Background

Following borrower default a Russian Bank took possession of real estate in the Port of St Petersburg, which was eventually sold via a Court-supervised public auction.

The borrower and its CEO and shareholders (the Borrower) took action against the Bank and its chairman (the Bank) in the High Court of England and Wales, claiming relief under Russian law for “unlawful harm.”  The Borrower said that it was the victim of a so-called ‘raid,’ designed to misappropriate the real estate for the benefit of the Bank, and carried out with the assistance of corrupt public officials.

The Borrower was unsuccessful at first instance, but secured orders for a re-trial on appeal.  However, in granting those orders the Court of Appeal was careful to recognise that very few of the original findings of fact had been challenged, and so, to avoid “another massive trial” it restricted the tender of fresh evidence, ultimately limited to evidence about the valuation of assets.

Expert witness evidence

Each side brought a new expert, rather than rely on those whose work had been severely criticised at first instance.

The Borrower’s expert had limited experience with Russian assets – a single assignment conducted “sometime in the last 20 years,” and under cross-examination he created “the clear impression that he knew that his personal experience of valuing Russian assets was extremely limited, a lack of experience…that he was distinctly unwilling to admit until pressed.”

The Court found that his evidence demonstrated “a marked lack of familiarity with the detail of the [first instance] report even though…his report was based on it,” as well as “a marked failure to recognise that his role was to assist the court by an independent and dispassionate statement of his views without descending into the arena to argue the [Borrower’s] case.”

Rather than value the assets as income producing real estate in their existing form he valued them as development projects, producing a valuation figure that the Court concluded was “wholly unrealistic.”

The Bank’s expert had professional qualifications, and significant experience valuing port assets and infrastructure in the St. Petersburg region, and the Court preferred her evidence justifying a much lower figure consistent with the actual auction outcome, which it described as “well thought-out, carefully expressed and justified firmly without descent into advocacy.”

Outcome

In Bank St Petersburg OJSC & Anor v Arkhangelsky & Anor [2022] EWHC 2499 the High Court of England and Wales held that:

• The CEO had an “ego-centric view of the world,” regarding criticism as “either lamentably misinformed or inferentially dishonest” and he was “deluded” about the value of the assets and the viability of his development plans.
• It was possible that the Bank might have thought that it could benefit from a raid, but such a suggestion was “trespassing into the realms of speculative fiction” and was completely inconsistent with the Bank’s actions in taking a significant write off before it had finished its enforcement.  The calling of a default was a simple case of the Bank protecting its own commercial interests in, and it occurred after a “readily understandable” loss of trust in the CEO.
• Much of what followed the loss of trust was driven by the Bank’s desire to defend itself against the conduct of an untrustworthy borrower who seemed prepared to take whatever steps were open to him to challenge the Bank’s security.
• Previous litigation demonstrated that “both parties lost all sense of commercial reasonableness in the battles they fought” with conduct on both sides that “was both deeply unattractive and dishonest.”
• The “missing piece” in the Borrower’s argument was the absence of any evidence that there were any other parties interested in bidding, let alone bidding at a higher price.
• The Borrower had failed to prove its conspiracy case, and it had failed to prove that it had suffered any harm had there been a conspiracy.