National Bank Trust (a company incorporated in Russia) v Ilya Yurov
| Jurisdiction | England & Wales |
| Judge | Mr Justice Bryan |
| Judgment Date | 23 January 2020 |
| Neutral Citation | [2020] EWHC 100 (Comm) |
| Date | 23 January 2020 |
| Docket Number | Case No: CL-2016-000095 |
| Court | Queen's Bench Division (Commercial Court) |
[2020] EWHC 100 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, Fetter Lane
London, EC4A 1NL
THE HON. Mr Justice Bryan
Case No: CL-2016-000095
Nathan Pillow QC, David Davies and Anton Dudnikov (instructed by Steptoe & Johnson UK LLP) for the Claimant
Paul Stanley QC, Tom Poole and Alexander Halban (instructed by Gresham Legal Limited) for the First and Fourth Defendants
Tim Penny QC and Tara Taylor (instructed by Fried, Frant, Harris, Shiver & Jacobson LLP) for the Second and Fifth Defendants
James Willan (instructed by Byrne & Partners) for the Third and Sixth Defendants
Hearing dates: 1, 2, 3, 4, 5, 8, 9, 10, 11, 15, 16, 17, 18, 22, 23, 24, 26, 29, 30 and 31 October 2018, 1, 5, 6, 7, 8, 12, 13, 14, 15, 19, 26, 27, 28, 29 and 30 November 2018
Further written representations: 9, 11 and 15 July 2019, 6, 9 and 12 September 2019, 21 and 23 October 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
THE HONOURABLE
INDEX
A. Introduction
B. The Issues that arise for determination
C. The witnesses and their evidence
D. The pleaded issues
E. The Shareholders and the structure of the Bank
F. The Borrowers and other companies within the network
G. The nature of the Loans and Transactions and the Shareholders' involvement
H. Personal Benefits
I. The CBR
J. Genuineness/Commerciality of particular entities' business
K. The nature of the “balance sheet management” exercise
L. Entitlement to rely on specific matters
M. Russian Law
N. Causation and Quantum Issues
O. Limitation of Liability
P. Time Bar
Q. Assets held by the Shareholders' wives
R. The Loans and Transactions
A. INTRODUCTION
A.1. The parties and the claims
In this trial the Claimant, National Bank Trust (the “Bank”/“NBT”) brings claims under Russian law against its former majority owners, Mr Yurov, Mr Belyaev and Mr Fetisov (the First, Second and Third Defendants) (the “Shareholders”/“YBF”), who were members of its Supervisory Board. The Bank's case is that Mr Yurov, Mr Belyaev and Mr Fetisov orchestrated a massive fraud over many years which it says involved, amongst other things, the Shareholders procuring the Bank to “loan” around US$1 billion (the experts have agreed a figure of US$1.062 billion of which US$854 million is the outstanding loan principal) to what are said to be their own companies as part of a scheme which it was said was intended deliberately to falsify the Bank's accounts, conceal bad debts and related-party lending, and deceive the Central Bank of Russia (the “CBR”), the Bank's auditors, and ordinary Russians savers who were persuaded to deposit their funds with the Bank. It is said that the fraud led to the Bank's collapse in December 2014, when it was rescued by a bailout of more than US$1 billion funded by the Russian taxpayer.
The Bank's case is that the money received by the Shareholders' companies was in large part swiftly transferred away to a myriad of further companies, also beneficially owned and controlled by the Shareholders, in what were said to be deliberately complex chains of fake or artificial transactions, often involving sham and/or back-dated documents, before ultimately being used for purposes such as making interest payments or repaying principal on other “loans” from the Bank as well as (in certain instances) for the personal benefit and enrichment of the Shareholders themselves. Much of the money lent to the Shareholders' network has simply disappeared. Whilst the Shareholders had previously indicated an intention to prove that all funds were “returned” to the Bank, Mr Yurov and Mr Fetisov's accountancy expert has not been able to do so set against the backdrop of the complexity of the web of transactions and transfers that took place over a ten-year period.
Some of those companies (the “Borrowers”) were, or had originally been, associated with an underlying business project (e.g. Stivilon and Priangarskiy) and did provide some security to the Bank; but the Bank says that these were generally failures and these companies owed large sums to the Bank at the time of its collapse. The exceptions to this are Willow River (“WR”) and Retail Chain Properties (“RCP”), two offshore companies which the Shareholders admit they own, and which own valuable and profitable commercial property in Russia. The Shareholders say that they always beneficially owned these profitable companies, but disavow any such interest in the vast majority of other (debt-ridden and insolvent) companies that the Bank says were established, held and managed in exactly the same way. The Bank says that there is a wealth of contemporaneous material, much actually signed by the Shareholders, confirming they owned all of the companies. The Bank submits that following the trial, the Defendants still have no credible explanation in respect of such evidence.
The Bank's claim is based on the outstanding debt owed by the Borrowers, taking into account any recoveries. That outstanding debt is well over US$1 billion, reflecting (says the Bank) the facts that the Borrowers: (a) were generally offshore shell entities with no independent business or means to repay; and (b) in many instances gave no security for the loans and had no (or few) assets. There is a large measure of agreement between the accounting experts as to the outstanding balances owed by the Borrowers.
The Bank identifies that the problem with a scheme that involves repaying or servicing loans with what are said to be sham loans is that it is self-perpetuating: if a shell company, A, “borrows” money from the Bank, which is actually used to repay loans to B, C and D, then A has no money to repay its own loan, and a yet further loan has to be made to E to enable A to repay. Such a scheme therefore becomes more and more complicated as those involved in the scheme have to juggle more and more (re-)payment obligations, as to both interest and principal, and have to enter into more and more transactions to (as the Bank puts it) “keep the house of cards from collapsing”.
The scheme in its ultimate form involved hundreds of companies (many of which were offshore), thousands of transactions, and what the Bank characterises as a team of people engaged full-time in devising the individual schemes, planning the money transfers and managing their implementation, through what the Bank describes as a sophisticated fake document factory and money-laundering machine, with all of this being funded with more funds said to have been extracted from the Bank in what are characterised as further fake transactions by the same network of Shareholder companies.
The Bank poses the question why, if such schemes were honest, was it necessary to create fake and backdated documents; recruit dozens of “nominee UBOs” and conceal the Shareholders' beneficial ownership of any companies (including those that they admit they owned)? The Bank's answer is that it was not – they say it involved lending real money deposited by ordinary Russian savers to offshore shell companies secretly owned by the Shareholders personally, much of which cannot be accounted for, and submitting knowingly false accounts to the CBR to cover up the fact that this was being done.
The Bank's case, in short, is that the “balance sheet management” (a phrase coined by Mr Yurov) is fundamentally dishonest, not in the Bank's best interests, and unreasonable; and it says the Shareholders were in serious breach of duty in procuring, facilitating, approving or acquiescing in it, and are liable to the Bank in respect of it.
The effect of “balance sheet management” led to a very large increase in the size (or apparent size) of the Bank's corporate loan portfolio and therefore the (apparent) asset base between 2008 and 2014. The unchallenged evidence of the Bank's expert Mr Allen was that the corporate loan portfolio more than doubled from about RUB 24.8 million in 2008 to about RUB 58 billion in the first half of 2014 (Table 3.1 to Allen 1).
That it was “balance sheet management” involving the Borrowers that led to the large apparent increase in the Bank's corporate loan portfolio is apparent from the fact that as at 30 June 2014, RUB 45.3 billion of the Bank's loan portfolio consisted of loans to just the Borrowers at issue in these proceedings (Table 3.2 to Allen 1). As the Bank points out, that was, in itself, a significantly greater sum than the size of the Bank's entire corporate loan portfolio in 2008 (c. RUB 24.8 billion). As at 31 December 2013, the Bank's total reported capital was just RUB 17.5 billion. Thus, says the Bank, this was not a “closed loop” in which a fixed amount of money was recycled round and round in a series of loans, with the hole in the balance sheet at the end of the process being the same as an original “loss” at the start.
An illustration of how the “balance sheet management” required more and more loans to be taken out to service existing loans is provided by the use of Erinskay and Baymore which, despite being Cypriot shell companies, became by far the Bank's largest corporate borrowers – a table to the CBR's 2014 Audit Report in relation to the Bank's largest corporate borrowers at that time records that they had, between them, borrowed over RUB 9 billion (about US$230 million), as at 1 October 2014. That table also illustrates that the Borrowers in this case dominated the corporate loan...
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