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By John Helmer, Moscow

The Supreme Court, the final court of appeal in the UK, issued a rejection notice on November 10, denying the Sovcomflot subsidiary, Novoship, an appeal against its defeat in the Court of Appeal on more than $150 million in claims against former chartering partner, Yury Nikitin, and companies associated with him. A three-judge panel of the court ruled the Sovcomflot group’s “application does not raise an arguable point of law”. The court also penalized Sovcomflot and Novoship by ordering them to pay the legal costs of Nikitin against whom they have been litigating in London for a decade.

The text of the Supreme Court ruling can be read here. There has been no official comment from the company.

In Sovcomflot’s most recent audited financial report, issued on June 30, the company’s auditors claimed that in the Court of Appeal the company “succeeded in confirming the trial judge’s findings of fact and the defendants’ liability to pay $410,379. That sum, together with interest, totalling $664,091 was received by the Group in August 2014.” Sovcomflot had been claiming more than $150 million (principal and interest) in court, so the award was a minuscule fraction of the claim, and of the success the note reported. A source close to the case says the legal costs incurred in pursuing the money are likely to be far greater than the recovery.

Sovcomflot has no public shareholders; it remains an unlisted state corporation, and the state interest is represented on the Sovcomflot board by several agencies, including the Ministry of Transport, Vnesheconombank, Aeroflot, and Transneft. For the record of Sovcomflot’s failed attempts to privatize and sell shares over the past decade, read this.

The two independents on the board, who have voted to approve the wording of the latest financial report, are David Moorhouse (rear row, 3rd from left) and Charles Ryan (rear, 4th left).

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Source: Sovcomflot Annual report for 2013, page 10-11

Moorhouse, a British passport holder, is a professional associate of Sovcomflot’s chief executive Sergei Frank (front row, 2nd from left; also lead image). They negotiated with each other in 2006 when Frank was threatening libel litigation in the High Court against Fairplay, a London maritime publication part-owned by Moorhouse’s company at the time, Lloyds Register. Moorhouse reports that “for services to shipping” he received a British medal in 2009, and a Russian one in 2013. He is one of the supervisors of Sovcomflot’s British court litigation as a member of the Sovcomflot board’s audit, remuneration and strategy committees.

Charles Ryan, a US citizen, has been a veteran investor in Russian state privatizations for a variety of commercial banks. That makes him an insider in the abortive efforts Sovcomflot has made to sell its shares, either by an initial public offering in London and New York, or by the sale to a strategic Russian investor. In warmer days, the frontrunner for that option was Gennady Timchenko.

Ryan currently describes himself as general partner of Almaz Capital, a Moscow fund manager, as well as chairman of UFG Asset Management and a senior advisor to Deutsche Bank AG. According to an alumni publication of Harvard University, where Ryan was an undergraduate, he “shares his expertise with a working group convened by Harvard’s Davis Center for Russian and Eurasian Studies to explore issues in current U.S.–Russia relations.”

According to the board-approved wording of the June financial report, Sovcomflot claims its appeal to the Supreme Court in the Novoship case was intended to overturn the earlier ruling that Sovcomflot had failed to demonstrate either causation or proportionality in its allegations of corruption against Nikitin and others associated with Novoship, before Frank took over the group in the autumn of 2004. “If that appeal is allowed and successful, the Group may again [sic] be entitled to $108.5 million plus interest. The Group provided security of $4.0 million in Court to fortify cross-undertakings in damages in respect of $90 million of security provided by the defendants to the claim.”

What this means since Monday’s judgement, case lawyers say, is that Sovcomflot now faces a cross-undertaking claim from Nikitin that may exceed the $4 million it has already lodged, plus Nikitin’s lost interest and profits while his $90 million was in court custody; plus the costs of the failed legal proceedings in the Court of Appeal and Supreme Court. The wager Frank persuaded Moorhouse and Ryan to vote for — $4 million to win $108.5 million – has bounced. How much the London litigation is costing Sovcomflot is buried in the “general and administrative expenses” item of the current accounts. This was $51.5 million in the six months to June 30, almost unchanged compared to a year ago. Sovcomflot doesn’t provision for the losses it has been taking in the London courts.

The Court of Appeal judgement, which now stands and which triggers the fresh Nikitin claim, was spelled out in July, and reported here and here. According to the now final judgement of the appellate judges, “corruption rots the entire business relationship between principals once the agent through whom negotiations are conducted is known to have taken bribes. That is so even if the bribes are given by a principal to other transactions, but the bribes are known about (and shared in) by the parties to the transactions in question.” Notwithstanding, “since the ship owning companies [Novoship] wished to avoid the risk of fluctuating rates for freight, and wished to secure a long term income, they necessarily wished to lay off the risk on to the charterer. Thus the profits that Mr Nikitin in fact made were the kind of profits that the ship owning companies deliberately decided to forgo. In our judgment they cannot be described as profits which ought to have been made for the beneficiary, and therefore they fall outside the rationale for the ordering of an account [repayment].”

On March 6, 2013, appellate court judge, Lord Justice Sir Andrew Longmore, declared in open court that Sovcomflot’s litigation was “a vindictive claim rather than a compensatory claim.”

fairfaxSovcomflot doesn’t report bad news from London. The company does disclose that one of its London managers, Nicholas Fairfax (right), testified recently in a House of Lords hearing on Arctic seafaring; and that the Platts media company of New York has short-listed Sovcomflot for this year’s 2014 Global Energy Awards. Including Sovcomflot, the Platts short-list counts 151 candidates. The awards ceremony is to be held next month at the Waldorf Astoria Hotel in New York.

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