Avonwick Holdings Ltd v Webinvest Ltd & Anor

This is the trial of a claim for repayment of monies said to be due under the terms of a loan agreement between the Claimant (“Avonwick”, a company incorporated in the British Virgin Islands) and the First Defendant (“Webinvest”, a company incorporated in St Vincent and the Grenadines) dated 23 April 2010 (executed by Webinvest on 26 April 2010 - “the Loan Agreement”) and also under the terms of an associated Deed of Guarantee also dated 23 April 2010 (“the Guarantee”) between the Second Defendant (“Mr Shlosberg”), who is the beneficial owner of Webinvest, and Avonwick. The claims relate to a loan of US$100 million made by Avonwick to Webinvest.

Webinvest used that money, combined with another US$100 million from its own resources, to make a loan of US$200 million to a company called Globoid Finance Establishment (“Globoid”), which is owned by Vitaliy Machitski (“Mr Machitski”), a Russian businessman. At the time, Mr Machitski was a close and longstanding friend of Mr Shlosberg.

The loan from Avonwick to Webinvest was negotiated between Mr Shlosberg and Mr Vitaliy Gayduk (“Mr Gayduk”) and their respective staff. Mr Gayduk is a wealthy Ukrainian businessman, who, at the time, was also a close friend of Mr Shlosberg and his family and had been for some years. Avonwick is owned by Mrs Gayduk.

The loan of US$200 million from Webinvest to Globoid (“the Globoid loan”) was due to be repaid in May 2012. The loan of US$100 million from Avonwick to Webinvest (“the Avonwick loan”) was due to be repaid a few days later.

In the event, Globoid did not repay the Globoid loan. In turn, Webinvest failed to repay the Avonwick loan. Avonwick allowed Webinvest and Mr Shlosberg a period of grace before demanding repayment, principally by reason of a personal tragedy which affected Mr Shlosberg from 2011, when his step-son was found to be suffering from cancer. Mr Shlosberg’s attention was focused on trying to find a cure, but without success. His step-son died on 13 June 2013. Eventually, in April 2014, Avonwick made formal demands for the repayment of the Avonwick loan by Webinvest and by Mr Shlosberg under the Guarantee.

The principal issue at the heart of this case is whether there was a collateral oral agreement made between Mr Shlosberg and Mr Gayduk to the effect that the Avonwick loan and interest thereon would only fall to be repaid by Webinvest, in amounts in relevant proportion to the sources of the loan to Globoid, if and when Globoid paid interest or repaid the principal of the Globoid loan to Webinvest. I refer to this alleged agreement as the ‘pay if paid’ agreement. The ‘pay if paid’ agreement was inconsistent with the terms of the Loan Agreement and the Guarantee, which on their face set out straightforward and unconditional obligations for payment of interest and full repayment of the principal sum of US$100 million at the maturity date of the Avonwick loan, on 17 May 2012.

Mr Shlosberg gave evidence that he made the oral ‘pay if paid’ agreement with Mr Gayduk at the time the Avonwick loan was being negotiated. The principal member of Mr Shlosberg’s staff involved in that transaction and in the Globoid loan, Ms Julia Mutieva (“Ms Mutieva”), gave evidence to corroborate his version of events in various respects, although she was not herself a party to the discussions which took place between Mr Shlosberg and Mr Gayduk privately.

Mr Gayduk vehemently denied that he made an oral ‘pay if paid’ agreement with Mr Shlosberg. He said that the Loan Agreement and the Guarantee truly and properly reflected what had been discussed and negotiated with Mr Shlosberg. His evidence was corroborated in various ways by evidence given by members of his staff who dealt with the transaction: his principal assistants, Mr Volodymyr Kravets (“Mr Kravets”) and Mr Oleksiy Petrov (“Mr Petrov”), and in-house counsel for the group of companies controlled by the Gayduk family, Mr Volodymyr Kupchyshyn (“Mr Kupchyshyn”).

On the central issue whether an oral collateral ‘pay if paid’ agreement was made, this is a case which turns on the credibility of these sets of witnesses.

Having heard the witnesses in person and upon review of the documentation in the case, I was left in no doubt that Mr Gayduk, Mr Kravets, Mr Petrov and Mr Kupchyshyn were credible witnesses who were telling the truth. I was also left in no doubt that Mr Shlosberg and Ms Mutieva were thoroughly dishonest witnesses who gave deceitful evidence about a ‘pay if paid’ agreement which never existed, in an attempt to avoid judgment being given to enforce the Loan Agreement and the Guarantee.

The contemporaneous documentation provides overwhelming corroboration for the evidence of the witnesses for Avonwick. Similarly, the practical dealings between the parties, both in the way the Loan Agreement and Guarantee were negotiated and drawn up and in the way in which they were implemented by both Avonwick and Webinvest and Mr Shlosberg, provide overwhelming corroboration for the evidence of the witnesses for Avonwick. Moreover, the alleged ‘pay if paid’ agreement would have been wildly at odds with commercial common sense in the context of this case.

In fact, Mr Shlosberg only made the suggestion that there had been an oral ‘pay if paid’ agreement between Mr Shlosberg and Mr Gayduk at the eleventh hour, in a witness statement dated 29 May 2014. Ms Mutieva supported him in this suggestion in a witness statement dated 10 July 2014. Mr Shlosberg and Ms Mutieva did this in order to obtain an injunction to prevent Avonwick presenting a petition to wind up Webinvest on grounds of insolvency evidenced by its failure to repay the Avonwick loan and a petition to make Mr Shlosberg bankrupt on similar grounds. This injunction was sought after Avonwick had made formal demands by letters dated 3 April 2014 addressed to Webinvest and Mr Shlosberg for full repayment of the Avonwick loan plus outstanding interest (a total sum as at that date of US$180,891,155.88), followed by statutory demands dated 8 April 2014, and after an attempt by Mr Shlosberg and Webinvest to reschedule the Avonwick loan (on terms which acknowledged that it was payable) had failed.

Although Mr Marshall QC, for Mr Shlosberg and Webinvest, made submissions about a range of possible defences to Avonwick’s claims, based on collateral contract, estoppel by convention, a claim for rectification of the Loan Agreement and Guarantee and mistake, I find that in substance they all turn on the outcome of the case on the issue of whether there ever was a ‘pay if paid’ agreement. Accordingly, they fall to be rejected along with the Defendants’ case about that. I also find that they fail for other reasons as well.

Mr Gayduk, Mr Kravets, Mr Petrov and Mr Kupchyshyn all gave evidence in person for Avonwick. As already stated, I found them all to be truthful witnesses. They gave their evidence in a straightforward way and it was entirely credible.

Two points deserve mention here in relation to their evidence. First, in his submissions, Mr Marshall sought to make much of the fact that the Loan Agreement, which was drawn up by Allen & Overy (“A&O”), did not include an entire agreement clause. He sought to suggest that this indicated that it was intended to allow scope for operation of the alleged collateral ‘pay if paid’ agreement he said had been made by Mr Shlosberg and Mr Gayduk. On the evidence, however, this point was unsustainable.

Mr Kupchyshyn was responsible for instructing A&O in relation to the preparation of the Loan Agreement and the Guarantee. Avonwick waived privilege in relation to the instructions given. Mr Kupchyshyn had been given instructions by Mr Petrov and Mr Kravets that he should instruct an English law firm to draft the Loan Agreement, contrary to their usual practice of relying on Mr Kupchyshyn to draft agreements of this kind, because they wanted the Loan Agreement to be “bullet proof” (meaning, clearly capable of enforcement according to its terms). None of them knew anything about any supposed oral collateral agreement between Mr Gayduk and Mr Shlosberg. On the issue of the absence of an entire agreement clause in the Loan Agreement, Mr Kupchyshyn’s unchallenged evidence, which I accept, was that he was relying on A&O to suggest the standard clauses to be included in the Loan Agreement and Guarantee, and it did not occur to him to add an entire agreement clause to their drafts; they were working under significant time pressure to draw up the Loan Agreement and Guarantee (commencing with instructions from Mr Petrov and Mr Kravets on 20 April 2010, culminating in final agreed form of the documents on 23 April 2010) and he was “confident that this was simply an oversight”; and “At no point was the possibility of including such a clause discussed during the drafting process, either internally or with A&O”. Therefore, the absence of an entire agreement clause did not reflect any instruction originating from Mr Gayduk reflecting the making of some form of oral collateral agreement between him and Mr Shlosberg.

Secondly, the evidence of Mr Petrov was that he did not know in detail the purpose of the Avonwick loan which he was tasked by Mr Gayduk with sorting out. Mr Marshall sought to exploit this feature of the evidence to suggest that Mr Gayduk and Mr Shlosberg had agreed that the reason for the loan should be kept confidential, in order to suggest a reason why the Loan Agreement and the Guarantee did not reflect the ‘pay if paid’ agreement on their face. However, in evidence which I accept, Mr Gayduk denied that there was any stipulation by Mr Shlosberg that the reason for the Avonwick loan should be kept confidential. Mr Kravets’s evidence, which I also accept, was that he was told the reason for the loan. It was just happenstance that Mr Petrov was not told the full background details; it was not information that he needed to complete his tasks in relation to the transaction. No suggestion was made to any of Mr Kravets, Mr Petrov or Mr Kupchyshyn by Mr Gayduk or anyone for Webinvest that there was any confidentiality which attached to information about the Avonwick loan or the reason for it which meant that the Loan Agreement and Guarantee could not accurately set out the obligations of the parties according to their terms. It was notable that in the course of his cross-examination when asked about confidentiality Mr Shlosberg’s initial reaction was that there was none.

Avonwick also called Michalis Moushouttas (“Mr Moushouttas”) as a witness. Mr Moushouttas was a truthful witness. He was one of the directors of Avonwick at the material times. Avonwick is an offshore company, incorporated in the British Virgin Islands. However, its directors are based in Cyprus. The directors are used to acting to give effect to transactions proposed by Mr or Mrs Gayduk via the office of PriceWaterhouseCoopers Ltd in Cyprus. The directors have the practice of approving such transactions with little or no independent consideration. Mr Moushouttas confirmed that the directors of Avonwick had not authorised Mr Gayduk to act as agent for Avonwick with authority to bind the company in relation to any contractual arrangement with Mr Shlosberg or Webinvest. It was Mr Moushouttas who signed both the Loan Agreement and the Guarantee as authorised agent for Avonwick.

Mr Shlosberg and Ms Mutieva gave oral evidence for the Defendants. In order to understand the significance of their evidence at trial it is necessary to explain that they had also made witness statements in the course of arbitration proceedings brought by Webinvest against Globoid for repayment of the Globoid loan: witness statement of Ms Mutieva dated 4 October 2013; witness statement of Mr Shlosberg dated 19 March 2014; witness statement of Ms Mutieva dated 27 April 2014 in response to a witness statement of Mr Machitski dated 14 April 2014; and witness statement of Mr Shlosberg dated 28 April 2014 in response to Mr Machitski. They had also made witness statements for the purposes of seeking injunctive relief against Avonwick in relation to the insolvency proceedings against Mr Shlosberg and Webinvest in England: witness statements of Ms Mutieva dated 10 July 2014 and 14 July 2014; witness statements of Mr Shlosberg dated 29 May 2014 and 11 July 2014. It was in Mr Shlosberg’s witness statement of 29 May 2014 that he first suggested that there had been an oral collateral ‘pay if paid’ agreement.

In the case of both Mr Shlosberg and Ms Mutieva, there were significant differences as between their evidence in the arbitration proceedings and the insolvency proceedings, and as between their evidence in both those proceedings and their evidence at trial.

Before trial, there was interlocutory sparring between the parties on the question whether the witness statements and other documents in the arbitration proceedings should be disclosed. Orders were made for their disclosure, and the relevant part of these orders were confirmed by order of the Court of Appeal made on 17 October 2014, on the last sitting day before the trial began on 20 October.

In Webinvest’s arbitration proceedings against Globoid, Webinvest sought to rely straightforwardly on the terms of a written loan agreement dated 22 April 2010 (“the Globoid Loan Agreement”). In Globoid’s defence, Mr Machitski asserted that there had been an oral collateral agreement made between him and Mr Shlosberg to qualify the terms of the Globoid Loan Agreement. This was denied by Mr Shlosberg, and as part of their answer to Mr Machitski’s assertion both Mr Shlosberg and Mr Mutieva said that their experience of Russian business is that negotiations often take place orally, but arrangements are documented in accordance with the agreements reached between the parties (i.e. without leaving out important parts of the agreements made) and that the documented agreements are legally binding (i.e. are not qualified by collateral oral agreements). That was important evidence for them to maintain in the arbitration proceedings, to meet the case being presented by Globoid and Mr Machitski. But it was distinctly unhelpful to the case Mr Shlosberg and Webinvest sought to maintain in the present action, in which it was Avonwick which sought to rely upon the relevant written legal agreements and Mr Shlosberg who was saying that he had made a separate oral collateral agreement with Mr Gayduk which was radically inconsistent with what the written agreements stated.

Unsurprisingly, Mr Shlosberg and Ms Mutieva were cross-examined about this tension between their evidence for the arbitration proceedings and their evidence at trial. They were also cross-examined about the position which Webinvest had maintained vis-à-vis Globoid, in which Webinvest had emphasised that it was being pressed for repayment by its own creditors in a manner which was inconsistent with Mr Shlosberg’s later case that there was a ‘pay if paid’ agreement with Avonwick, which meant that Webinvest owed Avonwick nothing until it was paid by Globoid. Neither Mr Shlosberg nor Ms Mutieva had good answers to these lines of questioning. Mr Shlosberg, for instance, suggested that even though he had signed declarations of truth he did not regard his witness statements in the arbitration as having the status of evidence, since the arbitration had been settled before he gave oral evidence, and also suggested that he had said things in his witness statements to fortify Webinvest’s case against Globoid which were not true. In my view, however, what Mr Shlosberg and Ms Mutieva said in their evidence in the arbitration was much closer to the truth than what they said at trial.

Ms Mutieva was a very unsatisfactory witness. She repeatedly lied or became evasive when challenged with inconvenient documents inconsistent with the story she was trying to put forward. She was visibly uncomfortable in giving many of her answers, and one might have felt sorry for her had she not been so dishonest.

Her evidence even began with a lie. In inter-solicitor correspondence before trial, Dechert LLP (“Dechert”, the solicitors for Avonwick) wrote to the Defendants’ solicitors, Fladgate LLP (“Fladgate”), for the purposes of working out the timetable for trial, to check that Mr Shlosberg and Ms Mutieva would be giving evidence in English, since they had signed witness statements in English. Dechert specifically asked to be informed if they intended to give evidence in Russian, since that would mean that the timetable would have to be amended. Fladgate responded to say that Mr Shlosberg would be giving his evidence in Russian with an interpreter, but stated “Julia Mutieva is confident in English but wishes to have an interpreter present when she gives evidence” (i.e. she was proposing to give evidence in English, but with support from an interpreter should any difficulties arise). However, when she came to give her evidence she said she would give it in Russian, which she proceeded to do, with every question being mediated through a translator, so buying herself extra time to think up answers. It was in fact clear at many points in her evidence and from her demeanour that she understood very well the questions that were being put to her in English by Mr Berry QC for Avonwick.

Mr Berry asked her about Fladgate’s letter, and she denied that she had ever told them that she would give her evidence in English. In his closing submissions, Mr Berry submitted that this was a lie. Having reviewed the matter with the benefit of submissions from Mr Berry and Mr Marshall, and having regard to the whole way in which Ms Mutieva gave her evidence, I consider that Mr Berry is right. Fladgate gave no indication of having behaved other than as highly competent solicitors in relation to these proceedings, and I find it inconceivable that they would not have checked directly with Ms Mutieva before responding to Dechert’s inquiry about how she would be giving her evidence. To have done otherwise, in a matter affecting the trial timetable, would have been to act in reckless disregard of their duty to the court.

Mr Marshall sought to defuse this by pointing out that in her first witness statement in the arbitration Ms Mutieva had said that although it had been prepared in English, she anticipated giving testimony at the evidentiary hearing in Russian. He suggested that, although privilege had not been waived, I should infer that a mistake had been made by Fladgate. In my view, however, this is a feature of the case which, if anything, strengthens the inference that Fladgate must have taken instructions directly from Ms Mutieva before indicating to Dechert that (unlike as proposed for the arbitration) she would give her evidence in English. If they had not done so, and were simply going by what she had said previously, they would have indicated that she, like Mr Shlosberg, would be giving her evidence in Russian.

Although I have explained why this particular part of Ms Mutieva’s evidence was unsatisfactory, this should not be taken to be the main foundation (or even a particularly significant part of the foundation) for my conclusion that Ms Mutieva was not a witness of truth. There were many other reasons for forming that view, arising both from the way she gave her evidence and from the substance of what she said.

Mr Shlosberg gave his evidence after Ms Mutieva. I found him also to be a thoroughly dishonest witness. His answers were frequently evasive. He veered between affecting detailed recollection of some things and affecting almost complete lack of memory for others, depending on what suited his case. In neither respect was his evidence persuasive. He had no good explanation for the shifts and changes in his evidence between the arbitration proceedings, the insolvency proceedings and for trial, when each time the story changed to serve different purposes or to take account of new and inconvenient matters. He was a witness willing to say anything, however untrue, to suit his purposes and to try to escape liability for himself and Webinvest.

Mr Shlosberg maintained that he had not read the Guarantee with any care before signing it. I did not believe him. It is very likely that he examined with care an instrument which purported to make him personally liable for a loan of US$100 million and that he arranged for Ms Mutieva to make inquiries about its meaning. Similarly, he said that he had not read the Loan Agreement with any care. Again, I did not believe him. Webinvest was his company, and it was assuming a liability of US$100 million. He did not instruct lawyers to advise him. Both instruments were drawn up at Webinvest’s request in both English and Russian, and the inference is that this was to enable Mr Shlosberg (whose English was not fluent, unlike Ms Mutieva’s) to study and understand them for himself. Upon reading these documents, he could not have failed to realise (and in my view he very clearly did realise) that they set out his personal obligations and those of his company in a way that allowed for no doubt, and which certainly contained no hint of any inconsistent collateral agreement with Mr Gayduk. Had there been any such agreement, it would have represented an extraordinary risk for Mr Shlosberg to proceed without it being recorded or adverted to in any way in the Guarantee and Loan Agreement. In fact, the reason it was not recorded was that no such collateral agreement had been made.

It was also a remarkable feature of the evidence of both Mr Shlosberg and Ms Mutieva under cross-examination that, when it came to the crunch, they failed at critical points in their oral evidence to “come up to proof” (as Mr Berry put it) regarding what exactly was said regarding any supposed ‘pay if paid’ agreement. Ms Mutieva’s oral evidence was merely to the effect that it was understood that the source of the funds to repay Avonwick would be the funds received from Globoid. She did not identify clear words used by Mr Shlosberg to inform her that he had made a specific collateral ‘pay if paid’ agreement with Mr Gayduk to limit the contractual obligations of Webinvest. Still more remarkably, at key points in his oral evidence Mr Shlosberg accepted that no words to limit Webinvest’s obligations were spoken between him and Mr Gayduk, and that it was all left as a matter of understandings rather than specific agreement.

The Defendants also sought to rely on the unchallenged oral evidence of Olga Belobrova, a Russian legal adviser to Mr Shlosberg and companies related to him. Ms Belobrova gave evidence regarding the provision of a loan of US$110 million from Castle Investment Fund Limited (“Castle”), a company owned by Mr Shlosberg’s wife, to Webinvest to fund the Shlosberg family contribution to the Globoid loan. One purpose of this evidence was to show that Webinvest had a creditor other than Avonwick, in order to try to explain communications from Webinvest to Globoid after Globoid went into default in respect of the Globoid loan in which Webinvest told Globoid that it was being pressed for repayment by its creditors. This position was inconsistent with the Defendants’ case in these proceedings that Webinvest’s liability to Avonwick was qualified by a ‘pay if paid’ provision, so Ms Belobrova’s evidence was adduced to show that Webinvest had another creditor to whom Webinvest could have been referring in these communications. I was not persuaded by this. It is very unlikely that Mr Shlosberg or Ms Mutieva, in their dealings with Globoid, meant to refer to pressure from Castle, a company in the control of the Shlosberg family. In my view, on a proper understanding of the relevant communications and the context in which they were sent, they were indeed meant to refer to pressure from Avonwick as a creditor of Webinvest, as Mr Berry contended. The evidence of Ms Belobrova did not indicate otherwise.

In addition, the Defendants sought to rely on a statement of Alexander Jeeves (one of the directors of Lex Services Limited, the corporate director of Webinvest in April 2010, who is based in Liechtenstein) and a statement of Giselle Millington (a director of Webinvest, appointed in November 2013, who is based in Saint Vincent and the Grenadines), which were served subject to hearsay notices from the Defendants. Against the background of Avonwick disputing that Mr Shlosberg had authority from Webinvest to make agreements (such as the collateral ‘pay if paid’ agreement) on its behalf, Mr Jeeves and Ms Millington sought to give evidence that Mr Shlosberg was authorised to enter into negotiations on behalf of Webinvest and to reach agreements on its behalf. Avonwick asked for these witnesses to be called at trial to be cross-examined, if necessary via a video-link. No good reason was given by the Defendants why this could not be done. In the case of Mr Jeeves, it was said that there would be difficulties about doing this in Liechtenstein, but even if that were true it would have been a simple matter for Mr Jeeves to travel a short distance to another jurisdiction to enable him to be cross-examined via video-link. In the circumstances, therefore, I felt unable to attach significant weight to their evidence.

In one respect, their evidence was positively unhelpful from Mr Shlosberg’s point of view. Under cross-examination, Mr Shlosberg asserted for the first time that there was in place in 2010 a written power of attorney from Webinvest granting him authority to make agreements on its behalf. No such instrument had been disclosed by Webinvest, and it is noticeable that neither Mr Jeeves nor Ms Millington refer to one. I do not believe that there ever was a written power of attorney for Mr Shlosberg. This was yet another instance of him making up a story to try to improve his case at trial.

Finally, mention should be made in this context of Mr Machitski. He was not called as a witness by the Defendants, even though Mr Shlosberg made a number of appeals in the witness box to Mr Machitski being able to confirm parts of his (Mr Shlosberg’s) evidence and maintained that they were close friends and even though Webinvest had settled its arbitration proceedings against Globoid in June 2014. There was available in these proceedings the witness statement of Mr Machitski in the arbitration, but Mr Shlosberg’s stated position in the arbitration was that Mr Machitski was lying in important respects in the arbitration proceedings as part of “a dishonest and fraudulent attempt … to delay or avoid altogether the [Globoid] Loan”. I did not feel able to attach significant weight to Mr Machitski’s witness statement.

The facts of this case, as I find them, are as follows.

In about March or early April 2010, Mr Machitski approached Mr Shlosberg to ask Mr Shlosberg to provide urgent funding for one of Mr Machitski’s projects. Mr Machitski owned or controlled a company called VI Holdings NV, which owned Vimetco NV, which owned and operated aluminium plants. VI Holdings was in breach of its loan covenants with a syndicate of banks, which therefore had control of Vimetco via security taken from VI Holdings.

Meanwhile, Mr Machitski had identified an opportunity to increase the value of the shares of Vimetco, which at the time were listed on the London Stock Exchange. Vimetco owned a major aluminium plant in China and Mr Machitski believed that its shares were undervalued on the London Stock Exchange, because of inadequate understanding of the potential of its Chinese operation, and would be boosted in value if Vimetco were instead listed on the Hong Kong Stock Exchange. He therefore wished to arrange for Vimetco to be de-listed from the London exchange and re-listed on the Hong Kong exchange. In order to achieve that, however, he needed to recover control of Vimetco from VI Holdings’ banks by repaying VI Holdings’ borrowings to secure release of the shares in Vimetco charged as security to the banks.

Mr Machitski did not have access to liquid funds in the amount required, and as a last resort he came to his close friend, Mr Shlosberg, to ask if he could provide the US$200 million which Mr Machitski needed to carry through his plan. Mr Shlosberg was unwilling to invest in the scheme on an equity basis, but was willing to participate on the basis of a loan for a limited period of time, maturing on 14 May 2012 or after receipt of proceeds from the re-listing of Vimetco (if that occurred earlier), at a high rate of interest of 24% p.a.. In relation to the interest, 5% p.a. was to be paid five business days after the end of each calendar quarter, and the remaining accruing interest of 19% p.a. was to be repaid at maturity. Mr Shlosberg was willing to participate without taking security or a personal guarantee from Mr Machitski, by reason of his close friendship with and trust in Mr Machitski and his belief in the viability of the proposed scheme. Webinvest was chosen as the corporate vehicle for the making of the loan and Globoid as the company in Mr Machitski’s control which would receive the loan monies.

However, Mr Shlosberg was only able to arrange for provision of US$100 million of the sum required by Mr Machitski out of liquid funds available to the Shlosberg family, via Castle. Although in his evidence at trial Mr Shlosberg denied that this was the case, I find that the attractive loan or investment opportunity presented to Mr Shlosberg was offered by Mr Machitski on the footing that Mr Shlosberg could only take it up if he provided the full US$200 million which Mr Machitski required. According to Mr Gayduk’s evidence, which I accept, this was what Mr Shlosberg told Mr Gayduk in April 2010.

This is also consistent with the picture presented by Mr Shlosberg in his evidence in the arbitration proceedings and in the insolvency proceedings. In his evidence for the arbitration, Mr Shlosberg said that Mr Machitski asked him for a loan of US$200 million, was in desperate need of that sum and its urgent availability was critical. He did not suggest that there was any discussion of a possible loan of US$100 million only, from Mr Shlosberg, nor that Mr Machitski would have found that a practicable or attractive option. Similarly, there is nothing in the supporting evidence provided by Ms Mutieva for those proceedings that suggests that the opportunity to make a loan to Mr Machitski was for any sum other than US$200 million.

In his witness statement of 29 May 2014 in the insolvency proceedings, Mr Shlosberg said this, at paragraph 11:

“I informed Mr [Gayduk] that I was considering making a loan repayable within two years to a business partner of mine [i.e. Mr Machitski]. The rate of interest for this loan was very attractive because my business partner had an urgent and pressing need for the money. However, to fund part of this loan I needed to borrow money and asked Mr [Gayduk] whether he would be willing to make a loan to me.”

This is to be contrasted with Mr Shlosberg’s evidence at trial, in which he said that it would have been possible for him to have lent Mr Machitski only the US$100 million which he had available. I did not believe Mr Shlosberg’s evidence to this effect. The proposals which Mr Machitski sent Mr Shlosberg on 19 April 2010 emphasised that Mr Machitski needed US$200 million urgently, and are consistent with Mr Shlosberg’s account in the insolvency proceedings rather than his later account at trial.

The significance of this point is that it explains the commercial logic for Mr Shlosberg’s approach to Mr Gayduk to ask him for US$100 million and why Mr Shlosberg offered Mr Gayduk the same attractive loan terms as Mr Shlosberg was able to get from Mr Machitski, without Mr Shlosberg making any profit on the part of the US$200 million Globoid loan which was to be funded by the US$100 million from Avonwick. Quite simply, Mr Shlosberg needed Avonwick’s US$100 million in order to take advantage of Mr Machitski’s offer and make the attractive return he hoped to achieve in relation to his own US$100 million, and Mr Shlosberg needed to make the proposal to Mr Gayduk as attractive as possible in order to persuade him to arrange to make the Avonwick loan. I do not believe Mr Shlosberg’s alternative explanation, offered at trial, that he offered Mr Gayduk the opportunity to make the Avonwick loan as a personal favour to him, to allow him to participate in an attractive investment proposition.

Shortly after Mr Machitski first approached Mr Shlosberg to ask for funds in relation to his plans for Vimetco, Mr Shlosberg went to see Mr Gayduk at his home in Kiev to ask if he would become a co-investor on an equity basis in relation to providing Mr Machitski with funding for those plans. Mr Shlosberg gave Mr Gayduk a few basic documents about the Vimetco corporate structure. Mr Gayduk agreed to consider the matter.

Mr Gayduk briefed Mr Kravets about the proposal, gave him the documents and asked him to find out what he could about Vimetco. Mr Kravets did some investigating and reported back to Mr Gayduk. Mr Kravets’ advice was that it would take several months of work to undertake the necessary due diligence to decide whether the investment would be a good one or not. This would not be possible under the urgent timetable which Mr Shlosberg and Mr Machitski wanted. Mr Kravets and Mr Petrov (who knew less about the background) advised against making such an investment without full due diligence, and Mr Gayduk agreed.

Mr Gayduk reverted to Mr Shlosberg to say that he was not interested in the project. Mr Shlosberg, however, was not deterred. He told Mr Gayduk that he needed another US$100 million to add to his own US$100 million in order to participate in the project, and asked if Mr Gayduk would be willing to lend him the additional US$100 million as a personal loan. Mr Gayduk agreed to do this. He did so specifically on the basis that Mr Shlosberg would take the risk of what happened in relation to the underlying Vimetco project, and Mr Gayduk would be relying on Mr Shlosberg personally to service the loan and repay it at maturity, whatever might happen in relation to Vimetco. Mr Shlosberg agreed to all of this, in order to obtain the additional funding he required to be able to make the US$200 million loan to Mr Machitski.

I reject Mr Shlosberg’s evidence, strongly denied by Mr Gayduk, that it was at this stage that an oral collateral ‘pay if paid’ agreement was made, according to which Mr Shlosberg (or the corporate vehicle used by him, Webinvest) would only have to pay interest or repay the loan to Mr Gayduk (or the corporate vehicle used by him, Avonwick) in a proportionate amount if Mr Machitski (or Globoid) paid interest or repaid the Globoid loan.

Such a ‘pay if paid’ agreement would have made no commercial sense in the circumstances. Mr Gayduk had already refused to participate in the Vimetco scheme as an investor, taking the risk of its success or failure, because of the impossibility of doing the necessary due diligence in the time available, and there was no reason why he would suddenly have agreed to take such a risk by making a ‘pay if paid’ agreement with Mr Shlosberg. Moreover, a ‘pay if paid’ agreement would have meant that Mr Gayduk or his company would have no recourse against Mr Machitski or his company for the money lent, and would only have recourse against Mr Shlosberg or his company if and when they were paid by Mr Machitski. Generous though he was prepared to be to his friend, Mr Shlosberg, there was nothing in the evidence that lent any credible support to the idea that Mr Gayduk was willing to make such a ‘pay if paid’ agreement, nor indeed to suggest that Mr Shlosberg ever proposed it. Mr Gayduk would not have been willing to expose himself to the risks associated with Mr Machitski’s project without full due diligence, especially when he had no close personal relationship with Mr Machitski and no particular basis for thinking he could trust him to return the money to be provided.

Mr Gayduk was willing to make a prompt personal loan of US$100 million to Mr Shlosberg on the terms which Mr Shlosberg proposed, without due diligence and without taking security, all in the interest of speed. Mr Gayduk knew that this was unusual and there would be some risk associated with it, but he was motivated by his friendship for Mr Shlosberg and thought that the risk was within acceptable bounds, since he had known Mr Shlosberg well for several years and was convinced that he was very wealthy (even if his wealth happened not to be liquid at the time) and had the means to repay the loan even if the Vimetco project did not go well. Mr and Mrs Gayduk are extremely wealthy, and Mr Gayduk knew that the family corporate group had unallocated liquid funds of US$100 million which could be used to make such a loan.

Having made an oral agreement in principle for a personal loan to be made to Mr Shlosberg from some suitable Gayduk family vehicle, Mr Gayduk and Mr Shlosberg instructed their respective staffs to work up detailed terms for an agreement. I find that at this stage neither Mr Gayduk nor Mr Shlosberg considered that they had made a legally binding agreement. Both knew that the details had to be worked out, and that this would include discussion about which entities might eventually enter into legally binding agreements to give effect to the agreement in principle that had been made. In these proceedings, Mr Shlosberg does not allege that Mr Gayduk made any agreement binding upon Mr Gayduk personally.

Mr Gayduk instructed his staff that they were to organise a personal loan of US$100 million to Mr Shlosberg. I also find that Mr Shlosberg instructed Ms Mutieva that the arrangement was for a full, unconditional loan to himself or one of his companies. There was no question of either Mr Gayduk or Mr Shlosberg instructing their respective staffs that there was a collateral ‘pay if paid’ agreement affecting the loan to be made.

Ms Mutieva conducted the detailed negotiations on Mr Shlosberg’s side primarily with Mr Petrov on Mr Gayduk’s side. The work was done as a matter of extreme urgency. Avonwick was identified as a Gayduk family company which had liquid funds of US$100 million and was proposed as the lender. Ms Mutieva proposed that the loan should be made to a company controlled by Mr Shlosberg, rather than to him personally. At first she suggested Castle as the borrower, but then proposed Webinvest. These companies were agreed as the parties for the Loan Agreement.

Shortly after Mr Shlosberg and Mr Gayduk gave their instructions, Mr Petrov sent Ms Mutieva a document in Russian headed “Memorandum of Understanding” signed by him, which set out an outline of the terms on which it was proposed that Avonwick would lend to Castle, including details of the interest payments to be made and stating that the term would be 18 months with repayment by one amount. The document also stated that the parties should maintain confidentiality in relation to “the prospective transaction” (meaning the Avonwick loan: this was not a reference to any confidentiality in respect of the Vimetco project).

There was a dispute about who prepared this document. Ms Mutieva said it was Mr Petrov; Mr Petrov said that it was Ms Mutieva, who wanted him to sign it to give some comfort that Avonwick would indeed in due course make the Avonwick loan. The disclosure materials were inconclusive on this point, but it seems that the intial draft of it was prepared and sent by Mr Petrov, as Ms Mutieva recalled. However, it is likely that Mr Petrov is correct in his recollection that it was Ms Mutieva who was pressing to receive this document. The version in the bundles has Mr Petrov’s signature, but not Ms Mutieva’s. Mr Shlosberg was the one pressing hard for a deal to be done urgently, and it is likely that he told Ms Mutieva to follow up with Mr Petrov to try to bind Avonwick into the transaction, at least in principle, as quickly as possible.

The “Memorandum of Understanding” makes no reference to any ‘pay if paid’ agreement, even though it was setting out privately between Mr Petrov, Avonwick’s representative, and Ms Mutieva the basic terms of the agreement which had been made between Mr Shlosberg and Mr Gayduk. It is yet another indication that Ms Mutieva’s evidence on the ‘pay if paid’ point is not credible. There would have been no reason for her to fail to point out the omission of reference to the ‘pay if paid’ agreement, had she thought such an agreement had been made.

Mr Petrov and Mr Kravets pointed out to Mr Gayduk that the Loan Agreement arranged between companies would not be a personal loan to Mr Shlosberg, and therefore that Mr Shlosberg should be required to give a personal guarantee of the loan in order to give effect to the agreement in principle that Mr Gayduk would arrange a personal loan of US$100 million to Mr Shlosberg. Mr Gayduk agreed and telephoned Mr Shlosberg to say that he would be required to give a personal guarantee. Mr Shlosberg readily agreed that he should do so. Again, there was no suggestion that there was any collateral ‘pay if paid’ agreement. The sense of the conversation between Mr Gayduk and Mr Shlosberg was that Mr Shlosberg would be fully and unconditionally personally liable for servicing and repaying the Avonwick loan.

Mr Kravets and Mr Petrov, who did not have any personal ties with Mr Shlosberg, were particularly concerned that the Loan Agreement and Guarantee should be drawn up formally and should be made “bullet proof” so that they could be enforced without difficulty. They told Mr Kupchyshyn that he should instruct English lawyers to draft the documents required, to make sure that they contained no loopholes.

Mr Kupchyshyn duly did so, by engaging A&O. After he had briefed A&O, they sent him first drafts of the Loan Agreement and Guarantee under cover of an email dated 21 April 2010 in which they unsurprisingly covered their backs by pointing out that their instructions had not included responsibility for them in relation to various matters, such as in respect of know-your-client checks and due diligence, local law advice from the British Virgin Islands and St Vincent and Grenadines, delivery of corporate authorisations, ongoing covenants or information requirements and anything other than very limited events of default. In my view, nothing in this email calls in question the evidence of Mr Kupchyshyn. It is clear from the evidence that nothing was said to A&O to suggest that there was any collateral ‘pay as paid’ agreement which affected matters.

In the event, there was some delay by Mr Kupchyshyn in obtaining confirmation from advisers in Webinvest’s home jurisdiction that the Loan Agreement had been properly executed by Webinvest, until some months after it was made. However, in my judgment this has no significance. It does not indicate that the parties thought that the Loan Agreement was merely for show and was not intended to be fully binding according to its terms. It is likely that Mr Kupchyshyn was relaxed about following up this technical matter because he understood that under the terms of the Guarantee Mr Shlosberg had assumed liability to repay the loan, even if the Loan Agreement proved for some reason to be unenforceable.

The Loan Agreement was drawn up by A&O to contain standard form terms governing repayment of the loan and payment of interest in clauses 5 and 7, as follows:

“5.

REPAYMENT

(a)

The Borrower shall repay the Loan in full on the Final Maturity Date.

(b)

No amount repaid under paragraph (a) may be re-borrowed. …

7.

INTEREST

a)

Interest will accrue on the outstanding amount of the Loan from day to day, commencing on the third calendar day after (but not including) the Drawdown Date, at a rate of 24% (twenty-four percent) per annum, which will consist of interest which (unless required to be paid earlier pursuant to Clause 6 (prepayment)):

i)

the Borrower must pay on each Interest Payment Date, accruing at a rate of 5% (five percent) per annum (the Quarterly Interest); and

ii)

the Borrower must pay on the Final Maturity Date, accruing at a rate of 19% (nineteen percent) per annum (the Deferred Interest).

b)

If the Borrower fails to pay any interest on any Interest Payment Date, such due but unpaid interest will remain due and payable at all times until paid but will not accrue any interest. If the Borrower fails to pay any principal amount of the Loan on the Final Maturity Date (or, if earlier, the date on which the Loan becomes due and payable in accordance with Clause 11.9 (Actions following an Event of Default)) interest will continue to accrue on the outstanding amount of the Loan from day to day at a rate of 24% (twenty-four percent) per annum in accordance with paragraph (a) …, but such interest will be due and payable at all times.

c)

For the purpose of calculating any interest accruing on all or part of the Loan, such interest will be deemed to have stopped accruing on that Loan (or the relevant part thereof) on the third calendar day prior to the date on which that Loan (or part thereof) is repaid.

d)

Interest accruing under this agreement will not be compounded.

e)

Notwithstanding any other provisions of this Agreement, any Interest Payment Date which would otherwise fall on a day which is not a Business Day will end on the next succeeding Business Day or, if that day falls in the following calendar month, on the immediately preceding Business Day.”

There was some debate about whether the Loan Agreement should specify the purpose of the Avonwick loan. The original draft prepared by A&O simply referred to general corporate purposes of Webinvest as the object of the loan, but Mr Petrov wished to tighten this up somewhat. He asked Ms Mutieva what tighter wording might be acceptable to Webinvest, and she proposed the formula which came to be adopted as clause 3: “The Loan may only be used for making investments into metallurgical projects.”

This too was vague, but Mr Petrov was content with it. Contrary to the suggestion by the Defendants, it was not proposed or agreed because of any belief that there was a confidentiality obligation between Mr Machitski (or Globoid) and Mr Shlosberg (or Webinvest) regarding the underlying Vimetco project. Neither Mr Shlosberg nor Ms Mutieva ever suggested that there was any confidentiality about that which could affect Mr Gayduk or Avonwick or the way in which the Loan Agreement and the Guarantee were drawn up.

In the course of the negotiations, although the principle agreed was that Avonwick would lend at the same time as Webinvest and get the same interest and repayment terms from Webinvest as Webinvest was getting from Globoid, Ms Mutieva asked for a small indulgence on the part of Avonwick, to allow a period of a few days before interest on the Avonwick loan began to accrue at the outset to allow for the fact that it would take that time for Webinvest to receive the Avonwick loan in cleared funds and make the Globoid loan and start to receive interest itself. This indulgence would have been unnecessary if there really had been a ‘pay if paid’ agreement, and reflects Ms Mutieva’s understanding that there was no such agreement.

Despite this, in her evidence at trial Ms Mutieva tried to say that the email she sent Mr Petrov on this subject on 22 April 2010 showed that the parties really knew that there was a collateral ‘pay if paid’ agreement. In that email she wrote:

“I have a kind request for you, please provide in the agreement that the interest starts to accrues not from the date of crediting funds to our account but +2-3 days, taking into account that we are co-investors, but we accumulate funds at our accounts.”

Ms Mutieva sought to suggest that the reference to Avonwick and Webinvest being “co-investors” showed that there was a ‘pay if paid’ agreement in place. I do not accept her evidence on this. She had no satisfactory explanation why she was asking for this indulgence at all, if there really was a ‘pay if paid’ agreement, since such an agreement would mean that such an indulgence was unnecessary (Webinvest’s obligation to pay interest would only be incurred when Globoid paid interest to it, and that interest would only run from when Globoid received the Globoid loan, not from when Webinvest received the Avonwick loan). In my view, her reference to Webinvest and Avonwick being co-investors (which is a single stray reference to this in the documents) was no more than commercial advocacy, seeking to persuade Avonwick to agree slightly more advantageous interest terms for Webinvest by exploiting the facts that Mr Shlosberg had said that the full US$200 million had to be lent to Globoid and that he had agreed to give Mr Gayduk the same rate of interest as he would receive. On proper understanding, this email is contrary to the Defendants’ case and evidence.

This part of Ms Mutieva’s evidence at trial is illustrative of a feature of the case which she sought to exploit, namely that there was an understanding that Avonwick was making the Avonwick loan to enable Mr Shlosberg to arrange the Gloiboid loan and a broad expectation on both sides that Webinvest would be using its income from the Globoid loan to meet its obligations under the Avonwick loan. Ms Mutieva tried to build on this for her evidence to corroborate Mr Shlosberg’s evidence and case that there was a collateral ‘pay if paid’ agreement in place, such that Webinvest’s and Mr Shlosberg’s obligation to pay interest and to repay the Avonwick loan would only be triggered by receipts from Globoid. In my assessment, however, Ms Mutieva’s attempt to corroborate Mr Shlosberg in this way involved deliberate conflation by her of different points. There was an important difference, which she understood very well, between a hope or expectation that everything would go well with the Globoid loan so that Webinvest could repay Avonwick without difficulty from the funds received from Globoid, and the contractual obligations regarding payment of interest and repayment of the Avonwick loan that Webinvest and Mr Shlosberg agreed to accept in order for Webinvest to get Avonwick’s money. At the time of negotiating the Loan Agreement and Guarantee and when giving her evidence, Ms Mutieva believed that the obligations set out in the Loan Agreement and the Guarantee truly represented the obligations assumed by Webinvest and Mr Shlosberg, which were unqualified by any ‘pay if paid’ agreement.

Other provisions included in the Loan Agreement were inconsistent with any ‘pay if paid’ understanding, and would have been extremely difficult to operate if there had truly been such an understanding. In particular, by clause 12, the Loan Agreement provided for the possibility of assignment to third parties or novation of the Avonwick loan, as follows:

“ASSIGNMENT

a)

The Borrower may not assign, charge, pledge or otherwise dispose of any of its rights hereunder without the prior written consent of the Lender.

b)

Subject to paragraph (c) below, the Lender may not assign or transfer any of its rights or obligations under this Agreement to any other person without the prior written consent of the Borrower (not to be unreasonably withheld or delayed).

c)

The Lender may, at any time after the date falling six months after an Event of Default has occurred, assign or transfer (including by way of novation) any of its rights and obligations under this Agreement to any other person.”

Had there really been a collateral ‘pay if paid’ agreement, it would have been at risk of being defeated by assignment or novation of the loan under this provision. I do not believe that Ms Mutieva would have allowed this provision to be included in these terms had she really been told by Mr Shlosberg that there was a collateral ‘pay if paid’ agreement.

The terms of the Guarantee were clearly unqualified, on their face, by any reference to even the possibility of a collateral ‘pay if paid’ agreement being in existence. They included the following:

“2.1

Guarantee and indemnity

The Guarantor irrevocably and unconditionally:

(a)

guarantees to the Lender punctual performance by the Borrower of all its obligations under the Loan Agreement;

(b)

undertakes with the Lender that, whenever the Borrower does not pay any amount when due under or in connection with the Loan Agreement, it must, immediately on demand by the Lender, pay that amount (in the currency in which it is due) as if it was the principal debtor in respect of that amount; and

(c)

agrees with the Lender that if, for any reason, any amount claimed by the Lender under this Clause is not recoverable from the Guarantor on the basis of a guarantee then the Guarantor will be liable as a principal debtor and primary obligor to indemnify the Lender in respect of any loss it incurs as a result of the Borrower failing to pay any amount expressed to be payable by it under the Loan Agreement on the date when it ought to have been paid. The amount payable by the Guarantor under this indemnity will not exceed the amount it would have had to pay under this Clause had the amount claimed been recoverable on the basis of a guarantee. …

2.3

Waiver of defences

The obligations of the Guarantor under this Clause will not be affected by any act, omission or thing (whether or not known to it or the Lender) which, but for this provision, would reduce, release or prejudice any of its obligations under this Clause. This includes:

(a)

any time or waiver granted to, or composition with, any person;

(b)

any release of any person under the terms of any composition or arrangement;

(c)

the taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect, take up or enforce, any rights against, or security over assets of, any person;

(d)

any non-presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security;

(e)

any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of any person;

(f)

any amendment of the Loan Agreement or any other document or security;

(g)

any unenforceability, illegality, invalidity or non-provability of any obligation of any person under the Loan Agreement or any other document or security; or

(h)

any insolvency or similar proceedings.”

I find that Ms Mutieva and Mr Shlosberg studied the Guarantee with care. By email dated 23 April 2010 Ms Mutieva asked Mr Petrov for clarification of the effect of clause 2.3. The probability is that he informed her that it meant that Mr Shlosberg would be personally liable to repay the Avonwick loan even if there turned out to be some problem with the enforceability of the loan as against Webinvest. If there had been a collateral oral ‘pay if paid’ agreement, I do not believe that Mr Shlosberg would have signed the Guarantee without ensuring that there was some reference to it in the document. Doing so would have represented a huge personal legal risk for him which he could easily have asked Mr Gayduk to allay by some form of formal acknowledgement of such a collateral agreement. The fact that Mr Shlosberg was willing to sign the Guarantee without any such formal acknowledgement is indicative of the fact that there was no ‘pay if paid’ agreement.

The Loan Agreement was signed by Mr Moushouttas for Avonwick. Ms Mutieva arranged for it to be signed by Bryan Jeeves on behalf of Lex Services Limited, the corporate director of Webinvest, on 26 April 2010. The Guarantee was signed by Mr Moushouttas for Avonwick and by Mr Shlosberg on his own behalf, on 23 April 2010. Both instruments came into effect on 26 April 2010. On 27 April 2010, Webinvest proceeded to draw down the Avonwick loan, and then in turn made the Globoid loan to Globoid.

Certain issues arise between the parties concerning whether Mr Gayduk and Mr Shlosberg had actual or ostensible authority to enter into any agreement on behalf of Avonwick and Webinvest, respectively, and whether they understood that any words spoken between them constituted a binding agreement between those companies. On these issues, I found Mr Shlosberg’s evidence under cross-examination to be a very revealing part of the evidence. At one point he appeared careful to qualify his answers about his own authority to act for Webinvest by saying that he had authority to negotiate terms on behalf of Webinvest, but stopped short of saying that he had authority to make binding commitments on behalf of Webinvest. But at another point he asserted that he had been given a written power of attorney to do so. In both respects, his evidence did not tally with the hearsay statements of Mr Jeeves and Ms Millington, and I did not believe his assertion that he had a power of attorney. I do, however, find that Mr Shlosberg’s qualified answers reflected the truth: for whatever reason, by virtue of tax concerns or otherwise, he had not been given actual authority in April 2010 to make binding agreements on behalf of Webinvest.

In this, Mr Shlosberg’s position vis-à-vis Webinvest was similar to what he understood the position of Mr Gayduk to be in relation to Avonwick. Mr Gayduk and Mr Moushouttas both gave evidence, which I accept, that despite Mr Gayduk’s enormous practical influence within the Gayduk family group of companies Mr Gayduk had not been given actual authority to make binding agreements on behalf of Avonwick. It might have been comparatively easy to spell out some form of ostensible authority for Mr Gayduk but for the evidence of Mr Shlosberg in cross-examination, which I find to be true, that he appreciated that the authority arrangements within Avonwick were such that Avonwick would only become contractually bound by an agreement when its directors signed it. Mr Shlosberg knew that Mr Gayduk had no power to enter into binding agreements on behalf of Avonwick.

Mr Shlosberg and Mr Gayduk negotiated with each other on the basis of a mutual understanding that Avonwick and Webinvest would not become contractually bound by anything they said or did and that contractual obligations between those companies would be defined by agreements made and signed by their respective directors. (Eventually, after the commencement of these proceedings, in an effort to deal with the issue of authority from Webinvest to Mr Shlosberg, Ms Millington signed a letter of authority and ratification purporting to ratify Mr Shlosberg’s authority to make the collateral oral ‘pay if paid’ agreement on behalf of Webinvest).

In the first phase after the Avonwick and Globoid loans were made, Globoid and Webinvest met their interest obligations in respect of those loans on time and without problem.

In October 2010, Mr Shlosberg asked for a small further loan facility to be made available to Webinvest from Avonwick of US$5 million for a short period, also under a personal guarantee from Mr Shlosberg, to assist him to trade in some Vimetco shares. This was agreed to and the amounts advanced were repaid in December 2011, after a short extension, without problem.

In 2011, Mr Shlosberg’s step-son fell ill with cancer. This was a major distraction for Mr Shlosberg. He devoted himself to trying to find a cure for his step-son. He spent any liquid assets available to him without stint to that end.

In December 2011, Mr Gayduk invited the Shlosberg family to come on holiday with the Gayduk family. At the same time, Mr Gayduk arranged for Avonwick to make a further loan of US$500,000 to Mr Shlosberg personally, to assist with contingency expenses associated with the treatment of Mr Shlosberg’s step-son. This loan also was paid back without problem in February 2012.

The Defendants sought to suggest that the fact that Mr Shlosberg had to ask for these further comparatively small loans showed that Mr Gayduk could never have thought that Mr Shlosberg was wealthy enough to be able to accept the risk of non-repayment of the Globoid loan and to bolster their case that the alleged collateral ‘pay if paid’ agreement had been made in April 2010. I did not find this at all persuasive. Minor liquidity problems for Mr Shlosberg in late 2010 and in late 2011 did not necessarily indicate that he was not hugely wealthy, particularly by reference to the illiquid assets he owned, as he appeared to Mr Gayduk to be. And in any event, this feature of the case does not make it likely that Mr Gayduk, in a fit of generosity in April 2010, would have thrown all commercial prudence to the wind and made the collateral ‘pay if paid’ agreement alleged by Mr Shlosberg.

In May 2012, Globoid failed to repay the Globoid loan. Webinvest, acting by Ms Mutieva, wrote to Globoid to complain, pointing out (in particular in emails dated 19 and 25 June 2012 and in a formal letter dated 2 July 2012) that Webinvest had been put in a difficult position in relation to its own creditors, who had to be repaid. In my judgment, this was a reference primarily to the obligations which Webinvest owed Avonwick in respect of the Avonwick loan. This was, again, inconsistent with Webinvest’s case at trial that it had no obligation to repay Avonwick unless and until Webinvest received repayment of the Globoid loan from Globoid. The communications from Ms Mutieva to Globoid are a further indication that Ms Mutieva never thought that Mr Shlosberg had made the alleged collateral ‘pay if paid’ agreement with Mr Gayduk.

The Avonwick loan matured on 17 May 2012, but was not repaid. Mr Gayduk and Avonwick tolerated the failure by Mr Shlosberg and Webinvest to repay the Avonwick loan for a considerable time after it went into default, as a concession to Mr Shlosberg and his family in view of the terrible tragedy that had befallen them with the illness and then death of his step-son. Though unhappy that the Avonwick loan had not been repaid, Mr Gayduk did not want to be seen to be pressing Mr Shlosberg and Webinvest for repayment during this period. Nonetheless, he did have a conversation with Mr Shlosberg in which he told Mr Shlosberg that interest was continuing to accrue and that he should ask one of his staff to sort out repayment or some form of restructuring of the loan. Mr Shlosberg did not dissent; nor did he protest that there was a collateral ‘pay if paid’ agreement between them to prevent any interest or capital sum being due while Globoid remained in default.

Mr Gayduk left it to Mr Petrov to try to sort matters out with Ms Mutieva, and allowed matters to drift. Mr Petrov and Ms Mutieva commenced negotiations for an agreement to restructure the Avonwick loan, which now had about US$140 million outstanding (including unpaid interest). The restructuring terms proposed and debated by Ms Mutieva were inconsistent with any understanding on her part that there was a collateral ‘pay if paid’ agreement in place.

Mr Petrov insisted that Mr Shlosberg should provide security as part of the restructuring package. Ms Mutieva did not object to this, as the Defendants could have done if there had been a collateral ‘pay if paid’ agreement. On the contrary, in November 2012 she sent Mr Petrov details of shares and real property and purported valuations (which in fact she had made up herself), supposedly totalling US$140.5 million in value, which Mr Shlosberg was willing to offer as security as part of the restructuring package. In the event, however, the terms for such a package were not agreed and the non-payment of the Avonwick loan dragged on.

Mr Shlosberg’s step-son died in June 2013. Mr Gayduk attended the funeral. So did Mr Machitski, even though Webinvest was at that stage locked in hostile arbitration proceedings against Globoid, which had commenced the previous month. Something about the high degree of closeness evident between Mr Shlosberg and Mr Machitski on this occasion caused Mr Gayduk to become suspicious about what was really going on between Webinvest and Globoid. Mr Gayduk began to suspect that Mr Shlosberg and Mr Machitski might be in the process of making some private deal in relation to the Globoid loan and that Mr Shlosberg might not be dealing fairly and honestly with him regarding repayment of the Avonwick loan.

From this time, although Mr Gayduk and Mr Shlosberg remained friendly, Mr Gayduk’s attitude towards him regarding repayment of the Avonwick loan hardened.

In August 2013, Mr Petrov met Ms Mutieva, who told him that Globoid was reneging on the terms of the Globoid loan and was seeking to say that the US$200 million advanced by Webinvest was really an equity investment rather than a loan.

In about late August or early September 2013, Mr Gayduk invited Mr Shlosberg and his family on holiday to Sardinia. Mr Gayduk questioned Mr Shlosberg about the nature of his relationship with Mr Machitski and told Mr Shlosberg that he now needed to repay the Avonwick loan by the end of 2013. Again, Mr Shlosberg did not refer to any defence he might have by reason of a collateral ‘pay if paid’ agreement between them.

However, Mr Shlosberg failed to arrange repayment of the Avonwick loan by the year end. Eventually, Mr Gayduk telephoned Mr Shlosberg in about March 2014. Mr Gayduk was much less sympathetic by this stage. He told Mr Shlosberg that he urgently needed cash and insisted that Mr Shlosberg must repay US$50 million of the loan within two weeks. Mr Shlosberg was apologetic. Contrary to his evidence at trial, in which he sought untruthfully to suggest that Mr Gayduk’s request for money was because Mr Gayduk was in financial difficulties and not because he was demanding repayment of the loan, in their conversation Mr Shlosberg fully accepted that the loan had to be repaid. It is likely that Mr Shlosberg made a counter-proposal for a restructuring of the loan, against an immediate payment of US$40 million as a contribution to its repayment and provision of security by him. Yet again, he made no reference to an alleged ‘pay if paid’ agreement.

In making my findings about this telephone conversation, I draw primarily on the evidence of Mr Gayduk, which I accept, and the contemporaneous documents which followed. But I also consider that Mr Gayduk’s evidence is corroborated by a letter dated 1 October 2014 from Fladgate to Dechert, in which Fladgate said “We are informed by our client that the dispute commenced shortly before the service of the statutory demands on 3 April when your client demanded payment by our clients of $50 million regardless of receipts from the third party …”. The inference is that Mr Shlosberg told his own solicitors that shortly before demands sent on 3 April 2014 Mr Gayduk had demanded the US$50 million in part repayment of the Avonwick loan, and not as a request for funding from Mr Shlosberg or from third parties, assisted by provision of security from Mr Shlosberg, which is what Mr Shlosberg maintained in his evidence at trial. Mr Marshall sought to dissuade me from drawing such an inference, by suggesting that this sentence in the letter was meant to refer to what was said in the formal demands sent by Avonwick on 3 April 2014 (and not in a conversation shortly before then), since the statutory demands were only sent on 8 April. I was unimpressed by this suggestion. The formal demands of 3 April made reference to a sum of about US$180 million to be repaid, and contained no demand for payment of US$50 million. That demand was only made by Mr Gayduk in his telephone conversation with Mr Shlosberg, and the most likely explanation for the reference to “service of statutory demands on 3 April” is that the writer of the letter simply confused the formal demands sent on that date with the statutory demands sent a few days later.

After their conversation, Mr Gayduk and Mr Shlosberg again left it to Mr Petrov and Ms Mutieva to sort out the detail of the terms of repayment of US$50 million and restructuring of the Avonwick loan, in respect of which about US$180 million was now outstanding. Once more, there was no suggestion by either Mr Shlosberg or Ms Mutieva that Webinvest’s liability under the loan was qualified by a ‘pay if paid’ agreement. In late March 2014, Ms Mutieva provided Mr Petrov with details of a property called The Elms in Highgate, London, which Mr Shlosberg was offering as security for a restructuring package in respect of the Avonwick loan.

Mr Shlosberg failed to make any payment against the Avonwick loan as demanded by Mr Gayduk, so on 3 April 2014 Avonwick served formal written demands on Webinvest and Mr Shlosberg for full repayment of the loan. These were followed up by statutory demands dated 8 April 2014 against both of them.

In parallel with this development, on 3 April 2014 Avonwick sent Ms Mutieva proposed Heads of Terms for a restructuring of the Avonwick loan, to include provision of security in the form of charges in respect of four properties directly or indirectly owned by Mr Shlosberg and immediate payment of US$40 million to be applied against the accrued but unpaid interest on the loan, in return for which the maturity date under the Loan Agreement would be extended to 17 May 2015. The Heads of Terms stated that the restructuring “is based on proposals already made by the Guarantor”, as did the covering email. This was a reference to what Mr Shlosberg had proposed to Mr Gayduk in their telephone conversation. The recitals in the Heads of Terms stated that Webinvest was in default and that Webinvest and Mr Shlosberg had indicated “that they seek the continued forbearance of [Avonwick]” and were willing to provide security in relation to a restructuring of the loan.

Neither Mr Shlosberg nor Ms Mutieva responded to say that Mr Shlosberg had not made such proposals; nor did they refer to any ‘pay if paid’ agreement by way of answer to Avonwick’s demands for repayment and proposals for restructuring. On the contrary, by letter dated 7 April 2014 from Fladgate to Avonwick, Fladgate wrote on instructions from Mr Shlosberg to make proposals for the restructuring of the Avonwick loan, despite the failure of Globoid to pay Webinvest, and stating “… we express on behalf of our clients great thanks for your understanding of the difficult circumstances of our clients that are beyond their control, they want to assure you that they have done and will continue doing everything possible to repay the outstanding amounts.”

Further, by letter dated 13 April 2014, Ms Mutieva wrote to Mr Petrov to emphasise that Webinvest wished to achieve a settlement agreement as quickly as possible and saying, “Since the overall structure of any settlement is not likely to differ substantially from your proposals, we would invite you to prepare draft documentation for our consideration.” She also indicated that Avonwick could proceed to obtain valuations of the four properties referred to. In relation to the immediate payment of US$40 million, Ms Mutieva said that Webinvest could not promise to make that initial payment by the end of April 2014 or by any set date, but went on that Webinvest was “endeavouring to raise as much as possible as soon as possible” (i.e. accepting that Webinvest ought to be repaying Avonwick substantial amounts quickly, even though no money had been received by Webinvest from Globoid).

In commenting on the Heads of Terms, Ms Mutieva said:

“The proposal for the reduction of principal by any payment is made in an attempt to reduce the further interest payments to manageable proportions. We would be willing to provide that to the extent that we recover from the Debtor [Globoid], or the individual behind the Debtor sufficient funds over the principal amount of debt to enable payment calculated to Avonwick recalculated as if the payments made is of interest, Webinvest Limited would recalculate retrospectively and pay Avonwick accordingly.”

Ms Mutieva’s letter is completely inconsistent with Mr Shlosberg’s and her evidence at trial that there was a ‘pay if paid’ agreement which prevented Webinvest from being liable to Avonwick until paid by Globoid. Ms Mutieva had no good explanation why she wrote in these terms if she really believed that there was a ‘pay if paid’ agreement.

Also on 13 April 2014, Mr Shlosberg wrote a personal letter to Mr Gayduk to offer condolences on the death of Mr Gayduk’s mother. Mr Shlosberg wrote, “I fully acknowledge my liability for the moral and material losses caused to you. I have done and continue doing everything possible to reimburse you at least the material damage.” In his evidence at trial, Mr Shlosberg sought to say that this was just a reference to the moral responsibility he felt at having induced Mr Gayduk to invest and lose US$100 million in the Vimetco project. I did not believe him. I find that Mr Shlosberg meant that he accepted his and Webinvest’s legal liability to repay the Avonwick loan in full. This is supported by the statement later in the letter, “I am ready not only to pledge to you everything I have but also … to make a will in your favour”. I do not believe that Mr Shlosberg would have offered to pledge everything he owned to Mr Gayduk in relation to a mere sense of moral obligation if Mr Gayduk had truly accepted the risk inherent in a ‘pay if paid’ agreement; the reason for Mr Shlosberg’s offer of a pledge was that he acknowledged he and Webinvest had legal liability in respect of the full amount of the Avonwick loan.

Mr Gayduk replied by personal letter to Mr Shlosberg dated 16 April 2014. This letter is consistent with Mr Gayduk’s evidence and inconsistent with any idea that there was a collateral ‘pay if paid’ agreement. In it he indicated that he had felt driven to call in Mr Shlosberg’s personal guarantee for repayment of the Avonwick loan, noting “In my heart of hearts, I was certain that you would take those steps” (i.e. ensure repayment without formal demands having to be made).

Mr Shlosberg responded with another personal letter to Mr Gayduk, dated 17 April 2014. In it he said, “Once again I confirm my personal responsibility for the financial and moral problems caused to you.” I find that this was a reference to the legal liability in respect of the Avonwick loan which he knew he had. A similar acceptance underlay a further letter of 22 April 2014 from Mr Shlosberg to Mr Gayduk, in which he referred to the statutory demand against him and asked that the expiry date be extended from 25 April until 9 May. This was to allow time for valuation of the security Mr Shlosberg was offering and for agreement on the restructuring package. Once more, Mr Shlosberg did not use an obvious opportunity to assert a defence based on a collateral ‘pay if paid’ agreement, and once more the inference is that he did not think that there was one.

On 9 May 2014, Mr Petrov sent Ms Mutieva a draft Memorandum of Understanding for restructuring the Avonwick loan, including recitals making it clear that the loan was due and owing. Mr Gayduk met Mr Shlosberg a couple of times in London at this point. At first Mr Shlosberg said he would consider matters with his lawyers, but then he refused to sign the Memorandum of Understanding.

Instead, Mr Shlosberg decided to apply for injunctive relief to restrain the presentation of a winding up petition against Webinvest and of a bankruptcy petition against himself. The period stated in the statutory demands, as extended by agreement between the parties, expired on 30 May 2014. The application for injunctive relief was issued just before this. It was in these insolvency proceedings that Mr Shlosberg made the allegation of the collateral ‘pay if paid’ agreement for the first time, in his witness statement dated 29 May 2014. On the basis of that allegation, on 15 July 2014, on the basis of an undertaking by Avonwick not to proceed until after judgment, the court adjourned the application and gave directions for a speedy trial.

By a Settlement Deed dated 24 June 2014 and a related Assignment Agreement dated 23 June 2014 between Webinvest and Castle, Webinvest settled its arbitration proceedings against Globoid on terms which involved Webinvest assigning all its legal rights and claims to Castle and Globoid transferring to Castle 25% of the issued share capital of Vimetco. Webinvest did not inform Avonwick about the terms of this settlement agreement before making it, nor at any time until October 2014. Avonwick is suspicious that the settlement agreement and assignment to Castle is a device for transferring value out of Webinvest in the face of the proceedings brought against it by Avonwick.

Finally, I should mention a further feature of the case which is inconsistent with the evidence of Mr Shlosberg and Ms Mutieva about the alleged ‘pay if paid’ agreement. I was taken to a schedule of payments made by Globoid to Webinvest as compared with payments made by Webinvest to Avonwick. This shows that Webinvest did not in fact operate in relation to the Avonwick loan as if a ‘pay if paid’ agreement was in place. On two occasions (16 February 2011 and 13 August 2012) Globoid paid Webinvest sums of about US$5 million on account of the 19% interest element due at maturity, but Webinvest did not pay on a proportionate share of those receipts to Avonwick once they were received. Still more revealingly, between 8 October 2012 and 11 October 2012 Globoid paid Webinvest US$2.5 million in respect of interest, but on 12 October 2012 Webinvest paid Avonwick US$1,260,273.97 (i.e. more that Avonwick’s supposed half share of Webinvest’s receipt, but the relevant sum due to Avonwick as interest under the terms of the Loan Agreement). And between 18 January 2013 and 7 February 2013 Webinvest again received a total of US$2.5 million from Globoid in respect of interest, but on 24-25 January 2013 (i.e. before Webinvest had received the full interest amount from Globoid) Webinvest again paid Avonwick US$1,260,273.97. Then, between 24 May 2013 and 9 July 2013, Webinvest received a further sum of about US$1.5 million from Globoid in respect of interest, but failed to pay any of that on to Avonwick. Neither Ms Mutieva nor Ms Shlosberg gave satisfactory accounts to explain this pattern of behaviour.

These defences all depend upon the Defendants’ contention that a ‘pay if paid’ agreement was made by Mr Gayduk and Mr Shlosberg. They all fail on the facts. There was no ‘pay if paid’ agreement. The Loan Agreement and the Guarantee were intended to take effect according to their terms, and should be enforced.

In addition, I find that these defences fail for the further reason that Mr Shlosberg knew that Mr Gayduk had no authority from Avonwick to make any legally binding commitment on its behalf.

In an effort to meet Avonwick’s case that Mr Gayduk had no actual authority from Avonwick, Mr Marshall made elaborate submissions concerning the operation of the principles explained in Re Express Engineering Works Ltd [1920] 1 Ch 466, Parker and Cooper Ltd v Reading [1926] Ch 975, In re Bailey, Hay & Co. Ltd [1971] 1 WLR 1357, at 1366-1367 and Re Duomatic [1969] 2 Ch 365, regarding the power of the shareholders unanimously to authorise or ratify action taken on behalf of the company. Mr Smith QC, who dealt with this aspect of the case for Avonwick, made detailed submissions in response.

However, it is unnecessary to examine the argument in detail, because in my judgment it goes nowhere in the circumstances of this case. The person said to have made the collateral ‘pay if paid’ agreement as agent on behalf of Webinvest, Mr Shlosberg, knew that Mr Gayduk had no authority to and did not intend to make any binding contractual commitment on behalf of Avonwick by anything he said or did. Thus Mr Shlosberg, Webinvest’s agent, knew that any discussion of collateral arrangements was not intended to be binding in law, and no amount of authorisation or ratification under the principles referred to in the cases referred to could turn what the parties to the relevant arrangement knew and intended to be non-binding into a binding arrangement.

Mr Marshall submitted that Webinvest and Mr Shlosberg had a further defence of unilateral mistake, making the Loan Agreement and Guarantee void, which as a matter of analysis did not depend upon the court finding that Mr Gayduk and Mr Shlosberg had made the ‘pay if paid’ agreement. He relied on the principles regarding the circumstances in which an agreement may be found to be void on grounds of mistake by one contractor as to the identity or identifying attributes of the other contracting party, as explained by the House of Lords in Shogun Finance Ltd v Hudson [2004] 1 AC 919. He submitted that in the mind of Mr Shlosberg, as owner and controller of Webinvest, it had been a critical feature of the identity of Avonwick that it was a company owned (and hence controlled) by Mr Gayduk. In fact, it was owned by Mrs Gayduk, and therefore the Loan Agreement and the Guarantee were void.

I reject this submission. On the Defendants’ pleadings and in the evidence of Mr Shlosberg, the reason given why the identity of Avonwick’s owner as Mr Gayduk was important was because Mr Shlosberg was relying on him in relation to the alleged oral ‘pay if paid’ agreement. Since there was no such agreement, the reason given in the pleadings and by Mr Shlosberg falls away. Whether Mr Gayduk owned Avonwick was immaterial so far as Mr Shlosberg was concerned. What was important to him was that Webinvest was contracting with a company which would lend it US$100 million, and Avonwick fitted that identity. It mattered not how Mr Gayduk happened to be able to procure Avonwick to make the Avonwick loan.

The fact that the Loan Agreement allowed for the possibility that the Avonwick loan could be assigned to a third party further supports the conclusion that the precise beneficial ownership of Avonwick was not a matter of importance for Mr Shlosberg.

Further, it is noteworthy that before Ms Mutieva procured the execution of the Loan Agreement on behalf of Webinvest on 26 April 2010, Avonwick supplied her with information which disclosed that Mrs Gayduk was the owner of Avonwick. Accordingly, Ms Mutieva was not mistaken about the beneficial ownership of Avonwick. She was happy to arrange for the Loan Agreement to be signed, and her absence of concern on this point is another strong indicator that those acting for Webinvest did not regard Mrs Gayduk’s beneficial ownership of Avonwick as a matter of concern, let alone as something fundamental to the loan agreement which was made.

This is a clear and straightforward case. Avonwick lent Webinvest US$100 million on the terms of the Loan Agreement and Mr Shlosberg gave a personal guarantee in respect of that loan on the terms of the Guarantee. There was no collateral oral ‘pay if paid’ agreement to qualify the effect of the Loan Agreement and the Guarantee. The evidence by Mr Shlosberg and Ms Mutieva that there was such a collateral agreement was dishonest. All the defences to Avonwick’s claim fail. The Loan Agreement and the Guarantee fall to be enforced according to their terms.