Macaria Investments Ltd v Sanders & Anor

This is an application under section 6 of the Insolvency Act 1986 (“the Act”) for an order that the approval of a Company Voluntary Arrangement (“CVA”) in respect of the second respondent (“Gatnom”) given by a meeting of creditors on 1 May 2009 be revoked on the grounds that there was material irregularity in relation to that meeting.

The first respondent was the supervisor of the CVA. He filed a witness statement setting out his actions leading up to and at the meeting, but takes no part in what is a dispute between the applicant (“Macaria”) and Gatnom. A brief skeleton argument was served on his behalf explaining how he had complied with his duties, and he asked to be excused from attendance at the hearing. Macaria had consented to this course and Gatnom had by its then solicitors also raised no objection. I duly directed that the first respondent need not attend.

Gatnom was represented by solicitors until 17 September 2010 when they came off the record and since then it has been without legal representation and acting by its director, Mr Omatov. Although Gatnom is an English company, Mr Omatov is a Russian citizen and appears to be based in Austria.

This case was listed for hearing on Monday, 18 October. On Thursday, 14 October, Gatnom issued an application for an adjournment of 6-8 weeks. Its application was made on two grounds. First, Gatnom said that it needed that time to instruct new solicitors and enable them to prepare for trial. The second ground was expressed as follows:

“Furthermore it has to be mentioned that the directors of the Company, as well as the witnesses and expert are Russian citizens and as such they do need a visa for visiting the United Kingdom. However, they do not have a visa yet.”

The case duly came on for hearing and Gatnom did not appear. I accordingly considered the application for an adjournment in its absence, which application was strongly opposed by Macaria, and for reasons given orally I rejected that application. The hearing of the case proceeded and I heard evidence from two witnesses, Ms Subczynska-Samberger as a witness of fact and Mr Heiko Davids, a partner in Knight Frank ZAO based in Moscow, as an expert on Russian property values. I reserved my judgment.

The day after the hearing, on 19 October, the court received a fax from Mr Omatov marked “Very Important! Very Urgent!” expressing astonishment at having learnt from Macaria’s solicitors the previous evening that the trial had taken place that day. The enclosed letter set out an account of the underlying background from Gatnom’s perspective and complained that its solicitors had made what it considered was a wholly excessive demand for a payment on account of costs in September that it could not meet, such that it was left representing itself and having to seek an adjournment. More significantly, Gatnom stated that it had repeatedly tried to find out when the trial would be listed, without getting an answer, until on 15 October it had received an e-mail from Macaria’s solicitors which stated that the trial will commence “on Monday 18^th November at 10.30 am”. Gatnom stated that it wanted to take part in the trial, and was hoping that week to sign an agreement with new solicitors and to prepare for a trial on 18 November; and it submitted that the court should not let “unfairness” take place.

I treated this letter as an application by Gatnom to re-open the hearing on the grounds that it had been misled as to the trial date. At my invitation, Macaria filed short supplementary submissions by way of comment and explanation, and Gatnom responded with its own submissions under cover of a letter dated 21 October. I directed that I was prepared to determine the application to re-open the hearing on the papers, but that if either side sought an oral hearing I should have the matter listed accordingly. Although Macaria stated that it did not seek an oral hearing, Gatnom by e-mail communication of 28 October requested an oral hearing. After some exchanges to find a convenient date for both parties, the matter was listed accordingly for an oral hearing on 11 November. However, mid-morning on 10 November, Gatnom informed the court by e-mail that it would not attend the hearing the next day. The e-mail apologised for “late notice due to illness”.

The hearing was accordingly vacated and this is my decision reached on consideration of the papers regarding Gatnom’s application to re-open the hearing of the substantive application.

Gatnom’s application raises two questions: (a) was it misled by the mistaken date in the e-mail of 15 October from Macaria’s solicitors; (b) if it was misled, would it otherwise have appeared at the hearing on 18 October?

On 23 November 2009 the court issued a formal Notice of Hearing Date, which stated that the case was a general list hearing in a five day window from 11 October 2010. It is clear from correspondence between Gatnom’s then solicitors and Macaria’s solicitors that Gatnom’s solicitors were aware of this listing and the solicitors were liaising in early September 2010 regarding dates within the trial window when their respective experts would be available. On 10 September 2010, Macaria’s solicitors copied to Gatnom’s solicitors a letter to Chancery Listing asking if the case could commence as late as possible in the trial window, and preferably on 18 October. The individual handling the case at Gatnom’s solicitors responded that he had “passed on your information relating to the listing of the trial on [sic], so that my client might address the visa issues”.

Shortly thereafter, Gatnom’s solicitors came off the record. But on 8 October, Macaria’s solicitors wrote to Gatnom directly a letter in which the information regarding the trial window dates was repeated but which explained that the court had indicated that the start of the trial would not be on 11 or 12 October but that “it may start at any day thereafter”. A subsequent paragraph in the letter stated:

“…whilst the court has been willing to delay the start date by at least 2 days, trial will commence on any day between 13^th-18^th October 2010.

You should also be aware that the trial will go ahead irrespective of whether or not you have found legal representation. As you know, Gatnom is entitled under English procedure to represent itself without legal representation, provided the court agrees, and it has elected to do so in its Notice of Change.” [Emphasis in original]

Mr Omatov responded by e-mail the same day, stating:

“Date of the trial

We are not ready for the start of the court hearing at those dates, which you have indicated. We kindly ask you to confirm your approval of an adjournment of the start of the trial, so that we have the possibility to engage qualified lawyers, and most important a qualified counsel for organising our defence and representation in court.

Furthermore neither I, nor our witnesses or the experts have the possibility to come to London, due to an absence of a visa for visiting England. The solicitor’s company, with which we had herebefore an agreement, has refused to present a document in its name or from the court for a visa application with the British Embassy without the payment of an enormous advance payment.”

Macaria’s solicitors replied by e-mail the same day:

“As stated in our letter of today’s date, our client will not under any circumstances agree to an adjournment of the trial. Trial will, therefore, commence next week or the week after on a day to be advised.

The trial will go ahead even if there is no-one present to represent Gatnom and a decision will be made in Gatnom’s absence.” [Emphasis in original]

On 14 October, Gatnom issued the application for an adjournment to which I have referred above.

It is relevant to set out the entirety of the e-mail from Macaria’s solicitors of 15 October on which Gatnom relies:

“For your information, it has now been confirmed that Mr Justice Roth will be the judge hearing the claim. The trial will commence on Monday 18^th November at 10.30am in court room 56 at the Royal Courts of Justice on The Strand. John Wardell QC will be the counsel representing Macaria.

We confirm receipt of your application notice requesting an adjournment of the trial for 6-8 weeks. Assuming that the judge decides to hear your application, our position always has been and it remains that we will resist it.

I have confirmed with Thornton Springer at Gatnom’s nominated address that they have received a copy of the trial bundles together with the inserts which were sent yesterday. We now enclose a copy of our skeleton argument which has been lodged with the court.

Finally, we understand that there will be no-one present representing Gatnom and none of Gatnom’s witnesses nor experts will be present either. Please tell us us [sic] by return if this has changed, or if there [sic] any changes over the weekend.”

The attached skeleton argument is headed “SUBMISSIONS ON BEHALF OF THE APPLICANT FOR HEARING WEEK COMMENCING 18 OCTOBER 2010”.

The 18 November 2010 is not a Monday but a Thursday. In the light of the above exchanges and documents, I consider that anyone taking a careful interest in the proceedings would have appreciated that the date in the e-mail of 15 October must be a mistake for 18 October, or at the very least that it was very likely to be a mistake and therefore would have taken the trouble to check. This applies as much to an intelligent layman as to a lawyer. I regard it as inconceivable that Gatnom could have been confident, as it suggests, that this e-mail meant that its application for an adjournment, which Macaria had consistently resisted, had been successful. Indeed, the second paragraph of the e-mail makes clear that no decision had yet been given on that application. The fourth paragraph of the e-mail is also inconsistent with any indication that the hearing on the following Monday was not proceeding. Accordingly, I reject the submission that Gatnom was misled as to the date of the hearing.

I should state that I also reject as wholly unfounded Gatnom’s allegation that the error was deliberate and designed to exclude Gatnom from the trial.

This question is rendered academic by my answer to question (a). However, for completeness I would add that, in my opinion, if the correct date had been stated in the e-mail of 15 October, that would not have led Gatnom to attend the hearing the following Monday. It had been a consistent theme in Gatnom’s letters that Mr Omatov and his witnesses and expert were not able to come to London at that time due to the absence of visas. That was the second ground of the formal application to the court on 14 October: paragraph 4 above. Accordingly, on Gatnom’s own submissions, I do not see how it could have attended at court on 18 October in any event.

For these reasons, I dismiss Gatnom’s application to re-open the hearing.

Gatnom is indebted to Macaria in the sum of $2 million and on 10 January 2008 Macaria issued a winding-up petition in respect of that debt. For reasons that it is not necessary to go into, the original hearing of that petition was adjourned and it was due to come on for hearing in the week commencing 4 May 2009. On 3 April 2009, Gatnom filed in this court a proposal made by Mr Omatov for a CVA under section 1 of the Act. The statement of affairs produced in support showed the debt to Macaria in the amount of £1,397,800 (as at 30 March 2009) but this was dwarfed by the liability shown to two other creditors in respect of alleged contracts for the purchase of two plots of land in St Petersburg, one to Byuro Kommercheskoy Development (“BKN Development”) in the sum of £3,599,335 and the other to Byuro Kommercheskoy Resurs (“BKN Resource”) in the sum of £4,158,455. I shall refer to these as “the land contracts”.

Macaria by its then solicitors raised objections to those debts on the basis that it had concerns about the bona fides of those contracts. However, for reasons that are not material, the first respondent decided to proceed with the creditors’ meeting that had been adjourned to 1 May 2009. However, in the light of the objections raised by Macaria, he marked the votes of BKN Development and BKN Resource as objected to, as provided for in rule 1.17A(4) of the Insolvency Rules 1986. The proxy votes of the two BKN creditors were cast in favour of the proposal, which was approved by 83.5% of the creditors. The two BKN creditors together accounted for just over 80% of the total indebtedness of Gatnom.

Macaria contends that the two land contracts are a sham. Without the support of the vendors under those contracts, the proposal for a CVA would clearly not have received the necessary majority in favour of more than three-quarters in value of the creditors voting, as required by Rule 1.19(1) of the Insolvency Rules.

The land contract with BKN Resource is dated 1 August 2007 and provides for the purchase by Gatnom of a plot of land comprising some 6058 square metres at Building 13 letter AD, Moskovskoe Highway, St Petersburg (“Plot 1”). The purchase price is specified as $5,950,000, to be paid in roubles at the exchange rate valid on the day of payment. The price is to be paid by 30 June 2008: clause 3.2. Delay in payment attracts a penalty of 6% p.a.: clause 3.6. In the interim, Gatnom was to be given access to the site for the purpose of undertaking planning and clearing works with regard to preparing the land for building and construction works; and it was also allowed to undertake construction of foundations, communication lines, roadways and electric power sub-stations: clauses 2.1.4 and 2.1.5.

The land contract with BKN Development is dated 20 August 2007 and provides for the purchase by Gatnom of Building 13 letter A on the same site (“Plot 2”). This plot comprises some 1924 square metres and the purchase price is specified at $5,150,000, payable in roubles by 30 September 2008. In other respects the contract with BKN Development is the same as the contract with BKN Resource.

On the same days as each of the land contracts, the respective parties executed what are called, in the English translation, “Mutual Non-Circumvention Non-Disclosure Agreements” (“NDAs”). Under the terms of the NDAs, the parties agreed not to attempt to “circumvent, avoid or bypass each other” in connection with the respective land contract and any new or parallel contracts relating to the project in respect of that land contract, and also not to disclose to any third party any confidential information provided by the other concerning financing or customers.

On 18 December 2008, Gatnom entered into supplementary agreements for Plots 1 and 2, each of which imposed a new, lower penalty interest rate of 3% p.a. payable, in each case, from the date when payment was initially due under the original land contract. Although payment of the purchase price was of course overdue under both the original contracts, no new payment date is specified in the supplementary agreements.

In his witness statement served for these proceedings, Mr Omatov explains that both BKN Resource and BKN Development are effectively owned by a Mr Kurkaev, and indeed Mr Kurkaev has also served a witness statement in support of Gatnom. Mr Omatov says that he first met Mr Kurkaev to discuss the possibility of a joint venture with his companies in May 2007, and then had a further meeting in June 2007 when he told Mr Kurkaev that he was interested in the proposed developments. Those developments are described by Mr Omatov as a business centre and a shopping and entertainment mall planned for Plots 1 and 2 (and also another development on a different plot that is not directly material to this application). He says that after Mr Kurkaev explained the projects in detail, he expressed interest in Gatnom participating and they held further meetings in June-July 2007 in Klagenfurt, Ljubljana, Budapest and Vienna before Gatnom reached agreement to purchase Plots 1 and 2. He states that they further agreed:

“that BKN Development and BKN Resource would provide certain services in relation to the proposed developments, such as the preparation of all necessary documentation, obtaining all authorisation documents required, acting in relation to all the public consultations and hearings, preparing all necessary documents to be agreed with governmental bodies, preparing design and estimate documentation, issuing technical design specifications, preparing installations and providing connections for all pipes and cables for all necessary utilities, such as heat, water, gas, electricity, sewage, telecommunications and so forth. All of these services were to be contracted, and paid for by either BKN Development or BKN Resource (as appropriate).”

However, there is an almost complete absence of documentation regarding any of these discussions or the details of the projects that were supposedly provided to Mr Omatov at the time. Gatnom provided disclosure in these proceedings pursuant to an order of 3 November 2009 and virtually the sole pre-contractual document is an e-mail dated 22 May 2007 from Mr Omatov to Mr Kurkaev that states:

“Thank you for the meeting which took place and for the fruitful negotiations.

In accordance with the arrangement we kindly ask you to send us the “layout plan of the territory of Moskovskiy administrative district” which you told me about. We also ask you to send us new provisional regulations as to the site development of the territory. We kindly ask you to inform us of the fact as to who we can contact in St Petersburg in order to examine the territory and the documents which have already been available.”

However there is no written response to that e-mail nor have any documents concerning the proposed joint venture itself been disclosed. Apart from a layout plan and what appears to be a planning proposal of 2005, all the other documents disclosed, as is clear from their text, follow the conclusion of the sale contracts. Moreover, the obligations supposedly accepted and undertaken by BKN Development and BKN Resource regarding ancillary services, as set out above, are not specified in the land contracts or any other documents at all. Even post-contract, the documentation is sparse, notwithstanding that Mr Kurkaev says in his witness statement:

“In the years 2007, 2008 and 2009 our companies carried out huge work in receiving authorisation documents for construction on the land plots which belonged to our company and on the two land plots which were purchased by Gatnom. Public consultations were held, authorisation documents were received, the projects were co-ordinated, practical work started as to the preparation of the land plots for project construction. We informed Mr Omatov of the state of affairs as to performance of these works in due time.”

Macaria submits that this almost complete lack of documentation is highly suspicious. I agree: it seems to me almost inconceivable that contracts of this scale and discussions of this nature were entered into without examination of significant documentation. Since, according to Mr Omatov, the benefit of the ventures lay in the development projects, at least some financial consideration of the expected revenue and profit and the anticipated time-lines, would surely have been undertaken. This is stated to be a joint venture project or projects, yet effectively there are no joint venture project documents whatsoever.

This is all the more striking in the light of the letter from Mr Omatov to the second respondent after the latter had raised queries with Gatnom before the creditors’ meeting regarding its alleged liabilities to the two BKN companies. On 21 April 2009, Mr Omatov wrote:

“…[Gatnom] together with its partners in Austria, France and Russia has worked through and negotiated construction of objects on these plots of land. Already in 2007, it was decided which objects will be built, how this property will be used etc.

Upon signature of the agreements, [Gatnom] together with its partners has carried out a big amount of works in the territory itself as well as in respect of preparation of technical, project and construction documentation.”

Moreover, Macaria contends that the prices paid under the land contracts are out of all proportion to the actual market value of the two plots. The two plots are part of a much larger site comprising altogether nine plots over some 277 hectares. Thus the two plots together constitute less that 1.5% of the whole site. The site is in a suburb of St Petersburg, about 12.5 kilometres from the centre, close to the motorway ring road. There were produced in evidence a series of photographs of the site and it is clear that it is currently in a very poor condition. I was told that it contains some 2-3 dozen old structures, some of them abandoned.

In his witness statement, Mr Omatov says that the prices under the land contracts were the market value of the land as determined by an independent expert valuer plus the costs “calculated to be incurred” in providing the additional services to which he refers. He says that two independent valuations were carried out in 2007, the first without taking into account the authorisations necessary for development of the land and the second taking those matters into account. However, he has produced only one of the earlier valuations for one of the two plots: that document values Plot 1 as at 25 May 2007 at $2.21 million. He says in his witness statement that he is trying to see if he can obtain copies of the other valuations. The statement was made on 24 September 2009 but the valuations have never been produced. If they were the basis upon which Gatnom entered into these very substantial contracts, I find it astonishing, to say the least, that Gatnom did not retain copies of them. I note further that, on Mr Omatov’s account, the second valuation which he received on Plot 2 was in the sum of $3.72 million, which is over $1 million less than the purchase price.  Although Mr Omatov says that this difference is accounted for by the additional services which BKN Development was to supply, as I have already observed there is no provision in any contract document for the supply of those services.

The order of 3 November 2009 provided for the exchange of expert valuation evidence in these proceedings. The original date fixed for exchange was 25 June 2010, but this was varied to 18 August 2010 by a consent order made on 4 June 2010. Extensions of this deadline were agreed between the parties’ solicitors, on the basis that the discussion between experts would be held shortly thereafter. On 24 September 2010, Gatnom served an expert’s report on Russian law issues (which, as matters developed, it has not been necessary for the court to consider) in exchange for Macaria’s experts’ reports but Gatnom did not then serve a valuation expert’s report. On 7 October 2010, Gatnom in correspondence still stated that its valuation expert report would shortly be served. However, no such expert report was furnished.

Macaria served an expert valuation report and supplementary clarification from Knight Frank ZAO. Mr Davids, who was called as to give evidence, explains that although the report was signed by Ms Olga Kochetova as the firm’s head of valuation in Russia, he had been responsible for leading the team involved in its preparation. Mr Davids inspected the two plots concerned and considered comparative valuations. His revised valuations as at 1 August 2007 are: Plot 1: $977,000; Plot 2: $377,300.

Furthermore, in his evidence to the court, Mr Davids explained that his valuations were based on the assumption that the two plots would be developed along with the remainder of the site. He said that it would be very hard to develop these plots on their own. Unsurprisingly, he said that in those circumstances one would expect a purchaser of the plots to get a contractual assurance regarding development of the remainder of the site otherwise it would obviously be commercially very exposed. However, no such assurance or condition is contained in the two land contracts here nor are there any side agreements to that effect. As for Mr Omatov’s suggestion that the prices include an uplift for the future development, Mr Davids said that it would be highly unusual to incorporate such an unconditional uplift in the price: if there was to be an uplift, one would expect it to be conditional such that it applied if and when the overall development took place, or at least when there was a successful change of user by the vendor for the whole site. Mr Davids stated that at present, the site is zoned for industrial usage and thus the kind of development referred to by Mr Omatov is not permitted without a change of planning usage, which is a complex process. The position will apparently change in 2015, but that is of course a considerable time in the future. Mr Omatov in his witness statement expressed a contrary view as to the zoning and planning position, but I find the documents in that regard to be unclear and Gatnom did not serve any expert evidence to support those contentions.

I am not bound to accept Mr Davids’s evidence and I bear in mind that he was not challenged in cross-examination. However, I found him to be an impressive witness. He has 11 years experience working in Russia and he was able to answer effectively the queries that I raised on particular points in his reports. I therefore accept his evidence and find that the purchase price in the case of each of these two land contracts was many times the likely open market value; and further that the structure of the agreements, especially for a purchaser without (according to Mr Omatov’s own statements) development experience would be highly unusual and lacks commercial logic.

In my judgment, the above circumstances, taken together, are sufficient to establish, on the balance of probabilities, that the two contracts are shams. Gatnom, through Mr Omatov, has been given the opportunity to produce evidence rebutting the allegations advanced in that regard and it has failed to do so on the documents or by an expert’s report on valuation, even leaving aside the fact that its witnesses did not attend trial to give evidence on its behalf.

In the light of that conclusion, it is not necessary for me to address the other grounds on which Macaria sought to rely. I shall only mention briefly that it was contended that the timing of the land contracts was suspicious, since they were entered into in August 2007 at the very time that Gatnom was, on the basis of the e-mails being sent by Mr Omatov to Macaria’s representative, unable to repay its debt to Macaria of $2 million. However, although Gatnom undertook new commitments under the land contracts in excess of $11 million, those sums were not due for payment until June and September 2008, and it may not have been unreasonable for Gatnom to expect that its financial situation was likely to change in the interim, given various other transactions in which it claims to have been involved.

Nor do I think that particular weight should be placed on the fact of the two NDAs. Macaria emphasised that they were relied on in dealing with the second respondent as nominee for the purpose of the CVA as a ground to prevent him from disclosing the land contracts to the general body of creditors. But the background to all of the dealings referred to in this case involving Macaria and Gatnom is obscure and Mr Davids confirmed to the court that non-disclosure agreements in Russian property development transactions are not uncommon, albeit that they are usually incorporated in the main sale and purchase agreement and not contained in a separate document. But in this case, the scope of the NDAs is arguably wider than the two particular land contacts.

Since I have found that the two land contracts are shams, the creditors under those alleged contracts were not entitled to vote at the meeting on 1 May 2009 which approved the CVA. In my view, it cannot be disputed that a decision in a creditors’ meeting to approve a CVA that was carried only because of the votes based on alleged liabilities that did not in truth exist constitutes a material irregularity within the terms of section 6(1)(b) of the Act.

Under section 6(4) of the Act, the court therefore has power to revoke any decision of the meeting approving the CVA. In the circumstances, I consider that it is clearly appropriate to exercise that power and I shall make an order accordingly.