Antonio Gramsci Shipping Corporation & Ors v Recoletos Ltd & Ors

The Claimants apply for summary judgment against the Defendants, alleging that between 2003 and 2005 they were the victims of a massive fraud or “corporate theft” perpetrated by former members of the Management Board and Supervisory Council of their parent company.

Summary Judgment: The Claimants’ skeleton argument ran to 54 pages; the Defendants’ to 66. A significant number of bundles of documents were before the Court – including at least 56 authorities, albeit that a good many of these were directed towards a claim for proprietary relief that was not ultimately pursued at this hearing. The carefully focussed and formulated arguments of Mr. Howard QC and Mr. Millett QC, to both of whom I was grateful, took over 3 days of Court time. The inevitable question prompted by these facts is whether this case was indeed appropriate for summary judgment.

On the one hand, summary judgment is designed for plain cases - cases which are not fit for trial at all: Three Rivers DC v Bank of England (No. 3) [2001] UKHL 16; [2001] 2 All ER 513, per Lord Hope at [95]. That consideration weighs all the more heavily when the case involves allegations of serious fraud or dishonesty; generally, conclusions on such issues ought to be reached at trial, so that obvious caution ought to be exercised before giving summary judgment in a case of that nature: Wrexham Associated Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237; [2007] BCC 139, esp., at [49 – 59]. On the other hand, where it can be ascertained without the conduct of a mini-trial that there is no realistic prospect of a successful defence, then summary judgment will or may be appropriate and the Court should not be deterred from granting such relief simply because of the volume – or, in some cases, smokescreen - of documents. Moreover, if in all the circumstances, there is no real prospect of a defendant successfully defending a claim, then, even though good faith, fraud or integrity are in issue, there is no longer a bar to giving summary judgment: Wrexham Associated Football Club, supra.

In Apvodedo NV v Terry Collins [2008] EWHC 775, Henderson J put the matter this way, at [32]:

“ It is well established that in order to defeat an application for summary judgment it is enough for the defendant to show a prospect of success which is real in the sense of not being false, fanciful or imaginary. However, the burden on the defendant is at most an evidential one. The overall burden of proof rests on the claimant to establish, if it can, the negative proposition that the defendant has no real prospect of success …..and that there is no other reason for a trial. Regard must also be had to the overriding objective of dealing with the case justly. The court should not hesitate to give summary judgment in a plain case, and if the case turns on a pure point of law, it may determine that point. However, the court has often been enjoined not to conduct a mini-trial on the documents, without discovery and oral evidence….”

Suffice to say that the question of which side of the line this case fell, loomed large throughout.

The Claimants: I turn to the dramatis personae. The Claimants are 30 “one ship” companies, incorporated in a variety of “offshore” jurisdictions, namely Liberia, Cayman Islands, Cyprus and Malta. They are all wholly, if indirectly, owned subsidiaries of the Latvian Shipping Company (“LSC”). Each Claimant delegated the conduct of all its business back to LSC and LSC managed the vessels owned by each of the Claimants on the terms of standard form “Shipman 98” ship management contracts (“the ship management contracts”). Most of the ship management contracts were governed by Latvian law; the remainder by English law.

The ship management contracts included the following express terms:

“ 3. Basis of Agreement

Subject to the terms and conditions herein provided, during the period of this Agreement, the Managers shall carry out Management Services in respect of the Vessel as agents for and on behalf of the Owners. The Managers shall have authority to take such actions as they may from time to time in their absolute discretion consider to be necessary to enable them to perform this Agreement in accordance with sound ship management practice.

3.3

Commercial Management

The Managers shall provide the commercial operation of the Vessel, as required by the Owners, which includes, but is not limited to, the following functions:

(I)

providing chartering services in accordance with the Owners’ instructions which include, but are not limited to, seeking and negotiating employment for the Vessel and the conclusion….of charter parties or other contracts relating to the employment of the Vessel…..

4.

Managers’ Obligations

4.1

The Managers undertake to use their best endeavours to provide the agreed Management Services as agents for and on behalf of the Owners in accordance with sound ship management practice and to protect and promote the interests of the Owners in all matters relating to the provision of services hereunder. Provided, however, that the Managers in the performance of their management responsibilities under this Agreement shall be entitled to have regard to their overall responsibility in relation to all vessels as may from time to time be entrusted to their management….. ”

The Defendants, the charters, the sub-charters and the core allegations: The First to Fourth Defendants are BVI companies; the Fifth Defendant is a Gibraltar company. The Defendants were established by a Mr. Iouri Paderov (“Mr. Paderov”), at the request of a group of companies, known as the Ventspils Group (“the Ventspils Group”), of which more presently. Mr. Paderov was the sole shareholder of the Defendants. However, on his own evidence and regardless of appearances, he was no more than the legal owner of the Defendants; the ultimate beneficial owner of the Defendants was the Ventspils Group. In turn, the individuals said to be beneficial owners of the Ventspils Group were Mr. Aivars Lembergs (“ Mr.Lembergs”), Mr. Oleg Stepanovs (“Mr. Stepanovs”), Mr. Olafs Berkis (“ Mr. Berkis”), Mr. Igors Skoks (“Mr. Skoks”) and Mr. Genadijs Sevcovs (“Mr. Sevcovs”). The Ventspils Group was, putting it neutrally, the largest shareholder in LSC but not, as will be explained below, the sole shareholder.

On the evidence thus far before the Court, key individuals within LSC so far as the present dispute is concerned were (or were arguably) Mr. Stepanovs, Mr. Valeriy Godunovs (“Mr. Godunovs”), Mr. Aivars Enkuzens (“Mr. Enkuzens”) and Mr. Alvis Akmens (“Mr. Akmens”), collectively “the LSC Individuals”. The LSC Individuals were all senior executive officers of LSC and had, or are to be taken as having had, effective control of the tanker fleet department of LSC. They worked closely with other individuals (“the related individuals”), including a Ms Nina Glebova (“Ms Glebova”). Pausing here, it follows that Mr. Stepanovs was both a beneficial owner of the Defendants and an LSC Individual. So far as concerns Mr. Lembergs, the Defendants submitted (see below) that he was the real power behind LSC, albeit not a senior executive officer. The Claimants disputed this characterisation of Mr. Lembergs’ role. The issue was and was recognised to be plainly arguable and was dealt with throughout the hearing on that basis.

It is common ground (or not seriously in dispute) that, between 2003 and 2005, the Claimants, through LSC as agent, entered into a total of 63 time charterparties (“the charters”) with the Defendants. Each of the charters was concluded on the Claimants’ behalf, by one of the LSC Individuals. All the charters were on standard Shelltime 4 terms; they were governed by English law (cl. 41(a)) and contained non-exclusive English jurisdiction clauses (cl. 41(b)). They also contained a right to elect for arbitration in London but that right has not been invoked. As will be seen, the charters comprise the battleground over which the fraud (or corporate theft) allegations are fought.

There is no (or no serious) dispute that the Defendants entered into voyage charterparties (“the sub-charters”) with independent third parties (“the sub-charterers”), who are in no way involved in these disputes. On the material before me, it seems plain that the sub-charters were fixed and operated by LSC (or LSC employees) as if there had been no interposed (time) charters. To the sub-charterers, it was as if the sub-charters had been fixed with LSC.

The difference between the returns from the charters and the sub-charters was retained by the Defendants, as their profits. For their part, the Claimants categorise the conclusion of the charters and the sub-charters as “the Scheme”, involving both the LSC Individuals and the Defendants, which enabled the Defendants to make “huge” profits at the Claimants’ expense. There was no honest reason for interposing the charters; the Claimants should have been put into a direct chartering relationship with the sub-charterers. Essentially, Mr. Howard submitted that:

“….certain shareholders of LSC for their own benefit….[had]…stolen corporate opportunities or used the assets of the claimants for their own benefit…”

The shareholders in question were the Ventspils Group. The charters had been entered into “improperly”, in order to divert profits from the Claimants to the Defendants, companies associated with the LSC Individuals - and the Ventspils Group. Moreover, Mr. Howard submitted, the interests of the Ventspils Group were not “coterminous” with those of LSC, in that LSC had other shareholders not part of the Ventspils Group. Such considerations foreshadowed the Claimants’ further allegation that the Scheme involved a “fraud on the minority” – i.e., the minority shareholders of LSC.

Pausing here, it may be noted that early in the proceedings the Claimants obtained a Freezing Order (“the Freezing Order”) against the Defendants, accompanied by various disclosure obligations. As will be seen, the Defendants’ responses to these requirements have proved a fruitful source of information as to the Defendants’ case.

Before considering the Claimants’ case further – and the manner in which it can fairly be said to have evolved – it is important to have regard to the evidence of the Defendants, which was the subject of much scrutiny at the hearing. Given its centrality on this application, this evidence must, unavoidably, be set out at some length; it provides a fascinating glimpse of corporate and, perhaps to some extent, political rivalry in Latvia in recent years.

The Defendants’ evidence: I start with the evidence of Mr. Martins Kveps (“Mr. Kveps”), a Latvian lawyer and Chairman of the Supervisory Board of AS Latvijas Naftas Tranzits (“LNT”) and Deputy Chairman of the Supervisory Board of AS Ventbunkers (“Ventbunkers”). Mr. Kveps says that Ventbunkers was, until 2006, the central company in the Ventspils Group. Mr. Kveps acts for four of the five beneficial owners of the Ventspils Group, i.e., all of those listed above save for Mr. Lembergs.

Mr. Kveps says this:

“ The Charters….were in fact part of the arrangements made by the Ventspils Group to buy out the interest of the Riga Group of companies (“the Riga Group”) in the….[LSC]. These proceedings in England are an attempt by Lembergs to keep control of the LSC for himself, through his shareholdings in various companies, and is part of a power struggle between him and the other four beneficial owners of the Ventspils Group, including Stepanovs, for control of the LSC.”

Mr. Kveps went on to describe the “background and political history” of the Ventspils Group. Geographically and for purposes of trade, Latvia’s location places it between “East” and “West”. Ventspils is the largest ice-free port city of Latvia, after Riga itself. Following independence from the USSR in 1991, the Ventspils port with its developed infrastructure quickly became the most important transit terminal for the transhipment of Russian oil and oil products, potash, coal and other cargoes. But in 1991, the Ventspils port infrastructure was owned by state-controlled companies. Senior managers of these companies, led by Mr. Lembergs, the Mayor of Ventspils since 1988, gradually privatised these “strategic assets”, so forming the Ventspils Group. That Group became not only economically and financially strong but was also, as Mr. Kveps put it, “politically very well connected”. A chart of the Ventspils Group companies, their respective shareholdings and their ultimate beneficial ownership, was furnished by Mr. Kveps (“the structure chart”) and forms the Annexe to this judgment. (For completeness, I should record that the Claimants adduced similar charts in their evidence – but, for present purposes, nothing turns on the differences between those charts and the structure chart; I therefore say no more about them and have not annexed them to this Judgment.)

Turning specifically to LSC, the announcement that it was to be privatised came in 2002. A confidential agreement was entered into between the Ventspils Group, then led by Mr. Lembergs and the so-called Riga Group, led by a Mr. Andris Skele (“ Mr. Skele”), said by Mr. Kveps to be one of the wealthiest individuals in Latvia; he has served two terms as Prime Minister. The agreement provided for joint ownership of the LSC by the Ventspils Group and the Riga Group.

For this purpose, two Guernsey companies, Ojay Limited (“Ojay”) and Eastgate Properties Limited (“Eastgate”) were incorporated. They were each 50% owned by Regina Development Limited (“Regina”), owned by members of the Ventspils Group and by Lake Street Investments Limited (“Lake Street”), owned by the Riga Group. The intention was that these two companies would become the controlling shareholders of the LSC after privatisation.

However, albeit that Mr. Kveps does not quite put it that way, the Ventspils Group and/or Mr. Lembergs reneged on this understanding. Instead and as is apparent from the structure chart, Ventspils Nafta acquired a controlling stake in the LSC (a 49.9% shareholding), leaving Ojay and Eastgate with a 27.55% shareholding. As Mr. Kveps does put it, Mr. Skele was “not surprisingly, furious”. Thereafter, the Ventspils Group and the Riga Group made unhappy bedfellows, so to speak, as shareholders in the LSC.

Against this background, the Ventspils Group wished to buy out the Riga Group’s interest in Ojay and Eastgate, the vehicles through which the Riga Group held its shareholding in the LSC. But, as Mr. Kveps expressed it in his first affidavit, it was necessary to find a purchaser appearing to be independent of the Ventspils Group; otherwise, the combination of the 27.5% and the 49.9% shareholdings would have required the Ventspils Group to bid for the whole of the LSC. This explanation was revisited in the course of the evidence; I shall return to it later but no more need be said for the moment.

Mr. Paderov now came into the picture. He had been President of the LSC from 1987 to 1991 and was already known to both Messrs. Lembergs and Stepanovs. He agreed to assist the Ventspils Group and in due course the Ventspils Group and the Riga Group agreed the price of the sale. The Ventspils Group then arranged for a company, Recoletos Limited (“Recoletos” – shown on the structure chart), nominally owned by Mr. Paderov, to purchase the Riga Group’s shares in Ojay and Eastgate.

To raise the funding for the purchase of the Ojay and Eastgate shares by Recoletos, according to Mr. Kveps, “arrangements were made whereby the funds were provided to the Defendants” through the charters. As Mr. Kveps later put it:

“ ....the purpose of the Charters was to raise money for the purchase of Ojay….and Eastgate….and it was for the benefit of the Ventspils Group and the LSC to resolve uncertainty within the LSC as to its ownership.”

Mr. Kveps went on to say this. At the time the charters were arranged, all the relevant companies, including LSC, were controlled “not by the official institutions, such as their respective Management Boards or Supervisory Boards” but by “an informal gathering” of the individuals behind Ventbunkers and LNT called “the Table”. The informal group, or gathering, was comprised of about 12 individuals and included Mr. Lembergs and the other four beneficial owners of the Ventspils Group, whom Mr. Kveps represents. Mr. Lembergs chaired the meetings of the Table, which took decisions on all important matters affecting the Ventspils Group, including LSC. The formal governing bodies of the companies in question would then “merely implement the decisions taken during the Table meetings”.

As to the Claimants, they were:

“…all one ship special purpose vehicles, wholly-owned by the LSC. They have nominee de jure directors in the offshore jurisdiction in which each is registered. Until 2004, those directors acted on the instruction of the management of the LSC, who were themselves acting on the instructions of the Ventspils Group, as determined by the Table, which exercised de facto management and control. Since 2004, the Claimants have been managed and controlled by Lembergs, acting through the management of the LSC.”

The overall arrangements for the charters were determined by the Table and were then implemented by LSC in accordance with instructions given by or from the Table. Until 2004, Mr. Lembergs was a very powerful man, with effective control of the Table; the LSC management would “not have dared” to question any decision made by Mr. Lembergs in relation to the charters.

In or around 2004, tensions developed between Lembergs and the other four beneficial owners of the Ventspils Group, who, as the structure chart reveals, enjoyed majority control (4/7 to 3/7) of their interests in Ventbunkers, LNT, Ventspils Nafta and LSC. A power struggle ensued, involving court proceedings in Latvia. Additionally, Mr. Lembergs was charged with various criminal offences; he was arrested in March 2007, detained in custody for about a year until released and a trial commenced in 2009 – but has apparently not yet concluded. The four beneficial owners of the Ventspils Group assisted the prosecution in the criminal proceedings. Unsurprisingly in the circumstances, there has been what Mr. Kveps calls a “major falling out” between his clients and Mr. Lembergs.

The power struggle has continued all the while. According to Mr. Kveps, Mr. Lembergs has been instrumental in commencing these proceedings. Building on Mr. Kveps’ evidence, Mr. Millett puts the Defendants’ case in this regard as follows:

“ . ….Mr. Lembergs has lost control of the Defendants but has retained control of LSC and the Claimants, although he will lose that control as well unless he secures or at least neutralises the 27.55% shareholding in LSC controlled by the Defendants.

The Defendants say that this is the reason for these proceedings, which are part of a much larger dispute between Mr. Lembergs and Mr. Stepanovs (and the other minority shareholders in the Ventspils Group), who are now in control of the Defendants. The Claimants admit that there is such a dispute but deny….that this case is a part of it.”

The role of Mr. Paderov has already been mentioned. He speaks of meetings in and around 2003, to discuss the funding for the Ventspils Group purchase of the Riga Group’s shares in Ojay and Eastgate. These meetings were attended by, inter alia, Mr. Stepanovs and one of the other LSC Individuals. Mr. Lembergs attended one such meeting and approved of these arrangements. According to Mr. Paderov:

“During these meetings, the idea of the LSC entering into the Charters….in order to raise the funds to purchase the shares in Ojay and Eastgate was proposed and I agreed to participate in this arrangement.”

To this end, Mr. Paderov admits and avers setting up the Defendant companies at the request of the Ventspils Group. He further admits and avers the intention that he should appear to third parties to be the beneficial owner of the Defendants, whereas he was in fact no more than the legal owner. He was remunerated for this assistance. The charters were arranged by LSC with the knowledge and approval of the Ventspils Group. In due course, payments for the shares of Ojay and Eastgate were made from Recoletos to Lake Street, in two tranches of US$31,276,952.00 and US$9,581,551.68, on the 29^th July and 27^th October, 2004, respectively – thus a total of a little over US$40 million, all derived from the charters. Subsequently, Mr. Paderov has insisted that, although he does not dispute the entry into and the profitability of, the charters, he neither admits nor accepts that they were entered into at an “undervalue”. He further states that he was not aware of any breaches of duty on the part of any of the LSC Individuals in relation to the charters.

Earnings from the charters were not confined to the US$40 million odd to which reference has already been made. In the course of compliance with the requirements of the Freezing Order, it became apparent that other payments had been made from the Defendants’ accounts. In the Defendants’ evidence, these were explained as follows:

For completeness, it may be noted that Dr. Rudolf Meroni, a Swiss lawyer, Chairman of the Supervisory Board of Ventbunkers and a member of the Supervisory Board of LNT, has given evidence very much to the same effect as that adduced by Mr. Kveps. For some time he acted for Mr. Lembergs and much of his evidence deals with the role/s played by Mr. Lembergs. According to Dr. Meroni, the charters were concluded for the “primary benefit” of Mr. Lembergs (given the size of his beneficial holding). At the time, Mr. Lembergs was, according to Dr. Meroni, the “(illegitimate) controlling mind and will of LSC in reality”. He too speaks of these proceedings as forming part of a wider shareholders’ dispute.

I turn to the rival cases. Both parties advanced extensive and wide-ranging arguments. My outline will be confined to matters central to the Part 24 application and will be as short as possible, while seeking to do justice to the submissions advanced before me.

As already foreshadowed, the Claimants claim to be victims of a massive fraud. That claim has evolved somewhat, at least for the purposes of these proceedings. The Particulars of Claim, as variously amended, begin with the stark allegation that the claims against the Defendants:

“…arise out of 63 undervalued charterparties between, in each case, a Claimant and Defendant as a result of the dishonest actions of individuals who acted for both the Claimants and the Defendants. As a result….the Claimants have collectively lost, and the Defendants have collectively made corresponding profits of, approximately US$100 million.”

The allegation that the charters were all entered into at an “undervalue” is not, however, pursued in the application for summary judgment; the Claimants accept that the “undervalue” issue (and, indeed a good many others) cannot be resolved other than at trial.

The Claimants say that, nonetheless, they are entitled to obtain summary judgment. Relying essentially on what they say are the Defendants’ admissions, the Claimants contend that there is no honest explanation for the Scheme with a realistic prospect of success. The Claimants submit that on the Defendants’ own evidence, the purpose of the Scheme was to divert profits from the Claimants to the Defendants so that the Ventspils Group (in accordance with the directions of the Table) could buy out the Riga Group shareholding. Accordingly, the interposition of the Defendants between the Claimants and the sub-charterers involved a diversion of corporate opportunities. By this means, the Claimants were, “as anticipated”, deprived of profits of over US$50 million. Such diversion involved LSC acting without authority and contrary to the interests of the Claimants. That was so under the governing law of the ship management contracts, whether Latvian or English law. In the circumstances already set out and given the overlap of personnel, if the LSC Individuals were acting without authority and contrary to the Claimants’ interests, the Defendants knew or must have known this. Accordingly, all the charters were void (“the Want of Authority case”).

The only potential defence was that LSC or the Claimants knew of or approved the charters. This was a matter of Latvian law. Under Latvian law, the knowledge of the individuals concerned (whether the LSC Individuals, or the beneficial owners of the Ventspils Group, or members of the Table, or Mr. Lembergs) – as distinct from their acts - could not be attributed to LSC, because of Art. 1415 of the Latvian Civil Code (“Art. 1415”), which provides as follows:

“ An impermissible or indecent action, the purpose of which is contrary to religion, laws or moral principles, or which is intended to circumvent the law, may not be the subject-matter of a lawful transaction; such a transaction is void.”

It could not therefore be said that LSC knew of or approved the charters. Likewise, the Claimants did not consent to or approve of the charters because LSC had not done so – and there was no indirect route around this.

Further or alternatively, the Claimants were entitled not only to permission to amend but also to summary judgment on the basis of the new claim contained in the Re-Amended Particulars of Claim, namely illegality (“the Illegality Case”). The Claimants submitted that the Scheme involved a “common law fraud” on the minority shareholders of LSC, so that the charters were illegal and void under English law – which was the applicable law, as the proper law of the charters.

To the extent that Latvian law was relevant, any defences of knowledge or approval or “in pari delicto” or “ex turpi causa” were met by Art. 1415, mutatis mutandis, for the same reasons as were applicable to the Want of Authority case. It was obviously unlawful for a company’s assets to be used secretly to benefit some of the shareholders at the expense of others – as it involved ignoring the separate legal identity of the company.

Pulling these threads together:

As to the interpretation of Art. 1415 and though there was conflicting expert evidence before the Court, I could determine its width and application at this hearing. The Court would not be in any better position to decide this issue at trial. It did not matter whether Art. 1415 was interpreted narrowly (so that Art. 1415 was only contravened if the Scheme was illegal per se) or broadly (so that it sufficed to contravene Art. 1415 if the Scheme, though legal per se, was driven by fraudulent intent); that said, it was correct to interpret Art. 1415 broadly. Interposing here, I have referred compendiously to “the Scheme” being avoided under Art. 1415; that suffices for the moment but requires more refined consideration below.

In summary, there was no realistic defence to the claim. The Claimants were entitled to summary judgment, alternatively a conditional order (under CPR Part 24.6) requiring the payment of a very substantial sum into Court.

Pausing here, although the skeleton arguments dealt in considerable detail with remedies, both parties sensibly agreed in the course of the hearing that whatever my decision on liability, remedies should be left for another occasion.

For the Defendants, Mr. Millett submitted that there was no “thread” which could lead the Court through the labyrinth of disputed fact and foreign law to summary judgment.

To begin with, the Claimants’ case purported to be based on the Defendants’ admissions; but the scope of those admissions was significantly more limited than the Claimants asserted. The Defendants admit that they were set up to make profits from the charters and sub-charters and that they did so. They do not admit that they were set up to make huge profits at the Claimants’ expense or that (without the benefit of hindsight) they were pre-destined to make profits. Mr. Millett submitted that the Defendants having entered into the charters, took the commercial risk of finding profitable voyage charters; there were many cases where the charters and sub-charters were not back to back so that vessels were “unlet” for substantial periods of time; it could not be said that the (voyage) sub-charters were “already in the bag” when the (time) charters were fixed.

The Scheme was not dishonest; still less could the Court conclude that it was on an application for summary judgment. The Table’s (or Ventspils Group’s) purpose was to buy out the dissentient Riga Group shareholders. That purpose was, or was arguably, in the best interests of LSC. In this regard and although Mr. Howard had sought to withdraw it in the course of argument, the Claimants’ skeleton argument had included a noteworthy concession; namely, for present purposes, it was to be assumed that:

“ The Table considered that this [i.e., buying out the Riga Group shareholding] was in the best interests of LSC.”

Whether or not that concession was withdrawn, it did nothing to enhance confidence in the Claimants’ case.

In any event, the Scheme was in the Claimants’ best interests; absent insolvency, the interests of the Claimants were “coincident with the interests of its shareholders”; accordingly, what was in the Claimants’ best interests was whatever LSC, as their 100% ultimate owners and controllers, decided. That was a commercial judgment “the majority shareholders, the controlling management” was entitled to make. It would be an “odd thing” if a group holding company could never lawfully procure its subsidiary to undertake a piece of business at cost in order to allow a wholly-owned sister or related company to receive the profits.

To put it to one side, the purpose of the Scheme was not to fund the payment of bribes; that the profits, surplus to those required to buy out the Riga Group, had been used to pay bribes, did not advance the argument.

As, for present purposes, it must be assumed that the charters had not been entered into at an under-value, it could not be said that either the Claimants or LSC had suffered any loss. For this reason and others, the Claimants faced insuperable difficulty with their new case of fraud on the minority LSC shareholders. First, permission to amend should be refused as the proposed claim was incoherent. Secondly, there was no loss. Thirdly, “fraud on a minority” in the technical English company law sense (see Daniels v Daniels [1978] 1 Ch. 406) could not assist the Claimants; there was no equivalent Latvian law concept and, at the time/s in question, it was lawful under Latvian law for a company to finance the purchase of its own shares. Fourthly, actual dishonesty was denied and in any event gave rise to triable issues. Fifthly, it followed that the Claimants’ case for the purposes of summary judgment must stand or fall on the argument that corporate opportunities had been diverted.

In this regard, the fact that there was an intention for the Defendants to make profits did not mean that there was an intention to divert the Claimants’ corporate opportunities. It could not be said that there had been a diversion of corporate opportunities unless the sub-charters were the “very charters” which the Claimants should have enjoyed themselves. Given the submission (already referred to) as to the charters and sub-charters not being back to back, that could not be said – at least absent a detailed analysis of each of the charters and sub-charters, which had not and could not have formed any part of this hearing. Further and contrary to the Claimants’ case, it could not be assumed that it was the duty of the agent (LSC) to maximise the profits made by the principal (the individual Claimants). So:

“…for all the Court knows, the Claimants were best protected by having a lower per diem hire rate but on a regular basis over a longer period (i.e., a more secure income stream, so that they could reliably pay ship mortgage instalments) than the more profitable but riskier voyage charters that the Defendants obtained from the genuine commercial voyage charters.”

Whatever the reason for the secrecy surrounding the Scheme (Mr. Paderov appearing to be a purchaser independent of the Ventspils Group), that was not inconsistent with the honesty (or arguable honesty) of the Scheme; on any view, it did not give rise to any relevant dishonesty.

If the Defendants were right or arguably right thus far that was an end of the application. LSC had not acted without authority in arranging the charters; in that regard, it was further to be noted that LSC enjoyed a discretion under the ship management contracts as to which business to allocate to which Claimant. It could not be said that the Defendants knew that LSC had acted without authority. There was or was arguably neither a diversion of corporate opportunities nor a fraud on the minority shareholders of LSC.

In any event, however, the application for summary judgment was to be dismissed on what may compendiously be termed the ground of ex turpi causa. As Mr. Millett put it from the outset:

“ It is the Defendants’ case that at all material times each of the Claimant companies, each of the Defendant companies and the …LSC…were under the direction and control of …[Mr. Lembergs]….

Accordingly, if as the Claimants allege, there was anything unlawful or illegal about the transactions to which the Claimants and the Defendants were parties, they were literally as well as legally in pari delicto and no possible claim can arise between them.”

With Mr. Lembergs “on both sides” the defence of ex turpi causa was applicable; the evidence at least for the purposes of summary judgment, was that he was – he was the head of the Table, the directing mind and will of all the relevant corporate entities.

Put another way, the Scheme could not be a fraud on the LSC minority shareholders, unless it was a fraud on LSC; but it could not be a fraud on LSC, if LSC was a knowing participant in it. If LSC knew of and consented to the Scheme, then it alone decided what was in the Claimants’ best interests as their 100% shareholder – and its knowledge and intention was to be attributed to the Claimants.

Art. 1415 could not be used to negative the knowledge otherwise attributable to LSC. Knowledge was not a “transaction” within Art. 1415; the whole Scheme could not possibly be the relevant transaction; no transaction had been identified by the Claimants which could be “avoided”. The mechanism by which knowledge would otherwise be attributed to LSC (for example, whether a formal resolution was required), was in dispute between the experts on Latvian law and was conceded to give rise to triable issues. In any event Art. 1415 did not assist the Claimants on either the narrow or the broad view. On the narrow view, neither the Scheme nor the charters were per se illegal. On the broad view, in Mr. Millett’s submission, for Art. 1415 to be engaged to avoid the attribution of knowledge, the Claimants needed to prove subjective bad faith on the part of the (alleged) perpetrators of any wrongdoing – and so ran into the difficulties (for purposes of summary judgment) already discussed.

As to the position of the Claimants, they were simply “vehicles”. It was not in dispute (for the purposes of Part 24) that, under the law of their places of incorporation, they would be attributed with the knowledge of Mr. Lembergs as their directing mind and will. His knowledge was to be attributed to the Claimants, whether via LSC or directly. That the de jure directors of the Claimants knew nothing of the Scheme was irrelevant; they had not been entrusted with the business of operating the ships but had instead delegated that business to LSC. The fact that Mr. Lembergs operated “through the LSC management” was also neither here nor there; LSC’s management acted at Mr. Lembergs’ direction. Even if Art. 1415 “blocked” LSC’s knowledge, the LSC Individuals and the Table had the relevant knowledge - and it was they who controlled the Claimants, at Mr. Lembergs’ direction.

Mr. Millett advanced two final submissions. First, if the Claimants did not know of the Scheme, then neither did the Defendants; both were controlled in precisely the same way; both were either knowing or ignorant; the claim accordingly failed in limine. Secondly, the issues were interlinked and fact sensitive; the case as a whole was not suitable for Part 24 determination.

To my mind, the correct disposal of this application requires a consideration of the matter as a whole; it will, however, be convenient first to consider the Scheme and, thereafter, what may be termed the ex turpi causa arguments. Throughout, I shall keep in mind the test for summary judgment and the caution necessary when allegations of serious fraud or dishonesty are involved, all as already discussed.

(I) The Scheme: I start with the facts of the Scheme. On the Defendants’ own evidence, its purpose was to facilitate the purchase of the Riga Group’s shareholding by the Ventspils Group, in the best interests of LSC. On the face of it, that is the basis upon which it must be judged.

Mr. Millett, however, submitted that the Scheme, arguably, might – or might also - have involved the protection of the Claimants by obtaining for them a more secure income stream from time charter payments (so facilitating mortgage repayments), rather than the more profitable but riskier voyage charter earnings which accrued to the Defendants. Mr. Millett developed this submission as follows:

Mr. Howard’s vigorous response proceeded as follows. First, he attacked the lack of an evidential foundation for Mr. Millett’s submission of risk management; there had been no attempt at all to adduce any evidence that the purpose of any of the charters was to secure a reliable income stream for the Claimants. Secondly, in some 46 of the 63 charters, the sub-charters had “definitely or probably” been fixed before the charters. Thirdly, the suggestion that the time chartered vessels had encountered significant periods of unemployment was implausible (or “bizarre”) and glossed over the short terms of the charters and the charterers’ options to extend or terminate them. Given that the admitted purpose of the Scheme was to generate profits for the Defendants, if the time chartered vessels were idle there was no good reason why the Defendants had not exercised their options to bring those charters to an end. Fourthly, the Defendants must stand or fall on their evidence: namely, that the Scheme was to be explained and justified on the basis of the desirability of buying out the Riga Group, in the best interests of LSC. That purpose was to be distinguished from any question of risk shifting; the Defendants had adduced no evidence to contradict the Claimants’ evidence; no one had given evidence to say:

“…we entered into these charters because we thought it was a good idea for the claimant to enter into this particular time charter; even though there was a profitable voyage charter there, we didn’t think the claimant should enter into the voyage charter because we thought it better to time charter to the defendant.”

For my part, I think that the Claimants have the better of this particular argument.

Accordingly, the Scheme falls to be evaluated in the light of the explanation which the Defendants have squarely advanced, namely that, in facilitating the buy-out of the Riga Group, it was in the best interests of LSC. Viewed in this light, I cannot avoid saying that it at once gives rise to a number of real misgivings – whichever legal system (English, Latvian or the countries of the Claimants’ incorporation) is applicable.

Keeping the essentially indisputable factual foundation in mind, the Claimants have a platform, as it seems to me, for advancing a number of powerful submissions, in connection with both the Want of Authority and Illegality Cases.

As to Want of Authority, the issue of whether the charters were void is governed by English law – the putative governing law of the contracts in question. As a matter of English law, if one party to a contract knows that the agent of the contractual counterparty, in purporting to conclude a contract on the counterparty’s behalf, is acting without authority, the purported contract will be void, or no contract comes into existence: see, Heinl v Jyske Bank [1999] Lloyd’s Rep Bank 511, at p. 521. The next issue, accordingly, is whether the charters were purportedly entered into by LSC, without the authority of the Claimant in question to do so. Depending on the governing law of the ship management contract, this will be a question of either Latvian or English law. As it seems to me, it is unnecessary to look beyond the express terms of those contracts, in particular cl. 4.1 thereof; the Claimants’ case must stand or fall on that provision. As it further seems to me, whether under English or Latvian law, there is a strong case for saying that the circumstances of the Scheme, already underlined, point to LSC exceeding its authority from the Claimants, as conferred by the first sentence of cl. 4.1 of the ship management contracts (set out above) – rather than simply being in breach of duty and so potentially liable to a claim in damages. It is not easy to contend that in interposing the Defendants between the Claimants and the sub-charterers, LSC was protecting and promoting the interests of the Claimants. If LSC was indeed acting outside the scope of its authority then the charters may well be void, depending on the knowledge of the Defendants.

Pausing here, two further submissions advanced by Mr. Millett are conveniently next considered.

Before leaving the Want of Authority Case, it remains to consider the Defendants’ knowledge. For the moment, I can take this matter very shortly indeed. On the Defendants’ own evidence, there can be no realistic doubt that, given the linkages and crossovers, Mr. Lembergs, the Table, the Ventspils Group, the LSC Individuals and hence the Defendants knew very well what was going on. If, therefore, LSC was acting without authority in the conduct of the Scheme, then it was doing so to the knowledge of the Defendants. All that said, this summary treatment of the Defendants’ knowledge foreshadows a fundamentally more difficult question, to be addressed when I come in due course to the ex turpi causa arguments.

Turning to the Illegality Case, the Claimants sought permission to amend their pleadings to advance this Case in the terms of the draft Re-Amended Particulars of Claim, focussing on the alleged fraud on the minority shareholders of LSC. The Defendants opposed the application, contending that the Claimants’ proposed amendments were “incoherent”. Having considered the arguments as to the Illegality Case de bene esse, I have no hesitation in granting permission to amend. For present purposes, it should be noted that the Illegality Case must stand or fall on demonstrating that the “fraud” in question was – as expressed, by way of shorthand during the hearing – “common law fraud”. This is so because the relevant law, for determining whether there was a “fraud on the minority” shareholders of LSC, is Latvian Law. On the materials before me, there was no basis for concluding, let alone for the purposes of summary judgment: (1) that Latvian law had any doctrine akin to “fraud on the minority” in the technical English company law sense; and/or (2) that it was unlawful under Latvian law, at the material time/s, for a company to finance the purchase of its own shares. Conversely, if “common law fraud” was established for the purposes of Part 24, CPR, then Mr. Millett realistically accepted, as I understood it, that the Scheme would be unlawful under Latvian law (or indeed any legal system). Accordingly, as Mr. Millett correctly summarised it, this Case was “common law fraud against the minority in LSC or nothing”.

Even set against this considerable bar, if it is right that the Scheme involved the secret use of LSC’s assets to benefit the majority shareholders at the expense of the minority, there is, at the least, a cogent case that this was a fraud on the minority (in the “common law fraud” sense). If so, then as a matter of English law, the putative proper law of the charters, there is likewise a formidable case for concluding that the charters were void.

Necessarily, this Case involves the need to establish dishonesty on the part of some or all of the LSC Individuals, the beneficial owners of the Defendants, the members of the Table and Mr. Lembergs. Here too and as with the Want of Authority Case, this consideration foreshadows the issues which arise under the ex turpi causa heading.

I shall defer expressing my conclusions on the Scheme as such until I have dealt with the ex turpi causa issues.

(II) Ex turpi causa: As already noted, the Defendants rely on what may broadly be termed the defence of ex turpi causa. The factual basis for this contention is straightforward indeed. Mr. Lembergs, the Table, the Ventspils Group – and hence to some extent as well, the LSC Individuals and the beneficial owners of the Ventspils Group – were on “both sides”; at the very least, Mr. Lembergs and the Table directed and controlled LSC, the Claimants and the Defendants. There is no or no serious dispute that for the purposes of Part 24, it must be assumed that Mr. Lembergs and the Table were indeed on both sides. At first blush therefore, there is an arguable defence of ex turpi causa - however unattractive, by its nature, such a defence may be and whatever its ultimate fate. The force of the point was, perhaps inadvertently, highlighted by the Claimants’ own initial pleading – subsequently deleted – that LSC “did not act honestly and in good faith in the best interests of the Claimant”; if, regardless of the deletion, that be right (or arguably right), the result would be that LSC was both perpetrator and victim of the (alleged) fraud. However and as has also been seen, the Claimants resist any such conclusion. In the light of the rival arguments, it is convenient to consider, first, the position of LSC and, thereafter, that of the Claimants.

The position of LSC: I agree with the Claimants thus far – the question of whether LSC knew of or approved the charters is a question of Latvian law. Realistically, the Claimants accept (for the purposes of Part 24) that questions of attribution and corporate will, despite the absence of formal meetings and the like, are too complex to be resolved in their favour – subject only to one exception. That single exception upon which this part of the Claimants’ case rests is Art. 1415 (set out above); by reason of Art. 1415, the knowledge of Mr. Lembergs, the Table and the LSC Individuals is not be imputed to LSC.

Rival views on the scope of Art. 1415 were before the Court, in written form, from two Latvian law experts. The Claimants relied on the views of a Mr. Bitans, the Defendants on a Mr. Liepa. Although there was some discussion as to the independence of Mr. Bitans, I am content to treat both Messrs Bitans and Liepa as having the necessary independence to assist the Court with their respective views.

In short summary, Mr. Bitans contended for a “broad” view of Art. 1415. For a transaction to be valid and binding on a company, it must be lawful. Art. 1415 rendered void not only transactions illegal per se – such as the sale of illegal drugs - but also those “driven by fraudulent intent”, which were intended to “circumvent the law”.

Conversely, Mr. Liepa’s opinion, relying on decisions of the Senate of the Latvian Supreme Court (“the Supreme Court”), was that a narrow view was warranted; the subject of the transaction (i.e., whether it was illegal per se) was critical and the Court had not analysed whether the intention of the parties had been to circumvent the law. Mr. Liepa acknowledged that “recently” the Supreme Court had switched to a broader approach, taking into account not only the subject matter of the transaction but also the intention of the parties. That said, there were not “sufficient grounds” for firm conclusions as to the true scope of Art 1415 in Latvian law. In this regard, Mr. Liepa relied on a decision of the Supreme Court of 12^th November 2008, in case No. SKC-416 (“SKC-416/2008”), which, he suggested, pointed once more to a narrow construction of Art. 1415.

Returning to the fray, Mr. Bitans disputed Mr. Liepa’s interpretation of SKC-416/2008 and any inference that it involved a return by the Senate to a narrower reading of Art. 1415. In any event and post-dating SKC-416/2008, the Supreme Court had issued a working paper on the application of Art. 1415 (“the Working Paper”) in which the theoretical foundation of the “broader approach” was explained and supported. Mr. Bitans put the matter this way:

“ The gist of the working paper is that Article 1415…in fact deals with the purpose of a legal transaction which is subjective motive (causa) of participants in a legal transaction – the reason why the participant entered into the legal transaction in question. Therefore, even if externally the legal transaction seems lawful (for example, a charterparty agreement), after examining the motives underlying the transaction it is possible to declare such a transaction void under Article 1415….The courts must distinguish between the subject-matter of the transaction and the purpose of transaction which is completely independent criterion in assessment of the legality of legal transaction. When examining this criterion, the courts should consider subjective wishes and motives of the participants to the legal transaction. The approach to Article 1415….according to which the courts do not examine the real motives of the participants to the legal transaction is incorrect….”

The Working Paper itself is plainly, with respect, a learned document but not easy to read in translation or untutored. A letter from the Supreme Court, accompanying the copy made available to Mr. Bitans, states that it involved an “overview” of “comparatively diverse court practice”, in order “to ensure uniform application of law”.

In my judgment, so far as it goes, the Claimants have the better of the argument that a “broad” rather than “narrow” view of Art. 1415 is probably correct. First, suffice it to say that I am unable to agree with Mr. Liepa that SKC/416-2008 does provide support for the narrow view of Art. 1415. Secondly, on the weight of both Mr. Bitans’ and Mr. Liepa’s evidence, it seems to me that the trend is towards a broader view of Art. 1415. Thirdly, the Working Paper provides strong support for Mr. Bitans’ opinion in this regard. Fourthly, insofar as it is permissible for me to do so, I would place some store on the wording of Art. 1415 itself; that wording refers in terms to “purpose” and to the intention “to circumvent the law”; if Art. 1415 was exclusively focussed on the subject-matter of the transaction per se, it is difficult to give content (or sufficient content) to this wording.

That preference for the Claimants’ argument as to the scope of Art. 1415 falls, however, well short of persuading me that summary judgment in the Claimants’ favour would be appropriate.

I have not in all this lost sight of Mr. Howard’s further submission that I should rule on Art. 1415 now and that at trial the Court would be in no better position. Of course it is right that in some cases, it is appropriate to rule, summarily, on a disputed point of foreign law; but with respect to Mr. Howard, this is not such a case. I agree instead with Mr. Millett that on a number of issues, to put it no higher, I cannot rule out that expert evidence of Latvian law at trial would prove of assistance. Such issues would seem to me to include evidence as to the true practical status of the Working Paper, as to the broad or narrow view of Art. 1415, as to the mental element involved in the broad view, as to the meaning of “transaction” and as to whether the imputation of knowledge can be avoided.

It follows that despite my preference for the Claimants’ submissions as to the correct scope of Art. 1415, I am unable to accept that a decision in the Claimants’ favour on Art. 1415 is one I can or should properly reach by way of summary determination. Accordingly, the question of whether Art. 1415 precludes the attribution to LSC of the knowledge of Mr. Lembergs, the Table and, so far as relevant, the LSC Individuals, gives rise to a triable issue. If so, it necessarily follows that there is at least an arguable defence of ex turpi causa.

The position of the Claimants: My conclusion that the knowledge of the alleged “masterminds of the fraud” is at least arguably attributable to LSC is sufficient to preclude summary judgment at least on the ex turpi causa issues. I would, however, have reached the same conclusion even if I had taken a different view as to the position of LSC. I agree with Mr. Millett that, regardless of the position of LSC, the knowledge of the alleged masterminds of the fraud – and in particular Mr. Lembergs and the Table – is at least arguably attributable to the Claimants.

In considering the position of the Claimants, the relevant law is that of the particular Claimant’s place of incorporation. For the purposes of Part 24 it is common ground or not seriously disputable both that: (1) Mr. Lembergs (if not the whole Table) was the directing mind and will of the Claimants at the material times; (2) under the various laws of the Claimants’ places of incorporation, the Claimants would be attributed with the knowledge of their directing mind and will – and so the knowledge of Mr. Lembergs (and perhaps the Table).

Mr. Howard submitted, forcefully, that none of this availed the Defendants. There was no shortcut to attribution. Mr. Lembergs operated through the LSC management; Art. 1415 (on his submissions) “blocked” the attribution to LSC of his knowledge; accordingly, that knowledge could not be attributed to the Claimants.

With respect, at least for present purposes, I do not agree. As a matter of (arguable) fact, the Claimants, through Mr. Lembergs and/or through Mr. Lembergs via the LSC Individuals (who controlled the Claimants at Mr. Lembergs’ and the Table’s direction) had the requisite knowledge. That LSC might not have had that knowledge, if contrary to my earlier conclusion Art. 1415 had precluded attribution under Latvian law, would seem to me to be neither here nor there when it comes to the Claimants. Here, if I may say so, it is the Claimants who are making insufficient allowance for their own separate corporate personality. Accordingly and for this reason too, the ex turpi causa issues must go to trial - for the avoidance of any doubt - in respect of both the Want of Authority and Illegality Cases.

(III) Overall conclusions: It is now time to pull some threads together. As to the ex turpi causa issues, I have concluded that they must go to trial. However, that conclusion is not necessarily decisive of the application, so far as concerns the Scheme as such.

As to the Scheme, it is convenient to pull some threads together. First, I have already indicated that on the largely undisputed facts of the Scheme, the Claimants have a powerful case both in respect of Want of Authority and Illegality. Secondly, if I had to assess the Scheme in isolation (and without the ex turpi causa issues to come), I would readily conclude that the Claimants have the better of the arguments thus far. Thirdly, it would not be over-stating the matter to characterise the explanation of the Scheme as “shadowy” (to use the old terminology of O.14, RSC).

In the light of my considerable misgivings as to the Scheme, there is a temptation in this case to grant summary judgment at least in respect of the Scheme itself. The insistence on and encouragement of proper standards of corporate governance are policy interests of the first importance.

However, having anxiously weighed the matter, I am firmly of the view that the temptation to proceed to summary judgment is to be resisted – and would be inappropriate in this case. My reasons are these:

It follows from these conclusions that I decline to give summary judgment on the claim or any part of it. But these conclusions do not rule out consideration of a Conditional Order, pursuant to CPR 24.6.2, 24.6.6 and the associated Practice Direction.

Having regard to my views on the Scheme and the ex turpi causa issues, considered together and as a whole, although it is possible that the Defendants will successfully resist the claim, it is improbable that they will do so. First, I refer to, without repeating, my views as to the Scheme. Secondly, whether considering the position of LSC or that of the Claimants, it is to be remembered that the ex turpi causa defence is logically reached with the Defendants already very much on the “back foot”, by reason of the debate as to the propriety of the Scheme. Thirdly, I think that the Claimants have thus far had the better of the debate as to the scope of Art. 1415. All in all, while I cannot exclude the realistic prospect of a successful defence, in particular and however unattractive, that of ex turpi causa, I regard it as improbable that the Defendants will successfully resist the claim.

Accordingly, I have jurisdiction to make a Conditional Order.

For my part, with little hesitation and in the exercise of my discretion, I conclude that a Conditional Order, providing that the Defendants are to pay a sum of money into Court as a condition of defending this claim, is the correct and just solution to this application. It falls short of summary judgment but reflects the balance of the argument before me. I shall canvass with counsel the precise terms of the Conditional Order but, however the matter is structured, I have in mind the Defendants paying into Court a very significant sum of money (without necessarily precluding, as an alternative, the provision of a true equivalent by way of security).

Postscript: Post-hearing matters: For completeness I record that I was sent a volume of communications subsequent to the hearing, essentially at the instigation of the Defendants. I have of course read what I was sent. Suffice to say that none of those exchanges appeared to bear on the issues arising for my decision and none have impinged at all on my conclusions.

I shall be grateful for the assistance of counsel with regard to drawing up an appropriate order (including case management directions) and on all questions as to costs.