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Court upholds worldwide freezing order in sham charterparty dispute

04.04.2019 Shipping

Jamila Khan

Jamila Khan Partner

Anna Devereaux

Anna Devereaux Managing Associate

Manchester Shipping Ltd v. (1) Balfour Worldwide Ltd & (2) Mr N V Sochin [2019] EWHC 194 (Comm)

The underlying dispute in this case involved allegations of fraud and sham charterparties. The English Court upheld a Worldwide Freezing Order (“WFO”) granted against the Defendants’ assets in an application brought by the Claimants (“Manchester”). The WFO was granted in the context of Manchester’s claim that the Defendants had fraudulently conspired to divert hire of over US$5.5 million under several charterparties.

The Court dismissed arguments that Manchester had not suffered any damage, that it did not have a good arguable case capable of supporting the WFOs and/or that the WFOs were neither just nor convenient. The Court also dismissed allegations that Manchester was guilty of breaching its duty of full and frank disclosure.

The background facts

Mr Sochin (“S”) and his former business partner, Mr Branov (“B”), jointly operated an international shipping business through a web of companies. S and B fell out and there were disputes between them which resulted in legal proceedings in various jurisdictions.

Manchester was one of the companies S and B used to charter vessels to third parties. The hire received (less a small commission) would be remitted by Manchester to companies forming part of the joint business.

There were three vessels involved in this dispute – however, the contractual chain was not clear. It was Manchester’s case that the charter chain was undocumented. The vessels were bareboat chartered to Ark Shipping (“Ark”). Ark chartered the vessels to Silverburn, which in turn chartered them to Manchester. Manchester would then let the vessels to third parties at a market rate. Manchester was liable to remit 99% of any hire received to Silverburn, the balance being Manchester’s commission.

Manchester said that it let the vessels to KGK under a series of written charterparties and that US$5.5 million in hire remained unpaid. Manchester contended that it was not paid hire by KGK because the Defendants wrongfully sought to divert those payments to Balfour by fraudulently procuring KGK and Balfour to enter into sham charters, the material terms of which mirrored those of the Manchester charters (“the Balfour Charterparties”).

The Defendants argued that Ark, rather than Silverburn, chartered the vessels to Manchester. They produced written charterparties in support of their contention. The Defendants claimed that the hire ought to have flowed up from KGK to Manchester and then to Ark. They said that B wanted to avoid this outcome as Ark was now controlled by S and so B sought to ensure that the hire flowed instead to Silverburn, which he controlled.

The Court noted, however, that the Defendants had previously argued that the hire was payable to Balfour pursuant to the concocted Balfour Charterparties and Balfour had, in fact, brought proceedings in Russia against KGK. The Defendants later admitted that the Balfour Charterparties were a sham authored by S.

Manchester intervened in the Russian proceedings and then brought separate claims against KGK for the unpaid hire. Manchester then assigned its rights of action against KGK to a Russian entity, Morshelf, under a deal whereby Morshelf would remit to Manchester the first $2.3 million of any sums recovered from KGK, and retain any further recoveries.

The English proceedings were concerned with the KGK claim and the WFOs were granted in respect of that claim. The Defendants applied to discharge the injunctions, which had been granted ex parte.

The Commercial Court decision

i.No loss

The Court considered the argument that Manchester had suffered no, or no substantial, loss. There was no dispute that Manchester had a good arguable case on liability, the Defendants having admitted that they concocted the Balfour Charterparties. The critical issue was whether Manchester had a good arguable case that it had suffered loss and damage in the amount of the hire (accepting that credit would be given for any sums that were received from Morshelf).

The Court found in favour of Manchester. There was a good arguable case that the Defendants’ conspiracy to divert payment of the hire to Balfour had caused Manchester not to be paid the sums due by KGK under the relevant charters. Specifically, a backdated letter by S to KGK stating that hire was due to Balfour under the fabricated Balfour charterparties had resulted in KGK refusing to pay hire to Manchester. The Court found that the ordinary risk of enforcing a straightforward debt claim against a counterparty is very different to the risk that materialised as a result of the Defendants’ conduct. But for the Defendants’ interference, KGK might well have paid the hire to Manchester.

The Court rejected the argument that Manchester had only suffered loss in respect of 1% of the hire, which it was entitled to retain as commission. The full hire (not just the 1% commission) was payable to Manchester and accordingly, it was entitled to sue for the full amount. The arrangements it made in respect of any onward payment were not relevant to the question of its loss.

ii.Material non-disclosure

The Defendants also submitted that the WFO should be discharged on the grounds that Manchester committed multiple and serious breaches of its duty of full and frank disclosure to the Court when it applied for the WFO.

The Court revisited the principles applicable in considering whether there was a material non-disclosure. The test is whether the matter not disclosed would be relevant to the exercise of the Court’s discretion. A fact is material if it would have influenced the Court when deciding to make the order or deciding on its terms. Among other things, the applicant has a duty to: disclose all facts which reasonably would or could be taken in to account by the Court; investigate the facts and fairly present the evidence to the Court; draw the Court’s attention to significant factual, legal and procedural aspects of the case and; draw the Court’s attention to weaknesses in his case and make sure the Court understands what may be said on the other side.

The Court, however, dismissed the application and was critical of the Defendants. Neither the evidence nor the written submissions served by them identified with precision the facts and matters alleged not to have been disclosed. The Defendants took a scattergun approach of making a large number of generalised complaints and this was deemed unsatisfactory.

Comment

This is another shipping case involving fraud, which is interesting because it confirms that Manchester was entitled to claim the whole of the hire due from KGK – not just the 1% that it was entitled to keep by way of commission. It also provides a useful reminder of the approach taken by the English Courts in relation to WFOs and, in particular, allegations of non-disclosure. The decision illustrates the English Courts’ intolerance of parties who engage in fraudulent activities and subsequently seek to hide behind technical legal and procedural arguments.

Article authors:

Jamila Khan Anna Devereaux