OJSC VTB Bank v Parline Ltd & Ors [2015] EWHC 1135 (Comm)

[2015] EWHC 1135 (Comm)Case No 2013-138
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A, 1NLDate 29/04/2015
Before
MR JUSTICE HAMBLEN
Between
OJSC VTB BankClaimant(1) PARLINE LIMITEDDefendants(2) RAISA NIKOLAYEVNA PARSHINADefendant(3) EVGENY VITALJEVICH BULGAKOVDefendant
Alan Gourgey QC and Peter Head (instructed by S C Andrew LLP) for ClaimantStephen Moverley Smith QC and Steven Thompson QC (instructed by Bird & Bird LLP) for DefendantHearing Hearing dates: 17, 18,19,20,23, 24, 25, 26 March and 16 April 2015
Judgment

Introduction

[1]The Claimant (“VTB”) is a Russian bank. It is one of the largest banks in Russia and is part of the VTB group which provides a range of banking services and products worldwide.[2]In March 2008 VTB entered into a loan agreement (“the Loan Agreement”) with Yurganz LLC (“Yurganz”) under which VTB agreed to lend Yurganz the sum of RUB 1bn (“the Loan”).[3]Yurganz is a Russian company and forms part of the DVTG Group of companies (“the Group”). The business of the Group at the material time was mainly concerned with the transportation of goods, chiefly by rail. Yurganz was the company within the Group which held the rolling stock which was leased out to operating companies within the Group.[4]It is VTB’s case that at all material times Yurganz was under the control of the First Defendant, Parline Limited (“Parline”) (the holder at the relevant time of all the issued shares in Yurganz) its director, the Third Defendant, Mr Bulgakov, and the Second Defendant, Mrs Parshina, the main beneficial owner of Parline and of the Group companies.[5]Yurganz became insolvent and in June 2010 it presented a bankruptcy petition in respect of itself which resulted in the initiation of a bankruptcy process.[6]VTB contends that the insolvency of Yurganz and its consequent petitioning for bankruptcy was caused by a number of acts on the part of the Defendants (as the controllers of Yurganz), namely(1) to cease to pay interest under the Loan Agreement in January 2009;(2) to reduce its debt to DVTG Finance LLC (“Finance”) by RUB 2.25bn in the second quarter of 2009;(3) to dispose of 45% of its fixed assets in the second half of 2009, and(4) to purchase worthless bonds issued by Finance for some RUB 1.4bn (“the alleged acts”).[7]VTB claims that this has caused it loss to be determined by reference to the diminution in the value of its receivables under the Loan Agreement as a result of the insolvency and consequent bankruptcy, which it values at RUB 713,452,836.[8]VTB’s claim is advanced pursuant to Article 1064 of the Russian Civil Code (“the Civil Code”) which provides a general basis of tortious liability for the causing of harm. If this is proved then the defendant can escape liability if he shows that the harm was not caused by his fault (which means intentionally or negligently) or that his conduct was lawful. VTB’s loss is claimed pursuant to Article 1082 of the Civil Code.[9]The Defendants deny that Article 1064 is applicable; that the alleged acts caused Yurganz’s insolvency; that they caused or procured those acts and that the loss claimed can be or is proved with the necessary certainty and specificity. They further contend that Yurganz’s acts were lawful and that, if they caused them, their own acts were equally so; that VTB caused or contributed to its own loss and that its claim is barred by limitation. Factual background The Group

Factual background

[10]At the material time the DVTG Group (literally ‘Far Eastern Transport Group’) was a substantial group of companies carrying on business in Russia in transportation and freight forwarding, chiefly the transportation of cargo by rail. The Group was established in 2000 with the setting up of Dalneftetrans (“DNT”), a company specialising in oil cargo transportation, and Dallestrans LLC (“Dallestrans”), which specialised in the transportation of timber.[11]The Group was headquartered in Khabarovsk, the second largest city in Russia’s Far East after Vladivostok. By the end of 2007 the Group was the second largest privately owned railway company in Russia with a turnover of around USD 500 million.[12]Yurganz was incorporated in 2001 and was the Group’s main asset-holding company. As at 1 January 2008, almost 92% of the Group’s rolling stock value was recorded on its balance sheet. The business of Yurganz was to acquire railway transport vehicles (railway tanks, open-box cars and flat wagons) and lease them out to various other operating companies within the Group, the main lessees being, DNT, Vostoktranskompany LLC (“VTK”), and OAO Dalnevostochnaya Transport Group.[13]OJSC DVTG (“DVTG”) was established in 2003 as part of a business restructuring, and became the ‘centre’ of the Group, managing gondolas and tank cars (operation, repairs, provision in use). DVTG owned 100% of the share capital of Finance.[14]Between 2001 and 2008, the General Director of Yurganz was Mrs Parshina’s mother, Mrs Gusakova. It was Mrs Parshina’s oral evidence that so far as material the role of General Director was in fact carried out by Mrs Matvienko pursuant to a power of attorney. On 7 April 2008, Mrs Gusakova was replaced as General Director by Mrs Matvienko, previously Yurganz’s CFO.[15]Finance was incorporated in 2007. It was incorporated in order to enable the Group to obtain finance from an alternative source from the banks, who were starting to increase the interest charged on borrowing. The intention was for Finance to raise money by bond issues and lend it on to Yurganz and other operating companies in the Group, and subsequently to float the company publically on a stock market outside Russia. The General Director of Finance was Mr Andrey Kulik.[16]Parline is a limited company incorporated under the laws of England and Wales on 3 October 2006. At all material times Parline was a non-trading holding company for Yurganz and DNT. Parline acquired 100% of the shares in DNT and Yurganz on 12 February 2007 and 20 April 2007 respectively. Parline was established as a holding company for Yurganz as it was envisaged that there would be an initial public offering of Yurganz’s shares on AIM in London in or around 2009. In the event, no such IPO took place.[17]At all material times Mr Bulgakov was the sole director of Parline. He is of Russian origin but resident in the UK. His evidence was that he deferred to Mrs Parshina in relation to any matters of significant commercial importance. He has also been a director and/or shareholder of certain other companies in the Group, namely DVTG UK, DVTG Container Limited, Northway Investments Limited, Trent Investments Limited and Stonelane Investments Limited.[18]Mrs Parshina is a Russian national and is said by VTB to be the ultimate beneficial owner and controller of the Group. At all material times she was the Chairwoman of the Supervisory Board of Directors of DVTG and the ultimate beneficial owner of around 70% of its issued share capital. She was also the beneficial owner of 70% of the share capital of Parline.

The Loan Agreement

[19]On 26 March 2008, Parline as the 100% shareholder of Yurganz, passed a resolution authorising Mrs Gusakova on behalf of Yurganz to borrow RUB 1bn from VTB. The resolution was signed by Mr Bulgakov as Parline’s ‘First Director’.[20]On 27 March 2008, VTB entered into the Loan Agreement with Yurganz. The Loan Agreement was executed on behalf of Yurganz by Mrs Matvienko pursuant to a power of attorney from Mrs Gusakova. The terms of the Loan Agreement included the following:(1) By clause 3.2, the purpose of the Loan was to acquire rolling stock, pulling and (s)witching power (sic).(2) By clause 6.1, interest was payable at the MosPrime rate, subject to increases in specified circumstances.(3) By clause 6.3, interest was payable monthly.(4) By clause 7.1, the Loan was repayable by 25 March 2015 by way of 5 tranches of RUB 200m each, commencing on 20 October 2014.(5) By clause 9.1(3), Yurganz was obliged to make early repayment of the full amount of the Loan on the occurrence of any of the circumstances set out in clause 12.4, which included a failure to fulfil any monetary obligation under the Agreement (clause 12.4(1)).(6) By clause 9.1(8), Yurganz was obliged “to notify [VTB] immediately in writing about any material fact (event, action) that in [Yurganz’s] opinion may substantially deteriorate its financial status or material position, have an impact on its solvency, as well as about measures taken in order to eliminate consequences of the said events, actions”.(7) By clause 10.1, security for the Loan was to be provided by way of pledges of rolling stock and guarantees provided by DNT and DVTG.[21]The Loan was drawn down by way of 3 tranches of RUB 270m, RUB 330m and RUB 400m on 28 March 2008, 9 April 2008 and 10 June 2008 respectively. On the same dates 3 pledge agreements were entered into between the Bank and Yurganz by which the latter pledged its wagons as security (a total of 535 rolling stock units in the form of railway tanks, flat wagons and open-box cars).

Default under the Loan Agreement

[22]On or about 31 January 2009, Yurganz defaulted on its monthly interest payment to VTB under the Loan Agreement.[23]No further interest payments were made under the Loan Agreement and on 16 June 2009 VTB accelerated repayment of the Loan with the consequence that the capital sum became immediately repayable and default interest began to accrue.

The purchase of bonds

[24]On 7 August 2007, Finance issued its first series of bonds to the market for RUB 1bn (“series-1”). Prior to the series-1 issue, Yurganz had made a public irrevocable offer (“PO1”) on 9 July 2007 by which it irrevocably undertook to purchase series-1 bonds from any person owning the bonds in certain circumstances, including where Finance as the Issuer had failed to fulfil its obligation to pay interest or principal.[25]On 7 August 2007, Finance advanced a loan of some RUB 300m to Yurganz, repayable on 1 August 2010.[26]On 24 July 2008, Finance issued a second series of bonds for RUB 5bn (“series-2”). As with series-1, prior to the series-2 issue, Yurganz had issued a public irrevocable offer (“PO2”) on 5 June 2008. Finance’s liability in respect of series-2 bonds was also guaranteed by DVTG, and by way of an additional public irrevocable offer made by DNT.[27]Between 30 June 2008 and 30 September 2008, Finance advanced a further loan to Yurganz of RUB 3,960,001,000.[28]In January 2009, Finance defaulted on its interest payments under the series-2 bonds.[29]In February 2009, Finance defaulted on interest payments in respect of series-1, and failed to honour a put option in respect of series-1. On 24 March 2009, Nomos Bank issued proceedings against Yurganz on the basis of its liability to bond-holders under PO2 in respect of series-2 bonds for a sum of RUB 1,091,048,336. On 8 April 2009, similar proceedings were issued against Yurganz by Pallada in respect of series-2 bonds for a sum of RUB 200m.[30]Between September and December 2009, Yurganz purchased bonds issued by Finance for RUB 1,492,482,000. The nominal value of the bonds purchased was RUB 1,975,198,000. Following the purchase of bonds from Pallada, Yurganz remained indebted to Pallada for a residual sum of RUB 355,317,000.[31]In late 2009, Finance’s liability to Yurganz under bonds worth approximately RUB 1.06bn was set-off against an equal amount of the liability of Yurganz to Finance, decreasing the liability of Yurganz to Finance accordingly. By 31 December 2009 the debt of Yurganz to Finance had been reduced to approximately RUB 1.35bn, and Yurganz was left owning RUB 887,777,420 of bonds issued by Finance.

Repayment of debt to Finance

[32]Between 31 March 2009 and 30 June 2009 it appears from the Yurganz Accounts for 30 June 2009 that Yurganz reduced its debt to Finance by approximately RUB 2.4bn. Between 30 June 2009 and 31 December 2009, the debt of Yurganz to Finance was reduced further to RUB 1,347,214,890. In the same period, overall bank lending to Yurganz reduced by approximately RUB 1.7bn from RUB 5,237,046,485 as at 30 June 2009 to 3,491,046,465 as at 31 December 2009.

Disposal of rolling stock

[33]Between 30 June 2009 and 31 December 2009, Yurganz disposed of approximately 45% of its fixed assets, reducing such assets from RUB 4,861,507,000 as at 30 June 2009 to RUB 2,733,931,000 as at 31 December 2009, a reduction of approximately RUB 2.1bn. This represented a very substantial decrease in the number of items of rolling stock owned by Yurganz: flat wagons went down from 1,372 down to 431; open-box cars from 2,532 to 1,770; railway tanks from 1,364 to 1,178.

Proceedings brought by the Bank

[34]Prior to the default in January 2009, and at various times thereafter, there were a number of meetings between VTB and representatives of Yurganz and the Group concerning the possible restructuring of the Loan. The meetings did not result in any agreement being reached for restructuring.[35]On 23 November 2009, VTB issued proceedings in the Moscow City Court of Arbitration for recovery of the debt under the Loan. On 1 April 2010 the Court entered judgment for VTB in the sum of RUB 1bn plus interest. To date none of VTB’s debt has been repaid. Yurganz is also in default under guarantees with VTB in respect of two loans to VTK (“the VTK Guarantees”).

Bankruptcy of Yurganz

[36]On 20 July 2010, Yurganz applied to the Arbitrazh Court of Amur Oblast for a ruling to adjudge itself insolvent. On 28 October 2010, Yurganz entered into a monitoring procedure (the first stage of the Russian bankruptcy procedure). On 28 June 2011, Yurganz entered into a formal bankruptcy procedure on the petition of a creditor. On 26 November 2012, the Court of Arbitration for the Amur Region initiated the procedure for the appointment of an External Manager for Yurganz (a further step in the bankruptcy procedure). The appointment of such an External Manager was approved on 17 February 2013, and by the order of the Court of Arbitration for the Amur Region dated 26 November 2013, the External Manager was appointed until 17 November 2014.[37]On 17 November 2014, the Supervising Court issued an order terminating external management and commencing the next stage of the bankruptcy process, namely Liquidation Proceedings. The Court ordered the Liquidation Proceedings to be completed by 14 May 2015.[38]VTB has been admitted as a creditor in the bankruptcy of Yurganz for the sum of RUB 1,560,175,004 in relation to the Loan to Yurganz, and RUB 126,889,387 in relation to the VTK Guarantees.

Bankruptcy of other companies in the Group

[39]Finance appears to have been dissolved. Bankruptcy proceedings in respect of Finance commenced on 5 July 2010. On 28 June 2011, the observation procedure was initiated. On 29 March 2012, Finance was declared bankrupt, and the bankruptcy procedure closed on 21 November 2013. Finance is said to have been ‘liquidated’ and excluded from the Unified state register of legal entities on 13 February 2014.[40]DNT and DVTG both appear currently to be subject to Court-approved arrangements with their creditors. VTK is subject to the Russian bankruptcy procedure and appears to have reached the same stage in the procedure as Yurganz, with a hearing on the issue of completion of the bankruptcy procedure apparently scheduled for 6 April 2015.

The evidence at trial

[41]VTB’s witnesses of fact were Mr Alexey Zolotukhin and Mr Dmitry Zadykhin. Mr Zolotukin is the Managing Director of LLC VTB DC (“DC”), the entity within the VTB group responsible for debt recovery. His evidence addressed Mrs Parshina’s alleged control of the Group, the Loan Agreement, the bankruptcy of Yurganz, and negotiations with Yurganz/DVTG. Mr Zadykhin is the head of audit group at DC and his evidence addressed the financial position of Yurganz. Neither witness was involved with the events giving rise to the claim.[42]The Defendants’ witnesses of fact were Mrs Parshina, Mr Bulgakov and Mr Alexander Voplyushkin. Mr Voplyushkin is an IT consultant who gave evidence by video link to explain how the Group had lost electronic data.[43]None of the parties provided any electronic disclosure and there was very limited internal disclosure.[44]VTB made a late application to adduce expert valuation evidence which was refused by Flaux J. It was, however, allowed to rely on the valuation evidence contained in the witness statement of Mr Panchenko, an employee of DC. His evidence set out his valuation of the receivables due to VTB under the Loan as at 1 January 2009, 29 January 2013 and 31 July 2014.[45]The Defendants’ responsive expert valuation evidence was contained in the report of Mr David Mitchell. Mr Mitchell’s conclusion was that it is not possible to arrive at an estimated value of VTB’s rights under the Loan Agreement based on the information available to him and he accordingly put forward no valuation of his own.[46]Expert evidence on Russian law was given by Dr Igor Mukhachev on behalf of VTB and Professor Maggs on behalf of the Defendants.

The Issues

[47]The principal issues may be summarised as follows:(1) Whether VTB’s claim can be brought under Article 1064.(2) Whether causation is proved and in particular (i) whether the alleged acts caused Yurganz’s insolvency and its filing for bankruptcy and (ii) whether the Defendants caused or procured those acts.(3) Whether VTB’s loss is proved with the necessary certainty and specificity.(4) Whether the conduct of Yurganz and the Defendants was lawful.(5) Whether it involved an abuse of rights under Article 10 of the Civil Code.(6) Whether VTB caused or contributed to its own loss.(7) Whether VTB’s claim is barred by limitation. (1). Whether VTB’s claim can be brought under Article 1064.[48]Unlike common law systems which have developed distinct categories of tort, Russia has only one general rule covering all types of causing harm - Article 1064. It provides as follows:
“Article 1064. General Bases of Liability for the Causing of Harm 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 of compensation in full by the person who has caused the harm. A statute may place 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 has caused the harm to pay the victim compensation in addition to compensation for the harm. 2. The person who has caused the harm 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 harm even in the absence of fault of the person who caused the harm. 3. Harm caused by lawful actions shall be subject to compensation in the cases provided by statute.”
[49]The effect of Article 1064 is that a claimant has to prove that the defendant has caused it harm. Causation is not defined in the Civil Code and is treated as an issue of fact by the Russian courts.[50]Once the claimant has shown causation of harm, the defendant can escape liability if he shows(i) that the harm was not caused by his fault, or(ii) his conduct was lawful.[51]Fault in this context is interpreted as intent or negligence.[52]A defendant can avoid liability by showing that harm was caused by a lawful action, such as self defence or fair competition.[53]The evidence of Dr Mukhachev was that the wording and the application of Article 1064 is general and unqualified. It applies whenever the requisite facts are proved. There is nothing in the express terms of Article 1064, or in any other piece of Russian legislation, precluding a claim prior to the completion of a company liquidation. If the Russian legislature had intended so to limit the applicability of the provision, it could and would have done so by express words.[54]Professor Maggs’ evidence was that Article 1064 cannot be relied upon to bring a claim against the controllers of a company whilst bankruptcy proceedings relating to that company are continuing. In this connection he relied in particular on Articles 56(3) and 105(3) of the Civil Code and Articles 3 and 6(3) of the Limited Liability Company Law (“LLC Law”).[55]Article 56 of the Civil Code provides: “Liability of legal entity Clause 3. the Founder (member) of a legal entity or owner of its property shall not be liable for legal entity’s obligation and the legal entity shall not be liable for the founder’s (member’s) or owner’s obligation except for cases stipulated by this Code or constituent documents of the legal entity. If insolvency (bankruptcy) of a legal entity is caused by founders (members), owners of legal entity’s property or other persons entitled to give instructions obligatory for such legal entity or otherwise entitled to determine its actions, such persons, in case the property of legal entity is insufficient, may become subject to subsidiary liability for its obligations”.[56]Article 105 of the Civil Code provides: “Subsidiary business company ….. The members (shareholders) of a subsidiary company are entitled to require recovery by the holding company (partnership) of losses inflicted through its fault to the subsidiary company, unless otherwise specified by the laws on business entities”.[57]Article 3 of the LLC Law provides: “Clause 3. In the case of insolvency (bankruptcy) of the company through fault of its members or other persons entitled to give instructions obligatory for the company or otherwise entitled to determine its actions, the stated members or other persons, in case the company’s property is insufficient, shall be subject to subsidiary liability for its obligations”.[58]Article 6 of the LLC law provides: “Subsidiary and affiliated companies” ….. A subsidiary company is not liable for debts of the holding business company (partnership). The holding business company (partnership entitled to give instruction obligatory for the same shall be jointly and severally liable with the subsidiary company for transactions entered by the latter to fulfil such instructions. In the case of insolvency (bankruptcy) of a subsidiary company through fault of the holding business company (partnership) of losses inflicted through its fault to the subsidiary company”.[59]The experts agreed that these “subsidiary” liability provisions can only be relied upon after the procedure of liquidation is finished. As stated in their Joint Memorandum, they are “applicable only in case of insufficiency of the debtor’s property” and “that requires the creditor not only to wait until the fact when the debtor is declared bankrupt but also when liquidation procedure is finished when it becomes obvious that the amount of property is insufficient”.[60]It was Professor Maggs’ evidence that the same approach applies to any claim sought to be made under Article 1064. The loss does not crystallise until the liquidation procedure is finished and it is determined whether and to what extent the debtor’s property is insufficient. Until that time the harm to the creditor cannot be specifically determined and no claim arises under Article 1064 or otherwise.[61]It was also Professor Maggs’ evidence that the more specific provisions of the LLC Law displace and prevail over the general provisions of the Civil Code. As he pointed out, if there were, as Dr Mukhachev suggested, a general right for persons indirectly injured to bring immediate suit, these specific and limited provisions would be unnecessary.[62]Professor Maggs further explained that if, as Dr Mukhachev claimed, the Civil Code had primacy that would undermine the Bankruptcy Law. As he stated:
“The fundamental purposes of the Bankruptcy Law are to suspend normal Civil Law remedies so as to rehabilitate the debtor if possible and to ensure fair distribution of assets in accordance with priorities set by the Law, if full payment to all creditors is impossible.”
[63]If Article 1064 claims could be brought during the course of the bankruptcy that would destroy the effectiveness of the Bankruptcy Law since it would allow claims to be made on a first come first served basis regardless of the priorities in the Bankruptcy Law.[64]In oral evidence Professor Maggs also stressed that the availability of such a claim runs contrary to the established principle of corporate limited liability. Articles 56(3) and 105(3) of the Civil Code and Articles 3 and 6(3) of the LLC Law provide a limited exception to that principle where the controllers or shareholders of a company have caused its insolvency. In such a case, it is only where the requirements of those provisions are satisfied that a claim may be made directly against the controllers or shareholders.[65]Some support for Professor Maggs’ opinion as to the inadmissibility of a tort suit against a third party while a bankruptcy claim is pending is to be found in the Oktaedr case, a decision of the High Arbitrazh Court. In that case Oktaedr was not permitted to bring a tort suit against a Bank for its failure to enforce an attachment of a company’s bank account. The company was in bankruptcy proceedings and Oktaedr’s claim for the underlying debt was included in the registry of claims. The Court held that:
“Since the Company has not lost the possibility of recovery of the claimed amount from the debtor within the framework of the bankruptcy proceedings, the court considered that the claimant had not presented proof that it had been caused harm by the bank and, as a result, there were not bases of satisfying the claim for recovery from the defendant of the amounts that defendant had not withheld from the account of the debtor.”
[66]VTB submitted that this was a decision on its own facts and does not set out any statement of principle. Whilst I accept that it does not state in terms that no tort suit may be brought during a pending bankruptcy or that harm can never be proved until that process is finished, the decision reached and the reasoning adopted does provide some support for the Professor Maggs’ general point that there is no provable harm or loss until the bankruptcy or liquidation procedure is finished.[67]Dr Mukhachev relied on a decision in the KapStroy-2003 case which he said supported the availability of a right to bring a tort suit during a bankruptcy. However, as Professor Maggs pointed out, that was a case concerned with current payments, where, as is accepted, different rules apply.[68]Having had careful regard to the parties’ evidence and submissions, on Issue(1) I prefer and accept the evidence of Professor Maggs for all the various reasons given by him and in particular: (1) If Article 1064 is available during a pending bankruptcy then: (i) the specific provisions dealing with subsidiary liability would effectively be rendered redundant; (ii) the principle of limited liability would be seriously undermined. (iii) the proper and fair operation of the bankruptcy process would be disrupted.(2) It is not possible or appropriate to quantify what, if any, loss has been suffered until the bankruptcy process is completed.(3) Some support for Professor Maggs’ evidence is to be found in the Oktaedr case.(4) No relevant case law has been identified to support Dr Mukhachev’s evidence.[69]In relation to point (4), if Dr Mukhachev is correct, there must be innumerable cases in which an Article 1064 claim could have been brought during the course of a bankruptcy. However, he was not able to identify a single instance where such a claim had been made, still less succeeded. As Professor Maggs stated, “I have read thousands of Russian cases, including hundreds of Russian bankruptcy cases, and have never seen a single case in which a creditor recovered before the end of the bankruptcy process”. Dr Mukhachev is a bankruptcy law specialist and has no doubt read even more bankruptcy cases. However, he was unable to identify a single relevant example.[70]I accordingly find that VTB’s claim under Article 1064 cannot be brought until the conclusion of the bankruptcy process, which has yet to occur. It accordingly has no present right to bring its Article 1064 claim. (2). Whether causation is proved and in particular(i) whether the alleged acts caused Yurganz’s insolvency and its filing for bankruptcy and(ii) whether the Defendants caused or procured those acts.[71]VTB contended that the result of the alleged acts was to cause Yurganz’s insolvency and filing for bankruptcy and thereby harm to VTB. In this connection it largely relied on an analysis of Yurganz’s accounts by Mr Zadykhin. However, there was little, if any, primary documentation relating to Yurganz’s financial position and the reasons for its insolvency or need to file for bankruptcy. Nor was there any expert forensic accounting evidence to support the general assertions made.[72]A fundamental difficulty with VTB’s case on causation is that, as it accepted, its pleaded case was that the Defendants’ alleged acts caused Yurganz to be balance sheet insolvent. It does not and cannot contend that they caused it to be cash flow insolvent.[73]As the Defendants submitted, however, none of the alleged acts would appear to have adversely affected Yurganz’s balance sheet, still less rendered it balance sheet insolvent. In particular:(1) The failure to pay interest to VTB would have resulted in Yurganz having more cash offset by a concomitant accrued debt;(2) The reduction of its debt to Finance by RUB 2.25bn involves the payment of creditors and the discharge of a balance sheet liability;(3) The disposal of 45% of its fixed assets was not suggested to have been a sale at an undervalue. According to the profit and loss statement for 31 December 2009 the sale of the rolling stock yielded RUB 2,350,494 as against a book value of RUB 2,064,989. VTB relied on a lesser receipt figure of RUB 1,946,960 recorded in a cashflow statement. It is not clear how this relates to the figure recorded in the profit and loss statement. However, even if that figure is taken it does not affect balance sheet solvency. Further, if there was a difference because the balance sheet value was based on cost this would have been in accordance with usual accounting practices.(4) The purchase of the “worthless” bonds involved a purchase at below face value of a liability on Yurganz’s balance sheet. It would therefore have improved the balance sheet position.[74]VTB submitted that the disposal of 45% of Yurganz’s assets significantly affected its turnover and income and thereby its balance sheet. It relied on an analysis carried out by Mr Zadykhin in relation to the accounts of Yurganz. It submitted that this shows that in the first half of 2009 the company’s rolling stock was still generating turnover of RUB 1.43bn, representing a reduction of 13% on the turnover for the first half of 2008 of RUB 1.65bn. The turnover for the second half of 2009 was RUB 670m, a reduction of a little over 50%. VTB submitted that this reduction was attributable to the sale of the fixed assets which generated turnover for Yurganz and that this loss of turnover was a major contributor to the substantial losses Yurganz suffered in 2009.[75]This is mere assertion. There was no detailed accounting or other evidence relating to the reasons for the substantial losses suffered by Yurganz.[76]As the Defendants submitted, allowance needs to be taken of the serious effects of the global financial crisis. This was acknowledged in a VTB internal memo of 6 April 2009 which stated that:
“5. Reasons and circumstance having resulted in Soured loans Soured indebtedness for the companies of Far Eastern Transport Group was formed due to deterioration of the overall economic situation in the Russian Federation in H2, 2008 which found its expression in: - increase in accounts receivable amounts of the contractors stipulated by deterioration of their financial status (enterprises in construction, metal, timber and other industries) which led to decrease of working assets of the company, - decrease in transportation load, forced demurrage of the rolling stock which negatively affected trade receipts obtained by the company, - additional expenses of the company group related to maintenance of railway rolling stock, its demurrage and absence of demand.” - increase in accounts receivable amounts of the contractors stipulated by deterioration of their financial status (enterprises in construction, metal, timber and other industries) which led to decrease of working assets of the company, - decrease in transportation load, forced demurrage of the rolling stock which negatively affected trade receipts obtained by the company, - additional expenses of the company group related to maintenance of railway rolling stock, its demurrage and absence of demand.”
[77]“Absence of demand” and “forced demurrage” due to idle rolling stock was borne out by the evidence of Mrs Parshina who stated that:
“A drop in the rolling stock causes the drop in proceeds. But I would like to note that during the crisis, rolling stock, the wagons, were not working sufficiently efficiently and a big part of 13,000 wagons simply had been idle, and operating companies did not pay rent rates for the wagons, because they simply had no money. And that’s why there were situations when simply a rail car wouldn’t earn any money but would spend money, because when it’s being idle, being parked at Russian railways, and operating companies had to pay for keeping the rail cars there for downtime and they had to pay for maintenance. They had to pay for downtime and they had to pay leasing payments.”
[78]Further, the rolling stock was pledged to other banks and its sale reduced Yurganz’s debt to the banks and its interest burden, thereby improving its financial position.[79]The April 2009 memo added that:
“Moreover, the activity of the company group was characterised by a debt load formed mainly due to short-term credits and loans, bonded loans, significant obligations related to maintenance of lease portfolio. Problems while refinancing short-term loans of the company related to decrease in the banks’ liquidity resulted in bonded loan and loan agreement defaults of the company group members and significant impairment of the credit history.”
[80]This highlights how any proper analysis of Yurganz’s financial position and the reasons for its deterioration requires detailed consideration of the complete picture, not just parts of it.[81]VTB further contended that Yurganz’s financial position was made still worse by the use of the proceeds of sale of the rolling stock to purchase “worthless” bonds. However, as already found, this did not affect the balance sheet position. In any event, given that the bonds were underwritten by Yurganz, DVTG and Dalneftetrans, it cannot be assumed and has not been proved that in 2009 they were “worthless”. Further, Yurganz was under an obligation to buy them and, as Professor Maggs explained, there can be no claim for harm based on the performance of pre-existing obligations.[82]In summary the evidence relied upon by VTB falls far short of proving that the alleged acts caused Yurganz to be balance sheet insolvent. There is scant evidence as to the reasons why Yurganz was forced into bankruptcy. There was no evidence relating to market conditions or the financial pressures that Yurganz was under. There was no evidence from the liquidator. The bankruptcy is more likely to be linked to cashflow insolvency (which is not part of VTB’s case) than its balance sheet position. To address this issue a far more in depth and detailed analysis of Yurganz’s finances would be required.[83]For all these reasons VTB’s case on causation fails.[84]Even if VTB could prove that the alleged acts had caused Yurganz’s insolvency and the filing for bankruptcy it would then be necessary for it to prove that it was the Defendants who caused or procured those acts.[85]It was VTB’s case at trial that Mrs Parshina made all significant commercial decisions for Yurganz and that Mr Bulgakov and thereby Parline would defer to her. If so, it is difficult to see how Mr Bulgakov or Parline caused or procured any of the relevant acts and there was no evidence of their involvement in those acts or of any collective involvement. I accept Mr Bulgakov’s evidence that his sole material involvement was in relation to the approval of the Loan Agreement and that he was not involved formally or informally in the alleged acts.[86]Mrs Parshina’s evidence was that her role was a strategic one and that all operational decisions were made by the General Directors of the relevant companies. In relation to Yurganz that meant Mrs Matvienko, either as General Director or acting under power of attorney from the General Director. Mrs Matvienko did not give evidence.[87]VTB made detailed criticisms of Mrs Parshina’s evidence and submitted that the documentary evidence, her witness evidence and the inherent probabilities showed that Mrs Parshina was far more involved than she was prepared to admit. It made particular criticism of her evidence as to the role played by her mother as General Director of Yurganz, and the contrast in that regard between her witness statement and her oral evidence.[88]I am prepared to accept that Mrs Parshina was more involved in Yurganz’s business affairs than she acknowledged and that the line between strategic and operational matters was not as clearly drawn as she suggested. However, that does not prove that she caused or procured the alleged acts. She may well have approved the relevant decisions but I am not satisfied that it has been proved that she made them. The evidence did not establish that she directed or forced upon the decision-makers the decisions behind the alleged acts, even if one assumes, which is unlikely, that all the acts reflected identifiable decisions rather than developments over time. I accordingly conclude that it has not been proved that the Defendants individually or collectively caused or procured the alleged acts. This necessary part of VTB’s case on causation is therefore also not proved. (3). Whether VTB’s loss is proved with the necessary certainty and specificity.[89]It was common ground between the Russian law experts that pursuant to Article 1082 and Article 15 of the Civil Code losses must be proved with specificity. As Dr Mukhachev accepted in cross examination, the loss or harm must be proved “with specificity, with particularity and with clarity”.[90]That requirement is not satisfied in this case since, for reasons already given, there can be no clarity or specificity until the liquidation procedure is finished.[91]Even if that be wrong, I am not satisfied that VTB has proved its loss with the necessary certainty and specificity for a number of reasons. In particular:(1) VTB’s claim is based on the loss caused to it as a result of Yurganz’s insolvency and consequent filing for bankruptcy. It does not suggest that it had a claim prior to bankruptcy. As such, one would expect such a loss to be measured by reference to the value of its receivables immediately before and after the filing for bankruptcy (if it is not necessary to await the completion of the liquidation procedure). However, there is no evidence of value close to that time. The only pre-insolvency valuation evidence is as at January 2009, 18 months before the filing. This was itself based heavily on an earlier third party valuation of the trucks carried out for the purposes of the making of the pledge of the trucks.(2) There was equally no evidence of value immediately after the filing. VTB submitted that the appropriate value date was the date of trial, but even it that were so the valuation relied upon was as at 31 July 2014, 8 months before trial. On VTB’s own case the valuation has fluctuated over time and no doubt would have continued to do so.(3) There is no evidence of whether and how projections or extrapolations can be made based on the valuations relied upon.(4) Mr Panchenko’s valuation of the trucks was dependent on their physical condition and the extent of depreciation. There was no evidence as to this and Mr Panchenko simply relied on his general experience and expectation.(5) Mr Panchenko’s valuation was a desktop valuation which depended on a large number of assumptions and a significant degree of guesswork.(6) Mr Panchenko did not have regard to any of the offers made for the rolling stock.(7) Mr Panchenko valued the covenants from Yurganz, DVTG and Dalneftetrans at zero, although DVTG and Dalneftetrans had entered into settlement agreements to pay VTB 70% of their claims over a period of years and had paid over RUB74min the course of 2014.(8) The limited evidence available and the various contingencies involved means that, if any figures could be put forward at all, realistically the most that could be put forward is a range of values, but Mr Panchenko gives a specific figure. There is insufficient evidence to do so.

Conclusion

[92]I have found that VTB’s claim fails on four distinct grounds. In those circumstances it is not necessary to consider the further issues which might otherwise arise. Despite the skill and ingenuity with which Mr Gourgey QC has presented VTB’s claim I am satisfied and find that it is an unproven and unsustainable claim which must be dismissed.

Cited in 2 later judgments