The Honourable Mr Justice Flaux:
Introduction
- There are two related applications before the court: (i) the claimant's application dated 27 March 2015 to amend the Particulars of Claim and (ii) the first defendant's application dated 13 July 2015 to strike out the Particulars of Claim, alternatively for summary judgment against the claimant.
- The claim made in the original Particulars of Claim is of an unlawful means conspiracy on the part of the first defendant ("Mr Kekhman") with a number of companies in the group which the claimant alleges that he controlled to defraud the claimant bank ("the bank"). The pleading of his control and direction of the corporate affairs of the group is set out in paragraph 8 of the existing pleading, as is an allegation at paragraph 9 that he was the controlling mind of each of the British Virgin Island companies and other companies in the JFC Group.
- Paragraph 30 of the original pleading sets out the alleged unlawful acts relied upon: (i) the second, third and fourth defendants (JFC BVI, Whilm and Garold) defaulted on their obligations under guarantees given to the bank in respect of the liabilities of companies in the JFC Group under the various loan agreements; (ii) JFC BVI, Whilm and Garold moved or permitted to be moved or diminished assets in breach of the guarantees; (iii) these breaches of contract were procured by Mr Kekhman exercising his ultimate control over those companies and JFC Russia; (iv) Mr Kekhman through his dominant control over the companies in the JFC Group and in breach of his fiduciary obligations to those companies procured the transfer of assets and diverted corporate opportunities away from the Group with the intention of interfering with the economic interests of the bank by unlawful means by rendering it impossible for the companies to fulfil their obligations to the bank or to repay the loans.
- In support of the allegation of a conspiracy to injure the bank, paragraph 31 of the original pleading sets out that whereas the audit reports for the Group at June 2011 showed net assets of U.S. $218 million, the balance sheet put before creditors in September 2012 showed net liabilities of U.S. $193 million, a reduction over the period of U.S. $411 million for which no legitimate commercial explanation has been provided. It is not explicable on the basis of trading losses. The bank contends that it is to be inferred that the reason for the reduction is that assets have been disposed of or diminished for no or no adequate consideration and that since Mr Kekhman was controller of the Group it is to be inferred this was done at his direction and for his benefit.
- Particulars of the unlawful means are then set out at paragraph 32 of the original pleading. Reference is made to a number of substantial dispositions of funds from Group companies, particularly JFC Russia and Garold to other companies which it is contended were ultimately controlled by Mr Kekhman including Kronos, Prometheus (Prometey), Maldus Consulting and Gepson. It is pleaded that these transfers were made for no or no adequate consideration and it is to be inferred that they were made at the behest or under the direction of Mr Kekhman, which constituted breaches of the fiduciary duties he owed the companies. It is alleged that a parallel structure of companies was set up by him or on his behalf and that business opportunities belonging to the JFC Group were diverted upon the instruction of Mr Kekhman, including Cetus and Prometey interposed in the supply chain of bananas to JFC Russia, Charterlink which was paid for freight services and Tradement which began acting as a seller of bananas in various other countries than Russia.
- It is also alleged that Prometey was making payments of tens of millions of dollars to companies controlled by or managed on behalf of Mr Kekhman during the course of 2011, including to companies in the LQ Group, (which was the Group which owned a substantial property portfolio) and to Cetus which in turn paid Kronos, Maldus Consulting and other companies, all ultimately controlled by Mr Kekhman.
- In paragraph 33 of the original pleading, it is alleged that the conspiracy caused the bank loss and damage consisting of the unpaid judgment debt of some U.S. $144 million and 328 million Roubles pursuant to summary judgment which the bank obtained against the second to fourth defendants in November 2012 which remains unsatisfied.
- The bank wishes to amend its pleading to allege that fraudulent misrepresentations were made to it to induce it to make the loans of U.S. $150 million to JFC Russia which were made in September and October 2011. The alleged misrepresentations fall into two categories: (i) the alleged "Garold Representations" in which the revenue and accounts of Garold were artificially and fraudulently inflated by some U.S. $200 million and (ii) the alleged Security Representation in which it was represented to the bank that the security provided in relation to the various outstanding loans of the JFC Group was as set out in a document headed "Breakdown of loan debts" including that the security provided to Sberbank was limited to guarantees from Group companies, whereas in fact there was a pledge of shares in JFC BVI to Sberbank which meant there was a serious likelihood that the percentage of shares pledged would give Sberbank control of JFC BVI in the event of default.
- In terms of the involvement of Mr Kekhman in the alleged fraudulent representations, it was already pleaded that the companies were controlled by him and that the role of Mr Afanasiev (who was in charge of international operations for the JFC Group) and Mrs Zakharova (who was head of the finance department), who had a 15% shareholding each in the JFC Group and a 5% shareholding each in the LQ Group, was to implement his instructions and be accountable to him. The proposed amendments pleaded that to the extent that the relevant misrepresentations to the bank were made by or on the instructions of Mrs Zakharova, it was to be inferred that this was done on the direction of and/or with the approval and knowledge of Mr Kekhman. The contested application for permission to amend came before me on 24 April 2015. In my judgment given at that hearing I refused permission for the amendments in their then form, principally on the grounds that the bank was declining to give particulars of the instances of control by Mr Kekhman of the relevant companies from which his participation in fraud was said to be inferred, contending in correspondence that this was a matter for evidence. I held in [23] of my judgment that the instances of control relied upon needed to be specifically pleaded and that the bank needed to clarify whether it was being alleged that Mrs Zakharova and Mr Afanasiev were implicated in the fraud.
- Following that hearing, on 22 May 2015 the bank produced a further draft of the amended pleading which set out at a new paragraph 8A particulars of the allegation that the role of Mrs Zakharova and Mr Afanasiev was to implement Mr Kekhman's instructions, in other words further particulars of his control of the various companies and their affairs. Those particulars of control are relevant to both the existing pleading of conspiracy to defraud and the proposed amendment. The terms of that paragraph are set out in the appendix to this judgment. Following production of that further draft pleading, Mr Kekhman has sought further particulars of the bank's case, in particular whether it was being alleged that Mrs Zakharova was party to the conspiracy with Mr Kekhman, one of the matters which I had said should be clarified, but which had not been. The bank has confirmed, in Further Information dated 22 June 2015, that it is part of its case that Mrs Zakharova was a party to the fraudulent conspiracy and to the fraudulent misrepresentations allegedly made to the bank. The bank is not contending that Mr Afanasiev was a party to any conspiracy or fraud.
- The application to amend came before me again on 26 June 2015, but since Mr Swainston QC was indicating that Mr Kekhman proposed to apply to strike out the existing pleading and/or seek summary judgment, it seemed to me more sensible to deal with those applications and the bank's application to amend at the same time, so that the whole matter was adjourned to 8 September 2015. There was, however, some debate between the court and Mr Gourgey QC for the bank at the 26 June hearing concerning the current form of the amendment which is of relevance to the applications before the court and to which I will refer below.
The law
- CPR 3.4(2) gives the court power to strike out a statement of case which discloses no reasonable grounds for bringing or defending a claim or a statement of case which is an abuse of process. Where, on the material before the court, there are disputed issues of fact, the court should not strike out a claim unless certain it is bound to fail: see per Peter Gibson LJ at [22] in Colin Richards & Co v Hughes [2004] EWCA Civ 226. The test is similar but not identical to that for summary judgment where the court will not grant summary judgment, here in favour of a defendant, unless the claim has no real prospect of success. It is well established that where it is clear that there are disputed issues of fact between the parties, the court should not engage in a mini-trial of the merits at an interlocutory stage: see Civil Procedure [3.4.2]. Where a party seeks to amend a statement of case, the court will not permit an amendment unless it has a real prospect of success, so that the test is the same as for summary judgment: see Civil Procedure [17.3.6].
- Mr Gourgey QC for the bank relies upon those principles in the present case to submit that (a) the evidence before the court, including the statement of Mr Afanasiev and the attendance note of the interview of Mrs Zakharova demonstrate that there are conflicts of evidence in the present case, for example as to the extent to which Mr Kekhman was still involved in the detailed management of the JFC Group even after he was appointed to the Mikhailovsky Theatre and those conflicts cannot and should not be determined at this stage; (b) both the existing pleading and the proposed amendment do have a real prospect of success so that the court should refuse the strike out and summary judgment applications and allow the amendments.
- However, Mr Swainston QC for Mr Kekhman submits that in a case where fraud is alleged (as is the case with both the original conspiracy plea and the proposed plea of fraudulent misrepresentation) there is an anterior question as to whether fraud is properly pleaded at all, in other words whether the requirements imposed by the rules of Court and as a matter of law in respect of pleading fraud have been satisfied. In that context, Mr Swainston QC relies upon the principles as to the pleading of fraud restated by the House of Lords in Three Rivers District Council v Bank of England [2001] UKHL 16; [2003] 2 AC 1.
- At [55]-[56], Lord Hope of Craighead stated the principles as follows:
"As the Earl of Halsbury LC said in Bullivant v Attorney General for Victoria [1901] AC 196, 202, where it is intended that there be an allegation that a fraud has been committed, you must allege it and you must prove it. We are concerned at this stage with what must be alleged. A party is not entitled to a finding of fraud if the pleader does not allege fraud directly and the facts on which he relies are equivocal. So too with dishonesty. If there is no specific allegation of dishonesty, it is not open to the court to make a finding to that effect if the facts pleaded are consistent with conduct which is not dishonest such as negligence. As Millett LJ said in Armitage v Nurse [1998] Ch 241, 256G, it is not necessary to use the word "fraud" or "dishonesty" if the facts which make the conduct fraudulent are pleaded. But this will not do if language used is equivocal: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, 268 per Buckley LJ. In that case it was unclear from the pleadings whether dishonesty was being alleged. As the facts referred to might have inferred dishonesty but were consistent with innocence, it was not to be presumed that the defendant had been dishonest. Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegation is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence.
56 In this case it is clear beyond a peradventure that misfeasance in public office is being alleged. There is an unequivocal plea that the Bank was acting throughout in bad faith. The Bank says that the facts relied on are, at best for the claimants, equally consistent with negligence. But the substance of that argument is directed not to the pleadings as such, which leave no doubt as to the case that is being alleged, and the basis for it in the particulars, but to the state of the evidence. The question whether the evidence points to negligence rather than to misfeasance in public office is a matter which must be judged in this case not on the pleadings but on the evidence. This is a matter for decision by the judge at trial."
- At [160] Lord Hobhouse stated:
"Where an allegation of dishonesty is being made as part of the cause of action of the plaintiff, there is no reason why the rule should not apply that the plaintiff must have a proper basis for making an allegation of dishonesty in his pleading. The hope that something may turn up during the cross-examination of a witness at the trial does not suffice. It is of course different if the admissible material available discloses a reasonable prima facie case which the other party will have to answer at the trial."
- The fullest statement of the relevant principles upon which Mr Swainston QC relied is that of Lord Millett from [184] onwards:
184. It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney Genera; for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.
185. It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means "dishonestly" or "fraudulently", it may not be enough to say "wilfully" or "recklessly". Such language is equivocal. A similar requirement applies, in my opinion, in a case like the present, but the requirement is satisfied by the present pleadings. It is perfectly clear that the depositors are alleging an intentional tort.
186. The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved."
- His Lordship then analysed the judgment of Thesiger LJ in Davy v Garrett and the judgments of the Court of Appeal in Armitage v Nurse and continued at [189]:
"189. It is not, therefore, correct to say that if there is no specific allegation of dishonesty it is not open to the court to make a finding of dishonesty if the facts pleaded are consistent with honesty. If the particulars of dishonesty are insufficient, the defect cannot be cured by an unequivocal allegation of dishonesty. Such an allegation is effectively an unparticularised allegation of fraud. If the observations of Buxton LJ in Taylor v Midland Bank Trust Co Ltd (unreported) 21 July 1999 are to the contrary, I am unable to accept them."
- In his reply submissions, Mr Swainston QC put the test which he submitted was to be derived from Lord Millett's speech in these terms:
"…the primary facts must necessarily lead to the inference that Mr Kekhman is guilty of fraud because otherwise and ex hypothesi the primary facts can be consistent with innocence…You don't get to arguability until you've established that there is a proper fraud plea. You don't establish that there is a proper fraud plea before particulars are pleaded which are only consistent with Mr Kekhman being dishonest and which cannot be consistent with Mr Kekhman being honest."
- I agree with Mr Gourgey QC that this overstates what is required for a valid plea of fraud. The claimant does not have to plead primary facts which are only consistent with dishonesty. The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact "which tilts the balance and justifies an inference of dishonesty". At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge. This is made absolutely clear in the passage from Lord Hope's speech at [55]-[56] which I quoted above.
- This approach has also been adopted by other first instance judges. In Abbar v Saudi Economic & Development Company Real Estate [2010] EWHC 2132 (Ch), Nicholas Strauss QC, sitting as a Deputy High Court Judge of the Chancery Division, rejected what was essentially the same argument as is advanced by Mr Swainston QC. At [3] of the judgment, he held:
"In the present case, the claimants have alleged fraud and, in the alternative, negligence. Mr. Reed submitted that this, by itself, must mean that the primary facts were consistent with honesty, and that fraud therefore could not be pleaded. This, if correct, would apply to all cases, and it would never be open to a claimant to plead alternative claims for fraud and negligence. Such alternative claims are of course commonplace, and this submission is wrong. If there are facts which "tilt the balance" and justify an inference of dishonesty, then dishonesty may be alleged. Alleging negligence in the alternative involves no inconsistency: it simply recognises that the court may find that the defendant was not dishonest but merely negligent."
- The same approach was adopted by Eady J in Foley v Lord Ashcroft [2012] EWHC 1710 QB at [15]:
"It is fair to say that the principle referred to by Tugendhat J in Bray v Deutsche Bank, by reference particularly to the Court of Appeal decision in Telnikoff v Matusevitch, goes back at least as far as Somerville v Hawkins (1851) 10 CB 583, 20 LJCP 131, 15 Jur 450 in the middle of the nineteenth century. But it is generally linked specifically to the requirements for pleading malice (albeit nowadays often equated to dishonesty). I do not believe that I have hitherto encountered a corresponding rule applied to pleading justification. I will proceed, therefore, on the assumption that particulars of justification, for an inference of dishonesty to be based upon them, do not need to be in themselves consistent only with such a conclusion – at least in a case where dishonesty is expressly pleaded. That would seem to accord with the majority in Three Rivers."
- Contrary to Mr Swainston QC's submissions in his written note submitted after the hearing, I do not consider that there is anything in the judgment of Millett LJ (as he then was) in Armitage v Nurse [1998] Ch 241 which supports the test for which Mr Swainston QC contends. In the circumstances, it seems to me that the right test to apply is the one put forward by Mr Gourgey QC.
The original pleading
Submissions on behalf of Mr Kekhman
- Mr Swainston QC contends that the existing pleading of conspiracy to defraud does not plead any primary facts which, in the words of Lord Millett, "tilt[s] the balance and justif[y] an inference of dishonesty." He relies in particular upon the fact that the particulars of control now pleaded in paragraph 8A of the amended pleading do not allege any control by or instructions from Mr Kekhman whether to Mr Afanasiev, Mrs Zakharova or anyone else in relation to anything which was not legitimate. Mr Swainston QC pointed out that, at the hearing on 26 June 2015, when the latest amendments were first discussed, Mr Gourgey QC on behalf of the bank accepted in answer to a question from me that all the pleaded instances of control were genuine and legitimate.
- If there was an attempt to resile from that position now by the bank and to suggest that particular (13): "Mr Kekhman directed that JFC Group funds should be utilised in such manner as would prioritise use of those funds as meeting liabilities owed to banks by the LQ Group… and Mrs Zakharova implemented such instructions" involved instructions to do something illegitimate, Mr Swainston QC submitted that in itself, the movement of funds from the cash rich JFC Group to support the LQ Group in the same beneficial ownership does not involve anything improper or illegitimate. There is no allegation that at the time the transfer took place the JFC Group was insolvent or that there was anything going on which amounted to the equivalent of fraudulent trading as a matter of Russian law. In the witness statement from Mr Tchernenko, an in-house lawyer at the LLC VTB Debt Centre, it is said that the transfers to LQ were illegal because they were in breach of covenants given by the JFC Group to other banks. However, as Mr Swainston QC points out, that point is not pleaded and, in any event, it is not alleged that any such covenant was given to this bank, so that, even if pleaded, this could not justify an inference of fraud against the bank. In the event, as set out below, Mr Gourgey QC accepted that on the information currently available, he was not in a position to say that the payments to the LQ Group were illegitimate.
- Mr Swainston QC submitted that even if, contrary to his primary submission, the original pleading satisfies the Three Rivers test for pleading fraud, the bank's case faces such insuperable evidential difficulties that it has no real prospect of success at trial, so that it should be struck out now and/or summary judgment entered for Mr Kekhman. He placed particular emphasis upon two aspects of the bank's evidence. First, that in so far as the bank relies upon the evidence of Mr Afanasiev (from whom a statement taken by Mr Tchernenko was served shortly before the hearing) the bank faces the logical conundrum that it has expressly eschewed any suggestion that Mr Afanasiev was party to any fraud or was in any way dishonest. It follows, says Mr Swainston QC, that, although Mr Afanasiev gives evidence about the extent to which Mr Kekhman continued to control the JFC Group and give instructions about the management and operation of the business even after he took up his post at the Mikhailovsky Theatre (and therefore contradicts Mr Kekhman's evidence about the position after he took up the post), since the bank accepts Mr Afanasiev was honest, he cannot and does not give evidence about having received instructions from Mr Kekhman to do anything dishonest or about having been present when Mrs Zakharova received such instructions.
- Mr Swainston QC submits that, given the bank's position that Mr Afanasiev is an honest man, the evidence which he can give on the issue of fraud is strictly limited. Mr Swainston QC focused on what Mr Afanasiev says in the last paragraph of his statement (in the context of the allegation of presentation to the bank of false accounts for 2010):
"It is inconceivable that Ms Zakharova would have presented false accounts to Mr Kekhman without telling him of their falsity and equally inconceivable that she would have presented the false accounts to the Bank without his approval. I say this for the followings reasons. The fact of the matter is that Mrs Zakharova would never have taken such a momentous step as to present false accounts to the Bank on her own initiative. There would have been no benefit to her in doing so. The only person who benefitted from all of this was the person who controlled the whole business, who could extract money from the business at will (whether for his LQ projects or donations to the Mikhailovsky Theatre or otherwise), that is, Mr Kekhman, and not Mrs Zakharova or me. Furthermore, the nature of the relationship between Mr Kekhman and Mrs Zakharova was such that he dominated her and she would not take any significant steps concerning the business without his knowledge and approval."
- Mr Swainston QC submitted that this passage was no more than assertion, what he described as a "foot stomping" point, to the effect that Mrs Zakharova was so much under the control of Mr Kekhman that it was inconceivable that she would have acted fraudulently without having either been instructed by Mr Kekhman to do so or having informed Mr Kekhman she was doing so and obtained his consent. He submitted that this took the bank no further than the assertions made in its pleading which were insufficient to sustain a case of fraud.
- The other aspect of the bank's evidence upon which Mr Swainston QC focused was the interview Mr Tchernenko conducted with Mrs Zakharova in Spain on 18 and 19 September 2014. Mr Swainston QC submitted that it is striking that, although it is now part of the bank's case that Mrs Zakharova was a party to the frauds allegedly committed by Mr Kekhman, nowhere in her interviews, which gave extensive and detailed information about the business, does she say that Mr Kekhman ever instructed her to do anything dishonest or told her to inflate the 2010 accounts or to misrepresent the financial position to the bank. I will return to this aspect of the evidence when I consider the application to amend.
- In his oral submissions, Mr Swainston QC highlighted a number of the difficulties which he submitted that the bank's original pleading of fraudulent conspiracy faced in view of these two aspects of the bank's evidence, namely that it accepts that Mr Afanasiev was honest and that it has no evidence from Mrs Zakharova that she was dishonest or that she was instructed to do anything dishonest. Thus, in relation to the allegation in paragraph 32(3) of the original pleading that Cetus, Prometey, Charterlink and Tradement were parallel structures set up by or on behalf of Mr Kekhman to divert monies or business opportunities which properly belonged to the JFC Group, Mr Swainston QC submitted that the allegation that this was part of a fraudulent conspiracy faced two fundamental difficulties. First, on the evidence from Mr Afanasiev and Mrs Zakharova which the bank has produced, these companies were set up and the business of the sale and supply of fruit and the chartering of vessels formerly carried out by Whilm and Garold and their subsidiaries transferred to them, at the instigation of Mr Afanasiev following the Star Reefers litigation in which the Group was involved. Mr Afanasiev's thinking was that transferring the business to new companies would ring fence the Group from, for example, the arrest of cargoes or vessels. Accordingly, on the bank's own case and contrary to its pleading, there was a commercial explanation for the creation of these new companies. Whether the commercial decision to create these new companies was entirely honourable is nothing to the point. Mr Swainston QC submitted that the decision was made at the instigation of a man who on the bank's case was honest, so it can hardly have been part of some overall plan masterminded by Mr Kekhman to divert money and business away from the Group.
- Mr Swainston QC submitted that the second difficulty which the allegation that this was all part of a fraudulent conspiracy faced was that, to the extent that payments were being made to these new companies, the bank has no evidence that these were not genuine payments for the supply of fruit or the chartering of tonnage to carry cargoes. Mrs Zakharova also said in the interview that Prometey sold to JFC directly and made no profit. On that basis, he submitted that funds can hardly have been diverted to Prometey other than by way of payment for fruit supplied.
- One of the allegations of diversion of funds into companies ultimately controlled by Mr Kekhman in paragraph 32(1) of the original pleading concerns the sum of U.S. $783,488.69 paid by Garold to Gepson in June 2012. In his statement Mr Kekhman explains that this payment was made pursuant to an arrangement whereby a company which Mr Akatseyvich owned agreed to give JFC Russia a corresponding credit for fruit. In his skeleton argument, Mr Gourgey QC pointed out that this company was Fruitservice LLC according to the Defence, so where was the benefit to Garold in paying Gepson. He also pointed out that this transfer occurred at a time when the Group was under pressure from creditors so that one might have expected Mr Kekhman to be keen to conserve cash within the group. Mr Swainston QC challenged this analysis on the basis that this was not a diversion of funds since it was a payment for fruit supplied or to be supplied in the future and, in any event, he submitted that this was far too late in terms of the chronology to be a fraud on the bank.
- In relation to the allegations about diversion of funds from the JFC Group to the LQ Group, I have already referred to the fact that there is no allegation advanced by the bank that at the time those funds were transferred over, the JFC Group was insolvent or engaged in fraudulent trading. Mr Swainston QC also relied upon the fact that in the interview, Mrs Zakharova said that the "receivables", loans on development projects (i.e. the payments to the LQ Group), were "alive" or "real", in other words that they would be repaid when those development projects were realised. Later in the interview, Mrs Zakharova was asked in terms what was the reason for JFC Russia having defaulted upon payment of the loan from the bank and she said the "first" reason (since she does not identify any other reason I take it she means the main reason) was that there was no high season for fruit in 2011. She says JFC was not ready for such a problem and that if there had been a high season, interest on the loan from the bank would have been repaid even if the receivables i.e. the payments made to the LQ Group had not been returned to the JFC Group. Mr Swainston QC relied upon what Mrs Zakharova said as demonstrating that the real reason why the bank loans were not repaid was not fraud on the bank but the absence of a high season.
Submissions on behalf of the bank
- In relation to Mr Kekhman's case that the existing pleading should be struck out or summary judgment entered for the defendants, one of the principal reasons why Mr Gourgey QC urged against such a course was that, where there was a conflict of evidence, for example between Mr Kekhman and Mr Afanasiev, the court cannot and should not determine that conflict or reach any conclusions at this interlocutory stage as to whose evidence is to be preferred. That is a matter for trial. A prime example of that is the bank's case, supported by Mr Afanasiev's evidence and the various statements of Mr Tchernenko, that the companies (set out in the Schedule to the existing Particulars of Claim) which it identifies as the recipients of funds or business opportunities diverted from the JFC Group are all ultimately controlled by and/or on behalf of Mr Kekhman and that to the extent that Mr Kekhman asserts that the companies were owned or controlled by other individuals, such as Mr Akatseyvich, those individuals were nominees for Mr Kekhman. This is hotly disputed by Mr Kekhman in his evidence and Mr Swainston QC submitted that Mr Afanasiev's evidence was unreliable, for example because his statement contradicted what he had told prosecutors in Russia last year. However, as Mr Gourgey QC rightly points out, that conflict of evidence and the evaluation of witnesses is for trial. For present purposes, despite Mr Kekhman's denial, the bank has a sufficiently arguable case that the companies identified were all ultimately controlled by or on behalf of Mr Kekhman.
- One of the few companies set out in the Schedule to the Particulars of Claim of which Mr Kekhman admits knowledge in his Defence is Gepson. I referred above at [32] to Mr Kekhman's case that the payment of U.S. $783, 488.69 by Garold to Gepson in June 2012 was in respect of a credit for fruit. Mr Kekhman accepts that he directed this payment. Mr Gourgey QC submitted that this explanation made no sense. As Mr Tchernenko points out, given that the monies came from Garold, surely any credit for fruit should have been given to Garold, not to JFC Russia. Mr Gourgey QC submitted that this transaction was not a genuine transaction. He relied upon the analysis of the chain of communications which led to the payment being made to Gepson set out in Mr Tchernenko's statement. Mr Tchernenko concludes: "It appears to be the case that the payment was made by Garold to Gepson without there being any genuine underlying commercial transaction justifying the payment and with the invoice used to justify the payment appearing to having been manufactured." Accordingly, Mr Gourgey QC submitted that this was simply stripping money out of Garold to go to Gepson for the benefit of Mr Kekhman.
- In relation to the creation of the parallel structure generally, Mr Gourgey QC submitted that, if it had simply involved the insertion of new companies in the chain within the JFC Group without the diversion of assets or business opportunities, then there would be no basis for any complaint. However, what happened here was that the companies were not in the Group and assets and business opportunities were diverted to Cetus and Prometey which should have gone to the Group. In answer to Mr Swainston QC's point that it was Mr Afanasiev who had advised the setting up of these companies, Mr Gourgey QC drew the court's attention to the Response to Further Information dated 22 June 2015 where the bank said: "As regards the diversion of corporate opportunities, Mr Afanasiev knew of the existence of some of the companies to which on the Claimant's case corporate opportunities were diverted, including Prometey and Tradement and knew that those companies were dealing with the JFC Group of companies. Mr Afanasiev believed cash generated from those companies would be for the JFC Group. While Mr Afanasiev was involved in the import and export side of the JFC Group business, he did not know in which companies profits were accumulated and understood that this was determined by members of the JFC Group financial department." This explanation of Mr Afanasiev's state of knowledge is confirmed by him in his witness statement. In these circumstances, Mr Gourgey QC submitted that the bank's case that assets and business opportunities were improperly transferred to companies in a parallel structure outside the Group was arguable with a real prospect of success.
- Mr Gourgey QC also drew attention to a number of key areas of Mr Kekhman's evidence that were challenged or at least put in doubt by the evidence of Mr Afanasiev or other evidence. Much is made by Mr Kekhman in his evidence and in the submissions on his behalf of the assertion that, after he took over the running of the Theatre, his active day to day involvement in the management of the JFC group ceased and he was only involved in relation to strategic decisions and communicated with Mr Afanasiev and Mrs Zakharova only occasionally. Mr Gourgey QC submitted that the evidence which the bank has obtained from Mr Afanasiev, in particular from his mobile phone and text records, demonstrates that this evidence of Mr Kekhman's is manifestly untrue, with more than 400 communications (calls and texts) between Mr Kekhman and Mr Afanasiev in each of the years 2008 to 2011 and 368 in 2012. The text messages still available do not seem to be limited to discussions about substantial business transactions, as Mr Kekhman had asserted in his witness statement. Furthermore, in interview, Mrs Zakharova said that nothing changed for her after Mr Kekhman moved to the Theatre in 2007. Accordingly, Mr Gourgey QC submitted that Mr Kekhman had a continued detailed involvement in and control of the management of the Group after he moved to the Theatre far greater than he was prepared to admit and that his untruthfulness about that cast doubt upon the veracity of other aspects of his evidence.
- Another area of the evidence of Mr Kekhman which is of considerable importance to his case is his evidence that he was unaware of the true financial position of the JFC Group in 2010 and 2011 (and therefore at the time that the loans from the bank were obtained) until late December 2011, when he says he became aware of the freezing order in the Star Reefers litigation. He says that it was only after that time that he started to take a closer look at the affairs of the Group and the management of Mr Afanasiev and Mrs Zakharova. Before then, he says he was misled by Mrs Zakharova as to the amount of working capital available to the Group. Whilst he was aware that the Group required fresh financing in 2011 from discussions with Mr Afanasiev and Mrs Zakharova, he did not instigate the process or instruct them to obtain the loans from the bank.
- This evidence of Mr Kekhman is strongly contested by Mr Afanasiev who says that Mr Kekhman was probably the only person who knew exactly how bad the JFC Group's position was in 2011, as he used it as though it was his personal bank. He explains that the Group's financial position worsened because it transpired that there would be no high season for fruit in 2011. He says that at Mrs Zakharova's suggestion, Mr Kekhman agreed that Mr Afanasiev should take over as General Director so that Mrs Zakharova could concentrate on finding alternative sources of funding. Mr Afanasiev's evidence is that Mr Kekhman knew that the profit margins from the sale of bananas were insufficient to cover the funds which he was siphoning off elsewhere for example to the LQ Group and that to survive the Group required an injection of external funding, which is why he instructed Mrs Zakharova to raise funds. Accordingly, Mr Afanasiev says that Mr Kekhman's evidence that he was misled by Mrs Zakharova as to the financial position of the company and did not become aware of the financial decline until the end of 2011 is not true. Mr Gourgey QC submitted that the bank has a good arguable case that Mr Kekhman is not telling the truth when he says that he was not aware of the true financial position of the JFC Group until late 2011 and that Mrs Zakharova misled him. That untruthfulness also, as with the untruthfulness in relation to his involvement with the management of the Group after his departure for the Theatre casts doubt on the truth of his evidence generally and his denial that he was involved in fraud on the bank.
- In relation to the transfer of funds from the JFC Group to the LQ Group, Mr Gourgey QC pointed out that there was evidence that these were being carried out on the instructions of Mr Kekhman, further evidence of his control of the JFC Group. Whether those payments amounted to breach of fiduciary duty or wrongdoing would depend upon whether they were accounted for as loans properly recorded in the books of the JFC Group and on whether the Group was solvent at the time of the transfers in question. He accepted that, aside from specific payments pleaded in paragraph 32 of the pleading which were to LQ Group companies for no or no adequate consideration, the bank was not in a position to say the payments to the LQ Group were unlawful, because the information was unavailable. Accordingly, Mr Gourgey QC was not submitting that particular (13) of paragraph 8A of the draft amendment was an allegation of dishonest instructions, but that did not impinge on what the bank said about payments identified in paragraph 32 of the Particulars of Claim.
- Looking at what might be described as the bigger picture, Mr Gourgey QC submitted that the bank's overall case as set out in paragraph 31 of the existing pleading was that there had been a significant reduction in the assets of the JFC Group over the 12 months or so between June 2011 and the second half of 2012 of more than U.S. $400 million for which there is no evident explanation other than the dissipation of those assets to companies ultimately controlled by or on behalf of Mr Kekhman. Mr Gourgey QC pointed out that, in his Defence, Mr Kekhman makes what is in effect a non-admission of that allegation, saying that he has never admitted that the net reduction in the assets of the Group occurred. He does not say that, if there was this reduction, then there was a legitimate explanation, although as Mr Swainston QC pointed out in an intervention during Mr Gourgey QC's submissions, he does deny that he was involved in any misrepresentation of the position.
- Mr Gourgey QC submitted that, since the bank had a sufficiently arguable case that the companies were ultimately controlled by or on behalf of him so that it was he who benefitted from the transfers, it was an entirely natural and proper inference that he was the person who was directing the transfers to these other companies which he controlled.
Analysis and conclusions
- Despite the vigour with which Mr Swainston QC advanced his submissions that the existing pleading is unsustainable, I accept Mr Gourgey QC's submissions to the contrary. In my judgment, on the material before the court, the bank does have a sufficiently arguable case to go forward to trial that: (i) the companies to which funds and business opportunities were diverted were in the ultimate control of Mr Kekhman; (ii) since he was therefore the person who would benefit from such diversion, it is a proper inference that he directed the transfers or that, at the very least, they were carried out with his knowledge and approval; (iii) no proper commercial explanation has been provided for the diversion.
- It is true that Mr Swainston QC was able to show that there may well be legitimate explanations for some of the transfers made, but as Mr Gourgey QC pointed out, there are certainly not legitimate explanations for the diversion of all of the U.S. $411 million reduction in the assets and there is no evidence put forward by Mr Kekhman to address the bank's pleaded case that the transfers set out in paragraph 32 (1) of the Particulars of Claim (which include the transfer of nearly U.S. $8.5 million by Garold to Kronos, another company which the bank says was controlled by Mr Kekhman) were made for no or no adequate consideration. Mr Kekhman's case as advanced in the Defence and in his evidence is that these payments were nothing to do with him. He does not seek to explain or justify them. However, on the basis that the bank has an arguable case that the companies to which the transfers were made were also ultimately controlled by him, it seems to me to be equally arguable that his denial in paragraph 36 of his Defence of any knowledge of the transfers (other than the one made to Gepson) is not true. It seems highly unlikely that such substantial assets were diverted from one group of companies controlled by him to other companies controlled by him without his knowledge and approval.
- Overall, although Mr Swainston QC sought to analyse in detail a number of the allegations made by the bank, for example in relation to transfers to the LQ Group and made forceful points, for example that, unless the JFC Group was insolvent at the time of the transfers, there could be nothing illegitimate in those transfers and although Mr Gourgey QC fairly accepted that the bank was not in a position to say on the information currently available that the transfers to the LQ Group were illegitimate, there are a large number of transfers as set out in paragraph 32 of the pleading in relation to which the bank has an arguable case that they were not made for consideration and are therefore illegitimate. It seems to me that the analysis in which Mr Swainston QC sought to engage leads to precisely the sort of detailed factual investigation which the court should avoid on a strike out or summary judgment application and the entire issue of the transfers made out of the JFC Group and whether they were justified requires investigation at trial.
- Equally, I consider that whilst Mr Swainston QC's submissions in relation to the diversion of assets and business opportunities to companies in a parallel structure may well prove to be correct at trial, on the evidence before the court, including the evidence of Mr Afanasiev that he thought that profits generated were to remain within the Group, the bank does have a sufficiently arguable case that this diversion of assets and business opportunities was illegitimate. On the basis that it is also fully arguable that the companies to which the assets and business opportunities were diverted were in the ultimate control of Mr Kekhman, the bank's case that this was all part of a conspiracy to which Mr Kekhman was a party is one which has a real prospect of success.
- Indeed, the more one looks at the detail in relation to companies to which transfers were made, the more it becomes apparent that there are matters which support the bank's case and which cannot and should not be resolved at an interlocutory stage. One example is the status of Prometey, one of the companies to which the bank alleges that business opportunities which properly belonged to the JFC Group were diverted. The bank's case is that Prometey was formerly owned by a company in the LQ Group, but from June 2010 was owned by Mr Lubomirov, who was a nominee for Mr Kekhman, so that Prometey was one of the companies in the ultimate control of Mr Kekhman. In his Defence, Mr Kekhman admits knowing of Prometey (although he denies owning or controlling it or any of the other companies in the Schedule to the Particulars of Claim). He says it was owned by Mr Lubomirov, who has never been his nominee.
- This denial that Mr Lubomirov was his nominee is odd given some of the other evidence from Mr Tchernenko, first that Mr Lubomirov was an employee of the JFC group and second that when Prometey sought a loan from the bank of some U.S. $21 million, JFC Group staff were involved in making the application and Mr Kekhman appears to have been prepared to provide a personal guarantee in respect of that loan. It is a fairly obvious question why Mr Kekhman would have been prepared to provide a guarantee and his staff would be applying for the loan if Prometey was nothing to do with him. What this demonstrates in my judgment is that the court cannot take at face value what Mr Kekhman says in his witness statement and Defence. As I have said, the whole issue of the diversion of assets and business opportunities away from the JFC Group, including to the LQ Group, requires a proper and detailed investigation which can only take place at trial.
- There are other crucial aspects of Mr Kekhman's case and his evidence which are contradicted by the bank's evidence, for example his assertion that he was not involved in the management of the Group except on a high level basis after his departure for the Theatre. It would not be appropriate to decide that issue at this interlocutory stage. However, on the material before the court, the bank has an arguable case which has a real prospect of success at trial that his level of involvement after his departure for the Theatre was far greater than he is prepared to admit and that he is therefore not being entirely truthful with the court.
- Equally, it is clear that there is a conflict of evidence between Mr Kekhman and Mr Afanasiev as to the former's knowledge of the financial position of the Group. Mr Kekhman says that he was unaware of the parlous financial position prior to the end of 2011 and was misled by Mrs Zakharova. Mr Afanasiev says this is not true, that Mr Kekhman was well aware of the true financial position, that he was also well aware of the need to obtain the loans from the bank and that, in seeking further finance for the Group, Mrs Zakharova interacted with and reported to Mr Kekhman. Again this is a conflict of evidence that cannot be resolved at this stage and can only be resolved at trial. However, on the basis of Mr Afanasiev's evidence, the bank has an arguable case that Mr Kekhman is not telling the truth when he maintains that he was unaware of the financial position of the JFC Group during the course of 2011.
- Thus, the bank has an arguable case with a real prospect of success that Mr Kekhman is not telling the truth about two critical aspects of his evidence, his involvement in the day to day running of the Group after he left for the theatre and his knowledge of the true financial position of the Group. This arguable lack of candour on his part supports the bank's case that other aspects of his evidence are not true either and in particular that, contrary to his evidence, Mr Kekhman (i) did direct the diversion of assets and business opportunities from the Group or at the very least that the diversion took place with his knowledge and approval and (ii) was aware at the time that the loans were obtained from the bank in 2011 of the true parlous financial position of the Group.
- In the circumstances, it seems to me that the bank is correct in its submission that it has a sufficiently arguable case to go to trial that an inference should be drawn that Mr Kekhman was implicated in the diversion of assets and business opportunities away from the Group. It follows that, so far as concerns Mr Swainston QC's point about pleading fraud, the primary facts pleaded in the original pleading: (i) as to the extent of control exercised by Mr Kekhman; (ii) as to the companies to which assets and business opportunities were being diverted being ultimately in his control, do demonstrate that an inference of dishonesty is more likely than one of innocence or negligence or do, in Lord Millett's words, tilt the balance and justify an inference of dishonesty on the part of Mr Kekhman. Accordingly, in my judgment, the originally pleaded case of conspiracy does have a real prospect of success and Mr Kekhman's application to strike out that case, alternatively for summary judgment against the bank in respect of it, is dismissed.
The proposed amendments
- In view of the conclusions I have already reached, I can deal with the issue of the proposed amendments to plead fraudulent misrepresentation in relation to the 2010 accounts and the Sberbank pledge more shortly. In my judgment of 24 April 2015 I declined to allow the proposed amendments, on the basis that it seemed to me that the bank had to plead particulars of the alleged control by Mr Kekhman which it contends supports the inference that he directed or approved the making of the fraudulent misrepresentations. Those particulars have now been provided in paragraph 8A of the draft pleading set out in the appendix to this judgment.
Submissions on behalf of Mr Kekhman
- In continuing to resist the amendments, Mr Swainston QC submitted that these were all instances of control by Mr Kekhman which, as Mr Gourgey QC accepted at the hearing on 26 June 2015 were legitimate. He submitted that those particulars could not satisfy what he contended was the Three Rivers test, namely that the primary facts pleaded are only consistent with an inference of dishonesty. However, as I have already concluded in the section of the judgment dealing with the law, that contention misstated the appropriate test which is whether, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence.
- Mr Swainston QC submitted that the bank's case on fraudulent misrepresentation was not sustainable for other reasons. For example, there was no evidence from Mrs Zakharova (who was alleged to have been instructed by Mr Kekhman to make the fraudulent misrepresentations or at least to have sought his approval) that she had acted fraudulently. On the contrary, when Mrs Zakharova was asked the question in the interview: "whether those inaccuracies were part of a deliberate plan by Mr Kekhman to deliberately mislead the [bank] into lending the monies. If so, please provide full details of that plan and how it was to be carried out and Mr Kekhman's involvement in it" her answer was: "YZ cannot say whether the half yearly accounts was planned/inaccurate." Mr Swainston QC submitted that it was no use the bank saying that, at the time of the interviews, the application to amend to plead the fraudulent misrepresentations had not been made, so that it was scarcely surprising that the interview did not deal with that point. The specific question posed demonstrates that, whilst the bank may not yet have sought to amend its pleading, it had well in mind that part of the case it wanted to establish was that there had been fraudulent misrepresentations made to the bank, to which Mr Kekhman was a party, which had induced the bank to make the U.S. $150 million loan.
- Equally, Mr Swainston QC submitted that the weakness of the bank's own evidence of fraud could not be overcome by saying that Mrs Zakharova must have been lying and that the true position is that she knew the accounts were deliberately inaccurate as she instructed her staff to prepare them and either did so on the instructions of Mr Kekhman or with his knowledge and approval. He submitted that this is not a promising basis for a fraud case and that what one would expect in a case where what is being alleged is that the ultimate controller of the group either instructed the relevant person to perpetrate the fraud or that it was committed with his knowledge and approval is some evidence from the relevant person that such instructions had been given or that the ultimate controller had known and approved. At present the bank has no such evidence at all and the allegation of fraud should not be permitted to proceed to trial on some sort of "Micawberish" basis that some evidence might turn up at trial.
- Accordingly, Mr Swainston QC submitted that there was nothing in the proposed pleading which justified the inference of fraud on the part of Mr Kekhman. On the contrary, the most plausible inference was that Mrs Zakharova had mismanaged the affairs of the JFC Group and decided to present false information to the bank with a view to covering up her own wrongdoing. This did not in any way implicate Mr Kekhman in her fraud. She had misled Mr Kekhman as to the true financial position of the JFC Group.
Submissions on behalf of the bank
- Mr Gourgey QC submitted that, contrary to the submission made by Mr Swainston QC, there was no cogent evidence that Mrs Zakharova did mismanage the affairs of the JFC Group. On the basis of the evidence before the court, the cause of the financial collapse of the Group was a combination of the diversion of assets and business opportunities from the Group by or on behalf of Mr Kekhman and the impact of the absence of a high season for fruit in 2011.
- Equally, although Mr Swainston QC submitted that the most plausible inference was that in making fraudulent misrepresentations to the bank in order to obtain the loans, Mrs Zakharova was seeking to cover up her own wrongdoing, Mr Gourgey QC submitted that there was other evidence which would belie that conclusion. As I have already held, the bank has a good arguable case that, at all material times, Mr Kekhman was well aware of the true financial position of the JFC Group and was involved in the process of obtaining the loans. Mr Gourgey QC submitted that, on the basis of that evidence, if it were accepted at trial, there would have been no reason for Mrs Zakharova to conceal from Mr Kekhman something he already knew.
- Mr Gourgey QC submitted that the crucial pleas as to why the inference should be drawn that the fraudulent misrepresentations were made at the direction of Mrs Zakharova and Mr Kekhman and/or pursuant to an agreement between them were those in sub-paragraphs (12) and (13) of Paragraph 12I of the draft amendment:
"(12) When directing Mrs Zakharova to apply for the loan, Mr Kekhman must have known that the claimant would require accounting information concerning the JFC Group as part of the process of applying for the loan and that such accounting information would include [the previous year's audited accounts for the Group and the management accounts]
(13) Given the significance of a decision to present false accounts for the JFC Group overstating receivables by over U.S. $200 million and materially misstating profits and having regard to the matters set out at 8 and 8A above, it is inconceivable that Mrs Zakharova would have given a direction in the presentation of those accounting documents to the claimant without first having obtained the direction and agreement of Mr Kekhman. It is to be inferred that such was given."
- Mr Gourgey QC relied upon the following primary facts which he submitted would justify the inference of fraud by Mr Kekhman: (i) the close control of the Group that he exercised even after his departure for the Theatre, on an almost daily basis; (ii) that he was aware of the true financial position and the need to obtain funding; (iii) that he had specifically required Mrs Zakharova to resign as general manager so that she could work on finding funding; (iv) that she did so in conjunction with him; (v) that in respect of any significant decisions she and Mr Afanasiev sought the instructions of Mr Kekhman; (vi) that overstating the financial position by U.S. $200 million in false accounts to be produced to the bank was clearly a significant matter; and (vii) that in relation to the existing conspiracy claim, Mr Kekhman exercising his control over the JFC Group required Mrs Zakharova to divert assets wrongfully from the Group for his benefit.
- Mr Gourgey QC submitted that, applying the correct test for pleading fraud, these primary facts made an inference of fraud by Mr Kekhman in the present case far more likely than any other inference. He submitted that Mr Kekhman's case that it was an equally plausible inference that he had nothing to do with the fraudulent misrepresentations and was unaware of them, would not be sustainable if those primary facts were established at trial.
Analysis and conclusions
- Despite Mr Swainston QC's submissions, I consider that the proposed pleading is both a proper plea of fraud for the purposes of the correct Three Rivers test and gives rise to a sufficiently arguable case of fraud on the part of Mr Kekhman which has a real prospect of success.
- As I have already held in the context of the existing pleading, the bank has a good arguable case (i) that Mr Kekhman was well aware at all material times about the true financial position of the JFC Group and that his denial of such knowledge in his evidence is untrue; (ii) that his involvement in the management of the Group in 2010 and 2011 was greater than he is prepared to admit in his evidence, so that his evidence about that is also untrue; and (iii) that that involvement included involvement in the process of obtaining the loans from the bank. In my judgment, if that case is established by the bank at trial, then the court will be entitled to draw the crucial inferences set out at [60] above, namely that it is inconceivable that the fraudulent misrepresentations would have been made without the direction and agreement of Mr Kekhman.
- Indeed, if that case is established by the bank at trial, it is difficult to see how an explanation of the fraudulent misrepresentations having been made which was consistent with Mr Kekhman's innocence would be sustainable. On this hypothesis, he would not have told the truth in respect of two critical aspects of his evidence and the obvious question is why he would do that unless he were trying to conceal his own involvement in the relevant wrongdoing. Furthermore, I accept Mr Gourgey QC's submission that on this hypothesis, Mr Swainston QC's suggestion that Mrs Zakharova was on some frolic of her own, engaged in fraudulent misrepresentations to the bank in order to cover up her own mismanagement and wrongdoing, is completely implausible. If Mr Kekhman was aware of the true financial position of the JFC Group, then there was nothing for Mrs Zakharova to conceal from him. On the assumption that both Mrs Zakharova and Mr Kekhman were aware of the true position of the Group, it is inconceivable that, if she had found that a loan could not be raised without misrepresenting the accounts, she would have proceeded on a U.S. $200 million overstatement of the accounts without informing Mr Kekhman and procuring his approval. Indeed, on this assumption and the further assumption that Mr Kekhman maintained close control of the Group (in relation to both of which assumptions the bank's case has a real prospect of success) it is far more likely that it is he who instructed her to misrepresent the accounts rather than her thinking of the idea and seeking his approval. Either way, I consider that if the bank establishes its case at trial as to Mr Kekhman's knowledge and control, the court would be entitled to draw the inference that he was a party to the fraudulent misrepresentations.
- In terms of the pleading, the primary facts upon which the bank relies to justify the inference that Mr Kekhman was party to the fraudulent misrepresentations, which I summarised in [61] above in the context of Mr Gourgey QC's submissions, are pleaded in the draft amended pleading in paragraphs 8A (set out in the appendix below), 12H and 12I (in relation to the Garold representations) and 13D and 13I in relation to the Security representation). The only possible exception is the allegation at (vii): "that in relation to the existing conspiracy claim, Mr Kekhman exercising his control over the JFC Group required Mrs Zakharova to divert assets wrongfully from the Group for his benefit." However, that allegation is already pleaded in general terms in the existing pleading at paragraph 30(4): "Mr Kekhman, through his dominant control over the corporate entities making up the JFC Group, and in breach of his own legal and fiduciary obligations owed to JFC Group companies, procured the transfer of assets and diverted corporate opportunities out of the JFC Group (and/or permitted the value of the assets of the JFC Group of companies to be diminished)…"
- Thus, any defect in the draft pleading because Mr Gourgey QC's primary fact (vii) is not specifically pleaded as a primary fact from which Mr Kekhman's participation in the fraudulent misrepresentation is to be inferred, could be remedied by the addition of that point to paragraph 8A and/or 12H and/or 12I and/or 13I of the draft. To the extent necessary, I would be likely to give permission to Mr Gourgey QC to amend his draft pleading, since the point is clearly before the court on the evidence on the applications and is within the existing plea in paragraph 30(4). In any event, the case remains at an early stage so that it is difficult to see what prejudice Mr Kekhman could have suffered. However, I will hear submissions from the parties on whether a further amendment is necessary and, if so, whether permission should be given.
- In support of his case, Mr Swainston QC sought to make much of the fact that the particulars of control set out in paragraph 8A of the draft did not include any matters which were not legitimate, but as I have already found, this was on the basis of a misstatement of the test for pleading fraud. Contrary to his submissions, it is not necessary when pleading fraud to plead primary facts which are only consistent with honesty. The correct test is as I said, is whether on the basis of the primary facts pleaded, an inference of dishonesty is more likely than an inference of innocence or negligence. In my judgment the primary facts do not themselves have to constitute dishonesty, because if they did, it would not be necessary for the court to draw an inference, as fraud would be established by the proof of the primary facts. It is sufficient for pleading purposes if the primary facts justify an inference of dishonesty, as Lord Millett put it if primary facts are pleaded which tilt the balance and justify such an inference.
- In the present case, I consider that the primary facts identified by Mr Gourgey QC as set out at [61] above, if established at trial, would fully justify the inference that Mr Kekhman was party to the fraudulent misrepresentations. Indeed, for the reasons given in [64] above, I consider that if the bank establishes its case on those primary facts at trial, Mr Kekhman's case that he was entirely innocent in relation to the fraudulent misrepresentations would be thoroughly implausible. That suggests that, even if Mr Swainston QC were right about the test to be applied in pleading fraud, this pleading is a proper plea of fraud in relation to which permission to amend should be given.
- The conclusion which I have reached that the bank has a sufficiently arguable case that Mr Kekhman was party to the fraudulent misrepresentations for permission to amend to be given is unaffected by the fact, of which Mr Swainston QC sought to make much in his submissions, that in her interview Mrs Zakharova had not admitted her own participation in a fraud or sought to contend that Mr Kekhman had been party to that fraud. It seems to me that whilst one reaction she might have had would be to admit the fraud, but say that Mr Kekhman had directed her to make the fraudulent misrepresentations, it is equally likely that she was simply not prepared to admit the fraud at all, especially given that, at the time of the interview, the bank had not in fact pleaded fraudulent misrepresentation. Furthermore, since the bank on any view has a perfectly sustainable case of fraudulent misrepresentation against Mrs Zakharova, the fact that it does not have any evidence from her admitting the fraud and that she lied in interview to the effect that the accounts were accurate cannot in any sense be determinative against that case. Logically, the position cannot be any different so far as the case against Mr Kekhman is concerned. The absence of evidence from her admitting fraud but incriminating him cannot be determinative of the case against him if there is other material from which the inference of fraud is justified.
- Mr Swainston QC placed a great deal of emphasis in his submissions on the fact that the bank does not allege that Mr Afanasiev was dishonest, which he suggested presented the bank with an insuperable difficulty in alleging fraud against Mr Kekhman. In my judgment, that analysis is misconceived. Mr Afanasiev can and does give a great deal of evidence about the extent of the control exercised by Mr Kekhman over the Group and Mr Kekhman's awareness at all material times of the true financial position of the Group, all of which directly contradicts the evidence of Mr Kekhman and will, if accepted at trial, establish that Mr Kekhman's evidence is not true in a number of important respects. I also consider that Mr Swainston QC's criticism of the last paragraph of Mr Afanasiev's statement as no more than assertion or "foot stomping" seriously underestimates the potential value of his evidence. Mr Afanasiev worked closely with both Mrs Zakharova and Mr Kekhman and was able to observe their relationship at first hand. If his evidence that Mr Kekhman dominated her and that she was scared of Mr Kekhman is accepted at trial, that is evidence which will support the bank's case that it is inconceivable that Mrs Zakharova would have committed a fraud on the bank without the direction or approval of Mr Kekhman. It is no answer to say that, if Mr Kekhman had been acting fraudulently Mr Afanasiev would have known about it. He was not concerned with the finances of the Group but the operational side of the fruit business so there is no reason why he should have known that a fraud had been committed.
- Since the bank has a sufficiently arguable case with a real prospect of success in relation to those primary facts, this fraud allegation is properly pleaded (subject to point (vii) which I referred to in [67] above) and the bank should be given permission to amend.
Conclusion
- I consider that both the existing pleading and the proposed amendment contain proper and sufficient pleas of respectively fraudulent conspiracy and fraudulent misrepresentations to which in each case Mr Kekhman was a party and that the bank's case of fraud against Mr Kekhman is one which has a real prospect of success. It follows that Mr Kekhman's application to strike out the claim, alternatively for summary judgment against the bank is dismissed. The bank's application for permission to amend is granted, subject to submissions about point (vii).
- In this judgment I have not sought to address every point made on each side in relation to the voluminous evidence produced, since I consider that to do so would be to descend to the sort of analysis of detail in which the court should not engage at an interlocutory stage. Rather I have focused on the important and critical aspects of the evidence upon which, as I see it, turn the questions whether fraud is properly and sufficiently pleaded and whether the bank's fraud case is one with a real as opposed to a fanciful prospect of success. The points of detail are for the trial.
APPENDIX
PARAGRAPH 8A OF THE DRAFT AMENDED PARTICULARS OF CLAIM
"8A. In support of the matters set out in paragraph 8(2), the claimant relies on the following:
(1) Mr Afanasiev was in charge of international and domestic operational matters, being responsible for purchases, logistics and distribution. Mr Afanasiev provided Mr Kekhman with regular operational reports which included information on sales volumes and sales prices. He also held the office of the General Director of JFC Russia from April 2011 until March 2012.
(2) Mrs Zakharova acted as the chief financial officer and was responsible for financial matters and was the General Director of JFC Russia (until April 2012). She delivered also on at least a weekly basis consolidated financial reports of the JFC Group comprising consolidated balance sheets and profit and loss accounts to Mr Kekhman who was therefore well aware at all times of the financial position of the JFC Group.
(3) Both Mrs Zakharova and Mr Afanasiev were in almost daily contact with Mr Kekhman by telephone. There were also meetings with Mr Kekhman, often weekly, both before and after Mr Kekhman was appointed as a director of the Mikhailovsky Theatre in 2007.
(4) The matters which Mr Afanasiev and/or Mrs Zakharova discussed with Mr Kekhman for the purpose of obtaining his instructions included (but were not limited to) the setting of prices for the sale of bananas, obtaining additional financing, the acquisition or purchase of property and the hiring or dismissal of key employees. The instructions given by Mr Kekhman were implemented by Mr Afanasiev and/or Mrs Zakharova.
(5) In August/September 2010, when the decision was made to terminate a charterparty agreement with Star Reefers, because the terms were too expensive, the matter was first discussed by Mr Afanasiev with Mr Kekhman, who approved the termination. Consequent on that instruction, Mr Afanasiev took steps to terminate the agreement.
(6) Mr Kekhman gave Mr Afanasiev instructions (together with Mr Kasatkin and Mr Podolsky, a member of the board of JFC Russia) to negotiate a settlement with Star Reefers. Mr Kekhman made it clear to them that they had no authority to negotiate the sum to be paid without first obtaining his approval, before any offer could be made. Pursuant to such instructions, Mr Afanasiev commenced such negotiations. The final settlement terms were then reached at a meeting between Mr Kekhman and the Chief Executive Officer of Star Reefers.
(7) In September/October 2010, it was Mr Kekhman who decided to charter two ships, the Atlantic Clipper and the Baltic Clipper, from Sea Trade and which were being built at the time. Mr Afanasiev opposed this, on the ground that the JFC Group already had sufficient shipping capacity, but Mr Kekhman overruled him. Mr Afanasiev then implemented Mr Kekhman's instruction.
(8) In August 2011, Mr Kekhman held a meeting with Ton Hyldelund, the managing director of ZAO Maersk Russia, as Mr Kekhman was interested in co-operating with Maersk. Subsequently, Mr Kekhman insisted on executing a contract with Nikilay Forsberg and Ms Pukhova of Maersk. Mr Afanasiev then implemented this instruction.
(9) Mr Kekhman instructed Mr Afanasiev to sign two Facility Agreements with the Claimant.
(10) In February 2012, Mr Kekhman agreed with Mr Afanasiev's suggestion that the application for bankruptcy by JFC Russia should be made and directed by Mr Afanasiev
(11) Once Mr Kekhman decided that Mrs Zakharova was not tough enough in her dealings with the banks with which JFC Russia had obtained facilities, and that he was not comfortable with her being further involved, Mrs Zakharova resigned as financial director of JFC Group in February 2012.
(12) At times when the JFC Group's weekly cash flow was insufficient to cover its expenses, with the consequences that JFC Group would need to draw on its credit lines with banks, Mrs Zakharova required the approval of Mr Kekhman before drawing on such credit lines. In the event that such approval was given Mrs Zakharova then directed payment to be made utilising bank finance.
(13) Mr Kekhman directed that JFC Group funds should be utilised in such manner as would prioritise use of those funds as meeting liabilities owed to banks by the LQ Group (as defined at paragraph 10 below) and Mrs Zakharova implemented such instructions.
(14) Mr Kekhman was the decision-maker as to the amount of any dividend from the JFC Group to Mrs Zakharova and Mr Afanasiev, and Mrs Zakharova implemented Mr Kekhman's instructions.
(15) Mrs Zakharova and Mr Afanasiev discussed with Mr Kekhman the possible consequences and risks for the Latin American operations of JFC Group arising from the case of Star Reefers. Mr Kekhman decided that it was necessary to "ring-fence" the assets of the JFC Group in South America. He wanted this done urgently as he was concerned that enforcement proceedings taken by Star Reefers would interfere with the supply of bananas, which was critical to the survival of the JFC Group. Mr Kekhman therefore wanted to keep the South American assets alive and instructed Mr Afanasiev in about December 2011 to take all such steps as were necessary to do so. Mr Afanasiev implemented such instructions by arranging for two companies, Bagnilasa SA and Duguit SA, to be set up to ringfence the Ecuador export operations."
