England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		21/05/2007

Mr. Justice David Steel :

1. In these proceedings, the Claimants, who are all part of the Sovcomflot group of companies, claim to be victims of a conspiracy between the Defendants to defraud them of very substantial sums of money. There also are a range of other allegations including fraud, bribery and breach of fiduciary duty.
2. The principal individuals at whom the Claimants direct their complaints are the First, Second and Third Defendants. The initial Defendant was Mr. Privalov. He was Managing Director of the Second Claimant ("Fiona"), being an English company responsible for the sale and purchase of vessels for the Sovcomflot fleet. The claim against him has been settled. He is apparently presently detained in a Swiss prison.
3. Mr. Skarga, the Second Defendant, was formerly Director General of the Twenty-Eighth Claimant ("Sovcomflot"). He was joined to the proceedings in August 2005. He is presently resident in England and, indeed, resides with the Third Defendant.
4. The Third Defendant, Mr. Nikitin, is a Russian businessman. He lives in England. He was also joined to the proceedings in August 2005. At the same time a worldwide freezing order was granted against him and his various companies, who are also defendants to the proceedings. This freezing order was discharged in September 2005 pursuant to a consent order whereby Mr. Nikitin transferred $208.5million in cash to his solicitors to hold as security, such security to stand together with a charge over his residence in Ascot valued at $16.5million.
5. One other individual should be mentioned at this stage. Mr Borisenko was the First Deputy Director and Chief Financial Officer of Sovcomflot. He was also accused by the Claimants of conspiracy to defraud and breaches of fiduciary duty. He is not a party to these proceedings. He has reached a settlement with the Claimants and retains his post.
6. Mr. Nikitin and the various defendant companies which he controls, (the "Nikitin Defendants") filed a defence in November 2005. Mr. Skarga did not accept service of the proceedings until February 2006. He has yet to file a defence on the basis (agreed by the Claimants) that it should await the completion of the amendments to the particulars of claim, part of which are the subject of the present applications.
7. By an application notice dated 12 June 2006, the Claimants sought to add two further claims (together with additional claimants and defendants associated with them). For convenience the two claims have been entitled the "RCB claim" and the "time charter claims".
8. As regards the time charter claims, the relevant time charters were subject to arbitration clauses. But the Claimant ship owning companies purported to rescind the charter parties, including the arbitration clauses, and sought an injunction to restrain the Defendant charterers from pursuing concurrent references to arbitration in which the charterers sought declarations that the charter parties were valid and subsisting. In response, the ship-owners contended that the dispute was not, in any event, within the scope of the arbitration agreement and, in the alternative, if they were, sought a direction that the issue as to whether the arbitration agreements were null and void should be determined at the same time as the trial of the other claims in these proceedings.
9. By an application notice dated 7 July 2006, the Claimants sought to add a third additional claim (together with yet further additional parties). For convenience, this claim has been called "the Clarkson Commission claim". The application also sought a freezing injunction in respect of all three new claims against both Mr. Skarga and Mr. Nikitin. It is this latter application which has formed the primary focus of the argument before the Court.
10. On 14 July 2006, the court ordered that the applications as regards the amendment relating to the time charter claims and the application for a stay of the arbitration proceedings be determined first. The matter came on for hearing before Morison J. On 12 October 2006, the judge announced his decision. His reasons were provided fairly shortly afterwards.
11. In summary his conclusions were as follows: -

a) He granted permission to add the time charter claims and the associated additional parties.

b) He granted an injunction against the charterers so as to restrain them from continuing the arbitrations.

c) He refused a stay of the present proceedings in so far as they related to validity of the arbitration agreement.

12. Accordingly, the issues for determination at this hearing which began on 17 October 2006 were as follows:-

a) the Claimant's application to add the RCB claim and the Clarkson Commission claim together with the necessary further parties;

b) The Claimant's application for freezing injunctions in respect of the three additional claims.

13. So as far as the first issue is concerned, although not conceding the point, I do not understand any of the Defendants existing or proposed to be making a positive case that the amendment should not be allowed. The theme of the Defendants' position is, whilst it cannot be contended that the Claimants have no real prospect of success in pursuing the claims, the Claimants have not established a good arguable case in respect of the newly pleaded claims sufficient to support the application for a freezing order.
14. Due to an emergency closure of the court, the initial application hearing was adjourned part heard after 2 days. The resumed hearing was fixed for 18 December 2006 but in due course that fixture was subsumed by an application by the Defendants for additional disclosure. In the result the hearing of the present application was not resumed until 23 April 2007.
15. In the meantime, part of the judgment of Morison J had been the subject of an appeal. There was no appeal against his grant of leave to amend in respect of the time charter claims but the Nikitin Defendants successfully challenged the order restraining them from pursuing the arbitrations and were granted a stay of the claims for rescission of the charter parties (and the associated arbitration clauses) covered by the present proceedings.
16. It should be noted however that at no stage was any application sought or obtained to stay the claims for damages contained within the scope of the time charter claims. Before me, the Nikitin Defendants sought to reserve their position in regard to this but it was by no means clear that there was any position to reserve. Accordingly, although a further appeal is, I am told, now to be heard by the House of Lords in June 2007, the outcome has little if any implication for the present proceedings.

Standard of Proof

17. I turn accordingly to the question of the freezing orders on the basis that it is appropriate to give leave to amend the Claimants' statement of case to encompass all three new claims on the basis that it is not challenged that they have realistic prospects of success. However, I accept the Defendants' submission that to obtain (or enlarge) a freezing order the applicant must show that in considering the evidence as a whole he has, at a minimum, a "good arguable case": The Niedersachsen [1983] 1 W.L.R. 141. This is to be contrasted with the lower merit requirement for the purposes of amendment namely "a serious issue to be tried": American Cyanamid v Ethicon Ltd [1975] AC 396, Eng Mee Yong v Letchumanan [1980] AC 331, Canada Trust v Stolzenberg (No. 2) [1998] 1 WLR 547, Lewis v Freighthire Ltd (Unreported CA 1^stFeb 1999), Laemthong International v ARTIS [2005] 1 Lloyds Rep. 100.
18. Put another way, the claims must on the material available be strong enough to justify not just an amendment but (on the assumption of a risk of dissipation) also a freezing order. That said, it must be accepted that the margin between a serious issue to be tried and a good arguable case is a narrow piece of territory and it may not always be easy to identify which side of the central reservation a particular claim which is legitimately pleaded falls.

Time Charter Claims

19. This claim is very large. It was originally advanced in the sum of US$212million on a "voyage charter" basis being the Claimants' calculation of the profits made by Mr Nikitin in sub-chartering on the spot market. Interest accrual and post rescission charter hire claims have increased the claim to US$315million. (Even on a "time charter" basis the original claim was in the sum of US$65million.)
20. The essence of the claims is as follows. The Claimants contend that various charters were entered into by Fiona with companies in which Mr. Nikitin had an interest on terms which conferred substantial benefits to the charterers at Fiona's expense. Some of the initial charter rates are said to have been well below market rates. More significantly, the Claimants say that various unusual options were granted to extend the charter at the existing charter rates either in the original time charter or by way of addendum. This, it was contended, was of great financial advantage to the charterers since the option could be exercised if the market rate was higher than the charter rate or declined if the market rate was lower. The Claimants said that these arrangements were so uncommercial that they were only explicable on the basis of Mr. Nikitin having bribed Mr. Skarga.
21. The foundation of the Claimants' claim is an expert's report from a Mr. Colin Pearce of Causeway Tanker Consultancy Ltd. Mr. Pearce, a former Head of Products Chartering at Shell, and subsequently Chartering Manager at Agelef set up his consultancy business in 2002. His evidence was, of course, highly controversial and challenged in particular by reference in the Defendants' evidence to the contrary advice afforded to the Defendants by their expert Mr. Huttemeier. Suffice it to say at the moment that I find Mr. Pearce's report sufficiently convincing to be more than an adequate support for the Claimants' case on the topic and that thereby they have a good arguable case.
22. I summarise the principal points in the report as follows:

a) The quality of charterers can be categorised into four classes of which the Nikitin chartering companies fell into the lowest category particularly as they were only vessel operators and not cargo owners.

b) The original time charter rates were broadly representative of the prevailing market; however the rates for the two Aframax and the two Suezmax vessels were not.

c) The number and nature of the options for additional periods was "truly unusual" since they were solely of benefit to the charterers, all the more so where the charterers were in the lowest category.

d) In the prevailing market any prudent owner would have avoided such options or placed a significant premium on them.

e) Indeed the options for the 4^th and 5^th year for the Aframax vessels were "irrational" whilst the options in the case of the two Suezmax ships were "unbelievably generous" and "defied logic".

f) In short, the report concluded that the concessions granted by the owners were "completely inconsistent with common market practice".

23. The Claimants also relied upon a number of additional matters as giving weight to their case that bribery of Mr. Skarga by Mr. Nikitin must have taken place to account for such uncommercial activity:-

a) Throughout the long period during which these charters were performed Mr. Skarga was the Director General of Sovcomflot and in control of the company.

b) On the evidence of Mr. Privalov and Mr. Borisenko in respect of later events, Mr. Nikitin had a propensity to pay bribes.

c) It would be improbable that the arrangements could be achieved without Mr. Skarga's knowledge and co-operation.

d) Mr. Van Boetzelaar, the Managing Director of Sovchart (which acted as agents for Sovcomflot) is recorded in the Claimants' evidence as saying that "it was obvious to him that Mr. Skarga was agreeing to uncommercial option periods" but since Mr. Skarga was the Director General he could do nothing about it.

e) The rationale for the grant of the options put forward by the Nikitin companies in the arbitration points of claim was that it was hoped that the grant would "tempt the charterers to continue the charters without owners having to spend large sums that really needed to be spent". At its lowest, this is an explanation which is difficult to follow.

f) In the evidence filed on their behalf, both Mr. Skarga and Mr. Nikitin are at pains to say that Mr. Skarga was not involved in the charters: viz. "on no occasion were the terms of any of the charters agreed directly between Mr. Nikitin and Mr. Skarga". This again, put at its lowest, is difficult to reconcile with some of the contemporary emails between Mr. Skarga and Mr. Van Boetzelaar.

24. On this material alone, I conclude that the Claimants have a good arguable case against both Mr Skarga and Mr Nikitin. I turn to the question of quantum. The primary claim is advanced on the basis that the Defendants must disgorge the profits they have made by sub-voyage chartering the vessels. This primary claim is by definition not compensatory: it is not based on the bribe (a deemed loss) nor even on any loss occasioned by the bribe. Questions will in due course arise as to the circumstances and extent to which a claimant can recover the profits made by a defendant as a result of a favourable contract entered into by reason of a bribe.
25. The Defendants place reliance on the decision of Toulson J in Fyffes v Templeman [2000] 2 Lloyds Rep 643 where it was held that, whilst a briber of an agent must usually be required to account to the principal for the benefits obtained from the corruption of the agent, it would not be right to direct an account of profits where the contract would have been concluded (albeit on different terms) in any event so that there was "an ordinary" profit element "not caused" by the bribery.
26. The present case is not of course an example of a situation where contracts would necessarily have been entered into in any event. Indeed it is clearly arguable (a) that Sovcomflot would not have been interested in a low category charterer without cargoes of its own and thus competing with Sovcomflot and (b) that the Nikitin companies would not have been interested in the charters otherwise than on the favourable terms afforded.
27. In any event, the Claimants rely first on the different approach of Lewison J in Ultraframe v Fielding [2006] F.S.R. 17 who held that the principle of disgorgement was not confined as suggested by Toulson J but that an account was appropriate whenever profit was made from dishonest assistance or underlying breach of trust:-

"1600. I can see that it makes sense for a dishonest assistant to be jointly and severally liable for any loss which the beneficiary suffers as a result of a breach of trust. I can see also that it makes sense for a dishonest assistant to be liable to disgorge any profit which he himself has made as a result of assisting in the breach. However I cannot take the next step to the conclusion that a dishonest assistant is also liable to pay to the beneficiary an amount equal to the profit which he did not make and which has produced no corresponding loss to the beneficiary."

28. The Claimants further contend that the approach of Lewison J is supported by the decision of the Court of Appeal in Murad v. Al-Saraj [2005] EWCA Civ 959. It is sufficient to quote a brief passage from the judgment of Lady Justice Arden:

"59. I would highlight two well established points about the reach of equitable remedies:

(1) The liability of a fiduciary to account does not depend on whether the person to whom the fiduciary duty was owed could himself have made the profit.

(2) When awarding equitable compensation, the court does not apply the common law principles of causation."

29. In my judgment, the Claimants have a good arguable case as against Mr. Nikitin and his companies for an account of profits. The position of Mr. Skarga is different. Of course he would be liable to account for any bribes. But I am not persuaded that the strength of the case that he is jointly liable with Mr. Nikitin for the profits that Mr. Nikitin has made is sufficient for the purposes of a freezing order. Mr. Skarga's exposure is likely to be limited to the losses sustained by the Claimants as a result of the uncommercial nature of the charters which were entered into as a consequence of the bribes.

Voyage Charter Basis

30. I accept the Defendants' case that but for the time charters, it is somewhat unlikely (even for present purposes) that Sovcomflot would be able to make good their case that it would have sub-chartered the fleet on the spot market. Certainly by October 2004 the bulk of the Sovcomflot fleet was let on time charter and not voyage charter, a situation that appears to be in accord with the charter policy of the company. It follows that the claim for the profits made by Mr. Nikitin by way of sub-charters are not on the face of it compensatory but solely recoverable, if at all, by way of disgorgement.
31. The Claimants, as already indicated, have sought to calculate the profit earned by Mr. Nikitin's companies by reference to the spot market. The figure as at 31 July 2006, shortly before this application got under way, was US$250 million inclusive of interest (of which about $90million represented the profits made on the stand alone options alone). Given the passage of time and the continuance of the charters which the Claimants assert had been rescinded, the figure will have climbed by 31 July 2008 to $367million.
32. It is, as I understand it, accepted by the Nikitin Defendants that profits of at least $133million have been derived from these transactions albeit no detail of these profits has been provided. In seeking to assess the Claimants' best arguable case on quantum, I bear that in mind. I also bear in mind:

a) that the Claimants' figures make no allowance for off-hire time such as breakdowns, dry docking, etc. which I assess at about 5%

b) no allowance has been made for differences of view on market rates, the effect of part cargoes, gaps between fixtures, etc.

33. I conclude that the freezing order sought against Mr. Nikitin and his companies in regard to the time charter claims should be based on a total figure, inclusive of interest, of $320million.
34. As regards Mr. Skarga, I conclude that any claim for a freezing order must be based on the extent to which the market rates exceeded the charter rates. This was put forward at US$65million as of 30^th April 2006 exclusive of interest and costs. Various adjustments need to be made:

a) There is no allowance for off-hire which I assess at 5%

b) Allowance has to be made for the sum of about $300,000 in respect of the initial period for the three product carriers in the light of Mr. Pearce's advice that these initial rates were within market expectations.

c) As regards the Aframax vessels it is contended by the Defendants that the US$5,000 premium for ice class was inconsistent with the hire obtained from Stena for a sister vessel. This is indeed supported by some evidence in an email from Mr. Van Boetzelaar. There would be an element of double accounting if this was treated as the price of the option.

d) There must also be some doubt about the claim in respect of the initial period for the Tropic Brilliance given the contemporary charter of the Romea Champion.

35. Doing the best I can on limited material, the good arguable case in respect of the compensatory claim against Mr Skarga should be valued at US$55 million inclusive of interest.

The Clarkson Commission Claim

36. The Claimants' case is that in mid-2001 it was agreed between Mr Gale of Clarkson and Mr. Nikitin that he (Mr Nikitin) would procure that Clarkson would be instructed in a substantial number of Sovcomflot's sale and purchase and new building transactions in return for 1.5% commission over and above the normal 1% commission to be paid to Mr. Nikitin or his companies or payment of an address commission, otherwise payable by the shipyards to the relevant buyers, to Mr. Nikitin or his companies.
37. The Claimants say that this was a fraudulent scheme to skim off money at the expense of Sovcomflot and its subsidiaries but to the benefit of Mr. Nikitin. The claim is also advanced against Mr. Skarga on the basis that he was aware of the scheme and approved of it in breach of his fiduciary duty to Sovcomflot, a breach probably encouraged by bribery or financial inducements from Mr. Nikitin (which may themselves be enhanced by payment out of profits).
38. In support of this case, an amendment in respect of which is not opposed, the Claimants rely in particular on the exchange of correspondence between Clarksons and Milmont Finance Ltd (the Fifth Defendant) purportedly dated in 2001:

a) On 12 February 2001 Milmont wrote to Mr. Gale at Clarksons offering "ideas" as an independent consultant relating to the buying and selling activities of Sovcomflot in return for the "normal" commission of 1.5%. The letter concluded:-

"Owing to the rather delicate nature of our exchanges, it would be appreciated that no reference is ever made to its source and this agreement is kept entirely confidential between us although we appreciate it must be shown to proper parties legally entitled to see it under English law."

b) Clarksons' reply apparently dated 20 February 2001 and somewhat surprisingly "delivered by hand" expresses pleasure in the relationship that had developed between Mr. Gale and Mr. Nikitin:-

"We do appreciate as per our discussions with Mr. Nikitin that owing to the sensitivity of the ideas exchanged we should be very careful with our records and communications and keep them absolutely confidential. Thus most if not all exchanges will be in face-to-face meetings and by telephone. On this basis we are more than pleased with our arrangement."

c) On 28 February and again on the 14 March 2001 Milmont reaffirmed the confidential nature of the arrangement and further confirmed that no tax liability would accrue in the UK.

39. The contents of these letters alone, it is suggested by the Claimants, call for some explanation:-

a) Clarksons usual commission was 1% as appears from their published accounts:

b) There was no recorded agreement to share this or any commission with anyone else:

c) The reason why the arrangement remained so "delicate" and "confidential":

d) Address commission is usually payable to buyers and indeed the relevant yards appear to have thought that was the case in respect of the new buildings for Sovcomflot

e) Mr. Nikitin does not claim to have made any contribution to Clarksons endeavours

f) Clarksons are a well known brokers and no introduction was needed.

40. To this must be added the Claimants' contention that the entirety of this correspondence was written not in 2001 but in 2004:-

a) Mr. Privalov asserted in an interview with the Claimants' solicitors that the letters had been backdated, an allegation which was duly set out in Mr. Shepherd's 8^th Affidavit of 11 October 2006.

b) The correspondence had been referred to in a long statement of Mr. Lax on behalf of Mr. Nikitin dated 18 September 2006 where, on instructions from Mr. Nikitin, reference was made to the "February agreement" without any suggestion that the relevant documents had been backdated.

c) However, in a supplementary statement to Mr. Lax dated 16 October 2006 (i.e. on the eve of the initial hearing), it was revealed as follows:

i) Mr. Nikitin agreed that the correspondence was created later.

ii) As regards the letter from Clarksons, it was suggested by Mr Nikitin that there was nothing "untoward about a party (in this case Clarksons) wishing to have on its file a document evidencing an agreement which bears the date when the agreement was reached rather than the date when it was created."

iii) The letters from Milmont were according to Mr. Nikitin also drafted by Clarksons

iv) Mr. Nikitin claimed that another director of Clarksons had approved the arrangement as being needed for tax purposes

41. Bearing in mind the size of the claim, this late concession is, the Claimants contend, somewhat surprising given that the application to add the claim was made as long ago as July. Yet even now the Claimants submit that no credible explanation has been given of the need to prepare the documents years after the arrangements were entered into, let alone the need to backdate all the documents.
42. As concerns Mr. Nikitin, I have no hesitation that the Claimants' have established a good arguable case on this claim. I say that in isolation from the other allegations of corrupt activity already pleaded against him, which form the basis of the existing freezing order.
43. As regards Mr. Skarga, the Claimants say as follows: -

a) A large sum was involved over a long period of time. It included address commission which Mr. Skarga, as Director General, would presumably anticipate Sovcomflot receiving. Yet, despite no payment having been received, he appears not to have instigated any inquiry or complaint.

b) Mr. Privalov had said that the scheme was discussed between Mr. Skarga and Mr. Nikitin in his presence.

c) Although it may be that the Executive Committee to Sovcomflot were kept in ignorance, it is difficult to see how the scheme (and indeed all the other benefits received by Mr. Nikitin and his companies at the expense of Sovcomflot) could be achieved without the involvement (or at least the consent) of Mr. Skarga not least because Mr. Privalov was perceived by all parties as a mere functionary.

d) That consent was probably obtained by bribes or other benefits given by Mr. Nikitin otherwise Mr. Skarga as Director General would have no motive for going along with it and putting himself in breach of his fiduciary duty.

e) No direct comment is made about the Clarkson claim in either of the witness statements made by Mr. Skarga (save notably making the assertion that the usual commission was as much as 3%).

44. In my judgment there is more than sufficient material to provide a good arguable case against both Mr Nikitin and Mr. Skarga in respect of this claim. So far as quantum is concerned there does not appear to be any significant issue. The total as at the end of July 2008 was in the region of US$47million which I treat as inclusive of interest.

RCB loan claim

45. In 2001 Fiona acquired a debt owed by AKP Sovcomflot to the Russian Bank RCB. This debt was acquired for 61c in the dollar from one of Mr. Nikitin's companies which in turn had acquired the debt indirectly from RCB for 45c in the dollar. It is the Claimants' case that there was no explanation for this transaction other than a scheme designed to siphon off the difference for the benefit of Mr. Nikitin (and Mr. Skarga) at the expense of Sovcomflot.
46. The Claimants rely on the following matters:

a) Despite Mr. Nikitin's assertion that the sale by RCB to Gemarfin, the company concerned, was the outcome of months of negotiation, no material has been adduced with regard to these negotiations despite a request from the Claimants in February 2006.

b) An executive board meeting of Sovcomflot took place on 9 August 2001. A letter from Gemarfin to Fiona was deployed before the board which read as follows:

"We have negotiated to take an assignment to the above mentioned loan. We are in turn offering to assign it to you the total interest for participation in this debt loan for the discounted amount of $0.71 in the dollar…with payment terms to be agreed on closing of any formal arrangement with you. The present offer is not intended to create any commercial relationship between us at this stage but is simply sent to you to gauge your interest in any such deal. We await your response with interest."

c) At the Board meeting Mr. Skarga proposed that Mr. Privalov should be instructed to hold talks on the basis of settling at 61c in the dollar rather than the 71c proposed in the letter.

d) However Mr. Privalov's evidence is to the effect that Mr. Nikitin and Mr. Skarga had in fact already agreed to the original purchase of 45c and to the on-sale to Fiona at 61c before the meeting ever took place.

e) In due course it was appreciated that there had been no written response to Gemarfin's letter and emails appear to have been exchanged with a view to making good that deficiency: however, there is no material available in the documents reflecting any negotiation by way of the reduction from 71c to 61c.

f) The debt had initially been assigned by RCB to BCV (Banque Cantonale Vaudoise) and then on to Gemarfin. It is clear from the limited email material that Mr. Nikitin (and his lawyers) were anxious that the documentation should not be produced and thereby reveal to Sovcomflot the involvement of BCV since the initial price of 45c would also have emerged.

47. The claim is more modest than some of the others and amounts to about $5 million inclusive of interest. In my judgment the Claimants have more than made out a good arguable case both against Mr. Nikitin and Mr. Skarga in respect of this claim as well.

Russian Law

48. It is broadly common ground between the parties that it is not possible on this application to resolve various contentious issues as to the applicable law relating to the merits or the quantum of the claims. In large part the Claimants say English Law and the Defendants say Russian Law is applicable.
49. However in one discrete area the Defendants seek to rely on Russian law. Their proposition runs as follows:

a) There is no concept of constructive trust in Russian Law, a proposition said not to have been challenged by the Claimants' expert, Mr. Butler.

b) It is clearly a case where Russian Law would apply to any allegation of breach of fiduciary duty, the bribes having been paid in Russia, in respect of Russian vessels beneficially owned by Russian companies.

c) It follows that no claim for disgorgement can be sound.

50. The Claimants respond as follows:

a) Under English conflict principles the applicable law in respect of the imposition of a constructive trust by reason of receipt of assets procured by breach of fiduciary duty is English Law: see Arab Monetary Fund v Hashim (No. 8) Chadwick J 15^th June 1994 and No. 9 27^th July 1994.

b) Issues of quantification are also for English Law: see Harding v Wealands [2006] 3 WLR 83.

c) In any event advice from Mr. Butler is to the effect that Russian law does recognise the principle of disgorgement of profits.

51. It is obviously not possible or appropriate to resolve these issues at this stage and I leave the matter out of account.

Old Claims

52. Before turning to the issue of the existence of a risk of dissipation I must deal with the submissions relating to the claims already pleaded and the sum posted by way of security to release the freezing order imposed on Mr. Nikitin's assets.
53. Mr. Nikitin contends that the Claimants are substantially over-secured in respect of those claims and that the balance must be treated as available for the new claims. To like effect Mr. Skarga also relies on this alleged over-security as limiting or even eliminating the need for any freezing order as regards his assets.
54. In my judgment these propositions are not open to the Defendants. It is necessary for this purpose to have regard to the history of this litigation:

a) The original application for a freezing order against Mr. Nikitin was made ex parte on 31 August 2006. The quantum of the claims was put forward by the Claimants in the sum of $251million. The injunction was sought in the lower figure of $237million.

b) In the event Mr. Justice Simon made an order in the sum of $225million, with a return date of 7 September 2006 later adjourned to 15 September.

c) Negotiations ensued between the parties, with the Defendants proposing security in the region of $175million or less and the claimants in the region of $253million or more. Mr. Nikitin himself proposed a figure of "below $200million" in his second affidavit dated 12 September.

d) These negotiations continued right through the return day. Late in the afternoon of 15 September a consent order was signed by Mr. Justice Simon. This settled the issue of security. It was agreed that security be posted in two forms, one by way of a charge on Mr. Nikitin's property at Sunninghill and second by way of a cash deposit in Mr. Nikitin's solicitor's account in the sum of $208,500,000.

e) This security was expressly "for the claims of the Claimants against each of the 3^rd - 5^th and 14^th - 17^th Defendants".

f) There were also cross-undertakings:

i) by the Defendants "not to seek to apply to discharge the order that Mr. Justice Simon made on 31 October 2006 whether in the form as made on that occasion or as subsequently varied";

ii) on the part of the Claimants "not without showing a change of circumstances to make any further applications for freezing orders or for security against the 3^rd - 5^th and 11^th - 17^th relating to any of the claims in the particulars of claim…"

55. It follows in my judgment that the Defendants are not entitled to challenge the merits or the quantum of the original claims so far as covered by the existing freezing order. The consent order reflected a bona fide compromise. The Claimants have no security in respect of the new claims. As regards the old claims the Claimants cannot complain that they are under-secured and the Defendants cannot contend that the Claimants are over-secured. It equally follows that Mr. Skarga's submission that the Claimants are already partly secured in respect of the new claims is misconceived.
56. That said I will deal briefly with the old claims but only from the perspective of considering factors which may be pertinent to the risks of dissipation on the part of Mr. Nikitin and in particular Mr. Skarga.

Athenian payment

57. In April 2001, Fiona agreed with Athenian to purchase 6 Suezmax tankers under construction at Hyundai. The shipbuilding contracts provided for staged address commission payments to an Athenian subsidiary. Entitlement to these was to be transferred to a Fiona subsidiary but in August 2003 Mr. Privalov instructed Mr. Wettern of Messrs Watson Farley, who were Fiona's solicitors, to arrange payment of the sums to Milmont, a company controlled by Mr. Nikitin and to do so by way of an account at Wegelin Bank. The sum involved was about $1.2million. It is the Claimants' case that Mr. Privalov was bribed by Mr. Nikitin to accomplish this transfer. They rely upon the payment of $30,000 into Mr. Privalov's bank account at this stage. Mr. Nikitin merely observes that this sum was a small sum and that he had no recollection of why he made the payment to Mr. Privalov. As regards Mr. Skarga there is force in the point made by the Claimants that, given his status, the payment referred to and the nature of the payments due from the yard, it is improbable that he was not involved in their diversion.

Share Sale / Ship Building Transaction

58. These claims arise out of transactions entered into by Fiona through Mr. Privalov whereby, so the Claimants contend:

a) options to enter into shipbuilding contracts at a beneficial price were transferred for no consideration to Mr. Nikitin or his companies

b) shares in Fiona subsidiaries which had entered into such contracts were transferred at undervalue to Mr. Nikitin or his companies.

59. The claim is a very large one based on the difference between the contract price and the value on delivery. The total claim is in the region of $200million. It raises similar issues as regards disgorgement of profits as are raised in the time charter claims.
60. The claims arose from options for vessels to be constructed at Hyundai and Daewoo. Strikingly, on the Claimants' case, the arrangements had the effect that the Nikitin companies, by having the options transferred to them, thereby obtained the advantageous price attributable to Sovcomflot's status and bulk order and the advantage of Sovcomflot's guarantee of instalment payments. On the face of it, it is submitted, none of this "piggybacking" was in the commercial interest of the Claimants.
61. Indeed, it is the Claimants' case that these arrangements are only explicable on the basis of bribery by Mr. Nikitin of Mr. Privalov and Mr. Skarga. Certainly the credibility of the case that this was a normal commercial arrangement is undermined by some of the following considerations:-

a) A letter which purports to record the arrangement dated 26 February 2003 was backdated. It was in fact prepared by Mr. Wettern in March 2004 at Mr. Skarga's request. It is signed by Mr. Wettern on behalf of Standard Maritime (which had yet to be formed in February 2003) and by Mr. Privalov on behalf of Fiona.

b) The letter spoke of a collaboration agreement with the Nikitin group as regards employment. No such arrangement is evidenced by any contemporary documents nor was such arrangement disclosed to the Board at a meeting attended by Mr. Skarga and Mr. Borisenko. Indeed the Board were not informed about the existence of Fiona's guarantee.

c) In contrast Mr. Borisenko did refer to such collaborative arrangements to the auditors who appear to have accepted the information on reviewing the transaction in 2005. The auditors were not informed about the backdating of the relevant agreement or indeed of the failure to disclose the arrangement to the Board. Certainly the collaboration agreement was short-lived as the bulk of the vessels were on sold by the Nikitin companies.

d) The sale of the shares in the Fiona subsidiaries which had contracted for hulls 1585 and 1586 took place in January 2004 but was also backdated to 23 August 2003. The transaction was never put before the board at that time. It was put before the Board in July 2004 albeit the guarantee was not mentioned. All this followed on a meeting between Mr. Wettern, Mr. Skarga, Mr. Nikitin and Mr. Privalov in St Petersburg in November 2003.

e) The share sales of the companies which had exercised the options for hulls 5272 and 5274 were concluded in January or February 2004 but the agreement was yet again backdated to November 2003 (prior even to the grant of the options) again following a discussion between Mr. Nikitin, Mr. Skarga and Mr. Wettern.

f) These incidents of back-dating were said by the Claimants to be against the background of a sharply rising market.

Sale and Lease back

62. At the time of the application to Simon J, this was a relatively small claim in the region of $3 to 6million arising out of the sale and leaseback of 8 vessels in April - November 2002 whereby Sovcomflot raised $132million from companies in the Nikitin group. The original claim sought to reflect the cost of "mezzanine" finance taken out by the buyers.
63. The claim has since been recast. As regards the alleged loss, it is put in this way. The bulk of the proceeds of the sale were used by way of repayment of existing loans. The claim now advanced relates to the balance of $60million and is calculated by way of comparison between the cost of borrowing on the open market as compared with the bareboat charter terms (giving credit for savings on the repaid loan). It is now put forward in the figure of about $14million. There is an alternative claim for disgorgement of profit in the sum of $38million.
64. According to the evidence filed by the Claimants, Mr Privalov and Mr Borisenko accept that these transactions were on uncommercial terms and, furthermore, it is conceded by them that the arrangements were procured by bribery of them by Mr Nikitin (something that they claim Mr Skarga was also aware of). For instance, the Claimants say that one of the bribes consisted of $400,000 paid to Mr Privalov in December 2002. It is accepted that such a sum was paid to him in respect of the 8 vessels. However it is asserted by Mr Nikitin that the sum involved was a "consultancy" fee for assistance with obtaining loans from the Banque Cantonale Vaudoise to assist with the purchase, a surprising arrangement given that Mr Privalov was an employee of the barboat charterers.

Termination of sale and leaseback

65. The sale and lease back transactions were terminated in July 2004 when all 8 vessels were sold to Primal Tankers. It is the Claimants' case that Mr Skarga agreed the terms of the surrender of the rights of Fiona under the bareboat charters at a substantial undervalue. The claim is put forward in the sum of $71million.
66. The claim is advanced by reference to the difference between the asserted buy back value of the option to purchase ($91million as calculated by experts retained by the Claimants) and the actual receipt by Sovcomflot ($20million). In regard to the claim Mr Privalov says that Mr Skarga had told him to ensure that Clarksons (through Mr Gale) produced artificially low valuations. Mr Privalov indeed contends that he was bribed in this respect. It is accepted that Mr Nikitin made an unsolicited payment of $200,000 to Mr Privalov but he says that this was for oral assistance regarding the appointment of auditors.

Risk of dissipation

67. The outcome of the application before Simon J demonstrates an acceptance on the part of Mr Nikitin of a real risk of dissipation on his part. In the light of the matters outlined above in regard to the old claims, the concession was realistic. As regards Mr Skarga, many of the features of the old claims reflect adversely on his bona fides as well and thus add substance to the Claimants' case on the risk of dissipation.
68. However, at the forefront of Mr Skarga's case on this issue (not forgetting that the burden is on the Claimants) is that given that the application for a freezing order in regard to these claims is made inter parties and some months after the allegations were first made, it follows that there is no such risk (and indeed no such risk is perceived by the Claimants). In this connection I have been helpfully reminded of the principles summarised by Colman J in Laemthong International v ARTIS [2005] 1 Lloyd's Rep 100 and in particular the proposition that the standard of proof of the risk of dissipation is "relatively high".

Delay

69. There is no doubt that the fact of the failure to make an earlier application against Mr. Skarga is a material consideration vis a vis the application against him. There are in this context two particular considerations:

a) The delay clearly raises the question whether the Claimant really needs an injunction pending trial: in short the delay may give rise to the provisional conclusion that the risk of secretion had already accrued.

b) Nonetheless, the applicant is entitled to take up time in making reasonable enquiries prior to launching an application, the more so where the nature of his case is based on fraudulent or dishonest activity(see Grupo Torras v Al-Sabah, C/A, 16 February 1994): the fact that thereafter the application is made inter partes is scarcely prejudicial to the respondent.

70. Furthermore it has to be borne in mind that the rationale for a freezing order is not so much the risk of dissipation as such, but the risk that a judgment in favour of Claimants would remain unsatisfied either because of dissipation or secretion or dispersal: see Mercedes Benz AG v. Leiduck [1996] AC 284. I accept that delay is potentially a significant discretionary consideration but much depends on the individual facts of each case.
71. Furthermore it strikes me that the Claimants are quite properly focusing on the requirements in the draft orders for disclosure by Mr Skarga and Mr Nikitin of their assets. In practical terms, the world-wide freezing order is ancillary to the disclosure order: see Grupo Torras v Al – Sabah, ante.

Background of bribery

72. At the heart of the Claimants' case on the risk of dissipation is the evidence of secret and illegitimate payments by Mr Nikitin, such payments being known to Mr Skarga. This sort of dishonesty and disgraceful conduct (where sufficiently established) obviously lends great force to the allegation of a real risk of dissipation Both Mr. Privalov and Mr. Borisenko admit receipt of monies as a financial inducement for facilitating transactions with companies of Mr. Nikitin. Mr. Privalov accepts he received some $3.7million in illegitimate circumstances: some $1.9million has been repaid by way of settlement. Mr. Nikitin gives a range of explanations for the payment of these sums, none of which are convincing (or at least not sufficiently convincing to dispel the impression of dishonesty).
73. The monies were paid to Laverne in 2003 and 2004 in the sum of about $1,040,000. It is the Claimants' case that Laverne was a company owned by Mr Borisenko. Mr. Nikitin's asserts that the these payments were made on the direction of Mr. Privalov for assistance provided by Mr. Primalov in promoting a commission sharing arrangement with the brokers Galbraith. This is unsupported by any documentary material.
74. These payments to both Mr. Privalov and Mr. Borisenko were made into off-shore accounts opened and managed by Mr. Nikitin's Swiss bank Wegelin and Co. Both Mr Borisenko and Mr Privalov maintain that Mr Skarga was fully aware of the payment of these bribes.

Backdating etc.

75. There is on the Claimants' case a pattern of backdating, forgery and false paper trails, some of which have already been identified in earlier parts of this judgment. Again the Claimants contend that this evidences a propensity to pursue any course to make money illegitimately and then take elaborate steps to hide both the methodology and the proceeds. For instance:

a) The letter apparently dated 26 February 2003 from Standard Maritime (a company only incorporated in March 2003) to Fiona Trust was in fact, and this is common ground, not created until March 2004. The purpose on the Claimants' case was to enable Mr. Skarga to maintain to the Executive Board in July 2004 that the earlier sales of options and new building contracts to Mr. Nikitin's companies were pursuant to a bogus "co-operation" agreement purportedly evidenced by the letter.

b) By way of furtherance of this misrepresentation, Mr. Skarga instigated the preparation of a memorandum to the board, purporting to refer to the February 2003 co-operation agreement, albeit unhappily leaving out the fact that that agreement (even if genuine) imposed on Fiona a continuing obligation to guarantee the performance of the very shipbuilding contracts (or options) which had been transferred or sold to Mr. Nikitin's companies.

c) The backdating of the Clarkson Commission correspondence is set out in some detail above. It is common ground that the letters were not written until some three years after their apparent date. This was in due course conceded by Mr Nikitin. The Claimants legitimately compare this concession with the earlier reference by him to the "February agreement". Added to this is the absence of any convincing explanation as to the need for the late preparation of the documents (let alone their backdating).

d) The share sale and purchase agreement in respect of the Hyundai Newbuildings was dated as at 14 August 2003. Yet the instructions for preparing the draft document had not been given until 23 November (after there had been a significant rise in the market) and the document was not in fact executed until January 2004.

e) In December 2002 $1.6m was paid to Mr. Privalov by Mr. Nikitin in the form of a deposit in an account at Wegelin and Co. The payment was made by reference to a numbered service contract. In fact Mr. Nikitin and Mr. Privalov had arranged for the creation of a fictitious service contract to disguise both the source and nature of the payments. It is worth noting that Mr Nikitin's explanation for this payment is twofold. Firstly that $1.2million represented Mr Privalov's diversion of monies derived from the Athenian transaction which had been paid into a Milmont account as Mr Privalov had asked Mr Nikitin to furnish him for his personal use an existing off-shore account. This money was, it was said, returned to Mr Privalov a year later. Second that the balance of $400,000 was (as noted earlier) paid to Mr Privalov in return for advice on the sale and lease back transaction.

f) An agreement apparently dated 23 March 2004 between Fiona and Standard Maritime whereby the security in the form of a pledge over the shares of the ship-owning companies was released despite the fact that Fiona had acquired the pledge in consideration for providing guarantees for the ship building contracts. Material provided by Mr Wettern reveals that the agreement was in fact prepared on the instructions of Mr. Privalov and Mr. Nikitin in January 2005.

i) Mr Nikitin's explanation for this is surprising. He claims that he had reached the conclusion by the spring of 2004 that the risk of default by his own companies on the ship building contracts was "remote". Having approached Mr Skarga it was agreed that the shares would be released when at least 30% of the purchase price had been paid. He then spoke to Mr Wettern in the early summer of 2004 to ask him to prepare the necessary documentation. He claims he had to chase Mr Wettern but that Mr Wettern had still not prepared the draft paperwork before Mr Skarga left Sovcomflot. Mr Nikitin then claims that the documents were eventually prepared, backdated and signed by Mr Skarga in 2005 albeit unknown to Mr Nikitin.

ii) That story would appear on its face to be somewhat improbable. In any event, Mr Wettern in his own draft statement claims that he was instructed by Mr Nikitin and Mr Privalov in December 2004. His initial reaction is revealed in a re-constructed e-mail dated 24 December 2004 where he suggested that although the bearer shares would be exchanged for registered shares, Standard Maritime should nonetheless create a pledge over them until delivery. This proposal was repeated in a draft letter prepared on 4 January 2005 (albeit it was proposed that it should be dated February 2003). Mr Wettern's accompanying email stated:-

"I do think that something is needed for Fiona to replace the share pledge deposits that are presently in place. If that is to be abandoned without any replacement then there is no sense in Fiona having agreed to the release so it would look really "smelly"."

Despite this advice it appears that the relevant supplemental agreement was signed at some stage between July and September 2004.

iii) It follows that the execution of the document by Mr. Skarga on behalf of Fiona in January 2005 was after he had ceased to have any authority to bind Fiona as its Director General. It also follows that the suggestion that the execution of the agreement was simply attributable to dilatory action on the part of Watson Farley and Williams is inconsistent with the contemporary emails. It is striking that Mr Skarga offers no explanation. In his solicitor's second witness statement there is this passage:

"Senator Skarga also admits to having signed a supplemental agreement on behalf of Fiona after ceasing to be the Director General of Sovcomflot but denies that this was fraudulent or in any way unlawful, denies the receipt of any bribes or any other benefits as alleged or otherwise and denies that any loss was suffered by Fiona as a result of the supplemental agreement …At the appropriate time and if required to do so Senator Skarga will testify to these matters."

iv) A few months later in October 2006 Mr Skarga prepared his second witness statement and despite again having the opportunity to explain the situation had only this to say:-

"Although I accept I signed two documents after I resigned as Director General of Sovcomflot I deny that I thereby acted dishonestly or that I intended thereby to cause harm to Sovcomflot or to make any personal gain. I shall provide a full and frank explanation in my defence of all matters in issue in these proceedings that concern me personally at the appropriate time."

g) Concurrently with all this Mr Wettern was involved in drafting a new employment contract for Mr. Privalov which provided for a substantial payment upon his retirement or resignation and without any restrictive covenant. It had been prepared on the instructions of Mr. Nikitin. It was duly signed by Mr. Privalov and Mr. Skarga (again at a stage when the latter was no longer a director of Fiona Trust) in January 2005 albeit the document is dated 23 February 2004. It was in short (and this is conceded) a false document which did not reflect Mr. Privalov's terms of employment. His existing contract of employment contained a restrictive covenant (and no provision for any lump sum payment on resignation). The purpose of the bogus contract was to allow him to recover the lump sum (and Mr. Privalov duly gave one month's notice on 14 February 2005) and thereafter to be able to go and work for Mr Nikitin without the limitation of any restrictive covenant:

i) On 4 January 2005 Mr Wettern sent the following email to Mr Nikitin which enclosed an electronic version of the draft employment contract:-

"This is for you and him to have a look at before I send you a final version. I would particularly like to discuss what to write in Clause 20. It would be abnormal to have nothing but I assume I you do not want it to be too restrictive in relation to what Yuri plans to do."

ii) It is clear that the draft was discussed with Mr Nikitin and a new version was transmitted the following day.

iii) All of this is somewhat difficult to reconcile with Mr Nikitin's explanation:-

"Mr Nikitin has no knowledge whatsoever of the steps that Mr Privalov took to alter his contract of employment. Mr Nikitin's email address had been used at Mr Privalov's request because they were together when Mr Wettern wanted to send the contact of employment through to Mr Privalov and Mr Privalov did not at that point have an email address to which the documents could be sent. Mr Nikitin's role was simply to have the document printed off and handed to Mr Privalov.

"Although Mr Privalov was talking to Mr Nikitin about the possibility of leaving Sovcomflot and had asked Mr Nikitin to employ him that discussion did not progress very far since Mr Nikitin knew he had no need of Mr Privalov's services on a full time basis and told him so…"

iv) As regards Mr Skarga as has already been observed no explanation whatsoever is proffered.

Failure to disclose

76. Examples of the Claimants' case on Mr Skarga's apparent failure to make proper disclosure to the board have already been given. In addition, the Claimants say that it is very striking that he seems to have failed to disclose to the board on 11 February 2003 the arrangements whereby Sovcomflot's options to purchase new buildings were to be transferred to Mr. Nikitin for no consideration. In fact on the very same day that the Board received a report from Mr. Privalov discussing the commercial benefits of the two vessels which had been ordered (and indeed the value of the option for four more), Mr. Privalov instructed Mr. Wettern to transfer two of the options to companies in which Mr. Nikitin had substantial interest. The Claimants say that Mr. Skarga must have been aware of this but made no comment.

Destruction of documents

77. The Claimants contend that there have been sustained efforts to destroy evidence. Mr. Privalov says that he destroyed the hard drive on his computer and claims that this was on the specific instructions of Mr. Nikitin. Indeed following a request from the Claimants for access to his computer, it was in due course revealed that the hard drive had been replaced and the old hard drive had been disposed of. A similar allegation (vigorously denied) is made with regard to Mr. Skarga and his computer.

Connection with England

78. I accept the Claimants' case that neither Mr Nikitin nor Mr Skarga have any substantial roots within the jurisdiction. Mr Nikitin has merely indicated that he will remain within the jurisdiction until the completion of this litigation "possibly longer". It is also of some significance that the actions of Mr Nikitin revolve around offshore companies with offshore accounts. As regards Mr Skarga, he may have to shadow Mr Nikitin since he appears to be financially dependent upon him.

Conclusion

79. Against all this background the Claimants have, in my judgment, fully made out their case of a real risk of dissipation against both Mr Nikitin and Mr Skarga. I turn therefore to other discretionary issues.

The Assets of Mr. Skarga

80. It is submitted on Mr. Skarga's behalf that there is no evidence (of any or any substantial) assets held by him. There is real property but all in the name of his wife or children. There was a payment to him of $1million (less tax) made by Sovcomflot on termination of his employment. However it is Mr Skarga's evidence that those monies have already been expended on the repayment of a loan and on living expenses.
81. It is true that he does not appear to have assets within this jurisdiction: indeed it is his position that his financial circumstances are such that they necessitate him being dependent of Mr. Nikitin for both his accommodation in England and his legal expenses. Nonetheless it remains the Claimants' case, which is strongly arguable, that Mr. Skarga was the recipient of bribes from Mr. Nikitin to encourage his participation in Mr. Nikitin's dishonest activities and the money must have been placed somewhere. Whilst no positive evidence of any assets elsewhere in particular within Switzerland is available, I am not persuaded that the investigations by the Russian or Swiss authorities (or private investigators retained by the Claimants) go anywhere near establishing that no such assets exist.
82. In this context I must touch on the complaint that these investigators (perhaps with the privity of the Claimants and/or their solicitors) have embarked on illegal methods of inquiry in Switzerland and elsewhere. This topic is dealt with in some length in my judgment dated 19 January 2007. It is right to say that the contents of the investigators' reports were consistent with improper investigatory techniques having been used to identify and "profile" both bank accounts and credit card accounts. But the outcome of any illegal investigation plays no part in the deployment of the Claimants' case for freezing order relief. Whilst this judgment should not be read as condoning any illegal activity, I see no basis for being reluctant (let alone refusing) to make freezing orders on the Claimants' application.
83. I should also add that the mere fact that such assets as Mr Skarga may have would be a drop in the ocean compared with the claim or even the security that has been posted by Mr. Nikitin is not of itself material. I am not minded to respond in any detail to the question raised by Mr Skarga whether there would be circumstances in which he would be held liable but Mr Nikitin would not. Given the existence of fiduciary duties on the part of Mr Skarga, it is clear that this is a distinct possibility.

Disclosure

84. The Defendants assert the Claimants have been guilty of non-disclosure to the extent that there should be no further freezing order relief even following on this inter partes hearing. The thrust of this complaint is directed at a failure to adduce the minutes of the executive board of Sovcomflot and the reports of Sovcomflot's auditors before Mr Justice Simon.
85. The short answer is this:

i) the failure is the subject of explanation and regret

ii) the minutes and the reports are now available

iii) the issue has already been determined against the Defendants in a judgment of His Honour Judge Mackie dated 24 February 2006.

The Political Battle

86. Lastly I must deal with an assertion that was originally raised by Mr. Skarga and Mr. Nikitin that this litigation is part of a much wider dispute involving political infighting in Russian politics. They invite the Court, as they put it, "not to lend its assistance to the pursuit of those interests by granting the order sought by the Claimants." In the event these points were not pursued.

Summary

87. The outcome is as follows:-

a) The Claimants have leave to amend their Statement of Case to add the Clarkson Commission Claim and the RCB claim.

b) The Claimants are entitled to a further freezing order against Mr Nikitin's assets up to an additional value of $377 million (with proportionate orders against the various relevant defendant companies).

c) The Claimants are entitled to a freezing order against Mr Skarga's assets up to a value of $112 million.