BANK ST PETERSBURG OJSC & Anor v VITALY ARKHANGELSKY & Anor

Liability under article 1064 of the Russian Civil Code requires proof of harm, causation, fault and unlawfulness. Dishonest enforcement of contractual security may satisfy fault and unlawfulness, but lawful enforcement undertaken in good faith does not. A low auction price, connected bidders, poor commercial judgment or unattractive conduct is insufficient without proof of dishonesty causing loss. An auction is not invalid merely because bidders are affiliated. The question is whether the process was real and competitive. Inferences of dishonesty are determined on the balance of probabilities, having regard to inherent probabilities and the gravity of the allegation. The court must assess the evidence cumulatively rather than piecemeal.

The proceedings were a re-trial of counterclaims brought by Vitaly and Julia Arkhangelsky and Oslo Marine Group Ports LLC against Bank St Petersburg and Alexander Savelyev. The counterclaimants alleged that the Bank and its associates had dishonestly conspired to seize and realise valuable Russian businesses and assets through repo arrangements, enforcement proceedings and auctions, causing harm contrary to article 1064 of the Russian Civil Code.

Hildyard J had dismissed the counterclaims after the original trial. The Court of Appeal allowed an appeal and remitted the counterclaims for re-trial, holding that the original judgment applied too high a standard of proof, contained inconsistencies and failed adequately to assess the evidence as a whole: [2020] EWCA Civ 408. The issues at the re-trial included the validity and conduct of auctions, the value of pledged assets, the ownership of Baltic Fuel and whether the claimants were liable under article 1064.

The counterclaim was dismissed.

1. Article 1064 required proof of harm, causation, fault and unlawfulness. Intentional harm satisfied fault. The counterclaimants had to prove harm caused by the alleged dishonest conspiracy; the burden concerning absence of fault under article 1064(2) did not arise until that stage was established. Good-faith enforcement of contractual rights was sufficient to negate fault.
2. The court applied the balance of probabilities. The seriousness of the allegations did not alter the standard, although inherent probabilities and the gravity of the allegation remained relevant. An inference of dishonesty required sufficiently cogent evidence that dishonesty was more likely than innocence, negligence or a legitimate commercial explanation. The evidence had to be assessed in the round.
3. The Bank was entitled to refuse further extensions, call defaults and act in its own commercial interests, subject to lawful enforcement of its security. The repo arrangements were consensual and were more probably intended to strengthen control over collateral and prevent obstruction than to effect a pre-planned raid.
4. Affiliation between auction bidders did not itself invalidate an auction. The relevant question was whether the process was genuine and competitive, or fictional and collusive. There was no sufficient evidence that independent bidders had been excluded, that the auction organisers were complicit, or that any alleged bid-rigging caused loss. Article 449 also imposed a one-year period for challenging auction validity, although proven dishonesty causing loss could support a separate article 1064 claim.
5. The valuation evidence established that the auction realisations fell within reasonable market-value ranges. The counterclaimants therefore failed to prove harm. Their allegations of dishonest conspiracy also failed: the Bank’s sometimes dishonest, oppressive or unattractive conduct did not establish an intention to misappropriate assets, and the evidence did not show that Baltic Fuel was owned or controlled by the Bank or Savelyev.

1. High Court, Chancery Division: Hildyard J dismissed the counterclaims after the original trial: [2018] EWHC 1077 (Ch).
2. Court of Appeal: allowed the counterclaimants’ appeal and ordered a re-trial, holding that the original judgment applied too high a standard of proof, contained inconsistencies and failed to assess the evidence cumulatively: [2020] EWCA Civ 408.
3. High Court, Chancery Division: on the re-trial, Mr Justice Trower dismissed the counterclaim.