Russian Commercial Bank (Cyprus) Ltd v Khoroshilov

This is the return date of injunctions granted on without notice applications by Nicola Davies J on 27 April 2011. At this hearing, Mr Fedor Khoroshilov and two of his companies (together “the applicants”) have applied for the injunctions to be extended until the final resolution of his claim at trial, to include any appeal. His claim is to set aside consent judgments and an arbitration award on the ground of fraudulent misrepresentation by the respondent bank, and he says that the court should hold the status quo until the issue is decided. The respondent on the other hand wants to be in a position to enforce the judgments/award and opposes the continuation of the injunctions on the ground of delay in applying for the injunctions, lack of fortification, no serious issue to be tried, material non-disclosure, and the balance of convenience.

Many of the facts are disputed, and it is not the function of the court on this application to resolve them. In brief, the background is as follows. The applicants are Mr Khoroshilov, who is a Russian businessman, and two of his companies, Talon Enterprises Limited (“Talon”) and OOO Obneftegas (“ONG”). Talon owns a 75% shareholding in a company called OJSC-Tekhneftinvest (“TNI”), which also features in this application. ONG owns 100% of the shares in a company named Kondaneft. The companies are, broadly speaking, involved in the business of acquiring oil exploration rights in Russia and seeking to exploit those rights. The respondent is Russian Commercial Bank (Cyprus) Limited (“RCB”), which is a subsidiary of VTB, which is Russia’s second largest bank (where appropriate I refer to them collectively as “the bank”). Both VTB and RCB lent substantial sums to TNI, ONG and their respective subsidiaries pursuant to various loan agreements. I will come to the details later, but note at this point that these have given rise to recovery proceedings in the Russian courts.

Two of the loans were subject to English law and jurisdiction. In two actions commenced in the Commercial Court in August 2009, RCB sued Talon as borrower on the 2005 loan agreement, and sued Mr Khoroshilov as guarantor of the 2007 loan agreement with ONG (neither of which loans had been repaid). Mr Khoroshilov and his companies filed substantial defences and counterclaims including alleged promises for further financing. At about the same time as bringing the actions, RCB commenced LCIA proceedings in August 2009 against ONG.

An aspect of the case concerned an Option Agreement entered into by Talon in October 2005 with a Cyprus company called Pancia Ltd. Talon’s defence was that an oral agreement had been made by Mr Khoroshilov with VTB’s Mr Levin and/or Mr Puchkov in September 2006 to the effect that the bank would “continue providing finance to Talon/TNI sufficient to enable it to reach a point in its business cycle at which funding was no longer necessary”. Talon alleged that this oral agreement was made in return for an early exercise of the option in about October 2006 under which Pancia was paid US$114 million including US$94 million in cash by Talon in return for its 20% shareholding in TNI. RCB disputes that it requested an early exercise of the Option Agreement. It says that this was part of the Khoroshilov parties’ corporate restructuring and refinancing that took place in September 2006. In the English proceedings, Mr Khoroshilov put in issue the honesty of bank officers over the Pancia matter, in particular that of Mr Andrei Puchkov, who is Deputy Chairman of VTB, by amending his Defence and Counterclaim to allege that Mr Puchkov had been deceitful in relation to Pancia.

The two Commercial Court actions were listed for a 10-12 day trial before Christopher Clarke J commencing on 28 June 2010. At that time the ONG arbitration was due to start in October 2010. On the third day of the trial, Mr Khoroshilov produced documents from unidentified private investigators concerning the ownership of Pancia which led to the trial being adjourned.

There is little or no relevant dispute about what happened immediately after the adjournment. According to his evidence, at the June 2010 hearing Mr Khoroshilov talked with Mr Puchkov, and they later talked on the phone, and they decided to see if a settlement could be reached. Mr Khoroshilov told him that he was negotiating with a Chinese investor called Cosmopolitan to refinance his companies’ borrowing from the bank. Meetings took place in Moscow on 19 July, 23 July and 2 August 2010 between Mr Khoroshilov’s sister Elena, and his lawyer Ms Elena Soboleva, and on one side, and Mr Puchkov and other representatives of the bank on the other. According to Mr Khoroshilov’s 4^th witness statement, Mr Puchkov orally represented to him and his representatives that if he submitted to judgment in the English actions and to an award in the arbitration in the full amounts claimed by RCB, the bank “would permit me to refinance the TNI Group companies via investment from Cosmopolitan and facilitate and cooperate with any arrangements which I might make to procure such investment”. Despite his history of conflict with the bank, he says he remained hopeful that Mr Puchkov would keep his promise. The fact that the bank took steps to adjourn a hearing due to take place in a Russian court the following day (3 August 2010) to do with the administration/winding up of TNI encouraged him, Mr Khoroshilov says, to agree the terms and admit liability and withdraw his counterclaims. However, his case is that in fact the representation he says that Mr Puchkov made was false and fraudulent.

Mr Puchkov disagrees with this account. He says that he felt that the bank was in a strong position, and that the only acceptable course would be for the defendants to submit to judgment in the English proceedings. He said that if they did this, the bank was willing to allow them time to try to find a party to buy all of Mr Khoroshilov’s assets and thereby repay, or at least partially repay, the bank’s unpaid loans. The issue, he says, was how much time should be allowed for that purpose, and they eventually agreed nine months. He denies making the representation alleged, and denies any fraud on his part.

In any case, agreement was reached on nine months, and on 2 August 2010, consent judgments were entered in the Commercial Court proceedings in favour of RCB against Talon and Mr Khoroshilov in the sums of US$136,008,564.76 and US$291,360,264.11 respectively. The arbitration proceedings were included in the agreement, and an award was made by consent against ONG in the sum of US$291,360,264.11 on 24 November 2010 (I am told by the applicants that the delay was because of some outstanding issues concerning the payment of the LCIA fees). As agreed, the terms of the judgments and the award provided for a stay of execution until 2 May 2011 to give Mr Khoroshilov the opportunity to re-finance his indebtedness to the bank.

On 3 August 2010 (it carried the date 2 August 2010), Mr Khoroshilov’s sister and Mr Puchkov signed a Protocol. The Applicants describe it as no more than a framework for future steps. Mr Puchkov says that it included everything that Mr Khorosholov’s team had told the bank that they wished to include, and that it is wrong to say that the bank agreed or promised anything that falls outside the borders of the document. In its terms, it provides for the settlement by TNI of the debts owed to the VTB group (including RCB) not later than 2 May 2011. It records that the parties shall take measures to introduce “external management procedures” (which are akin to English administration procedures) in relation to the companies. As regards criminal proceedings, the bank was to give the authorities notice of the arrangements which had been reached with respect to the settlement of the debt.

Negotiations continued thereafter with Cosmopolitan, including meetings in Hong Kong. There is considerable dispute as to the course of the negotiations, in which various intermediaries were involved. It is in contention whether or not they were Mr Khoroshilov’s agents. The applicants say not, and complain that they felt excluded from negotiations carried on by the bank. According to Ms Elena Khoroshilov, negotiations changed for the worse in November 2010, when she says “Cosmopolitan showed little enthusiasm in the deal”. Nevertheless, Term Sheets were exchanged between the bank and Cosmopolitan, the last being in January 2011. Some but not all were copied to Mr Khoroshilov or his lawyer. According to him, by the end of February 2011, it was clear to him that “Mr Puchkov’s conduct had sabotaged the chances of what was likely to be a successful deal with Cosmopolitan”.

At about the end December 2010, the applicants say that Mr Khoroshilov instructed investigators to resume inquiries into the Pancia deal. He says he received the first tangible evidence from them on 8 April 2011. He says that since 29 April and 2 May were bank holidays, the matter had to be heard before then, since the stay expired on 2 May 2011. That explains, the applicants say, the timing of the without notice application for the injunctions on 27 April 2011, made just before the stay expired. By their terms, the injunctions restrained RCB from enforcing the judgments/award until the return date (in other words the present hearing). They were granted on the basis of the applicants’ contention that the judgments and the award were obtained by the alleged fraudulent misrepresentation on RCB’s part which I have set out above. The applicants said that they thought that it was highly improbable that any damages which RCB could suffer could be anything other than nominal, whereas the prejudice to the applicants would be irreversible. As I have indicated, all these points are disputed by RCB, which makes a number of submissions why the injunctions should not be continued. It should be noted that since the injunction was granted a considerable body of further evidence has been placed before the court by both sides. The issues I have to decide are as follows.

Delay in making the without notice application

The parties had been in litigation up to trial in England, and their English lawyers were in communication after the settlement on 2 August 2010. There was no difficulty in making contact. By letter of 24 March 2011, the applicants’ lawyers said that they were “investigating a number of matters of grave concern which may justify a further order against your client”. By letter of 29 March 2011, the bank’s solicitors replied saying that they were not aware of any such matters, and asking to be given adequate notice of any application. Nevertheless, RCB was given only one hour's notice of the application for the injunctions on 27 April 2011. (Leading Counsel for RCB was able to attend without papers or instructions but the hearing was agreed to be on an ex parte basis.) The application was made in vacation, and was made to the vacation judge.

The timing is explained by the applicants by reference to the Easter holiday period that immediately preceded the application, and the fact that 29 April and 2 May 2011 were bank holidays (because of the royal wedding). However, that leaves unexplained why the applications were not made earlier, and why no notice was given to the bank. As to the former, it is said that the applicants are short of money, and that their solicitors were only put in funds just before Easter, and that preparation for the applications took about a week. No explanation (or no good explanation) has been given for the failure to give notice to the bank’s solicitors. The timing suggests that the applications were made to come on just before the stay which had been agreed on 2 August 2010 (and incorporated in the terms of the consent judgments and the arbitration award) expired on 2 May 2011, in circumstances in which the bank would effectively be deprived of the opportunity to be heard.

In answer, the applicants say that by the end of February 2011, they were considering a possible application to the English Court to set aside the settlement, but were not yet in a position to do so. They say that Mr Khoroshilov received “the first tangible evidence from my UK investigators on 8 April 2011”. A number of documents were exhibited to his fourth witness statement of 27 April 2011. These documents (to quote the applicants’ written submissions for this hearing) “suggest that Mr Puchkov was the ultimate recipient of the [Pancia] $114m and that the arrangements about Pancia were kept secret from the bank’s Credit Committee, perhaps because Mr Puchkov did not want the bank to know about his connections with Pancia”.

I shall have to come back to this point in relation to non-disclosure, but for the moment I am concerned with issues of timing. Delay is relevant as a discretionary matter so far as the injunction relates to the consent judgments. It also raises a jurisdictional issue so far as the arbitration award is concerned. The award is challenged under s. 68(2)(g) Arbitration Act 1996, as having been “obtained by fraud”. By s. 70(3), the application must be brought within 28 days of the date of the award. That period expired on 23 December 2010. In asking the court to intervene under the provisions of s. 44 (by granting an injunction under s. 44(2)(e)), the applicants (specifically ONG which was the respondent in the arbitration) accept that they must show that there should be an extension of time. That question was left over by the court on 27 April 2011, but both parties are agreed that it must be decided by the court now at the return date (though they disagree as to the proper outcome).

It was held in Kalmneft JSC v Glencore International AG [2001] 2 All ER (Comm) 577, Colman J, that extensions of time to bring applications under s.68 to set aside awards are determined under s.80(5) and the provisions of the CPR. In a passage referred to with approval by the Court of Appeal in Nagusina Naviera v Allied Maritime Inc [2002] EWCA Civ 1147 at [38], he said at [59] as follows:

“ … although each case turns on its own facts, the following considerations are, in my judgment, likely to be material: (i) the length of the delay; (ii) whether, in permitting the time limit to expire and the subsequent delay to occur, the party was acting reasonably in all the circumstances; (iii) whether the respondent to the application or the arbitrator caused or contributed to the delay; (iv) whether the respondent to the application would by reason of the delay suffer irremediable prejudice in addition to the mere loss of time if the application were permitted to proceed; (v) whether the arbitration has continued during the period of delay and, if so, what impact on the progress of the arbitration or the costs incurred the determination of the application by the court might now have; (vi) the strength of the application; (vii) whether in the broadest sense it would be unfair to the applicant for him to be denied the opportunity of having the application determined.”

It is submitted by the applicants that the arbitral tribunal was unable effectively to act before 2 May 2011 because one of its members was away, and the tribunal could not therefore be constituted before that date: reliance is placed on s. 44(5), which limits the power of the Court to grant relief to such circumstances. The extension of time is sought on the basis that a substantial injustice would be done if the court were not to extend time, since the arbitrators would not have the opportunity of assessing whether or not to set aside the award before the bank took steps to enforce it.

In submitting that there is no proper basis for the court to extend time to challenge the award RCB relies on:

In my view, there is force in each of these points. It is true that this is not a case in which the arbitration was proceeding in the meantime. Nonetheless, the delay in making the application was substantial, the applicant had the information necessary to make it much earlier (contrary to the submissions that have been made), and it cannot be said that the respondent caused or contributed to the delay. I will have to come back to the question of prejudice, but note at this point that the bank asserts prejudice in its submissions on the balance of convenience. The strength of the application is best considered under the heading of serious issue to be tried. I shall therefore express my conclusion as to whether (in the broadest sense) it would be unfair to the applicant to be denied the opportunity of having the application determined when I have considered these other issues.

Fortification of undertaking in damages and non-disclosure as to value of bank’s security

At the without notice hearing, the applicants were not required to reinforce their undertaking in damages by providing security, and made no offer to do so. That position is maintained at the present hearing. Essentially, they submit that the evidence shows that the value of the assets available to satisfy the indebtedness to the bank is significantly in excess of such indebtedness. The bank disputes this, and claims that there was significant non-disclosure as to the value of its security.

So far as the numbers are concerned, the applicants say that the value of the assets is US$4.2 billion. This figure comes from a report from DeGolyer & McNaughton, a company which they say (and I accept) is a leading specialist in the field, and which values oil and gas assets in accordance with Western classifications approved by the Society of Petroleum Engineers. The report is dated 31 December 2009 and was produced on 23 April 2010. I shall come back to this.

As to the amount of the indebtedness, as stated in the applicants’ written submissions, it is “common ground that the total claimed in the two actions and the arbitration is $510,129.77”. There is however other bank debt outstanding, and for the purposes of the application, the applicants are prepared to proceed on the basis of the bank’s assertion that they owe the bank a total of US$2.1 billion. To put it precisely, the applicants accept for the purpose of these applications that, as at June 2011, the judgments which RCB and VTB have obtained against TNI and ONG and their subsidiaries total US$2.1 billion. Of that sum, approximately US$1.5 billion is due pursuant to judgments obtained in Russia under separate loans from those in issue in the English Court, in respect of which final appeals have been dismissed. VTB also has a judgment dated 16 October 2009 in Russia against Mr Khoroshilov under a guarantee in the sum of over US$70 million.

The position taken by the applicants, as I understand it, is that they are not in a financial position to fortify their cross-undertaking in damages by way of a bank guarantee, or otherwise. I asked Mr Michael McLaren QC, counsel for the bank, what amount he would regard as adequate. Perhaps unsurprisingly, he did not enter into the discussion by suggesting a figure. In fact, I doubt that much turns in this case on the presence or absence of fortification. The substantial questions that arise about the value of the assets are whether (as the bank asserts) the position was misrepresented to the court on the making of the application, and in particular whether the bank is in fact fully secured, which is relevant when considering the balance of convenience. I shall deal with these issues under that head.

No serious issue to be tried

It is not in dispute that to maintain the injunctions, the applicants must show that there is a serious question to be tried (American Cyanamid Co v Ethicon Ltd [1975] AC 396). Their case (which is now pleaded) can be summarised as follows. On 2 August 2010, Mr Puchkov orally represented to Mr Khoroshilov’s representatives that, if he and Talon submitted to judgment in the two actions and if ONG submitted to an award in the arbitration in the full amounts claimed by RCB, it would permit Mr Khoroshilov to refinance the TNI companies via investment from Cosmopolitan and would facilitate and cooperate with any arrangements which Mr Khoroshilov might make to procure such investment. At the time of making those representations, it is said in the applicants’ written submissions that the bank intended to permit him to do this. On that basis, he and his companies submitted to judgment and to the award of the arbitrators, and RCB agreed not enforce them until 2 May 2011. Their case is that these representations were false and made fraudulently, and that RCB’s intention always was to double-cross Mr Khoroshilov, Talon and ONG, by seeking to deal with Cosmopolitan to the exclusion of Mr Khoroshilov and his interests so that the debts could not be repaid before 2 May 2011, and then to seize the entirety of his business which, it is said, is worth many times the debt owed. Further, in the event, the bank did not permit Mr Khoroshilov to refinance the TNI and ONG companies via investment from Cosmopolitan, and they neither facilitated nor cooperated with any arrangements which Mr Khoroshilov might make to procure such investment; but, on the contrary, they successfully frustrated any such attempts by Mr Khoroshilov.

So far as the evidence is concerned, it is submitted that the applicants have at least an arguable case on the merits because (1) Mr Khoroshilov actually told his solicitor that the misrepresentations had been made at the time they were made. (2) She told another partner in her firm (Mr Simon Moore) at the same time that Mr Khoroshilov had told her that the misrepresentations had been made at the time they were made. (3) He has a credible reason for not making the application for the injunctions earlier (impecuniosity and not wanting to jeopardise the negotiations). (4) Both his sister and his Russian lawyer have given evidence explaining why they did not provide a written record of the misrepresentations. (5) Mr Khoroshilov has provided a credible account of why he agreed without there being such a record (the imminence of the winding up meeting of the TNI Group; the bank’s power and its refusal to allow any more time).

As to the negotiations themselves, the applicants say that the evidence shows that the bank was never prepared to accept less than US$850m for the indebtedness (mostly it required US$900m) and insisted upon unreasonable demands, such as a deposit of US$425m only refundable in very restricted circumstances, and a sale on an “as is” basis without permitting a realistic period for the stringent due diligence on which any buyer would insist when the sale was on such a basis.

The bank submits that there is no serious issue to be tried in respect of this case. It is said that there is no evidence that at the material time, namely as at 2 August 2010 (when the representation was allegedly made), RCB/Mr. Puchkov lacked the “represented” intention, or had an intention to frustrate any deal. Even if Mr Puchkov lied in relation to Pancia, that is of no probative value as regards an alleged misrepresentation years later. Further, it is said that the evidence shows clearly that the bank did cooperate and take a constructive approach to the refinancing following the meeting on 2 August 2010. In particular, it offered to take a very substantial reduction on the face value of the debts owed to the bank by Mr Khorosholov’s companies. The reason that the negotiations with Cosmopolitan did not result in an agreement, it is said, was that Mr Khorosholov demanded too much for his shares. Further, it is said that the terms of the alleged representation lack credibility. No banker would promise to facilitate and to cooperate with “any arrangements which [a debtor] might make to procure investment”.

It is also said that there is no evidence that the alleged representations on 2 August 2010 were in fact made at all. The bank places particular reliance on the fact that no such term appears in the only document recording what was agreed at the 2 August 2010 settlement meeting in Moscow (which “Protocol” was prepared at the request of, and signed by, the Khoroshilov Parties after having been reviewed by their Russian lawyers). The Protocol was entitled: “MINUTES of a meeting to settle the debts of companies in the TNI group”. While reference was made to a number of things that RCB would do (such as taking all necessary steps to introduce external management to TNI), no mention was made of the alleged representation now alleged by the applicants.

There is a mass of evidence before the court by which both sides seek to make good their case. I accept the bank’s submission that whether the applicants can show that there is a serious question to be tried has to be seen in the light of the fact that the claim is to set aside consent judgements (and an arbitration award) on the basis that they were obtained by fraud. Plainly, there is a high hurdle to be surmounted, and there is (in my view) force in the bank’s submission that Mr Khoroshilov’s pleaded case consists of little more than an assertion of fraud. Despite the weight that has been placed on it in submissions, there is no reference in the pleading to the Pancia issue at all. On the other hand, it is no part of the court’s function at this stage to weigh the evidence and draw factual conclusions. As to whether the Cyanamid threshold is crossed, the following points seem to me to be of particular relevance.

It is at least credible to suppose that Mr Puchkov encouraged Mr Khoroshilov in the expectation that the bank would cooperate in a refinancing by Cosmopolitan (indeed I am not sure to what extent this is denied). It is harder to see much credibility in the representation that Mr Khoroshilov must prove to succeed in his claim—namely that Mr Puchkov in fact intended on 2 August 2010 to double-cross him. I further agree with the bank that omission of any reference to facilitating refinancing in the terms of the Protocol is significant, since it has the appearance of a document recording terms that the parties were prepared to put their names to.

On the face of it, there is also force in the points made by the bank as regards the course of the negotiations. On the one hand, it is correct that the negotiations did not result in an agreement with Cosmopolitan, but on the other hand, the evidence that this was because the bank sabotaged the negotiations seems thin. It is relevant in that regard that Mr Khoroshilov was asking Cosmopolitan for substantial sums—he was asking for between US$1.5 to US$2 billion for his shares in September 2010, and US$1.85 billion in January 2011. In his fifth witness statement of 3 June 2011, he indicates that by April 2011, in response to a message from Mr Borovskiy (one of the intermediaries involved in the negotiations), he would have been prepared to accept US$200 million (but never received any written offer).

The other side of any deal with Cosmopolitan involved the incoming investor taking over debt owed to the bank with a value of about US$1.5 billion including accrued interest. A key component of any deal was the discount which the bank was prepared to accept. Here, there is documentary evidence in the form of Term Sheets some but not all of which were copied to Mr Khorosholov or his lawyer. As one would expect in a negotiation, the numbers the bank was prepared to accept varied. The applicants point out that the package the bank proposed also contained potentially onerous provisions as regards a deposit. Apparently, Cosmopolitan said that it was prepared to offer around 50% of the value of the debt. The bank began in October 2010 asking for US$900 million, but by the time of the last Term Sheet (21 January 2011), Cosmopolitan’s figure of US$750 million appears in the draft “to be discussed”. The amount of the proposed deposit is also substantially reduced from the first Term Sheet, though the applicants point out that the terms as to refund may not be as generous to the incoming investor. On the face of it, there is force in the bank’s submission that the documents appear to show a negotiation in which the bank was prepared to accept a considerable discount on its debt, but that the parties were unable to agree terms that were sufficiently attractive to the incoming investor.

On the other hand, there is the evidence of the applicants themselves that the bank did sabotage the negotiations. In addition to that of Mr Khorosholov, this case is supported by the witness statements of his sister, and his lawyer, Ms Soboleva, who were both involved in the negotiations in Hong Kong. They give details of meetings and conversations, including a specific conversation on a flight from Hong Kong to Moscow, to make their case good.

I express my conclusion in this way. In my view, on the evidence currently before the court, the applicants’ underlying claim to set aside the consent judgments (and the arbitration award) is not strong, in particular because such documentation that the court has seen does not lend support to it. But I cannot reach the conclusion that there is no serious question to be tried—that is a relatively low bar for applicants for injunctive relief to surmount. Whether the claim is justified or not can (in my view) only be resolved at trial, if the case gets that far.

Non-disclosure and misrepresentations

There is no dispute as to the applicable principle. Bingham J’s statement of principle (in a case of a freezing order) has been applied in subsequent authority. In Siporex Trade SA v Comdel Commodities Ltd [1986] 2 Lloyd's Rep 428 at 437 he said:

“The scope of the duty of disclosure of a party applying ex parte for injunctive relief is, in broad terms agreed between the parties. Such an applicant must show the utmost good faith and disclose his case fully and fairly. He must, for the protection and information of the defendant, summarise his case and the evidence in support of it by an affidavit or affidavits sworn before or immediately after the application. He must identify the crucial points for and against the application, and not rely on general statements and the mere exhibiting of numerous documents. He must investigate the nature of the cause of action asserted and the facts relied on before applying and identify any likely defences. He must disclose all facts which reasonably could or would be taken into account by the Judge in deciding whether to grant the application. It is no excuse for an applicant to say that he was not aware of the importance of matters he has omitted to state.”

RCB has a number of complaints in this regard which lead, it says, to the conclusion that there has been serious non-disclosure and/or misrepresentation in obtaining the without notice injunctions on 27 April 2011, and that this is not a case where the injunctions should be re-granted. The first question is whether there was any such material non-disclosure and/or misrepresentation, and if so, the second question is as to its effect.

Was there non-disclosure and/or misrepresentation on making of the application?

A considerable number of alleged material non-disclosures and/or misrepresentations are identified by RCB in its submissions. Some are more significant than others. It is important to make absolutely plain that no criticism is made of counsel who made the application to the judge (who was not trial counsel and who had only been instructed on 21 April 2011) nor of the applicants’ other lawyers who had to prepare a difficult and complex application in a short period of time. However given the 2 May 2011 deadline they should have been instructed earlier, and as the passage cited from Siporex v Comdel shows, the fact that they personally were unaware of matters that should have been disclosed does not affect the application of the principle stated above.

First, it is said that the applicants misrepresented the position as regards the negotiations with Cosmopolitan. Documents evidencing the true course of negotiations with Cosmopolitan, in particular the Term Sheets were not disclosed. It is said that there was material non-disclosure as to the reasons why the deal with Cosmopolitan did not proceed, particularly the high sums that Mr Khoroshilov was asking for his shares, and the amount of the discount that the bank was prepared to contemplate. As to the facts in this respect, see above. It is said that the negotiations with Cosmopolitan were wrongly represented to the court as intended to be tripartite, with the Khoroshilov parties not to be excluded from any part thereof. This was not a fair and balanced description. The applicants now accept that negotiations were intended to be a two-stage process, first, the sale by the bank of the indebtedness of the TNI Group to Cosmopolitan, and (2) the sale by Mr Khoroshilov of his shares to Cosmopolitan. This, it is submitted, severely undermines their allegation at the ex parte hearing that RCB wrongfully excluded them from the negotiations and/or did not cooperate.

The applicants accept that the documents identified by the bank were not exhibited or shown to the court. But they say that there has been no misrepresentation or non-disclosure because their case has never been that they knew nothing whatever of the negotiations between the bank and Cosmopolitan, but rather that there were crucial meetings and exchanges from which they were deliberately excluded. Exhibiting some documents without providing full disclosure of all the documents in the bank’s possession or control relating to the negotiations tells the court nothing of significance. Many of the documents were copied to intermediaries, neither of whom has ever been the agent of Mr Khoroshilov or of any of his companies. The failure to disclose such documents as the applicants possessed at the time of the application was entirely innocent.

The bank has produced an annex to its written submissions comparing the evidence before the court on 27 April 2011 with its case now as to the negotiations with Cosmopolitan. It is certainly noticeable that the case as put to the court on 27 April 2011 emphasised the “tripartite” nature of the negotiations. That is to say, the negotiations were to take place between Cosmopolitan, the TNI Group, and the bank, whereas the complaint was that meetings were taking place bilaterally between the bank and Cosmopolitan. The applicants now accept that the correct position was that the bank debt and the price for the shares raised separate issues to be dealt with in two stages. While this does not in any way destroy a case to the effect that the bank sabotaged the deal, if that can be made good on the evidence, I agree that it does at least put the negotiations into a different context. I consider that there is force in the submission that the facts as to the negotiations were not put before the judge in a balanced way (see for example the reference in his fourth witness statement to “independent secret negotiations” between the bank and Cosmopolitan). On balance however, I am not convinced that there was any material non-disclosure or misrepresentation in that regard. It would clearly have been desirable to state explicitly that it was at least arguable that the applicants would not necessarily be expected to be involved at the stage in the negotiations when the bank was discussing the write-down of its debt. But the fact is that it was difficult to present this part of the case since the facts as to the negotiations are complex and highly contentious, and it remains difficult to follow what happened even after further evidence. I do not think that this issue in itself gives grounds for discharging the injunction.

Second, the bank relies on the fact that court’s attention was not drawn to the fact that the Protocol of 3 August 2010 (which was the only document drawn up at the time to record what the parties had discussed prior to entering the Consent Orders the day before) made no reference to the alleged representation now relied on. The applicants’ response is that the Protocol was an action plan, not a record of the meeting, and there was no reason to expect it to include representations without which there would have been no action plan. The document, it is said, looked forward, not back. There was, therefore, no reason to show the court this document.

I accept the bank’s case in this respect. It was, in my view, a reasonable assumption that the bank would rely on the Protocol not just as an action plan, but as evidence of what had been agreed, and it does rely on it in this way. The fact that no reference is made in the document to the alleged representation by Mr Puchkov is arguably a material factor in determining whether or not such a representation was made. I should emphasise that the document is referred to in Mr Khoroshilov’s fourth witness statement and was exhibited—there was no attempt to conceal it in any way. But as the authorities show (see Siporex v Comdel above), for a centrally important document, this is insufficient disclosure on an ex parte application. The Protocol should have been specifically drawn to the court’s attention stating that it would or might be relied on by way of defence, and the failure to do this amounts in my view to material non-disclosure.

Third, the bank says that there was a one-sided presentation of "background" evidence to the court. It says that given that issues of credibility and fraud arose, the applicants were obliged to draw to the attention of the court any significant material to the credit of Mr. Puchkov or detriment of Mr. Khoroshilov, in order to give the court a reasonably balanced and fair picture. Particular reliance is placed on the following. Reference was made in Mr Khoroshilov’s witness statement to the assertion that in 2009, Mr Puchkov and the bank made threats to fabricate the basis of a criminal investigation into him and his companies unless he transferred control of his interests in the TNI Group to VTB. This allegation was strongly denied by the bank, and was the subject of dispute in the witness evidence prepared for trial.

The applicants’ response is that at the making of the application the court was repeatedly told that “so Mr Khoroshilov says”, which made it plain, it is submitted, that the bank did not accept and would not accept that such threats had been made. No one, it is said, would expect the bank to accept such an allegation. If the bank had accepted such an allegation, there would have been no application to the court.

There is, as a matter of common sense, some force in this response. Nevertheless, in putting before the court the allegation that the bank had fabricated criminal charges against Mr Khoroshilov, I consider that it would have been desirable to state expressly that this allegation had been strongly denied by the bank, and had been the subject of witness statements prepared for the trial. However on balance, and bearing in mind what was said, I do not think that this amounted to a misrepresentation or a material non-disclosure.

Under the same heading, the bank says that the court should have been told that Mr Khoroshilov’s counterclaim at trial was founded largely on his assertion that the bank’s actions had led another Russian bank (Sberbank) to refuse his request for refinancing. Again on balance, I consider that the applicants’ response on this point is correct. In short, they say that the circumstances in which Mr Khoroshilov raised the Sberbank issue at trial were very different to the present claim, his complaint there being related to the publication of information about a freezing order made against him, and the effect that this had on his negotiations with Sberbank. I accept his submission that though Sberbank also involved a refinancing, there is otherwise no similarity, and that there was no cause to disclose this matter.

The fourth ground relates to the Pancia issue. This is self-evidently a very serious issue. I have set out the basic factual background above, but the court cannot on this application reach any conclusions as to what are strongly contested factual issues. The allegation made by the applicants is that Mr Puchkov and other unnamed bank officials benefited personally from the payments made in October 2006, the amounts mentioned in the evidence varying between US$90m to US$114m. The applicants say that Mr Khoroshilov received “the first tangible evidence from my UK investigators on 8 April 2011”. This, as I have set out above, was an explanation given for the timing of the application of 27 April 2011. A number of documents were exhibited to his fourth witness statement of 27 April 2011. These documents (to quote the applicants’ written submissions for this hearing) “suggest that Mr Puchkov was the ultimate recipient of the [Pancia] $114m and that the arrangements about Pancia were kept secret from the bank’s Credit Committee, perhaps because Mr Puchkov did not want the bank to know about his connections with Pancia”.

The way it was put to the court at the hearing on 27 April 2011 was as follows: “So it is not really until we come to 8th April [2011] when we find the information which, as far as Mr. Khoroshilov is concerned, indicates plainly that Mr. Puchkov was lying about the Pancia deal. In the light of that, he came to the conclusion that he had had false representations made to him on 2nd August 2010 and beforehand, and that the Bank had always intended to take the money when they could and not to cooperate – indeed to frustrate the attempts to refinance and themselves to double cross Mr Khoroshilov…”.

It was on that basis that the injunction was granted. It reflects the nature of the applicants’ case in this respect, which is that the representations made by RCB on 2 August 2010 were (again to quote the applicants’ written submissions for this hearing) false and made fraudulently, and that RCB’s intention always was to double-cross Mr Khoroshilov. It is put as a fraudulent representation made at that time— the applicants do not contend that there was an agreement by the bank in terms of Mr Puchkov’s alleged representation. The bank says that there was a failure to identify the way the Pancia issue arises as regards the present claim, and a failure to draw the court’s attention to the lack of any evidence of fraud specifically relevant to the 2 August 2010 representations.

There is a specific point on one of the new documents produced for the hearing on 27 April 2011 with which I need to deal. For the bank, in his second witness statement of 7 June 2011, Mr Leontiy Chernenko (who is an officer of VTB) raises a number of issues as to what purports to be a statement of account issued by Hellenic Bank in Cyprus. This is a significant document because the applicants’ case is that it was only when they got it in April 2011 that they could see the Pancia US$114m going through a bank account linked to Mr Puchkov. Mr Chernenko points out however that the numbers in the credit column of the bank statement do not add up. Specifically, US$25 million and US$65,500,000 are said to total US$92 million, which is US$500,000 short. So, it is said, the document is forged. For the applicants, the factual matters in this respect are dealt with in the ninth witness statement of Ms Chumak, who is their English solicitor. It is said that an explanation is to be found by reference to the fact that this particular copy statement of account is an archived copy. At first blush, that does not appear to be a particularly convincing explanation of the discrepancy. On the other hand, the document does not stand alone, and plainly I cannot make any findings on this application as to whether or not it is a forgery.

The more substantial point that arises on the documents is as follows. The applicants’ case is that the new documents go to Mr Puchkov’s credibility. As such, they are, it is submitted, of critical relevance to the issue whether he made the alleged fraudulent representation on 2 August 2010—which must be proved against him if the applicants are to make good their case that the consent judgments and arbitration award are to be set aside. It is even more important than it originally seemed (it is submitted) because it is relevant to the issue of the bank’s motivation, and, in particular, Mr Puchkov’s motivation.

RCB on the other hand points out that the allegations in relation to Pancia are unrelated in time and subject matter to the representation allegedly made by Mr Puchkov on 2 August 2010. The issue in relation to Pancia they point out arose in the underlying litigation and concerned the question of whether Pancia was owned by or affiliated to the bank. At trial, the Khoroshilov parties had alleged that in October 2005 Mr Puchkov had said that Pancia was so owned, but he denied it in his witness statement. The Khoroshilov parties’ case was that the ownership of Pancia was relevant to the credibility of the witnesses, and in particular whether Mr Puchkov allegedly orally promised in September 2006 that “VTB and/or [RCB] would continue providing finance to Talon/TNI sufficient to enable it to reach a point in its business cycle at which funding was no longer necessary”.

This in itself does not amount to an allegation of fraud, but RCB points out that Mr Khoroshilov amended his Defence and Counterclaim on 2 July 2010 to allege that Mr Puchkov had been deceitful in relation to Pancia. This is an allegation of fraud. Furthermore, there is now evidence in the form of Ms Chumak’s ninth witness statement of 3 June 2011 (so made after the application for the injunctions) as to what the applicants actually thought at the time of the consent judgments about Mr Puchkov’s honesty. She explains that she spoke to Mr Khoroshilov and Ms Soboleva on 2 August 2010. She says that her view at that time (and now) was that Mr Puchkov had a personal motive to “cover up the truth behind the Pancia issue”. She had by then concluded, she said, that what had happened was an illegitimate diversion of US$95 million from the bank’s coffers orchestrated by senior bank officials, including Mr Puchkov. She advised both Mr Khoroshilov and Ms Soboleva against agreeing to the settlement that the bank proposed, explaining “that it was highly risky to trust Mr Puchkov again and it was imperative to record the verbal promises [Mr Khoroshilov says he made] in writing. I said that if Mr Puchkov breached his oral assurances, it would be challenging for Mr Khoroshilov to discharge the Consent Orders and the Final Award, which are silent on this issue. Further, I pointed out that the Bank/Mr Puchkov would have no incentive to honour their assurances after Mr Khoroshilov admitted liability, and that given that Mr Puchkov had lied before, he will lie again”.

Given that this was the factual position, RCB submits that it was misleading for the court on the without notice application for the injunctions to be told by the applicants that there had been a recent discovery in relation to Pancia that led Mr Khoroshilov to the conclusion that Mr. Puchkov was dishonest. It is clear, it is submitted, that this conclusion had been reached prior to the agreement which was concluded on 2 August 2010.

My conclusions are as follows. Given the reliance placed on the Pancia allegation in the application for the injunctions, and its inherent seriousness, it was important that the issue was presented to the court with considerable accuracy. It had to be made clear (see Siporex v Comdel above) that Pancia arises in these proceedings as an issue going to the honesty/credibility of Mr Puchkov, that it is factually related to the issues in the underlying litigation, but factually unrelated to the alleged misrepresentation of 2 August 2010, that being the basis of the claim to set aside the consent judgments and the arbitration award. I consider that the bank is correct to submit that both in the witness evidence and in submissions the impression was given that the Pancia issue was in itself relevant to what was said on 2 August 2010. Further, I consider that the bank is correct to submit that the impression was given that it was only as recently as 8 April 2011 that discoveries had been made in relation to Pancia which led Mr Khoroshilov to believe that Mr Puchkov had been fraudulent on 2 August 2010. For reasons explained above, his alleged dishonesty was well in issue so far as the applicants were concerned by this time. This resulted, in my view, in a significant non-disclosure.

Fifth, points are taken as regards disclosure of the prejudice the injunction would cause, and misrepresentation as to the value of the exiting security. These factual issues are best considered later in relation to the balance of convenience. For the present, it is sufficient to say that I consider that the applicants were wrong to tell the court that the bank would suffer no prejudice by reason of the grant of the injunctions, because the valuation relied upon in support of that proposition was part, but only part, of the complete picture. On the other hand, I do not consider that the position was misstated in a way that amounted to non-disclosure or misrepresentation.

Sixth, it is submitted by the bank that the court should have been told that the defence on the claims on the loan agreements also relied on oral agreements to the effect that the bank would continue to provide finance. It is said that the similarity between that defence and the ground upon which Mr Khoroshilov presently seeks to set aside the judgements/award is striking, and should have been drawn to the court’s attention. In response, Mr Khoroshilov submits that the defences in the actions referred to agreements, not to representations, whereas in relation to 2 August 2010, he does not suggest that there was an actual agreement. The difference, it is said, is critical, because if he had been inventing conversations it would have been an “enormous advantage” to claim that the bank had made an agreement with him that it would assist, as opposed to a mere representation. I find that line of argument unconvincing. Whether proposed as an agreement or a representation, the point remains in substance the same, namely an allegation that the bank said that it would facilitate further finance or refinance. It would have been preferable for the court to know that a similar assertion had been made before, but I appreciate that not everything can feasibly be covered in a without notice application, and in the broader picture I do not regard this as particularly serious or amounting to material non-disclosure.

The effect of the non-disclosure and/or misrepresentation

In the event, I have found proved two misrepresentations/material non-disclosures, the first being that the Protocol dated 3 August 2010 should have been specifically drawn to the court’s attention at without notice hearing, and the second being how the Pancia issue was presented. The applicants submit that the court ought nevertheless now grant fresh injunctions in identical terms. The bank submits that this is not a case where the injunctions should be re-granted.

As to the approach the court should take in such circumstances, the authorities that I have been referred to concern non-disclosure in the context of freezing orders. Such orders are capable of having such devastating effect that the courts place a high duty on a party seeking such an order without notice. It is well established that the general rule is that if the court finds that there have been breaches of the duty of full and fair disclosure on the ex parte application, it should discharge the order obtained in breach and refuse to renew it. It is asserted by the bank (and not disputed on behalf of Mr Khoroshilov) that the same approach applies in the present case, though the application was for an injunction restraining enforcement of the consent judgments/award rather for than a freezing order. Specifically, the bank submits that the correct approach is set out in Arena Corp Ltd v Schroeder [2003] EWHC 1089 (Ch) in which Mr Alan Boyle QC sitting as a Deputy High Court judge summarised the principles as follows at [213]:

“(1)

If the court finds that there have been breaches of the duty of full and fair disclosure on the ex parte application, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial.

(2)

Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order.

(3)

That jurisdiction should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

(4)

The court should assess the degree and extent of the culpability with regard to non-disclosure. It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order. Equally, there is no general rule that a deliberate breach will attract that sanction.

(5)

The court should assess the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court. In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.

(6)

The court can weigh the merits of the plaintiff's claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff's case is allowed to undermine the policy objective of the principle.

(7)

The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

(8)

The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence.

(9)

There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances.”

These specific considerations aside, the court has, as he went on to point out, a “single discretion”, to be exercised in accordance with all the circumstances of the case, taking account of these various factors as appropriate. The judgment has been rightly described as “a thorough and valuable review of the authorities” and been relied on by other judges since (see The Complete Retreats Liquidating Trust v Geoffrey Logue [2010] EWHC 1864 (Ch) at [60], Roth J).

In its submissions, the bank relies on the general rule that the court should discharge an order obtained in breach and refuse to renew the order until trial, and that the jurisdiction to continue or re-grant the order should be used sparingly. It contends that a high degree of culpability attaches to the non-disclosures/misrepresentations demonstrated. Mr. Khoroshilov knew the true position but chose not to be full and frank. The matters not disclosed to the court were highly important and significant. The court’s ability to weigh the merits of the applicants’ claim albeit without conducting a simple balancing exercise does not favour a re-grant of the injunction (because the Khoroshilov parties’ claim lacks merits/credibility). The policy objective of upholding the public interest in requiring full and frank disclosure is, it is submitted, a powerful factor against the re-grant of any injunction.

I accept that the Arena principles apply to the present case, but keep in mind that they are concerned with the case of a freezing injunction (and Anton Piller search order) in which the nature of the order is draconian, and there are particularly strong policy reasons for refusing to renew an order obtained in breach of the required standard. I also keep in mind the fact that I have only accepted part of the bank’s case in this regard. Nevertheless, both matters I have found proved were important, and there is, in my view, a significant degree of culpability on the part of the applicants in this respect. The injunctions related to consent judgments entered after a trial had begun (and an arbitration award). There is a significant public interest in such circumstances, and it would not, in my view, be disproportionate to decline to renew the injunctions. Nevertheless, I bear in mind that there is a “single discretion” to be exercised, and before reaching a conclusion must give consideration also to the balance of convenience.

Balance of convenience

I begin by summarising the parties’ respective cases in this regard. The loans to Talon and ONG in respect of which the consent judgments/arbitration award were entered are supported by security of various kinds, including pledges of the shares in the companies to the bank. The applicants’ case is that the bank has suffered and can suffer no prejudice whatever and can only sustain nominal loss (at most) by the grant and maintenance of the injunction, not least because it has ample security for the alleged indebtedness. RCB’s case is that if the injunctions are not set aside and the applicants were later to fail to have the judgments and award set aside, RCB (and indeed third parties such as VTB and other creditors) would suffer irreparable harm which the applicants would not be able to compensate.

The background

Because the judgments and the arbitration award are only part of a complicated overall picture as between the Khoroshilov companies and the bank which involves ongoing insolvency proceedings in Russia, it is necessary to say something more about the background (with the caveat that the details are not easy to evaluate and the precise details may not matter). While the English litigation was progressing, VTB made demands in respect of entirely separate loans and guarantees, which are subject to Russian law and jurisdiction. The applicants accept for the purpose of the present application that, as at June 2011, the judgments which RCB and VTB have obtained against TNI and ONG and their subsidiaries total US$2.1 billion. Of that sum, approximately US$1.5 billion is due pursuant to judgments obtained in Russia (under separate loans from those in issue in the English Court) in respect of which final appeals have been dismissed. VTB also has a judgment dated 16 October 2009 in Russia against Mr Khoroshilov under a guarantee in the sum of over US$70 million. The balance consists of the English judgments and award. I am told that no sum has been paid by the Khoroshilov parties in respect of any of these judgments.

The Russian judgments obtained by VTB/RCB and judgments of other creditors have led to the instigation of insolvency proceedings in Russia in respect of TNI and ONG (as well as their subsidiaries Yangpur, and Kondaneft) as follows. TNI and its subsidiaries have been in bankruptcy proceedings since 16 December 2009 by order of the Arbitrazh Court of Tyumen Region, when a process known as “supervision” commenced. There have been various hearings, and on 3 June 2010 at a meeting of creditors VTB voted in favour of TNI being wound up. On 15 June 2010, the court hearing was adjourned to 3 August 2010.

It was that hearing that was further adjourned as a result of the settlement reached between Mr Khoroshilov and the bank. On 7 October 2010, the court ordered a bankruptcy procedure called External Management (for nine months the applicants say). A manager was appointed who is answerable to the court. There is a dispute between the parties as to when the current External Management period expires. The applicants say that the plan of action is for a period of 18 months, i.e. until 7 February 2012 in order to prepare TNI for a process called “Substitution of Assets”. This involves the assets of the debtor companies being transferred to subsidiaries and then sold, with the sale proceeds being used to pay off creditors, with any surplus going to the debtor company. The bank says that the current External Management period expires on 7 July 2011. It is common ground that there is a further hearing of the court on 7 July 2011 (the timing has partly dictated the date of the present application and the date on which judgment has been given). The applicants say that the hearing is to determine whether the External Management should be extended for a further 9 months. The bank says that the purpose is to consider whether to prolong External Management or commence winding up procedures. It is common ground that winding up would be very disadvantageous because of its effect on the licences to develop the oil fields, without which the companies have no value.

ONG’s subsidiary Kondaneft has been in bankruptcy proceedings since early 2010. On 13 September 2010, the Arbitrazh Court of Khanti-Mansinsk Region placed it in the External Management procedure and ordered that there should be a hearing on 6 June 2011 to consider a report of the External Manager. He then submitted a Plan of External Management including a plan for the substitution of assets, and an application for the extension of the term of the External Management for another 9 months until March 2012. According to the applicants, the court ordered the extension. There is however a dispute in this respect (which I am not asked to resolve on this application) as to whether the approval of shareholders is needed for substitution of assets to take place.

ONG itself was put into bankruptcy proceedings and was placed under the “supervision procedure” on 4 May 2011 as a result of a judgment obtained by VTB against ONG in the Russian courts in February 2011. The first meeting of ONG’s creditors must take place by mid October 2011. Again, there is a dispute between the parties in this respect. The bank says that the 30 day period for filing claims in that insolvency expires on 20 June 2011, although it may be possible for creditors to file at a later stage. It says that while it has not proved in the insolvency, it is not able to participate in creditors’ meetings. The applicants say that RCB and VTB are ONG’s largest creditors by far, and there is nothing to prevent VTB from attending the first creditors’ meeting and voting in favour of future steps in relation to the ONG bankruptcy

As regards Yangpur (which I understand owns one of the four fields that is presently producing oil) and which is the other relevant subsidiary mentioned above, in early 2010 it was placed into the supervision procedure as the first stage of bankruptcy proceedings.

The parties’ respective cases

Against that background, what the parties say is as follows. The applicants submit that the bank is fully secured. Its concern that it is under-secured depends (it is submitted) on the relationship between two figures: (1) the quantum of the indebtedness of the TNI Group to the bank which for the purposes of the application the applicants are prepared to accept as US$2.1 billion; and (2) the value of the TNI Group. The bank’s complaint (it submits) is about the latter, specifically the valuation of the TNI Group at US$4.2 billion. However this comes from a report from DeGolyer & McNaughton which values oil and gas assets in accordance with Western classifications dated 31 December 2009 and produced on 23 April 2010. The figure is based on (1) a valuation of the oil reserves which the TNI Group is exploiting; (2) the estimated cost of that exploitation; and (3) oil prices. This is the process by which all commercial valuers assess the worth of oil fields. The bank’s concern about the first variable is unjustified, the applicants submit, because the valuation of the oil reserves used in the 2009 Report is that independently verified and certified by the Russian State Valuation Committee. There is no issue as to the estimated cost of exploitation, and oil prices are a matter of public knowledge and have been rising. Moreover, the TNI Group has not finished exploiting the oil fields. Unless no new oil at all is found, the fields may yet prove even more valuable. It follows, the applicants submit, that the figure of $4.2bn derived from those three variables is incontrovertibly the minimum value of the TNI Group. Reliance is also placed on the fact that the balance sheet valuations of TNI and Kondaneft for the purpose of the External Management plans show the companies to have a net asset value (US$78m and US$156m respectively). Finally, it notes that in the Term Sheet of 21 January 2011 prepared in the course of the negotiations (see above), the bank itself urged Cosmopolitan to rely on the latest D&M report “more than on any other information.”

RCB takes issue with the adequacy of the assets to cover its indebtedness, and submits that it is suffering prejudice in that:

Both Talon and ONG are in bankruptcy proceedings based on Russian judgments obtained by VTB (and other third party creditors) and these should, RCB submits, be permitted to take their course. The External Managers of TNI are under a legal duty to realise the best price for the assets so the interests of shareholders are protected. The applicants on the other hand will be adequately compensated in damages should they succeed in making their claims good. There is no doubt, it is submitted, that VTB (Russia’s second largest bank) would be good for any damages claim the applicants pursue against it or RCB.

Discussion and conclusions

I start from the assumption for the purposes of this application that the D & M report is prepared by a reputable company, and carries considerable weight. It is the only valuation of the TNI Group drawn to the court’s attention in any detail at this hearing, and it was not available when Gross J granted a freezing injunction against Mr Khoroshilov in October 2009. The US$4.2 billion valuation is the central plank in the applicants’ case. To give further force to the valuation, the applicants rely on the fact that the bank itself commended the valuation to Cosmopolitan in the course of the negotiations. (This is correct, though I think that the bank is entitled to retort that it tends to undermine the applicants’ case that it sabotaged the negotiations.) However, for present purposes the material point as regards the negotiations appears to me to be as follows. By January 2011, the bank was prepared to discuss taking US$750 million for debt which it says was worth US$1.5 billion (that figure is not in dispute for the purposes of this application). The fact that the bank was prepared to take such a large discount suggests, it submits, that the amount of the valuation must be treated with caution. As a commercial proposition, that is not surprising, and I accept it.

Furthermore, there is some evidence that the D & M valuation must be considered in the context of the investment needed to get the fields into full production. Indicative terms sent to Cosmopolitan on 22 September 2010 by VTB Capital estimate that in order to start full production an investment of US$1-1.5 billion would be required. The bank also points out that by 7 April 2011, Mr Koroshilov’s own evidence is to the effect that he was prepared to accept a deal resulting in the payment of US$750 million to the bank and US$200 million to himself (which was far less than he had originally asked for). There is force, therefore, in the bank’s submission that in those circumstances the evidence shows that the D & M valuation of US$4.2 billion is way over the market value of the assets. As against that, it is accepted for the purposes of this application that the total amount of judgments entered in Russia and in England against the Koroshilov parties (including the arbitration award against ONG) is US$2.1 billion, of which approximately US$1.5 billion is due pursuant to judgments obtained in Russia. In those circumstances, while the applicants have shown that the bank does have substantial security for the indebtedness, I do not consider that they have by any means demonstrated that it is fully secured. On the evidence, it appears to me that it may well fall short. Furthermore, the evidence shows that the realisation of the value of the assets is likely to be a complex and time consuming matter. I reject, therefore, the applicants’ primary submission that, in assessing the balance of convenience, the court should proceed on the basis that the bank is fully secured, and for that reason will suffer no prejudice by a continuation of the injunctions.

The parties are agreed that the court cannot resolve on this application the specific matters relied upon by RCB as constituting prejudice in the Russian insolvency proceedings. As I have explained, these are that (according to RCB) the injunction is impeding the process of substitution of assets, because it prevents it voting the shares in TNI, and that (according to RCB) the injunction prevents it from participating in the bankruptcy of ONG, since it cannot prove in the insolvency as a creditor. In any case, these points depend on issues of Russian insolvency law and procedure, which are in dispute, and cannot be resolved at this stage.

Each party offered what it presented as a practical way through in this respect. The bank suggested that, even if the injunction is lifted, it would take a very considerable time before the process of substitution of assets was achieved. A time frame of 18 months was suggested. Only if and when that process was complete might the need for an injunction arise, it was said, because it would be at that point, and not before, that the bank would execute its judgments. Since the parties were agreed that substitution of assets was in their mutual best interests, there is no prejudice in refusing to continue the injunctions at this point in time.

For their part, the applicants offered a variation of the injunction which they say is unnecessary but which will preserve the status quo whilst indubitably avoiding the consequences which the bank says it fears. That would be accomplished by lifting the injunction to the extent of permitting RCB to vote in favour of the extension of the extension of the External Management of TNI, thereby allowing the substitution of assets to progress. Further, the applicants would agree to a variation of the injunction permitting RCB to file its claim in the ONG insolvency and take part as a creditor to the extent of voting in favour of the imposition of External Management on ONG.

I am not persuaded by either of these solutions. The bank’s point is in essence that since both parties agree that the substitution of assets should happen, and that this will take some time, there is no need for an injunction now. But the applicants respond that if the injunction is lifted, the bank may simply sell its shares in TNI. I am not clear whether there is an answer to this response, and have no way of assessing how sale of the shares might affect the timing.

As regards the applicants’ proposal, the proposed variation of the injunctions would result in a complex regime. The amendment (I have taken the wording from an open letter sent by the applicants’ solicitors on 13 June 2011) would entitle RCB to “vote in favour of the extension of the External Management of TNI; and … the adoption and execution of an in accordance with all the stages of the Substitution of Assets identified in the Plan in the form produced by the External Manger of TNI and approved by TNI’s creditors on 14 January 2011”. But it is subject to a proviso that restricting the permission so that it would apply to “such stages [as] are only preparatory to the sale or agreement for sale of any of TNI’s assets, and do not constitute any such sale or transfer of or dealing with any such assets or any agreement for sale or transfer of or dealing with any such assets”. There is a similar proviso as regards the ONG insolvency. The bank is not prepared to agree to any such variation, which it says will leave the outcome at risk. In my view, it is entitled to take that position. It further seems to me that issues might arise as to the application of the provisos, resulting in the English court becoming involved in the Russian insolvency proceedings.

My conclusions as regards balance of convenience are as follows. I start from the position that the bank is not a litigant seeking to enforce loan agreements disputed by the borrower and subject to a counterclaim. That stage has been passed. The applicants have accepted liability in full in respect of the English law loans, and have consented to judgment, and in the case of the arbitration, consented to an award. This settlement came when the dispute was far progressed, coming after the trial had begun. The bank therefore stands in the position of judgment creditor, albeit subject to challenge on the grounds of alleged fraud, a case which I have said raises a serious issue to be tried, but which is not strong. In addition to the English judgments, the applicants are heavily indebted to the bank on judgments obtained in the Russian courts, and insolvency proceedings are well under way in Russia. Although the applicants may be right that risk of a winding up is capable of being managed, there is on the evidence clearly a risk that the imposition of the injunctions may disrupt the orderly resolution of the proceedings. If an order was made to wind up the judgment debtors, the prejudice to the bank would be severe because (as I have explained) the licences to exploit the fields would thereby be put in jeopardy.

I further accept the bank’s fundamental point that it is prejudiced because the injunctions prevent RCB realising its security, which causes it financial losses on a daily basis. The applicants submit that there is no evidence that RCB is incurring borrowing costs, and no evidence of the alleged rate of interest. As to the latter point, the rate asserted by the bank is only 0.4% p.a., reflecting historically low dollar rates, but even that amounts to a loss of US$166,667 per month. As to the former point, in my view the bank is entitled to put a figure on the cost on being kept out of its money, and has done so at a realistic level. If the injunctions are not renewed, the insolvency process in Russia will continue without the restrictions consequent upon a further stay on enforcing the English judgements/award. Should the applicants succeed in setting the judgments/award aside, and succeed in disputing the loans and/or establishing their counterclaim, they can be compensated in damages. It is correct that they will have to look to RCB to satisfy any award in damages, and neither RCB nor VTB has, as I understand it, any UK presence (though I am told that VTB Capital has a substantial presence in this country). On the other hand, VTB is Russia’s second largest bank, and RCB is its subsidiary, and it has not been suggested that its solvency is in doubt. Balancing the various factors, in my view the balance of convenience militates against the renewal of these injunctions.

On 2 August 2010, the applicants agreed a stay of nine months on execution of the judgments/award in favour of RCB, but that time expired on 2 May 2011. For the above reasons, I have come to the conclusion that the balance of convenience is against continuation of the injunctions, which would have the effect of prolonging the stay for an indefinite (and probably considerable) period. In the light of that conclusion, I revert to the question of the effect of the non-disclosure that I have found established. I consider that such non-disclosure also militates against renewing the injunctions granted on 27 April 2011. In the exercise of what has been called a “single discretion”, my conclusion is that they should not be renewed, either in their original form, or in the amended form proposed in the applicants’ solicitors’ letter of 13 June 2011 quoted above.

That leaves for decision the application to extend time to challenge the arbitration award. I have set out the contentions of the parties and the applicable statutory provisions above. The non-renewal of the injunctions does not mean that the applicants cannot pursue their claim to have the consent judgments set aside on grounds of fraud. The issues are (as I understand it) effectively identical in relation to their application to set aside the arbitration award on grounds of fraud. In those circumstances it would be unsatisfactory to deny the applicants the opportunity to have their application to set aside the award determined (see the last of the considerations identified by Colman J in the Kalmneft case referred to above). I shall therefore extend time to bring the application in that respect.

I am grateful to the parties for their assistance, and will hear them as to consequential matters.