JSC BM Bank v Vladimir Abramovich Kekhman & Ors

Fraud may be established in civil proceedings on the balance of probabilities. The seriousness and inherent improbability of the allegation affect the evaluation of evidence, not the standard of proof. In a circumstantial case, evidence may operate cumulatively; the court need not exclude every alternative explanation.

Where a company’s controller directs or approves materially false financial information supplied to a lender, and the lender relies on it, the controller may be liable for the resulting loss under the Russian Civil Code. The same applies where the controller intentionally causes assets or business to be diverted beyond creditors’ reach. A bankruptcy discharge does not release liabilities tainted by actual dishonesty under section 281(3) of the Insolvency Act 1986.

The claimant bank lent JFC Russia approximately US$150 million and ₽305,732,000. The first defendant, the founder and controlling beneficial owner of the JFC Group, was sued under Russian law for fraudulent financial representations and for causing assets and business to be diverted from JFC companies.

The claimant alleged that inflated Garold revenue and receivables were presented to induce the lending, that a pledge of shares to Sberbank was concealed, and that assets were dissipated to companies beneficially owned or controlled by the first defendant. He denied knowledge, control and involvement, and relied in part on his discharge from bankruptcy. The court determined liability, causation, recoverable loss and the effect of the discharge.

1. Fraud and evidence. The burden remained on the claimant and the standard was the balance of probabilities. Seriousness and inherent improbability required careful assessment and, ordinarily, cogent evidence, but did not create a heightened standard. Circumstantial evidence could be assessed cumulatively; the whole could be stronger than its individual parts.
2. Factual findings. The first defendant retained significant control over the JFC Group after moving to manage the theatre. He was kept informed of its true financial position and required consultation and approval before significant or serious decisions. He was not a truthful witness. The false Garold accounts were produced with his knowledge, instruction and approval. He also directed or approved the concealment of the Sberbank share pledge and the diversion of assets and business.
3. Reliance and causation. The claimant’s credit committee relied on the inflated financial information and the absence of disclosure of the pledge. It would not have made the loans had those representations not been made. The resulting loss was the sums advanced less recoveries.
4. Russian law. Article 1064 of the Russian Civil Code required harm, an unlawful act or omission, causation and fault. Article 1080 imposed joint and several liability for jointly caused harm. Those elements were established. The dissipation claim was also made out, although its quantified loss was subsumed within the recovery for the misrepresentations.
5. Bankruptcy. Section 281(3) of the Insolvency Act 1986 preserved liabilities resulting from actual dishonesty. The first defendant’s liability for the dissipation was therefore not released by his bankruptcy discharge.
6. Disposition. Judgment was entered for the claimant for US$140 million plus ₽305,732,000, less US$5,895,278.81 recovered, with interest. The additional US$18,531,000 dissipation claim was subsumed within that recovery.