Dumford Trading AG v OAO Atlantrybflot

LORD JUSTICE CLARKE: There are four applications before the court. The appellant, OAO Atlantrybflot, ("OAO"), seeks an order staying execution of the judgment pending the determination of the substantive appeal. The respondent, Dumford Trading AG, ("Dumford"), seeks an order that as a condition of being allowed to proceed with the appeal, OAO pay the whole of the judgment debt and/or the costs ordered to be paid on account into court and ordered to provide security for costs.

The applications arise in connection with an appeal from an order made by His Honour Judge Chambers QC in the Commercial Court on 11 May 2004, in which he gave judgment for Dumford in the sum of £1,890,007.87 together with interest of £206,657.88 and costs to be the subject of a detailed assessment. He also ordered OAO to pay £75,000 on account of the costs. He refused permission to appeal but directed that OAO should make any application to this court for permission to appeal on or before 8 June 2004. The judge stayed enforcement of the order until seven days after the decision of the Court of Appeal on OAO's application for permission to appeal. On 2 July permission to appeal was granted by Longmore LJ, who observed that its prospects of success was not "wholly unrealistic". The stay of enforcement of execution thus expired on 9 July.

The claim arose under a guarantee dated 22 November 2001 as amended by a guarantee dated 5 November 2002. The guarantees were given to secure the repayment of a loan by Dumford to Shelley Marketing LLC, ("Shelley"). The loan was in respect of the financing of a number of fishing vessels. Dumford is incorporated in Liechtenstein, Shelley is incorporated in Delaware and OAO is incorporated in Russia, its registered office being in Kaliningrad.

OAO's defence is that the guarantors were not OAO but ZAO Atlantrybflot. There is an entity called ZAO Atlantrybflot, ("ZAO"), whose registered office is in Moscow which, at the time of guarantees, was a subsidiary of OAO. ZAO is no longer a subsidiary of OAO. The shares in OAO were sold in late November 2003 to a number of shareholders, the majority shareholder being a company called OceanProduct. The shares in ZAO were sold elsewhere.

In paragraph 3 of her skeleton argument for the appeal, Ms Dias describes the main point at issue in the appeal as follows:

Ms Dias concedes that the court has jurisdiction under CPR Part 25.13(2)(a) to order security for costs of the appeal on the ground that OAO is a foreign company resident in Russia. She correctly submits that the court should not order security for costs merely because of OAO's nationality, but only to reflect the additional burden of enforcement abroad: Nasser v United Bank of Kuwait [2001] EWCA Civ 596; [2002] 1 WLR 1868 at paragraph 61-67. However, Ms Dias correctly concedes that it is appropriate to make an order for security of costs in this case. The issue is essentially one of quantum and the time within which the security is to be provided.

Dumford estimates its costs for the appeal in the sum of more than £38,000. Ms Dias submits that that sum is wholly excessive in circumstances where the arguments are a repeat of those before the judge and OAO is likely to bear the bulk of the costs as appellant. OAO has offered to put up security in the sum of £25,067.00, which is 65 per cent of the amount claimed. Ms Dias submits that that is a reasonable figure in respect of Dumford's recoverable costs. She further submits that it would be reasonable to order such a sum to be put up over a six week period given OAO's financial position. I shall return below to the appropriate order to make after considering the other aspects of the case.

I turn to Dumford's application that conditions should be imposed on the permission to appeal. As indicated, Dumford invites the court to require OAO to pay into court some or all of the judgment sum including the amount which the judge ordered to be paid on account of costs as a condition of permitting OAO to proceed with the appeal. It is common ground that the court has jurisdiction to impose such conditions: see eg Hammond Suddards v Agrichem [2001] EWCA Civ 2065; CIBC Mellon Trust Co v Mora Hotel Corp [2002] EWCA Civ 1680; Bell Electric Limited v Aweco Appliance Systems GmBH & Co KG [2002] EWCA Civ 1501, [2003] 1 All ER 344; and Contract Facilities Ltd v The Estate of Rees [2003] EWCA Civ 1105. It is also common ground that in the light of CPR 52.9 this court should only impose such conditions if persuaded by Dumford that there are compelling reasons to do so. The question is whether the court should make such an order on the facts of this case, since each case depends on its own facts.

In my view it will be an unusual, and perhaps rare, case in which it will be appropriate to make such an order, especially an order imposing as a condition the payment of the whole judgment sum into court. As I accepted in paragraph 48 when giving the judgment of the court in Hammond Suddards, it is appropriate to adopt a cautious approach to CPR 52.9. Subsequent cases, notably the CIBC Mellon Trust case, have perhaps emphasised the need for such caution.

Mr Marshall, on behalf of Dumford, relies upon a number of factors in support of the conditions sought. As summarised in his skeleton argument (since when it is fair to say there has been some development of the evidence) he put the factors thus in paragraph 3:

Mr Marshall relies on what he says are unsatisfactory aspects of the evidence. In particular he relies on these particular factors:

In short, Mr Marshall submits that the documents raise many more questions than they answer and that the inference is that the sales were not made for ordinary business purposes but were arrangements made within the group of which OAO is a part in order to avoid OAO paying the judgment or paying it in full.

The key question on the facts of this particular case is whether OAO has sought to dissipate its assets in order to avoid paying the judgment, as is submitted on behalf of Dumford, or whether it has disposed of assets in the ordinary course of its business as submitted on its behalf. If OAO has sought to dissipate its assets in order to avoid paying the judgment, there would be much to be said for making an order along the lines suggested by Mr Marshall. In order to resolve that question, it is sensible to consider the three topics addressed in argument by Ms Dias, namely OAO's financial position, OAO's access to funds and the sale of the vessels. I consider the first two topics together.

I accept Ms Dias' submission that the evidence shows that OAO could not pay the whole of the judgment debt into court out of its own resources. I do not think that Mr Marshall submits that it could. However he submits that I should infer that OAO has been funding this litigation with the assistance of others, notably OceanProduct; that it is likely to fund the appeal with OceanProduct's assistance; and that OceanProduct should be faced with a choice, namely either to abandon the appeal or to proceed with it on the basis that it pays the judgment, including the costs ordered by the judge, into court.

So far as the costs are concerned, he relies upon the principle stated by Waller LJ, giving the judgment of the court in the Contract Facilities case at paragraphs 27 to 28 as follows:

In my judgment, that the mere fact that OAO has a parent company, namely OceanProduct, or indeed that PSB has some shares in OAO, would not be a sufficient reason to impose the kind of draconian condition suggested on behalf of Dumford. Groups of companies are entitled to set themselves up through separate legal entities. In the absence of funding of the kind to which I have referred, or of dissipation of assets, it would not in my opinion be right or just to impose the conditions sought. One can readily understand why both OceanProduct and PSB have indicated that they do not propose to provide funds to discharge the judgment. Put simply, it would not be in their financial interest to do so. I shall return to the question of funding.

I turn first to the sales of the vessels. Mr Marshall refers to the coincidence of timing between the hearing before the judge and the sale of the vessels. I agree with him that on its face the coincidence is striking. However, it must be put in its context. Finval had expressed interest in buying some vessels in late 2003. More importantly, Ms Dias relies on a number of documents produced by OAO. She also submits that this is not a case like Hammond Suddards where little or no information was provided to the court. I accept her submission that OAO has provided a considerable amount of information in response to the legitimate requests of Dumford's solicitors. They include spreadsheets, bank accounts, balance sheets and profit and loss accounts over the relevant period. It is not suggested that any of those documents are other than genuine; nor would it be appropriate to hold that they were other than genuine.

The documents also include a letter dated February 2004 from the Chairman of OAO, Mr Bakov, to its board of directors, which appears to be an entirely genuine document which is a strong pointer against the conclusion that the sale of the vessels was effected to avoid paying the judgment. It sets out the position as it was thought to be when OAO was purchased and the position as it had turned out by February 2004. It includes the following:

I see no reason not to accept that this document correctly sets out the state of mind of Mr Bakov and of OAO as at February 2004. In these circumstances it seems to me to be a reasonable inference that the subsequent decision to sell the vessels was as a result of the considerations set out in the letter. That conclusion is supported by the minutes of a Board meeting held on 5 March 2004, which include the following.

I was given these dates as potentially relevant in late 2003:

Ms Dias, however, points to the state of knowledge of the buyer of the shares in OAO and to Mr Bakov's proposal, the board resolution and the various mortgage dates. She submits that they support the existence of mortgages and are consistent, or at least not inconsistent, with the evidence of Mr Kanavin, who has been the General Director of OAO since 4 February 2004, that the amount lent by PSB and still owed to it by OAO was more than the aggregate value of the vessels.

Mr Marshall submits that that evidence should not be accepted; indeed he submits that the balance sheets which have been produced do not support the existence of bank loans. The points he makes undoubtedly have some forensic force because of the use of the words "loans" and "bank loans" in the balance sheets. However, notwithstanding the textual points which can be made on the documents, Ms Dias submits that it is more likely than not that the "loans" referred to in the balance sheets, including the "long term loans", include bank loans and that the loans to OAO are thus referred to in the documents.

While questions undoubtedly remain, I accept those submissions as being more likely than not to be correct. In particular, Ms Dias submits that the documents show a significant increase in the "long term loans" in 2004 and that that evidence is consistent with Mr Bakov's letter and with the conclusion that the long term loans include bank loans. I do not think that this consideration, forcefully as it is put by Mr Marshall, is sufficient to lead to the conclusion that there were no mortgages or that the sales and mortgages referred to in the contemporary material did not take place, or that they were not carried out in the ordinary course of business.

It is true that the documents disclosed from Finval, such as they are, suggest that it is in some financial difficulties, and questions arise as to whether Finval still own the vessels that it bought from OAO. Mr Marshall relies on the figure for fixed assets shown in Finval's balance sheet as at 30 June 2004, namely 96 million roubles, which at today's exchange rate is the equivalent of about US$3.3m. That is to be compared with the total purchase price of the vessels of some US$4.1m, which the evidence shows was arrived at by reference to independent market evidence. Where have all the vessels gone, asks Mr Marshall? Ms Dias submits that it cannot safely be held that they have been sold, since there is some evidence that it is Russian practice to put depreciated book values and not market values in balance sheets of this kind. The evidence of that is far from clear, but the difference between US$3.3m and US$4.1m does not seem to me to be sufficient to lead to the conclusions that the sale agreements were made in order to defeat the judgment.

It is said that the figures do not explain what happened to the $830,000 received by OAO, or at least the net figure of $785,000, after the setting off of charter hires. Mr Marshall submits that in the light of figures for expenses, it cannot have been spent only on ordinary business expenditure.

There is on the face of it some force in this point, but Ms Dias observes that the documents clearly show the receipt by OAO of the net sum of $785,000, and that the spreadsheets, supported as they are by the bank accounts, show what expenditure there was. No discrepancies have been shown between the spreadsheets and the bank accounts. Mr Marshall says that a breakdown of all the items on the spreadsheets is not available and speculates that the expenditure might have been incurred by others, eg Finval. There is, however, no evidential support for that conclusion. Neither party has translated all the spreadsheets, although both parties have access to Russian speakers.

In all these circumstances, while again questions remain unanswered, I do not think that it would be right for me to draw the inferences sought by Mr Marshall.

Finally, it is correctly said that Finval has stopped paying the instalments, to which it is retorted that that was at OAO's request because of a possible problem with liability for Russian VAT or its equivalent. That retort is greeted with forensic astonishment. It is true to say that the position is not fully documented. Nevertheless, there is force in the point that, if the purpose of the sale was not to facilitate OAO's business but to squirrel away assets, the instalment arrangement would have been a curious way of achieving it.

Ms Dias submits that Dumford is better off than it would have been but for the sales because the mortgages have been transferred to property owned by Finval and because OAO's losses have been reduced. I am not sure that we have enough information about the comparative position before and after these transactions to be confident that that is so. But my overall conclusion is that this is not a case in which the appellant, OAO, has failed to provide any substantial disclosure. Here much has been produced. Not all Nabarro Nathanson's reasonable questions have been answered, but many have. I am not persuaded that the vessels were sold for reasons other than those given in Mr Bakov's letter of February, which I have no reason to believe was not genuine.

I am conscious that I have not dealt with every point raised in yesterday's argument, but my conclusion is that there is no compelling reason to direct OAO to pay the whole judgment debt into court as a condition of allowing the appeal to proceed.

I turn to the submissions on funding. As I indicated earlier, Mr Marshall submits that the case is just like the Contract Facilities case with Mr Shuck's part being played by OceanProduct. When the hearing began yesterday, the position was somewhat obscure, at least to me. The evidence suggested that OAO had been paying its costs, albeit over a lengthy period, with some gaps as a result of financial difficulties. Ms Dias submitted in her skeleton argument that OAO's position was not so parlous that it could not, with difficulty, continue to fund its own costs of the appeal and put up a reasonable sum by way of security for Dumford's costs.

I was told yesterday that Baker & McKenzie's office in Moscow had been paid by OceanProduct, and that it was thought in London that OceanProduct had been or would be reimbursed by OAO, although no such payments could be identified in the financial documents available to the court. I was further told that the court could not be given more information yesterday because the Moscow office was closed, or the person dealing with the matter was not there. At the end of the arguments yesterday I invited Baker & McKenzie to investigate the matter further overnight. I have been informed this morning that OAO has not in fact paid any of Baker & McKenzie's fees or expenses which have been funded by OceanProduct. I was further told that an agreement to pay is in the course of being drafted between OceanProduct and OAO, but not yet executed. This appears to have been done at a late stage. I was not told when this drafting process began.

It thus appears that OceanProduct has been providing funds to defend OAO's position in this litigation. In these circumstances there is undoubtedly some force in Mr Marshall's submission that I should approach the matter in the same way as the court approached the Contract Facilities case and impose a condition in relation to payment of the costs. There is force in his submission and I have considered carefully whether I should do so.

However, the position of OceanProduct is not to my mind the same as that of Mr Shuck in the case of Contract Facilities. In that case, as I indicated earlier, the relevant company, which was there the claimant and not the defendant, had no assets at all and Mr Shuck was financing the whole litigation. In this case OAO has assets. It is a trading organisation which has been trading, as the documents which I have seen and which have been disclosed by OAO indicate. It is an ordinary trading operation.

It seems to me on balance that it would not be right to impose a condition in relation to the payment of the costs. In my view the right course in order to find a balance between the parties is to ensure that OAO secure Dumford in respect of the costs of the appeal so that if the appeal fails Dumford will be in the same position as they are today. They will in fact recover the costs of the appeal and be able to seek to enforce the money judgment in the order made by the judge.

So far as security as costs is concerned, for the reasons I have given Dumford should be fully secured for their recoverable costs of the appeal. I recognise that the amount should reflect the difficulties facing Dumford in executing the judgment in Russia. However it is plain to me that there would be considerable difficulties in that process; any other view would be naive, since it is scarcely likely that OAO will readily discharge their obligations under the judgment.

Ms Dias submits that I should order only 65 per cent of the sum put forward by Dumford, partly to reflect the fact that Dumford is unlikely to recover the whole sum in the schedule and partly to take account of OAO's difficulties in raising the money. She submits that I should order the sum of £25,000 payable over six weeks. Ms Dias has not, however, pointed to any particular defects in Dumford's schedule, but simply made the general point that the sum appears excessive for a one-day appeal. I am not persuaded that I should reduce the sum of £38,000 on that basis.

Should I then reduce it to take account of OAO's cash flow difficulties? I was at one time inclined to think I should, but now that it appears that OceanProduct has been willing to fund OAO's defence in the litigation, it appears likely that OceanProduct will fund OAO's costs of the appeal if necessary. I see no reason why OceanProduct should not at least fund the provision of security for costs. In any event I am unpersuaded that OAO cannot provide £38,000 by way of security. Moreover, I am unpersuaded that it is necessary for it to take 42 days or six weeks in order to do so.

The appeal is at present fixed to be heard in February. In my view it should be heard before then so that both parties will know the position and be able to make financial provision according to the results. The court can fix the appeal for one or other of two dates, either 17 or 23/24 November, 2004. I propose to fix the date of the appeal floating over 23/24 November. That is on the basis that the appeal is likely to take one day. I record that I have been told by one side it may take somewhat longer. However Mr Marshall assures me that it can be dealt with in a day. I think the court can deal with it in a day and will be able to deal with any slight over-run there may be.

In these circumstances, I propose to direct that OAO put up security by payment into court in the sum of £38,000 on or before 22 October 2004. If OAO fails to pay the security into court on or before that date, the appeal will stand dismissed without further order with costs.

I refuse Dumford's application that I should impose conditions, but I accede to their application for security for costs on the basis indicated.

As to a stay of execution, the judge ordered a stay pending OAO's application for permission to appeal, thus giving OAO an opportunity to apply for a stay to this court if permission was granted. Ms Dias submits that the stay should be continued pending the hearing of the appeal because if the whole sum is paid OAO will go out of business. She submitted in her skeleton argument that there is a risk that any monies paid under the judgment will not be recovered from Dumford if the appeal succeeds. Dumford has recognised that last point and Mr Marshall has indicated that Dumford will undertake to pay any sums recovered into court pending the appeal.

Miss Dias submits that since the court ordered a stay, logic says that I should extend it. I do not agree. The general rule is that a stay will not be granted pending an appeal. It all depends on the circumstances of the case. There remain uncertainties as to OAO's financial position. I can see no reason why Dumford should not take steps to execute the judgment before the appeal provided that it undertakes to pay any monies recovered into court. That undertaking may prove somewhat academic since the prospects of it actually recovering monies between now and the appeal do not seem to me to be very good. It may be that if the appeal is to be heard in November Dumford will not think it worthwhile to incur costs in connection with enforcement in Russia, but that is a matter for it to decide. I will include a liberty to apply on this aspect of the order in case some untoward event should occur in the execution process.

Finally, although it may not be of much comfort to Dumford, OAO should give the undertaking to the court which Mr Kanavin offered in his second affidavit, namely, that OAO will not enter into any transaction other than in the ordinary course of business.

LORD JUSTICE CLARKE: Both sides seek their costs of these applications. This has been a somewhat complicated matter. Dumford's application for security for costs has succeeded and OAO's application for a stay has failed. On the other hand, Dumford's application for the imposition of conditions has failed. Although there is undoubtedly some overlap between these various issues, that was undoubtedly the central battle ground. It is on those issues that Dumford has lost.

On the other hand, the facts as they appeared to Dumford, especially the coincidence of dates to which I have referred, were indeed striking. The most important document which has led to my conclusion was the letter of Mr Bakov dated February to which I have referred in some detail. That was only very recently produced. I do not blame OAO or Baker & McKenzie for that. This was a developing matter and there have undoubtedly been difficulties in Russia of which we are all aware.

In my view the fairest course is simply to order all these costs to be costs in the appeal. I do not however think that that should affect my order as to security for costs.

I would add one other matter. Mr Marshall has twice referred, both yesterday and today, to a provision in the guarantee entitling Dumford to its "reasonable costs of enforcing the guarantee" or words to that effect. If Dumford wishes to seek to recover any of the costs of these applications, either at first instance or of the appeal itself under the terms of the guarantee, that is a matter that should be raised before the court hearing the appeal and a Respondent's Notice and skeleton argument should be produced in respect of it.