Defendants, is that VTB has no
real prospect of success of establishing that it has suffered loss by reason of the
matters complained of. The Defendants’ case is that the only party which has suffered
loss is VTB Moscow. Furthermore, the Defendants contend that this is an issue of law
rather than of fact, and so the court should determine it now.
146. The basic principles are not in dispute. The starting point is the statement of Lord
Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 39:
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
“I do not think there is any difference of opinion as to its being
a general rule that, where any injury is to be compensated by
damages, in settling the sum of money to be given for
reparation of damages you should as nearly as possible get that
sum of money which will put the party who has been injured,
or who has suffered, in the same position as he would have
been in if he had not sustained the wrong for which he is now
getting his compensation or reparation.”
147.
In the case of claims for fraudulent misrepresentation, the position was pithily
summarised by Lord Steyn in Smith New Court Securities Ltd v Scrimgeour Vickers
(Asset Management) Ltd [1997] AC 254 at 284D:
“There is in truth only one legal measure of assessing damages in an
action for deceit: the plaintiff is entitled to recover as damages a sum
representing the financial loss flowing directly from his alteration of
position under the inducement of the fraudulent representations of the
defendants.”
148. The Defendants point out that, as a result of the alleged fraudulent misrepresentations,
VTB entered into two agreements forming part of one overall transaction, namely the
Facility Agreement and the Participation Agreement. Under the Facility Agreement
VTB paid out some US$225 million to RAP, but under the Participation Agreement
VTB received exactly the same sum from VTB Moscow. Accordingly, the
Defendants contend, VTB suffered no loss even if one ignores the arrangement fee
VTB was paid and the subsequent recoveries. Furthermore, the Defendants say that
this analysis is supported both by the terms of the agreements and by the economic
reality that, as the contemporaneous documents and VTB’s own evidence show, it
was VTB Moscow which provided all the sums lent to RAP and which assumed all of
the credit risk.
149. So far as the terms of the agreements are concerned, the Defendants rely in particular
on clauses 4.1.1 and 4.2.3 of the Facility Agreement (which provide that RAP may
not draw down the loan until the conditions precedent are satisfied and VTB has
received the funds from VTB Moscow), clauses 2.1 and 2.2 of the Participation
Agreement (which require VTB Moscow to pay VTB amounts equal to sums paid to
RAP under the Facility Agreement in the same currency and at the same time and
place) and clause 6.3(a) of the Participation Agreement (which gives VTB Moscow
the right to require an assignment or novation of VTB’s rights under the Facility
Agreement in the event of default).
150. So far as the contemporaneous documents are concerned, the Defendants rely upon
statements such as those made in the Applications for Credit Facilities dated 13 and
15 November 2007 (see paragraphs 36 and 37 above) that VTB Moscow “will fully
fund the transaction and fully undertake the credit risk under the transaction”.
151. As for VTB’s evidence, the Defendants rely upon statements such as the following by
Leonty Chernenko (Managing Director of VTBDC) in paragraph 20(B) of his first
witness statement:
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
“VTB Moscow was fully funding the facility before any
drawdowns were made against it pursuant to the Participation
Agreement between VTB and VTB Moscow. The consequence
of the Participation Agreement was that in the event of default
VTB Moscow took responsibility for all the amounts due from
RAP, thereby eliminating credit risk exposure for VTB for the
main credit facility.”
152. The Defendants put their argument in three ways. First, they say VTB simply suffered
no loss at all. Secondly, and in the alternative, they say that VTB was exposed to a
potential future loss which was avoided by reason of the funds it received from VTB
Moscow. Thirdly, in the further alternative, they say that, if and to the extent that
VTB did suffer actual loss, it received a corresponding benefit as a part of the same
continuous transaction induced by the alleged misrepresentations. The Defendants go
on to contend that in these circumstances the burden falls on VTB to establish an
exception to the general rule articulated by Lord Steyn, and that neither the principle
referred to as res inter alios acta nor the exception established in The Albazero [1977]
AC 774 is applicable here.
153. VTB contends that it has suffered an actual loss, and that this is not a case of a
potential future loss avoided or of a corresponding benefit having been received. I
agree with this. My reasons are as follows.
154. As counsel for VTB submitted, it is necessary to focus upon the relevant transaction.
VTB’s case is that, as a result of the misrepresentations, it was induced to enter into
the Facility Agreement. (It was also induced to enter into the ISA, but it is not
necessary for present purposes to analyse that separately.) Under the Facility
Agreement, the lender was VTB, and VTB Moscow was not a party to the agreement.
Furthermore, the funds which VTB advanced to RAP pursuant to the Facility
Agreement belonged (as the Defendants accept) to VTB, not to VTB Moscow. Thus
VTB has suffered a loss consisting of the amounts lent, against which it must give
credit for the net sum recovered.
155. This is not affected by the fact that VTB simultaneously entered into the Participation
Agreement, to which RAP was not a party; nor by the fact that VTB received funds
from VTB Moscow pursuant to the Participation Agreement equal in amount to the
funds which VTB advanced to RAP. As counsel for VTB pointed out, clauses 6.1
paragraphs (a), (b), (c) and (d) of the Participation Agreement are crystal clear that the
relationship of VTB and VTB Moscow is that of debtor and creditor and that VTB
Moscow has no proprietary, equitable or subrogation interest in the Facility
Agreement or in the funds advanced thereunder. The fact that VTB Moscow has the
right under clause 6.3 to call for an assignment or novation makes no difference to
this, since VTB Moscow has not exercised that right. Furthermore, clause 6.4(b)
provides that VTB is to pay the proceeds of enforcement pro rata to VTB Moscow
under the Participation Agreement and in discharge of VTB’s own debt under the
ISA.
156. The Defendants relied on the following passage in the decision of Phillips J (as he
then was) in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2
All ER 769 at 802g-j, a case concerning a syndicated loan:
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
“The banks which joined in the loan transactions by subsequent
syndication reimbursed BBL in respect of part of the loans that
BBL had advanced. They became parties to the loan transaction
by novation and had transferred to them a pro rata share of
BBL’s rights under those transactions including BBL’s interests
in the property securing the transactions. There was thus
transferred from BBL to the syndicate banks a share of the risks
inherent in the loan transactions. BBL contends that the Court
should disregard this transfer of risk and assess damages as if
the subsequent consequences of the transactions were borne
exclusively by BBL. The principle of res inter alios acta
requires the Court to disregard an indemnity received by the
Plaintiff from a third party in respect of the loss caused by the
Defendant. It does not require or permit the Court to assess
damages on the basis of a fiction; to treat losses sustained by
third parties as if they had been sustained by the Plaintiff. The
intervention of the syndicate banks did not indemnify BBL in
respect of consequences of entering into the loan transactions.
It resulted in the syndicate banks suffering those consequences
in place of BBL. The loss claimed by BBL is not loss suffered
by BBL prior to syndication, but loss suffered by all the
syndicate banks after syndication. The principle of res inter
alios acta does not permit BBL to recover damages in respect
of the losses sustained by the syndicate banks.”
157.
In my judgment the present case is clearly distinguishable from Banque Bruxelles. As
can be seen from the passage quoted, in that case the banks which joined in the
syndication became parties to the loan in place of BBL by novation. Thus the banks
suffered the loss, and not BBL. But in the present case there has been no novation of
the Facility Agreement in favour of VTB Moscow. It is immaterial that VTB Moscow
would have its own cause of action for fraudulent misrepresentation or that, from a
commercial or regulatory point of view, VTB Moscow assumed the credit risk.
158. Turning to the second way in which the Defendants put the argument, the Defendants
relied upon Dimond v Lovell [2002] 1 AC 384 and Burdis v Livesey [2002] EWCA
Civ 510, [2003] QB 36. In Dimond v Lovell the claimant’s car was damaged by the
negligence of the defendant. The claimant hired a substitute car. Her potential future
loss consisting of the hire charges was, in the event, avoided because the hire contract
was unenforceable under the Consumer Credit Act 1974. Accordingly, the claimant
was unable to claim the cost of hiring the substitute car, or damages for the loss of use
of her car, from the defendant.
159.
In Burdis v Livesey the issue concerned the costs of repairing the claimant’s vehicle,
which she had financed by borrowing money from a finance company. Again, the
contract was unenforceable. The Court of Appeal distinguished Dimond v Lovell for
reasons which Aldous LJ, delivering the judgment of the Court, expressed as follows:
“84.
In our judgment a fundamental distinction must be drawn, for
present purposes, between repair costs and hire charges. When
a vehicle is damaged by the negligence of a third party, the
owner suffers an immediate loss representing the diminution in
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
85.
86.
87.
value of the vehicle. As a general rule, the measure of that
damage is the cost of carrying out the repairs necessary to
restore the vehicle to its pre-accident condition (see Dimond at
page 1139G per Lord Hobhouse).
In Burdis v Livesey the general rule applied, and it was
common ground that the repairs restored Miss Burdis’ car to its
pre-accident value. Nor was there any issue as to the
reasonableness of the garage’s charges. Thus at the moment
when the accident occurred Miss Burdis suffered a direct and
immediate loss, the measure of which was the cost of the
repairs which were in fact carried out (£2,981.19). But it was
not a condition precedent to the recovery of compensation for
that loss that the car be repaired: Miss Burdis’ cause of action
for the recovery of damages representing the diminution in the
value of her car caused by Mr Livesey’s negligence was
complete when the accident occurred: see The Glenfinlas
(Note) [1918] P 363 and The London Corporation [1935] P 70.
Similarly, a claimant’s damages will not be affected by the fact
that, in the event, the repairs are carried out at no cost to him:
see The Endeavour (1890) 6 Asp MC 511, where the vessel
was repaired but, due to the bankruptcy of the owner, the
repairer was never paid.
By contrast, the hire charges which were sought to be
recovered in Dimond represented a potential future loss,
consequent upon the defendant’s tort, which was recoverable
as damages only if and when it was in fact suffered. In the
language of pleading, the hire charges constituted special
damage. As the judge put it in Seddon v Tekin [2001] GCCR
2865, 2890, in the passage quoted earlier, the hire charges are
‘of the essence of the damage which is consequential loss or
special damage’. Hence in Dimond, because the credit hire
agreement was unenforceable and the hire charges were
accordingly irrecoverable from the claimant, the hire charges
never formed part of the claimant’s loss.
The distinction between an immediate and direct loss on the
one hand and a potential future loss on the other is of
importance for present purposes because it leads to different
treatment of benefits derived from a third party after the
commission of the tort. In every case a claimant’s recoverable
loss is limited to the loss which he has actually suffered –
damages in the tort of negligence are, after all, ‘purely
compensatory’ (see per Lord Bridge in Hunt v Severs [1994] 2
AC 350, 357H) – but the process of determining, in the light of
subsequent events, what loss the claimant has actually suffered
differs according to whether the loss was suffered when the tort
was committed (direct loss) or whether it was suffered
subsequently (consequential loss).
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
88.
…
91.
92.
In a case of direct loss, subsequent events will operate to
reduce or extinguish the loss only in so far as such events are
referable to the claimant’s duty to mitigate his loss, and hence
referable in a causative sense to the commission of the tort: see
the British Westinghouse case [1912] AC 673 and Koch
Marine Inc v D’Amica Societa di Navigazione ARL [1980] 1
Lloyds’s Rep 75. In the Koch Marine case, Robert Goff J said,
at p 88: ‘what is alleged to constitute mitigation in law can
only have that effect if there is a causative link between the
wrong in respect of which damages are claimed and the action
or inaction of the plaintiff.’
In our judgment, the authorities to which we have so far
referred establish that subsequent events which are not
referable in a causative sense to the commission of the tort, that
is to say events which, on a true analysis, are collateral to the
commission of the tort, or res inter alios acta, or too remote –
we regard these expressions as interchangeable – do not affect
the measure of a direct loss suffered when the tort was
committed.
In the case of potential future losses, on the other hand, the
general rule is that to the extent that such a loss is in fact
avoided (for whatever reason) it is a loss which is never
suffered and which is accordingly irrecoverable for that reason.
… ”
160. Applying this reasoning, I consider that VTB’s loss when it entered into the Facility
Agreement and advanced the loans to RAP was an immediate and direct loss, and not
a potential future loss. VTB’s cause of action was complete at the moment it credited
Tranche A to RAP’s account pursuant to the Facility Agreement. It suffered an
immediate and direct loss at that moment, since the security it received in return under
the Facility Agreement was inadequate to cover the sums lent. It is therefore
immaterial that it simultaneously received money from VTB Moscow under the
Participation Agreement.
161. Turning to the third way in which the Defendants put the argument, the Defendants
relied upon Primavera v Allied Dunbar Assurance plc [2002] EWCA Civ 1327,
[2003] PNLR 12. In that case the claimant had been given negligent pensions advice.
The negligence involved two misrepresentations by the defendant relating to the
payments needed to be made by the claimant to realise a tax-free fund. The first
misrepresentation was made
that
misrepresentation had not been made, the claimant would have made larger payments
than he did, which would have resulted in a larger tax-free fund becoming available to
him in 1995 than was the case. The second misrepresentation was made at the time of
the discovery of the first misrepresentation in 1995, and discovered in 1997. This
meant the claimant took no action until 1997. As a result of the discovery in 1997, the
claimant then made extra payments which resulted in a larger tax-free fund becoming
available to him in 2000. The claimant claimed various heads of loss. The defendant
in 1987, and discovered
in 1995.
If
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
contended that the overall effect of the negligence was, in the events which had
happened, to lead to the claimant making a substantial gain rather than a loss. In
simple terms, the difference between the parties was as to the date as at which the loss
should be assessed. The claimant contended that it should be assessed as at 1995, with
the consequence that he had a fund which was then worth £101,000 less than it should
have been. The defendant contended that it should be assessed as at 2000, with the
consequence that he then had a larger fund due to intervening gains in the market.
162. All three members of the Court of Appeal held that it was appropriate to adopt the
approach taken by Mustill LJ (as he then was) in Hussey v Eels [1990] 2 QB 227 at
241 and to ask, as Simon Brown LJ (as he then was) put it at [20]:
““Did the negligence which caused the damage also cause the
profit”? Was the increased value of the fund consequent on its
retention “part of a continuous transaction of which [the
appellants’ negligence] was the inception”? Or did the
negligence merely provide the opportunity for the respondent to
gain the benefit and not itself cause it?”
On the facts, the Court held that the loss should be assessed as at 1995, since the gain
realised by the claimant after 1995 was caused by the claimant’s own actions (and the
advice of subsequent advisors) from 1997 onwards rather than by the defendant’s
negligent misrepresentations, albeit that the latter had provided the opportunity to
make the gain.
163. Counsel for VTB submitted that Primavera v Allied Dunbar was to be distinguished
from the present case because it concerned a situation in which the claimant knew
about the misrepresentations at the time he took the steps which led to the gain,
whereas in the present case VTB did not know about the misrepresentations at the
time it entered into the Participation Agreement. While this is factually accurate, and
germane to VTB’s argument based on res inter alios acta, it does not appear to me to
be significant with regard to the test applied by the Court of Appeal in that case. If
one applies that test to the facts of the present case, however, the conclusion I reach is
that profit which VTB made under the Participation Agreement was not part of the
same transaction for this purpose as the loss it suffered under the Facility Agreement.
Rather, it was a separate, independent transaction between different parties on
different terms, albeit forming part of one overall transaction together with other
agreements.
164. Another route to the same conclusion is the principle of res inter alios acta invoked
by VTB. In this connection, VTB relied upon Interallianz Finance AG v Independent
Insurance Co Ltd (unreported, Thomas J, 4 June 1997). In that case Interallianz
claimed for losses it made on a loan to a company called Iris as a result of the
negligence of the defendant surveyors Allsop. Allsop contended that Interallianz’s
damages should be limited to 12.56% of the amount claimed because, after the loan
had been drawn down, it had entered into sub-participation agreements with five other
banks. The effect of the sub-participation agreements was that Interallianz only had to
find 12.56% of the sum lent from its own resources. Each of the sub-participation
agreements provided that the relationship between Interallianz and the bank was that
of debtor and creditor and that Interallianz was entitled to receive all principal,
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
interest and other monies payable under the loan agreement. Interallianz remained the
only party in a contractual relationship with Iris.
165.
Interallianz contended that it had suffered loss representing the difference between the
valuation given by the defendant and a correct valuation and that the sub-participation
agreements made no difference either because the sub-participation agreements were
res inter alios acta or because the claimant was under a duty to account to the other
banks for their respective shares of the recovery. Thomas J accepted both these
contentions.
166. So far as the first contention is concerned, he expressed his reasons at p. 73 of the
transcript as follows:
“Taking into account the important consideration that the sub-
participation agreements were made at a time when Interallianz
had no knowledge of Allsop’s breach of duty or of any damage
flowing from it and thus did not arise out of the breach of duty
or the loss but were wholly independent of it, I do not consider
that the sub-participation agreements should be brought into
account to reduce the damages that Allsop would otherwise
have to pay. The sole relationship that Allsop had was with
Interallianz and the sole relationship that Iris had was with
Interallianz. They in fact obtained security for their loan to Iris
of a value less than they had been told by Allsop; they suffered
that loss on draw down. The fact that they entered into
independent arrangements with others which had
the
consequence that loans to them by the sub-participants do not
have to be repaid is a matter that is in my judgment collateral
and does not have to be brought into account. There is nothing
unjust or unreasonable in that conclusion.”
167.
He went on to distinguish the Banque Bruxelles case on the ground that in that case
there had been a novation as discussed above.
I agree with counsel for VTB that this reasoning is equally applicable to the present
case. The Defendants argued that the present case was to be distinguished from
Interallianz on the ground that the Facility Agreement and the Participation
Agreement were not independent transactions, but formed part of the same
transaction, and that upon VTB’s own evidence both agreements had been induced by
the same misrepresentations. The key point to my mind, however, is that in both cases
the relationship between the lender (VTB or Interallianz) and the participant(s) (VTB
Moscow or the other banks) was one of debtor and creditor and thus was legally
independent from the relationship between the lender and the borrower (RAP or Iris).
In both cases the consequence was that the lender suffered a loss on the loan even
though it also received money from the participant(s).
168. Thomas J went on to hold that Interallianz were under a duty to account to the other
banks from their shares of the sums recovered by Interallianz from Allsop on the basis
that this was an implied term of the sub-participation agreements, although he rejected
Interallianz’s argument that this was expressly provided for in the sub-participation
agreements. Similarly in this case, VTB contends that it is under a duty to account to
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
169.
170.
VTB Moscow either by virtue of clause 3.2 of the Participation Agreement or by
virtue of an implied term. Subject to the fact that I consider that the relevant term of
the Participation Agreement is clause 6.4(b) rather than clause 3.2, I accept VTB’s
contention that it is under an express duty to account to VTB Moscow. If I am wrong
about that, I would hold that it was necessary to imply a term to that effect to give the
Participation Agreement business efficacy notwithstanding
the detailed and
apparently carefully drafted nature of the express terms.
In these circumstances it is not necessary to say much about The Albazero. Counsel
for VTB accepted that, as the law stood, this exception only applied to claims in
contract and not tortious claims such as the present one. In my judgment there is no
basis for extending this exception to the present case.
(2) No joint liability of MarCap BVI. MarCap BVI contends that VTB has no real
prospect of establishing either that MarCap BVI is jointly liable in respect of the
deceit alleged or that it participated in the alleged conspiracy. It is common ground
that the question whether a person is party to a conspiracy is essentially the same as
whether he is liable as a joint tortfeasor by reason of having participated in a common
design: see Clerk & Lindsell on Torts (20th ed) at §24-94. It is not necessary to show
that that person himself committed the tort: see Dadourian Group International Inc v
Simms [2009] EWCA Civ 169, [2009] 1 Lloyd’s Rep 601 at [84] (Arden LJ).
171. VTB’s pleaded case against MarCap BVI is as follows. In paragraph 67(a) of the
Particulars of Claim VTB alleges that all of the Defendants acted in concert pursuant
to a common design to induce VTB to enter into the Facility Agreement. In paragraph
68 VTB pleads the matters it relies upon in support of its claim that MarCap BVI,
MarCap Moscow and Mr Malofeev were parties to the conspiracy as follows:
“a. Marcap [defined previously to mean ‘the Marshall Capital
group of companies’], through MarCap BVI, had de facto
control of and beneficially owned in part Nutritek at the time of
the Facility Agreement and SPA.
b.
c.
d.
e.
f.
Marcap stood to benefit from the deceit on VTB.
Marcap was heavily involved in the negotiations leading to the
Facility Agreement and SPA and the provision of information
in relation thereto as explained in detail above.
The whole transaction under which VTB was defrauded was
co-ordinated by Marcap.
The whole transaction was introduced to VTB/ VTB (Moscow)
by Mr Malofeev and it is clear from the discussions he had
with Mr Tulupov that Mr Malofeev was closely involved in the
then proposed transaction.
Further, it is apparent from the matters set out in section A
above that Mr Malofeev exercises substantial control over the
affairs of Marcap.
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VTB v Nutritek
g.
Given the fraudulent nature of the scheme to extract funds
from VTB, it is inconceivable that it would have taken place
without Mr Malofeev’s approval and encouragement.”
172. VTB then alleges in paragraph 69:
“The only inference that can reasonably be drawn is that
Marcap group and Mr Malofeev were party to a conspiracy
with Nutritek to defraud VTB. Further, it is reasonable to infer
that the Marcap companies involved included not only Marcap
Moscow (which was directly involved in the negotiations) but
also by Marcap BVI which owned at least a little under half of
Nutritek.”
173. Counsel for MarCap BVI submitted that there was simply no basis in either the
pleading or VTB’s evidence for the inference sought to be drawn in the second
sentence of paragraph 69. In summary, he argued that the claim against MarCap BVI
depended on the attribution to it of the acts of one or more human beings: see
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC
500 at 506B-507B (Lord Hoffmann). The only human being referred to in paragraphs
67-69 of the Particulars of Claim was Mr Malofeev. It was not alleged that Mr
Malofeev had express authority or ostensible authority to act on behalf of MarCap
BVI. At best, the allegation was one of implied authority. On the most generous
reading of the Particulars of Claim, the only pleaded bases for that allegation were
that (i) MarCap BVI was one of the companies in the chain of ownership of Nutritek,
(ii) to that extent MarCap BVI stood to benefit from the proposed transaction and (iii)
MarCap BVI was substantially controlled by Mr Malofeev. That was not a sufficient
basis for the implication of authority since it was no more consistent with Mr
Malofeev having acted as agent for MarCap BVI than with his not having done so:
see The Aramis [1989] 1 Lloyd’s Rep 213 at 224 (Bingham LJ, as he then was).
174. No doubt recognising the force of this argument, counsel for VTB sought to rely on
various unpleaded matters to bolster VTB’s case against MarCap BVI. Some of these
matters related to MarCap Moscow, such as the role of Mr Leonov. As such they do
not advance VTB’s case against MarCap BVI at all. More significantly, counsel also
relied on evidence concerning one of the two directors of MarCap BVI at the time of
the Facility Agreement, a Swiss lawyer called Phillipe Houman. Under clause 21.23
of the Facility Agreement, RAP was required to obtain the balance of the purchase
price payable under the SPA by way of subordinated loan. As noted in paragraph 43
above, on 26 November 2007 Leskata entered into a loan facility agreement with
Migifa and at around the same time Leskata may have entered into a loan agreement
with Migifa. Counsel pointed out that the former document was signed on behalf of
Leskata by Mr Houman and that the signatory named on behalf of Leskata on the
latter document (although he had not actually signed it) was again Mr Houman.
Counsel also pointed out that Mr Houman had signed another loan agreement between
Madinter and RAP dated 28 January 2009 and that he had been involved in executing
documents in September 2011 when Mr Malofeev had attempted to get the WFO
discharged by providing certain undertakings in respect of his interest in Rostelecom
shares (as to which, see below).
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VTB v Nutritek
175.
In my judgment these additional matters do not support the pleaded case against
MarCap BVI. All they show is that Mr Houman had authority to sign documents on
behalf of other companies which are, or appear to be, connected to Mr Malofeev.
Furthermore, the execution of documents in January 2009 and September 2011
occurred well after it is alleged by VTB was fraudulently induced to enter into the
Facility Agreement.
176. As for the pleaded case, I accept the submissions of counsel for MarCap BVI
summarised above. I therefore conclude that there is no serious issue to be tried
between VTB and MarCap BVI.
177.
(3) No joint liability of Mr Malofeev. Mr Malofeev contends that VTB has no real
prospect of establishing either that he is jointly liable in respect of the deceit alleged
or that he participated in the alleged conspiracy. I have set out VTB’s pleaded case
against Mr Malofeev above.
that VTB had no real prospect of success
178. Counsel for Mr Malofeev’s argument proceeded in two stages, as follows. First, he
submitted
the
misrepresentation as to the absence of common control. To this end, he undertook a
root and branch attack on VTB’s case that the representation had been made, or if
made relied upon by VTB, although he also argued that in any event there was no
evidence of Mr Malofeev’s involvement in any such misrepresentation. Secondly, he
submitted that, in the absence of any case on the misrepresentation as to the absence
of common control, VTB had no real prospect of successfully establishing that Mr
Malofeev was jointly liable in respect of the misrepresentation as to the value of the
Dairy Companies.
in establishing
179. The first stage of counsel’s submission involved a detailed analysis of the evidence
concerning the alleged representation and VTB’s alleged reliance thereon. In my
view, this exercise amounted to a mini-trial on the documentary material before the
court without the benefit of disclosure or cross-examination. I do not propose to
lengthen this judgment still further by repeating the exercise. It suffices to say that,
having considered all the evidence, I am quite satisfied that VTB has a real prospect
of establishing that the representation was made and relied upon. I will nevertheless
comment on two of the main points counsel made.
180. The first concerns the emails dated 6 and 8 November 2007 (see paragraphs 29-30
above). Counsel submitted that there was no evidence as to the source of the
ownership information contained in the 6 November email and no evidence to
confirm that the source of the ownership information in the 8 November email was
Nutritek. I am unimpressed by this submission. It is fair to say that in his witness
statement Mr Tulupov appears simply to rely upon the emails themselves.
Nevertheless the 8 November email clearly attributes the information contained to
“Nutritek management”. As for the 6 November email, it is reasonable to infer that
the information emanated either from Nutritek or MarCap Moscow. In any event,
those two emails do not stand alone. On the contrary, they form but a part of the
evidence relied upon by VTB as establishing that the representation was made.
181. The second concerns the issue of reliance. Counsel pointed out (among other things)
that the first and second draft term sheets (see paragraphs 14-15 above) identified
MarCap Moscow as the beneficiary of the borrower and that there was no evidence of
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VTB v Nutritek
any due diligence having been carried out in relation to Mr Alginin. Counsel
submitted that these points showed that VTB Moscow, and hence VTB, didn’t care
who owned RAP. Again, I am unimpressed by this. The term sheets were early drafts.
Mr Tulupov says that at this stage all he meant to indicate was that US$50 million
would come from someone other than VTB Moscow. In any event, the third draft
differed in this respect. As for Mr Alginin, it may be the case that VTB Moscow could
and should have done more to investigate his involvement; but it does not necessarily
follow that it did not rely on the representations made about him. Mr Tulupov’s
evidence is that VTB Moscow did rely on them.
182. Since I do not accept the first stage of counsel’s argument, it is not necessary to
address the second stage. Nevertheless, I have considered whether the evidence
establishes that VTB has a real prospect of establishing that Mr Malofeev was jointly
liable for each of the two fraudulent misrepresentations. In my judgment, it does.
183.
I therefore conclude that there is a serious issue to be tried between VTB and Mr
Malofeev.
The gateway
184. VTB relies upon paragraph 3.1(9)(i) of Practice Direction 6B as founding jurisdiction
for its tort claim. The Defendants dispute that VTB has a good arguable case that it
has sustained damage within the jurisdiction, but only on the ground that, as a matter
of law, VTB has suffered no loss at all. I have already considered and rejected that
contention.
Forum non conveniens
185. Even if VTB establishes that there is a serious issue to be tried on the merits and that
it has a good arguable case that the claim falls within of the one of the classes of case
in which permission to serve out may be granted, it must also satisfy the court that in
all the circumstances England is clearly or distinctly the appropriate forum, and that in
all the circumstances the court ought to exercise its discretion to permit service out.
Lord Goff’s speech in Spiliada v Cansulex establishes that this question is to be
approached in two stages. The first stage is to ask whether England is clearly and
distinctly the natural forum, that is to say, the forum “with which the action has the
most real and substantial connection”. If England is not the natural forum, the second
stage is to ask whether England is nevertheless the appropriate forum, in particular
because there is a real risk that the claimant will not obtain substantial justice in the
natural forum.
186. Stage 1. The factors that may be taken into account in determining which is the
natural forum for the action include: (a) the personal connections which the parties
have to the countries in question; (b) the factual connections which the events relevant
to the claim have with those countries; (c) factors affecting convenience or expense
such as the location of the witnesses or documents; and (d) the applicable law.
187. Counsel for VTB submitted that England was the natural forum because (i) VTB is
English, (ii) the misrepresentations were relied upon in England, (iii) the money was
lent and the loss sustained in England, (iv) the Facility Agreement, ISA, the
Participation Agreement and the SPA contain English law and English jurisdiction or
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VTB v Nutritek
arbitration clauses and (v) the applicable law is English law. I do not consider that any
of these factors points strongly to England being the natural forum in the present case.
So far as (i) is concerned, VTB is controlled by VTB Moscow. As to (ii), as explained
above, it seems to me that VTB’s reliance was wholly secondary to that of VTB
Moscow. In relation to factor (iii), the loss was sustained because Russian assets
provided inadequate security. As to (iv) and (v), the English law clauses are
immaterial once it is concluded, as I have, that the law applicable to the tort is Russian
law. The English jurisdiction and arbitration clauses are a pointer to England, but not
a strong one given that the claim is a tort claim not a contract claim.
188. Counsel for the Defendants submitted that the following factors pointed to Russia
being the natural forum. First, the connections of the parties to Russia. VTB is
controlled by VTB Moscow, which is Russian. Furthermore, the litigation is being
managed by VTBDC, which is also Russian. MarCap Moscow and Mr Malofeev are
Russian. It is common ground that Nutritek was managed from Russia, and VTB’s
case is that Mr Malofeev controls both Nutritek and MarCap BVI. Furthermore, it is
VTB’s case that Mr Malofeev orchestrated the fraud, primarily through MarCap
Moscow.
189. Secondly, the connections of the events constituting the torts to Russia. The
transaction was introduced to VTB Moscow at meetings between Russian individuals
in Russia. The negotiations mainly took place in Russia. The misrepresentations were
made and mainly received in Russia. The more important misrepresentation
concerned the performance of the Dairy Companies, which are Russian companies.
The 2007 E&Y Valuation was a valuation by Ernst & Young’s Moscow office and
was based on information provided by Nutritek’s Russian management. The
misrepresentations were primarily relied upon by VTB Moscow acting through its
Credit Committee and Management Board in Russia. It was VTB Moscow and
VTBDC which primarily dealt with RAP’s default and enforcing the security. The
secured assets were in Russia. The discovery of the fraud took place in Russia.
Although the loss was sustained by VTB in England, as discussed above the ultimate
economic impact is in Russia.
190. Thirdly, most of the witnesses are Russian and many of the documents are in Russian
and located in Russia. So far as the witnesses are concerned, there are a considerable
number of relevant Russian witnesses from VTB Moscow, VTBDC, Ernst & Young,
Nutritek (Mr Skuratov and the managers of the Dairy Companies), MarCap Moscow
(Mr Leonov, Mr Provotorov, Ms Tyurina and Mr Popov as well as Mr Malofeev) and
RAP (Ms Kremneva and Mr Pankov). Other potential Russian witnesses include Mr
Sazhinov and Mr Alginin. By contrast, there are relatively few material witnesses
from VTB. The two most important ones appear to be Ms Bragina and Mr Ryzhkov.
Both have left VTB (as has Mr Thunem). It appears that Mr Ryzhkov is in Russia,
while VTB’s evidence is that Ms Bragina is “believed to be” in England. Although
Mr Ryzhkov has been contacted about the matter, it does not appear that Ms Bragina
had been.
191. As counsel for the Defendants pointed out, it is striking that all of VTB’s witness
statements in support of its application for permission to serve out, other than one
from its solicitor, were made by Russian witnesses. In addition to the statements of
Mr Tulupov and Mr Chernenko, these consisted of:
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VTB v Nutritek
i)
ii)
iii)
a statement made by Andrey Puchkov, Deputy Chairman of VTB Moscow,
which among other matters dealt with VTB Moscow’s reliance on the
misrepresentations alleged, Mr Puchkov having been present at
the
Management Board meeting on 13 November 2007 at which the transaction
was approved;
a statement made by Vadim Muraviev, Head of the Division of Distressed
Debt Settlements at VTB Moscow, who gave evidence as to VTB’s reliance on
the misrepresentations alleged based on interviews with four English
employees of VTB including Mr Magee and Mr Pasek; and
a statement made by Denis Zemlyakov, General Director of VTBDC, who
gave evidence concerning RAP’s default and the enforcement of the security.
192.
In addition, VTB relied on two draft statements from Alexander Buryan and Irina
Leonova, who were employed by RAP as Vice-President and Chief Accountant.
Furthermore, since then a number of statements have been made by Arthur Klaos of
VTBDC, in the most recent of which Mr Klaos relays information provided to him by
(among others) Mr Ryzhkov and Alexander Yastrib (at the time Senior Vice President
of VTB Moscow and now a board member of the Bank of Moscow).
193. While the four VTB employees interviewed by Mr Muraviev are evidently material
witnesses to VTB’s claim (although Mr Magee and Mr Yates appear to have had more
involvement in the transaction than Mr Pasek or the fourth employee Julia Ferris), it is
clear that they are of secondary importance compared to Ms Bragina and Mr
Ryzhkov, let alone Mr Tulupov and his colleagues in Moscow. If the claim is tried in
England, witnesses located in Russia will not be compellable except by means of
letters rogatory. Even if they are prepared to give evidence voluntarily, they may not
be prepared to come in person, necessitating evidence being given by videolink. Even
if they are prepared to come in person, they are likely to require interpreters. As for
the documents, many of these have required or will require translation. It is true that
the agreements are mainly in English, and that these are important documents, but
these and other documents in English form a relatively small proportion of the
relevant documents even at this stage of the proceedings.
194. Fourthly, counsel for the Defendants submitted that the applicable law was not a
strong factor in favour of England even if it was English law. It is clear from the
expert evidence before the court (as to which, see below) that the Russian courts can
receive expert evidence as to English law. Furthermore, the key issues in the case are
likely to be factual rather than legal. In the event, of course, I have concluded that the
applicable law is Russian law, which supports the conclusion that Russia is the natural
forum.
195.
In my judgment, taking all the factors considered above into account, the natural
forum is Russia.
196. Stage 2. The House of Lords made it clear in Amin Rasheed v Kuwait Insurance Co
[1984] AC 50 that, in exercising its discretion, it is not normally appropriate for the
court to compare the quality of justice obtainable in a foreign forum which adopts a
different procedural system (such as that of the civil law) with that obtainable in a
similar case conducted in an English court. As Lord Wilberforce said at 72D, “It is
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VTB v Nutritek
not appropriate … to embark upon a comparison of the procedures, or methods, or
reputation or standing of the courts of one country as compared with those of
another”.
197. Although earlier cases had suggested that it was relevant to enquire whether or not a
stay or refusal of permission to serve out would deprive the claimant of a “legitimate
personal or juridical advantage”, the correct approach to this question was explained
by Lord Goff in Spiliada v Cansulex at 482D-F:
“…as Oliver L.J. [1985] 2 Lloyd’s Rep. 116, 135, pointed out
in his judgment in the present case, an advantage to the plaintiff
will ordinarily give rise to a comparable disadvantage to the
defendant; and simply to give the plaintiff his advantage at the
expense of the defendant is not consistent with the objective
approach inherent in Lord Kinnear’s statement of principle in
Sim v. Robinow, 19 R. 665, 668.
The key to the solution of this problem lies, in my judgment, in
the underlying fundamental principle. We have to consider
where the case may be tried ‘suitably for the interests of all the
parties and for the ends of justice.’ Let me consider the
application of that principle in relation to advantages which the
plaintiff may derive from invoking the English jurisdiction.
Typical examples are: damages awarded on a higher scale; a
more complete procedure of discovery; a power to award
interest; a more generous limitation period. Now, as a general
rule, I do not think that the court should be deterred from
granting a stay of proceedings, or from exercising its discretion
against granting leave under R.S.C. Ord. 11, simply because the
plaintiff will be deprived of such an advantage, provided that
the court is satisfied that substantial justice will be done in the
available appropriate forum.”
198. Lord Goff returned to this point in Connelly v R.T.Z. Corporation plc (No 2) [1998]
AC 854 at 872G – 873A:
“From the discussion [in Spiliada v Cansulex], a general
principle may be derived, which is that, if a clearly more
appropriate forum overseas has been identified, generally
speaking the plaintiff will have to take that forum as he finds it,
even if it is in certain respects less advantageous to him than
the English forum. He may, for example, have to accept lower
damages, or do without the more generous English system of
discovery. The same must apply to the system of court
procedure, including the rules of evidence, applicable in the
foreign forum. This may display many features which
distinguish it from ours, and which English lawyers might think
render it less advantageous to the plaintiff. Such a result may in
particular be true of those jurisdictions, of which there are
many in the world, which are smaller than our own, and are in
consequence lacking in financial resources compared with our
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VTB v Nutritek
own. But that is not of itself enough to refuse a stay. Only if the
plaintiff can establish that substantial justice cannot be done in
the appropriate forum, will the court refuse to grant a stay …”
199. Examples of factors that are generally ignored include:
i)
ii)
iii)
iv)
v)
the comparative level of disclosure: see Spiliada v Cansulex at 482E-G;
different rules of evidence or provision for cross-examination: see RTZ v
Connelly at 873 and Ceskoslovenska Obchodni Banka AS v Nomura
International plc [2003] ILPR 20 at [17] (Jonathan Sumption QC sitting as a
Deputy High Court Judge);
the experience of the foreign court in trying particular types of case: see The
Varna (No 2) [1994] 2 Lloyds Rep 41 at 48 (Clarke J, as he then was) and
Ceskoslovenska v Nomura at [15];
the duration of proceedings in the natural forum unless the delay would be
excessive: compare The Vishva Ajay [1989] 2 Lloyd’s Rep 558 with
Radhakrishna Hospitality Service Private Ltd v EIH Ltd [1999] 2 Lloyd’s Rep
249, Chellaram v Chellaram (No 2) [2002] EWHC 632 (Ch), [2002] 3 All ER
17 and Ceskoslovenska v Nomura;
the claimant’s prospects of success: see Dicey, Morris & Collins on The
Conflict of Laws (14th ed) at §12-033.
200. On the other hand, the burden can be satisfied by showing that there is a real risk that
the claimant will not obtain substantial justice in the foreign forum, although this will
weigh less heavily in the exercise of the court’s discretion than evidence that justice
“will not” be obtained: see AK Investments v Kyrgyz at [91]-[95] and Pacific v Surkis
at [31]-[35].
201.
In the present case VTB relies on certain features of Russian law and procedure as
meaning that it either will not or may not be able to obtain substantial justice in
Russia. The parties have adduced a considerable quantity of expert evidence directed
to this question. This reveals certain conflicts of evidence between the parties’
respective experts. To my surprise, counsel were unable to direct me to any authority
as to the correct approach to such conflicts on an application such as the present.
Obviously, I cannot resolve the conflicts without cross-examination. Nor is it
necessary for me to do so given that it is sufficient for VTB to establish that there is a
real risk that it will not be able to obtain substantial justice in Russia. Nevertheless,
counsel were, I think, more or less agreed by the end of the hearing that I was both
entitled and obliged to consider the quality of the evidence, taking into account factors
such as the experience of the experts, the cogency of their reasoning and the materials
relied upon to support it.
202. VTB relied upon the evidence of two experts. The first is Professor Peter Maggs. He
is a Professor of Law and the holder of the Clifford M and Bette A Carney Chair at
the University of Illinois College of Law, specialising in Russian law, law of the other
Soviet republics and law of the former Soviet Union. He has taught these subjects at
the University of Illinois since 1964. He is author, co-author, co-editor, translator or
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VTB v Nutritek
co-translators of a dozen books and numerous articles on Soviet and Russian law,
including a translation of the Russian Civil Code and a book entitled Law and Legal
System of the Russian Federation. It is clear that he has extensive academic
knowledge of the Russian legal system, but he has little practical experience of
litigating in Russian courts.
203. The second expert is Mikhail Rozenberg. He is a qualified Russian lawyer. He has
been practicing law in Russia for over 30 years. He is now Senior Partner of the
Moscow office of Chadbourne & Parke LLP. His experience includes both civil and
criminal cases in Russia.
204. Nutritek’s expert is Professor Vladimir Yarkov. He has held the Chair of Civil
Procedure at the Urals State Law Academy and been a Professor in the Russian
School of Private Law since 1996. He has been a Visiting Professor at Université
Paris Ouest Nanterre La Défense since 1998. Among his other positions, he is editor-
in-chief of the journal Arbitration and Civil Procedure and of a yearbook of civil and
arbitration process. He has authored over 500 publications, including contributions to
over 40 books. Among these are the 7th edition of the textbook Civil Procedure and
the 3rd edition of Comments on the Russian Civil Code. It does not appear that
Professor Yarkov has practical experience of litigating in Russian courts, but
nevertheless it is clear that he has considerable expertise in civil procedure.
205. MarCap BVI’s and Mr Malofeev’s expert is Dr Alexander Muranov. He is a qualified
Russian lawyer. He has practised for 17 years, and has been managing partner of
Muranov, Cherkyakov and Partners Law Firm since 2003. He has also been a
Professor of the Russian School of Private Law since 2009, specialising in conflicts of
international commercial arbitration and
laws,
international trade law. He is the author of over 90 articles and several books.
international civil
litigation,
206. Although a considerable number of issues were canvassed in the expert reports, in his
submissions counsel for VTB concentrated on three points. I will consider these in
turn.
207. Competition of claims and the need for the contract to be invalidated first. It is
common ground between the experts that under Russian law claims equivalent to
VTB’s claims in deceit and conspiracy would fall under Article 1064 of the Russian
Civil Code. It is also common ground between the experts that there is a principle of
Russian law which prohibits what is referred to as “competition between claims”.
VTB contends, in reliance upon the evidence of Mr Rozenberg, that: (1) as a result of
the principle of competition of claims, it would be necessary for VTB to have the
Facility Agreement declared invalid under Article 179 of the Russian Civil Code
before it could bring a claim under Article 1064; but (2) it is not possible for VTB
now to have the Facility Agreement declared invalid because it has affirmed the
agreement by obtaining judgments based on it.
208. Article 1064 provides (in the second revised edition of a translation by Professor
Maggs and a colleague):
“1.
Harm caused to the person or property of a citizen and also
harm caused to the property of a legal person shall be subject
to compensation in full by the person who has caused the harm.
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VTB v Nutritek
A statute may play a duty for compensation for harm on a
person who is not the person that caused the harm. A statute or
contract may establish a duty for the person who caused the
harm
to
the victim compensation
compensation for the harm.
in addition
to pay
2.
3.
The person who has caused
is freed from
compensation for the harm if he proves that the harm was
caused not by his fault. A statute may provide for
compensation for the mark even in the absence of fault of the
person who caused the harm.
the harm
lawful actions shall be subject
Harm caused by
to
compensation in the cases provided by a statute. Compensation
for harm may be refused if the harm was caused at the request,
or with the consent, of the victim, and the actions of the person
who caused the harm do not violate the moral principles of
society.”
209. Article 179 provides:
“1.
2.
A transaction made under the influence of fraud, duress, threat,
an ill-intentioned agreement of the representative of one party
with another party, and also a transaction that a person was
compelled to make as a result of the confluence of harsh
circumstances on conditions extremely unfavourable for
himself that the other party used (an oppressive transaction)
may be declared invalid by a court on suit of the victim.
If a transaction is declared invalid by a court on one of the
bases indicated in paragraph 1 of the present Article, then the
other party shall return to the victim everything it received
under the transaction and, if it is impossible to return it in kind,
its value in money shall be compensated. Property received
under the transaction by the victim from the other party and
also due to it in compensation for that transaction shall be
transferred to the income of the Russian Federation. If it is
impossible to the transfer the property to the income of the
state in kind, its value in money shall be taken. In addition the
victim shall be compensated by the other party for the actual
damage caused to him.”
210. Counsel for the Defendants submitted that, on analysis, Mr Rozenberg’s own
evidence shows that the principle of competition between claims does not apply in the
present circumstances. In paragraph 38 of his report, Mr Rozenberg describes the
principle as follows: “where the law prescribes a specific cause of action, the
claimant, in order to succeed, should proceed with this specific cause of action”. As
he accepts in paragraph 52 of his report, “a claim against a third party (i.e. not RAP)
would need to be brought under Article 1064”. Thus Mr Rozenberg accepts that
Article 179 would not provide the basis for VTB to bring a claim against the
Defendants. Counsel for the Defendants submitted that it followed that there was no
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VTB v Nutritek
competition between a claim by VTB against RAP for a declaration that the Facility
Agreement was invalid under Article 179 and a claim in tort by VTB against the
Defendants under Article 1064.
211. As counsel for the Defendants pointed out, the evidence of both Professor Yarkov and
Dr Muranov supports this analysis. As Professor Yarkov put it in paragraph 18 of his
third report, “Whether the Facility Agreement has been invalidated against the
counterparty, RAP, [under Article 179] is irrelevant to whether compensation can be
obtained from third parties, such as the respondents, under Article 1064.”
212. Furthermore, this point was not advanced by Professor Maggs in his first report on
behalf of VTB. Indeed, he did not refer to Article 179 or the principle of competition
of actions. Although Professor Maggs did refer to the point in paragraph 57 of his
second report, he dealt with it very cursorily. Moreover, Professor Maggs disagrees
with other aspects of Mr Rozenberg’s evidence.
213.
In my judgment the points made by counsel for the Defendants are cogent. I am not
satisfied that there is a real risk that VTB will not be able to obtain substantial justice
in Russia for this reason.
214. The need for a criminal prosecution first. VTB contend, again in reliance on the
evidence of Mr Rozenberg, that a civil claim for fraud by VTB could not succeed
without a prior criminal conviction of the Defendants.
215. Counsel for the Defendants submitted that this proposition was unsustainable for four
reasons. First, Mr Rozenberg’s evidence is internally inconsistent with regard to this
point. In paragraph 63 of his report, he says that “a civil claim based on allegations of
fraud … cannot succeed unless a Russian court in criminal proceedings has found …
that a crime has been committed [emphasis added]”. By contrast, in paragraph 57 he
merely says that “in the absence of criminal findings courts are reluctant to rule in
favour of claimants in such disputes [emphasis added]”. Furthermore, in paragraph
78, he says that “an independent civil claim alleging fraud may only be successfully
be granted by a court in the absence of any finding or court’s verdict under criminal
case in the following cases: … (ii) clear evidence confirming the elements of the tort
claim were submitted to the court.” As counsel pointed out, this clearly acknowledges
that it is possible to succeed in a civil claim without a prior criminal conviction if
clear evidence is submitted. One might say that the approach of the English civil
courts to fraud claims is not dissimilar.
216. Secondly, Mr Rozenberg’s more extreme view is not supported by Professor Maggs.
Professor Maggs’ opinion, as expressed in paragraph 18 of his second report, is that
“a civil court would be reluctant to make a finding” of intentional fraud in the absence
of a criminal conviction.
217. Thirdly, Mr Rozenberg’s more extreme view is contradicted by Professor Yarkov and
Dr Muranov, both of whom opine that it is not necessary to obtain a criminal
conviction in order to succeed in a civil fraud claim.
218. Fourthly, Professor Yarkov and Dr Muranov’s opinion is supported by decided cases
in which Russian civil courts have found fraud without prior criminal convictions.
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VTB v Nutritek
219.
220.
Indeed, two such cases are cited by Mr Rozenberg himself, one of them in a footnote
to paragraph 78(ii).
In my judgment the points made by counsel for the Defendants are again cogent. I am
not satisfied that there is a real risk that VTB will not be able to obtain substantial
justice in Russia for this reason.
It is therefore not necessary for me to consider the further points made by counsel for
the Defendants that there is nothing to stop VTB initiating a criminal investigation
anyway, and that that would not lead to such an excessive delay as to amount to a
denial of substantial justice.
221. Uncertainty. Finally, counsel for VTB submitted that the evidence showed that there
was uncertainty in a number of respects as to what would happen if VTB brought a
claim in Russia. In particular, he submitted that it was uncertain which law would be
applied (English or Russian), which courts would have jurisdiction (the specialist
Arbitrazh courts or the general civil courts), how much disclosure could be obtained
and how easily any judgment could be enforced, particularly in countries like Cyprus.
222.
I am unimpressed by these points. Neither individually nor cumulatively do I consider
that VTB has shown that there is a real risk that it will not obtain substantial justice as
result of these uncertainties.
Conclusion
223. For the reasons set out above I will set aside Chief Master Winegarten’s order and
refuse VTB permission to serve the claim outside the jurisdiction.
The WFO
224.
In case I am wrong in the conclusion I have just reached, I will consider the
applications relating to the WFO on the footing that VTB is to be permitted to serve
its tort claim (but not its contract claim) out of the jurisdiction.
225. This is the first occasion on which there has been an effective contested consideration
of VTB’s entitlement to a WFO against Mr Malofeev, since Vos J was only
concerned with the question of whether the undertakings offered by Mr Malofeev
provided VTB with sufficient protection to obviate the need for a freezing order.
Accordingly, VTB must demonstrate that this is a proper case for a WFO. The basic
requirements are that VTB has a good arguable case against Mr Malofeev and that
there is a real risk that Mr Malofeev will dissipate his assets otherwise than through
ordinary business or living expenses. Mr Malofeev disputes that either requirement is
satisfied. In addition, Mr Malofeev submits that the WFO should be discharged on the
ground of material non-disclosure by VTB on the without notice application to Roth J.
Good arguable case
226. Counsel for Mr Malofeev submitted that VTB had not established that it has a good
arguable case against Mr Malofeev since (i) VTB has suffered no loss and (ii) there is
no serious issue to be tried with regard to the allegations against Mr Malofeev. I do
not accept those submissions for the reasons given above.
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Risk of dissipation of assets
VTB v Nutritek
227. There is no dispute as to the applicable principles. The basic test remains that stated
by Kerr LJ delivering the judgment of the Court of Appeal in Ninemia Maritime Corp
v Trave Schiffartgesellschaft GmbH [1983] 1 WLR 1412 at 1422H:
“In our view the test is whether, on the assumption that the
plaintiffs have shown at least ‘a good arguable case’, the court
concludes, on the whole of the evidence then before it, that the
refusal of a Mareva injunction would involve a real risk that a
judgment or award in favour of the plaintiffs would remain
unsatisfied.”
228. As HHJ Waksman QC pointed out in Cherney v Neuman [2009] EWHC 1743 (Ch):
“70.
71.
In order to consider that risk, the applicant is often said to have
to show a risk of ‘dissipation’ of the Defendant’s assets. But a
risk that the assets will be hidden or otherwise dealt with so as
to make any judgment nugatory will suffice as well. See Derby
v Weldon [1990] Ch 48 per Parker LJ at p 57. There needs to
be ‘solid evidence’ of this risk. See Thane v Tomlinson [2003]
EWCA Civ 1272 per Gibson LJ at paragraph 21. The context
there was a without notice application but there is no reason
why the same stringency should not apply to a ‘with notice’
application.
The ultimate ‘risk’ to be guarded against is that of an
unsatisfied judgment. The reason why emphasis is placed on
the risk of dissipation is because what has to be shown is the
risk of an unsatisfied judgment by reason of the dissipation or
secretion of assets. Thus, the freezing injunction is not to be
used simply to provide security for the claim. So if in truth the
risk that the judgment may not be fruitful is because the
Defendant happens to live in some remote location or because
he does not have much by way of assets anyway, it is not
appropriate to grant it. See the judgment of Colman J in
Laemthong v Artis [2005] 1 Lloyds Rep 100 at paragraph 54.
Hence the standard of proof of the risk of dissipation is
‘relatively high’: see paragraph 61.”
229. Evidence of dishonesty is often relied on this context. In this regard it is important to
bear in mind the salutary warning of Peter Gibson LJ in Thane Investments Ltd v
Tomlinson [2003] EWCA 1272 at [28]:
“Mr Blackett-Ord submitted that it has now become the
practice for parties to bring ex parte applications seeking a
freezing order by pointing to some dishonesty, and that, he
says, is sufficient to enable this court to make a freezing order.
I have to say that, if that has become the practice, then the
practice should be reconsidered. It is appropriate in each case
for the court to scrutinise with care whether what is alleged to
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VTB v Nutritek
have been the dishonesty of the person against whom the order
is sought in itself really justifies the inference that that person
has assets which he is likely to dissipate unless restricted.”
230. As counsel for Mr Malofeev submitted, in considering whether there is a real risk of
dissipation in the present case, it is important to appreciate two points at the outset.
First, VTB did not seek a freezing order either when it commenced the proceedings
on 23 December 2010 or when it applied for permission to serve the proceedings
outside the jurisdiction on 11 May 2011. When VTB applied for the WFO, its
solicitor Mr Riem stated in paragraph 62(A) of his (first) affidavit in support of the
application that “At the date of the application for permission … VTB considered that
further evidence of risk of dissipation was required coupled with evidence of Mr
Malofeev’s assets”. It follows that VTB accepts that the evidence it relied upon to
obtain permission to serve the proceedings outside the jurisdiction did not establish a
sufficient risk of dissipation. Secondly, VTB’s own evidence is that Mr Malofeev
became aware of the proceedings on or very shortly after 28 May 2011. Thus he had
had over two months in which to dissipate his assets by the time that the application
for the WFO was made, if he was likely to do so.
231. On the application before Roth J, VTB relied on the following matters as showing the
risk of dissipation:
i)
ii)
iii)
iv)
v)
the fact that, if VTB’s claims were correct, Mr Malofeev had been engaged in a
major fraud;
the fact that Mr Malofeev operated “a complex web of companies in a number
of jurisdictions”, particularly Cyprus, the BVI and the Cayman Islands, which
both enabled him to commit the fraud and made it difficult for VTB to enforce
any judgment;
“most significantly”, evidence that Mr Malofeev was actively seeking to dispose
of or diminish the value of the most substantial asset which VTB had identified
Mr Malofeev as having a direct or indirect interest in, namely shares in OJSC
Rostelecom, a leading Russian telecommunications company, by selling them in
small parcels of US$15 million each;
a draft report concerning the Nutritek group of companies prepared by Ernst &
Young (CIS) BV dated 26 February 2010 (“the E&Y 2010 Report”), a copy of
which VTB had obtained, was said to provide “strong evidence that Mr
Malofeev and others have operated a web of companies both in Russia and
offshore through which they have concealed the true financial position of the
Nutritek Group to investors and creditors and which they have used to
misappropriate monies of the Nutritek Group”;
the fact that Mr Malofeev’s business activities were attracting increasing
adverse publicity in Russia, which was said to provide an incentive for him to
liquidate his assets and secret them in jurisdictions around the world.
232.
It appears from the judgment of Roth J that he was persuaded to grant the WFO by the
combination of points (i)-(iv) listed above, and particularly (i)-(iii). So far as point (v)
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VTB v Nutritek
was concerned, Roth J was not persuaded that Mr Malofeev was under particular
pressure, let alone mounting pressure. I agree with that assessment.
233. So far as points (i) and (ii) are concerned, VTB had all the evidence it needed in
relation to these at the time of the application for permission to serve outside the
jurisdiction. It follows that, by its own admission, these points did not establish a
sufficient risk of dissipation. I would add that, while point (ii) is relevant, it is not my
judgment a strong pointer towards a risk of dissipation. It is not uncommon for
international businessmen, and indeed quoted UK companies, to use offshore vehicles
for their operations, particularly for tax reasons. This may make it difficult to enforce
a judgment. But in that respect claimants such as VTB have to take defendants such as
Mr Malofeev as they find them. More is required before the court will conclude that
there is a risk of dissipation.
234. So far as point (iii) is concerned, counsel for VTB accepted before me that, in the
light of the evidence now before the court, VTB was unable to continue to contend
that Mr Malofeev had been seeking to dispose or diminish the value of his interest in
Rostelecom. On the contrary, Mr Malofeev increased the value of his interest by an
acquisition in August 2011. It follows that the most significant plank of VTB’s
application before Roth J has now fallen away.
235. As to point (iv), counsel for Mr Malofeev submitted that, in the light of the evidence
now before the court, it could not bear even the limited weight which Roth J placed
upon it. In this regard he made two main points. First, the unchallenged evidence of
Mr Malofeev’s solicitor Mr Michaelson is that he has been told by Ivan Ryutov, the
partner responsible for preparing the E&Y 2010 Report, that Mr Malofeev himself (as
Deputy Chairman of Nutrinvestholding) commissioned the report and instructed Ernst
& Young to conduct a forensic examination of the accounting practices and
transactions taking place within the Nutritek Group. Secondly, the E&Y 2010 Report
does not implicate Mr Malofeev in wrongdoing. Indeed, it barely mentions him.
Furthermore, Mr Ryutov told Mr Michaelson that the witnesses Ernst & Young spoke
to were not able to provide any specific information about Mr Malofeev’s role. I
accept this submission.
236.
In my judgment it follows that, in the light of the evidence now before the court, the
points which VTB relied upon before Roth J do not establish a sufficient risk of
dissipation to justify the WFO.
237. No doubt anticipating this conclusion, counsel for VTB sought to rely upon a series of
further points as showing that there was a risk of dissipation. It is important to note
that all of these concern Mr Malofeev’s responses to the WFO. Thus none of these
points would have been available to VTB if the WFO had not been granted by Roth J,
which in the light of the evidence now available it ought not to have been. This does
not mean that VTB cannot rely upon such points, but in my view it does mean that
they need to be carefully scrutinised to see if they do establish a risk of dissipation.
238. The first is Mr Malofeev’s delay in giving disclosure of his assets. Paragraph 8 of
Roth J’s order required Mr Malofeev to disclose all his assets worldwide exceeding
£30,000 in value whether in his own name or not and whether solely or jointly owned
by 11 September 2011, a week after the return date of 5 September 2011. On 19
August 2011 those dates were altered by Floyd J to 19 September 2011 and 12
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VTB v Nutritek
September 2011 because VTB was having difficulties effecting service. On 12
September 2011 Mr Malofeev applied to Vos J to have the WFO discharged by giving
undertakings intended, to put it shortly, to preserve his interest in Rostelecom to the
extent of at least US$200 millions’ worth, and thus provide protection for VTB in that
way. If that application had been successful, of course, it would have obviated the
need for Mr Malofeev to give disclosure. Vos J adjourned the matter to 14 September
2011, when he refused to discharge the WFO and continued it until after the disposal
of the applications to set aside permission to serve out which are now before me. By
paragraph 7(1) of his order, Vos J required Mr Malofeev to give disclosure by 26
September 2011. On 26 September 2011 Mr Malofeev applied once again to Norris J
to have the injunction discharged upon the giving of undertakings. Norris J adjourned
this application to be heard as an application by order. (Subsequently it fell away
because Mr Malofeev ceased to be in a position to offer the undertakings in question.)
In the meantime Mr Malofeev sought an extension of time for disclosure of his assets.
Norris J granted a very short extension to 27 September 2011, with permission to Mr
Malofeev to file a supplemental or corrective affidavit by 3 October 2011. Mr
Malofeev then sought permission to appeal against Norris J’s order. On 27 September
2011 Aikens LJ granted permission and a stay. On 4 October 2011 the Court of
Appeal (Carnwath and Jackson LJJ) dismissed the appeal: [2011] EWCA Civ 1252.
Only then did Mr Malofeev give disclosure of his assets. Counsel for VTB invited me
to view this history as a determined attempt on the part of Mr Malofeev to avoid
having to give disclosure of his assets. I am prepared to accept that characterisation of
Mr Malofeev’s conduct, but I cannot see that it is evidence of a risk of dissipation. As
Jackson LJ said in his judgment at [49], “A worldwide freezing order and an order for
disclosure are indeed harmful to a person in Mr Malofeev’s position”. He was entitled
to attempt to have the WFO discharged by providing security. It was not unreasonable
that he should wish to avoid having to give disclosure until after his applications to
discharge the WFO had been determined, as all three members of the Court of Appeal
accepted.
239. The second is an incorrect statement by Mr Malofeev in paragraph 3 of a witness
statement made by Mr Malofeev on 13 September 2011 in support of his first
discharge application and in response to a request for information made on behalf of
VTB on 12 September 2011 that he had “no assets in England and Wales held directly
or indirectly”. There is no dispute that, in fact, Mr Malofeev is the ultimate beneficial
owner of Gilroy Trading Ltd (“Gilroy”), a company incorporated in the BVI, which
has two bank accounts with JPMorgan Chase Bank NA London (“JPMorgan”). The
way in which this came to light was that on 4 October 2011 Mr Malofeev’s solicitors
wrote to VTB’s solicitors stating that Mr Malofeev wished to make various ordinary
course of business payments and that he proposed to do so from the JPMorgan
accounts. Mr Malofeev has apologised for the error in his first witness statement. His
explanation is to the effect that he did not appreciate that Gilroy had accounts in
London at the time he made his witness statement, and this only came to light when
information for his asset disclosure affidavit was being gathered. While I do not
minimise the seriousness of Mr Malofeev having made an inaccurate statement in his
witness statement, this seems to me to be a plausible explanation. Moreover, the key
point is that it was Mr Malofeev himself who revealed the existence of the JPMorgan
accounts. Accordingly, I do not consider that this episode constitutes evidence of a
real risk of dissipation.
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Approved Judgment
VTB v Nutritek
240.
241.
It is convenient to deal with the third, fourth and fifth points together. These are that
Mr Malofeev gave information about his interest in Rostelecom piecemeal on his
application to discharge the WFO, that his interest turned out to involve certain
repurchase agreements, and that he effected a share transfer on 13 September 2011.
These points all stem from the rather complicated manner in which Mr Malofeev held
his interest in Rostelecom prior to 13 September 2011. In my view it is neither
necessary nor appropriate to go into great detail concerning this. The essential points
are as follows. Mr Malofeev held his interest via a Cayman Island fund called
Universal Telecom Investment Strategies Fund SPC (“the Fund”). The Fund is
managed by Universal Telecom Management (“the Fund Manager”), another Cayman
Island company. The Fund and the Fund Manager are owned and controlled by
Gazprombank, the largest non-state-owned bank in Russia. Prior to 13 September
2011, Mr Malofeev indirectly owned 100% of the participating non-voting
redeemable shares in the Fund via, first, a BVI company called Marshall Capital
Group Ltd (“MCG”), and secondly, a BVI company called Tarsara Portfolio Corp
(“Tarsara”). On 13 September 2011 Mr Malofeev arranged for the shares in Tarsara to
be transferred from MCG to himself. The evidence filed on his behalf is to the effect
that this was done in order to simplify the chain of ownership and thus make it easier
for Mr Malofeev to arrange for undertakings to be offered by the relevant parties. On
22 September 2011 Mr Malofeev’s solicitors revealed for the first time that the
Rostelecom shares owned by the Fund are divided into those that are pledged and
those that are not pledged. The pledged shares are security for finance provided by
Gazprombank to the Fund under repurchase agreements with two companies
incorporated
in Cyprus which are controlled by Gazprombank. Repurchase
agreements are a way of providing a secured loan to a borrower using stock as
collateral. In this instance the Fund is the borrower and the lender is the Cypriot
company. The repurchase agreement has two parts to it. In the first part, the borrower
sells stock to the bank for a purchase price which constitutes the loan. In the second
part, the bank sells the stock back for a price which represents the loan plus interest.
In my view there is justification for VTB’s complaint that the information about these
various arrangements was provided in a piecemeal and unsatisfactory manner. In
particular, I consider that VTB is right to say that it should have been told about the
repurchase agreements sooner than it was. Nevertheless, one must not lose sight of
why the information was being provided by Mr Malofeev. It was being provided
voluntarily by Mr Malofeev in order to attempt to show that he had an unencumbered
asset available, dealings in which could be restricted by means of undertakings so as
to provide VTB with protection, and thereby obtain discharge of the WFO. In those
circumstances it clearly behoved Mr Malofeev to provide accurate and transparent
information about the arrangements in a timely manner. It is understandable that he
nevertheless wished not to provide more information than was necessary for the
purpose at hand. The result was that he failed to do what he needed to do, and he paid
the price, which was that Vos J refused his first discharge application and he had to
withdraw the second discharge application because by then Gazprombank was no
longer willing to cooperate with him. Furthermore, I am not persuaded that there is
anything about these arrangements which is sinister. They are undoubtedly complex,
and they are plainly designed to ensure that little or no tax is paid by those involved.
But, regrettably, both those comments apply to many financial instruments these days.
Similarly, I see nothing sinister in the transfer which was effected on 13 September
2011. Again, Mr Malofeev undertook this as part of his application to discharge the
THE HON MR JUSTICE ARNOLD
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VTB v Nutritek
WFO. The evidence filed on his behalf was open that this had been done, and
explained why it had been done. No doubt it confirms, if confirmation were needed,
that Mr Malofeev is able to re-arrange the manner in which his assets are held at short
notice; but it goes no further than that. Thus I do not consider these points constitute
evidence of a real risk of dissipation.
242. The sixth point relied upon by VTB is a complaint that, even now, Mr Malofeev has
given incomplete disclosure of his assets. There is no dispute that Mr Malofeev has
not provided all the information sought by VTB, but he contends that VTB’s requests
for information go well beyond what is required by the court orders and are
disproportionate. It is not appropriate to try to resolve this dispute. It suffices to say
that I do not regard Mr Malofeev’s failure to answer all the questions VTB has raised
about his assets as demonstrating a real risk of dissipation.
243. Having considered all of the points relied on by VTB individually, it remains
necessary to stand back and consider the position as a whole. I am conscious that, as
Vos J pointed out in his judgment of 14 September 2011 at [73], the court should not
engage in salami-slicing of the evidence. Even if each individual point relied on by
VTB does not demonstrate a real risk of dissipation when considered in isolation,
what matters is the overall impact of the evidence. I have not found this easy to
assess. In the end, however, I am not persuaded that, even considered as a whole, the
evidence establishes a real risk of dissipation on the part of Mr Malofeev.
Material non-disclosure
244. Mr Malofeev contends that the WFO should in any event be discharged for material
non-disclosure by VTB on the without notice application before Roth J. Again, there
is no dispute as to the applicable principles. The leading case is Brink’s Mat Ltd v
Elcombe [1988] 1 WLR 1350, in which Ralph Gibson LJ said at 1356F-1357F:
“In considering whether there has been relevant non-disclosure
and what consequence the court should attach to any failure to
comply with the duty to make full and frank disclosure, the
principles relevant to the issues in these appeals appear to me
to include the following. (1) The duty of the applicant is to
make ‘a full and fair disclosure of all the material facts:’ see
Rex v. Kensington Income Tax Commissioners, Ex parte
Princess Edmond de Polignac [1917] 1 K.B. 486, 514, per
Scrutton L.J.
(2) The material facts are those which it is material for the
judge to know in dealing with the application as made:
materiality is to be decided by the court and not by the
assessment of the applicant or his legal advisers: see Rex v.
Kensington Income Tax Commissioners, per Lord Cozens-
Hardy M.R., at p. 504, citing Dalglish v. Jarvie (1850) 2 Mac.
& G. 231 , 238, and Browne-Wilkinson J. in Thermax Ltd. v.
Schott Industrial Glass Ltd. [1981] F.S.R. 289, 295.
(3) The applicant must make proper inquiries before making
the application: see Bank Mellat v. Nikpour [1985] F.S.R. 87.
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VTB v Nutritek
The duty of disclosure therefore applies not only to material
facts known to the applicant but also to any additional facts
which he would have known if he had made such inquiries.
(4) The extent of the inquiries which will be held to be proper,
and therefore necessary, must depend on all the circumstances
of the case including (a) the nature of the case which the
applicant is making when he makes the application; and (b) the
order for which application is made and the probable effect of
the order on the defendant: see, for example, the examination
by Scott J. of the possible effect of an Anton Piller order in
Columbia Picture Industries Inc. v. Robinson [1987] Ch 38 ;
and (c) the degree of legitimate urgency and the time available
for the making of inquiries: see per Slade L.J. in Bank Mellat v.
Nikpour [1985] F.S.R. 87, 92–93.
(5) If material non-disclosure is established the court will be
‘astute to ensure that a plaintiff who obtains [an ex parte
injunction] without full disclosure … is deprived of any
advantage he may have derived by that breach of duty:’ see per
Donaldson L.J. in Bank Mellat v. Nikpour, at p. 91, citing
Warrington L.J. in the Kensington Income Tax Commissioners’
case [1917] 1 K.B. 486, 509.
(6) Whether the fact not disclosed is of sufficient materiality to
justify or require immediate discharge of the order without
examination of the merits depends on the importance of the
fact to the issues which were to be decided by the judge on the
application. The answer to the question whether the non-
disclosure was innocent, in the sense that the fact was not
known to the applicant or that its relevance was not perceived,
is an important consideration but not decisive by reason of the
duty on the applicant to make all proper inquiries and to give
careful consideration to the case being presented.
(7) Finally, it ‘is not for every omission that the injunction will
be automatically discharged. A
locus poenitentiae may
sometimes be afforded:’ per Lord Denning M.R. in Bank
Mellat v. Nikpour [1985] F.S.R. 87, 90. The court has a
discretion, notwithstanding proof of material non-disclosure
which justifies or requires the immediate discharge of the ex
parte order, nevertheless to continue the order, or to make a
new order on terms. ‘when the whole of the facts, including
that of the original non-disclosure, are before [the court, it]
may well grant … a second injunction if the original non-
disclosure was innocent and if an injunction could properly be
granted even had the facts been disclosed:’ per Glidewell L.J.
in Lloyds Bowmaker Ltd. v. Britannia Arrow Holdings Plc.,
ante, pp. 1343H–1344A.”
245. Slade LJ said in the same case at 1359C-E:
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VTB v Nutritek
“By their very nature, ex parte applications usually necessitate
the giving and taking of instructions and the preparation of the
requisite drafts in some haste. Particularly in heavy commercial
cases, the borderline between material facts and non-material
facts may be a somewhat uncertain one. While in no way
discounting the heavy duty of candour and care which falls on
persons making ex parte applications, I do not think the
application of the principle should be carried to extreme
lengths. In one or two recent cases coming before this court, I
have suspected signs of a growing tendency on the part of some
litigants against whom ex parte injunctions have been granted,
or of their legal advisers, to rush to the Rex v Kensington
Income Tax Commissioners [1917] 1 KB 486 principle as a
tabula in naufragio, alleging material non-disclosure on
sometimes rather slender grounds, as representing substantially
the only hope of obtaining the discharge of injunctions in cases
where there is little hope of doing so on the substantial merits
of the case or on the balance of convenience.”
246. So far as the question of the court’s discretion to continue or re-grant an injunction
even if there has been a material non-disclosure is concerned, the applicable
principles were summarised by Alan Boyle QC sitting as a Deputy High Court Judge
in Arena Corp Ltd v Schroeder [2003] EWHC 1089 (Ch) at [213]:
“(1)
If the court finds that there have been breaches of the duty of
full and fair disclosure on the ex parte application, the general
rule is that it should discharge the order obtained in breach and
refuse to renew the order until trial.
(2) Notwithstanding that general rule, the court has jurisdiction to
continue or re-grant the order.
(3)
(4)
(5)
That jurisdiction should be exercised sparingly, and should
take account of the need to protect the administration of justice
and uphold the public interest in requiring full and fair
disclosure.
The court should assess the degree and extent of the culpability
with regard to non-disclosure. It is relevant that the breach was
innocent, but there is no general rule that an innocent breach
will not attract the sanction of discharge of the order. Equally,
there is no general rule that a deliberate breach will attract that
sanction.
The court should assess the importance and significance to the
outcome of the application for an injunction of the matters
which were not disclosed to the court. In making this
assessment, the fact that the judge might have made the order
anyway is of little if any importance.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
(6)
(7)
(8)
(9)
The court can weigh the merits of the plaintiff’s claim, but
should not conduct a simple balancing exercise in which the
strength of the plaintiff’s case is allowed to undermine the
policy objective of the principle.
The application of the principle should not be carried to
extreme lengths or be allowed to become the instrument of
injustice.
The jurisdiction is penal in nature and the court should
therefore have regard to the proportionality between the
punishment and the offence.
There are no hard and fast rules as to whether the discretion to
continue or re-grant the order should be exercised, and the
court should take into account all relevant circumstances.”
247. Counsel for Mr Malofeev submitted that there had been material non-disclosure by
VTB in two areas.
248. Failure to disclose details of the loan transaction. Counsel advanced two main
complaints under this heading. The first is that VTB did not disclose the first, second
or third draft term sheets (see paragraphs 14-15 and17 above), and in particular the
fact that they provided for the VTB Group to have a 30% equity stake (first draft) and
a 15% equity stake (second and third drafts) respectively. So far as this point is
concerned, VTB’s evidence is that it did not disclose these documents for the simple
reason that it had not found them despite extensive searches. Mr Tulupov didn’t
mention them in his first witness statement because he had left VTB Moscow in
October 2008, he had not himself retained any documents relating to the transaction
and so he had relied on the documents provided to him by VTB for the purpose of
making his statement, and he had not remembered the first-third draft term sheets. In
any event, as counsel for VTB pointed out, the first-third draft term sheets do not
accurately reflect what was finally agreed. For those reasons I do not consider that
there was any material non-disclosure by VTB in this respect.
249. The second point concerns the role of Dalford. Here, the position is rather different.
The only information relating to Dalford that was disclosed by VTB on the
application before Roth J was contained in a statement for RAP’s account with VTB
dated 30 November 2007. This document was amongst those exhibited to the first
witness statement of Mr Chernenko. The statement shows a payment of US$3.5
million to Dalford on 28 November 2007. No mention was made of this in Mr
Chernenko’s statement, however. Indeed, there was no reference to Dalford’s role at
all in any of VTB’s witness statements or affidavits by the time of the application to
Roth J. Furthermore, VTB’s evidence represented it to be the position that, as part of
the transaction, VTB would receive (i) an arrangement fee of US$5 million pursuant
to the Fee Letter referred to in the Facility Agreement and (ii) an equity fee of 5%
pursuant to the share warrant deed dated 23 November 2007.
250.
It is now apparent that VTB Moscow received via Dalford (i) an additional fee or
contribution to transaction costs (it is not clear which, since Mr Chernenko says it was
an arrangement fee whereas Mr Klaos says it was transaction costs) of US$3.5 million
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
pursuant to the consultancy agreement dated 1 November 2007 and (ii) an additional
equity fee of 10% pursuant to the undated share warrant deed (see paragraphs 27, 43
and 45 above). As I have explained, VTB accepts that no services were provided or
intended to be provided pursuant to the consultancy agreement, the true purpose of
which was to avoid tax. None of this was revealed to Roth J.
251. The explanation given for this in paragraph 8 of Mr Chernenko’s third witness
statement is as follows:
this was a sensitive
to raise before
“The reason why there was no explicit reference to the payment
to Dalford was because, as the payment raised issues of tax
therefore
optimisation,
embarrassing
the Court. This form of
arrangement is common. VTB did not intend to mislead, and
did not believe that it was misleading, the Court. VTB
apologises to the Court for not bringing the matter to its
attention.”
issue and
Thus Mr Chernenko admits that the role of Dalford was deliberately concealed from
the court because VTB did not want to reveal the fact that VTB Moscow had entered
into a sham contract in order to avoid tax. I do not understand his suggestion that this
form of arrangement is common. If it was common, there would be no need to hide it.
252. Counsel for VTB accepted that VTB had failed to disclose the role of Dalford, but
submitted that the non-disclosure was not material. I do not accept that submission. In
my judgment the non-disclosure was material for the following reasons. First, the
information now available shows that VTB Group’s equity stake in the transaction
was 15%, not 5%. In my view that is relevant to the issue of reliance, and in particular
reliance on the representation as to the absence of common control. It may or may not
make a difference at the end of the day, but it raises a question mark over VTB’s
evidence on that issue. Secondly, and perhaps more importantly, VTB Moscow’s use
of a company incorporated in Belize and a sham contract in order to avoid tax, and Mr
Chernenko’s defence of this as a common form of arrangement, puts its case on the
risk of dissipation by Mr Malofeev, and in particular its reliance upon his use of
offshore vehicles, in a rather different light.
253. Failure to disclose that information had been obtained in breach of confidence etc.
Counsel for Mr Malofeev complained that VTB has failed to disclose the fact that
information concerning Mr Malofeev’s dealings in Rostelecom shares relied upon by
VTB had been obtained in breach of confidence and that VTB had not disclosed the
source of some of the information. I do not propose to discuss these complaints in any
detail. In my view there was no material non-disclosure by VTB in these respects.
Counsel for Mr Malofeev also made a rather different point under this heading,
namely that the information had turned out to be incorrect. In this regard, he
submitted that VTB had failed to make proper enquiries. In my view this point has
more force, but in the end I am not persuaded that VTB made a material non-
disclosure. It put such information as it had before the court, and was reasonably open
about the limits and possible unreliability of that information. I do not consider that it
was under a duty to test the accuracy of the information in the manner suggested by
counsel for Mr Malofeev.
THE HON MR JUSTICE ARNOLD
Approved Judgment
VTB v Nutritek
254. Should the injunction be continued or re-granted? Having concluded that there was a
material non-disclosure by VTB, it is necessary to consider whether, if I was satisfied
that this was otherwise a case in which it would be appropriate to continue the WFO,
the WFO should be discharged on that ground or whether it should nevertheless be
continued or re-granted. In my judgment the WFO should be discharged for the
following reasons. First, the non-disclosure was deliberate. Secondly, I consider that
the facts which were suppressed were significant with regard to the application for the
WFO. Thirdly, I consider that, even if (contrary to the conclusion I have reached
above) there is a real risk of dissipation, VTB’s case for a WFO is not a strong one
given that (as discussed above) the main plank of that case has fallen away.
Result
255. For the reasons given above:
i)
ii)
iii)
iv)
I shall refuse VTB permission to amend the Particulars of Claim;
I shall set aside the order of Chief Master Winegarten and refuse VTB
permission to serve the proceedings outside the jurisdiction;
even if I were willing to give VTB permission to serve the proceedings outside
the jurisdiction, I would not continue the WFO until trial;
even if I were otherwise prepared to continue the WFO, I would discharge the
WFO for material non-disclosure by VTB.