Sibir Energy Ltd & Ors v (1) Slocom Trading Ltd & Ors

The Court of Appeal dismissed the appellants' challenge to Roth J's findings at first instance. Two principal legal issues were considered: (i) whether the December 2008 loan agreement (the "December Loan Agreement") was a sham and therefore unenforceable, and (ii) whether the subsequent assignment of Derbent's rights to Slocom was voidable as a transaction at an undervalue under section 423 of the Insolvency Act 1986. The court affirmed the judge's application of the law on sham (derived from Snook and later authority) and his distinction between recitals and operative provisions: construing the agreement as creating a new liability of Tatik was permissible and the judge was entitled to find that, by August 2008, the parties subjectively intended that Tatik should assume liability when able, so the document was not a sham. On section 423 the court accepted Roth J's finding that, although the assignment was intended to put the asset beyond the reach of Sibir (a fraudulent preference), it was not a transaction at an undervalue; an obligation by Slocom to exonerate Derbent in relation to accounting for proceeds was properly implied as consideration and no undervalue arose.

This was an appeal from Roth J's judgment following a 12-day trial concerning an international complex of loans, security and an ultimately controversial sale of a high-value French property (the Villa). The factual matrix involved loans made (through intermediaries) to or for the benefit of the ultimate beneficial owner of the Villa, the creation of written documents in August and December 2008, and a hurried assignment of the loan and related security to Slocom on 24 December 2008 after discovery of suspect transactions. The claimants (Slocom and Derbent) sought to enforce the December Loan Agreement and related security and to uphold an equitable mortgage over the Villa; the defendants (Sibir, Maritime and Tatik) advanced two principal defences on appeal: that the December Loan Agreement was a sham and that the Assignment Agreement was voidable under section 423 of the Insolvency Act 1986.

Procedural posture: appeal from the Chancery Division (Roth J), judgment of first instance reported at [2012] EWHC 3464 (Ch); permission to appeal granted by Kitchin LJ. The Court of Appeal heard focused grounds: (1) the judge erred in rejecting the sham defence to the December Loan Agreement, and (2) he erred in rejecting the s.423 attack on the Assignment Agreement.

Issues framed:

• Whether the December Loan Agreement was a sham because it misdescribed past dealings or lacked the parties' true common intention to create the rights and obligations it appeared to create;
• Whether the Assignment Agreement was a transaction at an undervalue under s.423 because Derbent purported to assign the loan and security without receiving adequate consideration and thereby defrauded Derbent's creditors (notably Sibir).

Court's reasoning: The court endorsed the judge's legal exposition of sham: the test is subjective and requires a common intention to create a false appearance of legal rights and obligations. The judge properly focused on the operative provisions creating rights going forward rather than on recitals that misdescribe history. He accepted the claimants' construction that clauses 2 and 3 of the December Loan Agreement created a new liability of Tatik (the "New Loan" case) and found, on the evidence, that a shared subjective intention for Tatik to assume the debt had crystallised by August 2008 (even if implementation had to await recovery of control of the shares). The burden of proof lay on the defendants alleging sham and they did not discharge it. On s.423 the judge accepted that the assignment was motivated to put the asset beyond Sibir's reach (a fraudulent preference) but held that s.423 applies only to transactions at an undervalue; he found there was consideration because Slocom impliedly undertook to exonerate Derbent from its accounting obligations to the original funders, and that the value exchanged was equivalent to the rights assigned. The Court of Appeal found no error in law or unsustainable findings of fact and dismissed the appeal.

The appeal was dismissed. The court upheld Roth J's findings that the December Loan Agreement, properly construed, created a new liability of Tatik and was not a sham because the judge was entitled to find the parties' subjective intention (formed by August 2008) that Tatik should assume the debt when able; and that the Assignment Agreement was not voidable under section 423 because it was not a transaction at an undervalue, the assignee's implied obligation to exonerate Derbent providing adequate consideration.

Appeal from the Chancery Division before Roth J (trial decision reported at [2012] EWHC 3464 (Ch)). Permission to appeal granted by Kitchin LJ on 2 December 2013. Judgment on appeal delivered by the Court of Appeal (Briggs LJ, Tomlinson LJ and the Chancellor of the High Court) on 17 June 2014, dismissing the appeals.