Slocom Trading Ltd & Anor v Tatik Inc & Ors

A document is not a sham merely because it contains inaccurate recitals, misdescriptions or artificial arrangements. The question is whether the parties shared an intention that the document should create different rights and obligations from those it appeared to create. A transaction entered into for an ulterior purpose may remain effective according to its terms.

Under Insolvency Act 1986, section 423, the transaction must be at no consideration or an undervalue and entered into for the real substantial purpose of prejudicing creditors. A valid assignment of a debt may have consideration where the assignee assumes the assignor’s corresponding liability to account for the debt proceeds.

Slocom Trading Ltd and Derbent Management Ltd claimed against Tatik Inc, Sibir Energy plc and Maritime Villa Holdings SCI in relation to loans made from money beneficially owned by the Kruglov family and secured against Tatik’s shares and the Villa Maria Irina.

The principal issues were whether the Derbent-Tatik Loan Agreement and related stock pledge were shams; whether those instruments or the assignments to Slocom were transactions defrauding creditors under section 423 of the Insolvency Act 1986; whether the defendants breached contractual priority arrangements; whether Sibir and Maritime induced breaches of contract; whether the sale of the Villa was impeachable; and whether Maritime acquired the Villa subject to an equitable mortgage.

1. Validity of the loan documents. The Derbent-Tatik Loan Agreement and the Second Tatik Stock Pledge were valid and effective. The parties intended Tatik to assume liability for the outstanding lending, including the loans made to companies controlled by Mr Tchigirinski. Errors in the stated dates, descriptions and calculations did not make the agreement a sham.
2. The test in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, as explained in Stone v Hitch [2001] EWCA Civ 63, applied. The issue was the parties’ common intention, assessed with external evidence. An ulterior purpose or an artificial or uncommercial transaction was insufficient.
3. The loan agreement was not entered into for the substantial purpose of prejudicing Mr Tchigirinski’s creditors. It therefore was not impeachable under section 423, and the stock pledge was not impeachable either. The assignment from Derbent to Slocom also did not fall within section 423 because Slocom assumed Derbent’s corresponding liability to account for the loan proceeds.
4. Tatik was liable to Slocom in debt, save for the sum wrongly included for the Capitalised Interest Loan. If necessary, Tatik was also bound by contractual estoppel as to the agreed basis of its liability. The court applied the principles discussed in Springwell Navigation Corporation v JP Morgan Chase Bank [2010] EWCA Civ 1221, subject to the established equitable exceptions.
5. The sale of the Villa breached Tatik’s obligations because it occurred without Slocom’s effective consent and the proceeds were not applied first to the Slocom debt. Sibir and Maritime knowingly induced breaches by Mr Tchigirinski and Tatik. The sale itself was not impeachable under section 423.
6. Maritime purchased the Villa with notice of the contractual obligation to grant security. The obligation gave rise to an equitable mortgage, binding Maritime. Further argument was invited on the appropriate remedy for foreign land.
7. Sibir’s claim to set aside its settlement with Derbent failed. The statement concerning Mr Towers was not a contractual warranty, and the balance sheet warranty was not breached because the loan had validly been assigned to Slocom.

There was a declaration that the Villa was held by Maritime subject to an equitable mortgage in favour of Slocom. The remaining consequential orders were left for further argument.