By John Helmer, Moscow
Joint Fruit Company (JFC), once the owner of Russia’s largest fleet of banana boats and the largest importer of bananas in the Russian market, is slipping on something much bigger than one of its own fruit skins. But the company and its owner, St. Petersburg entrepreneur Vladimir Kekhman, insist everything is ship-shape. More, they say — it’s British justice and five High Court judges who are at fault for JFC’s troubles. Kekhman owns 80% of JFC through Cyprus and British Virgin Island-registered entities, Huntley and JFC Group Holdings. Bank of St. Petersburg owns a 20% stake.
Early this month, the European Bank for Reconstruction and Development (EBRD) disclosed that a $50 million loan, which has been negotiated with JFC and apparently agreed almost a year ago, has not been “signed”. An EBRD source declined to say what exactly has halted disbursement of the funds. The tentative loan announcement appeared on December 10, 2010. “All I can say is that no such loan has been signed,” announced Richard Wallis, spokesman for the EBRD in Moscow on September 5.
The next day JFC defaulted on a $16.3 million payment order issued by the High Court in London An announcement from London-based specialist in seaborne transportation of chilled and frozen cargoes, Star Reefers, followed on September 9. Along with papers filed in the High Court, Star charges that a 3-year charter agreement between it and JFC for three vessels, Almeda Star (1991), Cape Town Star (1993) and Avelona Star (1990), had been improperly cut short by a year. JFC’s Cyprus subsidiary Kalistad had announced it was terminating the charter agreement on September 15, 2010, claiming Star had failed “to maintain the vessels in the operational conditions in line with technical parameters stated in the Charter Party.”
JFC isn’t disclosed in the Kalistad announcement as either owner of the Cyprus front-company, or the guarantor of its financial obligations. But the press release does make the admission that the Russian group didn’t want to pay the bill for its chartering contract. “Taking into account the [Star Reefers] hire rate that is significantly higher than the market level for the last 1,5 years Kalistad had every reason to hope for a different kind of service.”
In fact, Star has argued in court, JFC had wanted to exit the fleet operating business after it ran into financial difficulties during the 2008 crisis, and found itself obligated to pay contract rates roughly double the spot cargo market rates offered by a Maersk service between Ecuador and St. Petersburg. Maersk’s new banana delivery route to Russia was inaugurated by Prime Minister Vladimir Putin on March 22, 2010 .
At that time, Kekhman was reported to be over-leveraged; that he might have pledged JFC’s onshore assets to secure real estate project loans; and that Russian banana prices and thus JFC’s revenues were falling .
In addition to canceling the Star vessel charters, JFC had sold five of its own vessels to scrap, and cancelled another 2 new vessel orders with another refrigerated cargo company, Seatrade Reefer of Antwerp .
A month after the Kalistad announcement, Star filed an arbitration claim and also a lawsuit in London, applying to the High Court to enforce the payment guarantees issued by JFC for the Kalistad charters. The guarantee documents said, among other things, “we [JFC] hereby certify that our company guarantees the performance of the Charter Party dated 04-04-2008 of m/v Almeda Star, Avelona Star, or Andulucia Star for account of our Nominee, Kalistad Limited, Nicosia.” A guarantee dated July 15 used identical language to promise payment by JFC for Kalistad in the charter agreement for the Cape Town Star.
|On the signature line of the guarantees there was the signature of Andrei Afanasyev, then titled “commercial director, on behalf of JFC Group, St. Petersburg.” Afanasyev is now identified on JFC’s website as vice president of the JFC group of companies and a director on the group board; he ranks third on the company hierarchy after Kekhman.|
To stop enforcement in London, Kekhman ordered his lawyers into a St. Petersburg court to argue the guarantees were invalid under Russian law. Star then won an injunction from Justice Christopher Clarke in London, followed by a second ruling from Justice Sir Nigel Teare, who called the Russian court tactics “vexatious and oppressive”.
Three other High Court judges ruled separately that the guarantees signed by JFC were valid and enforceable under UK law; that the Russian company and its executives had formally accepted UK jurisdiction in the event of charter contract disputes; and that JFC’s allegations of faulty service and vessel breakdowns were spurious. The attempted hijacking of the legal proceedings to safe haven in Kekhman’s home town was challenged by the British judges, one of whom warned JFC in his ruling on November 23, 2010: “I consider more likely than not that the Russian proceedings were commenced with a view to frustrating the determination of the dispute in England. The Russian proceedings were commenced after arbitration proceedings had been commenced in England and were commenced without warning [to Star].”
The best JFC could argue in the London court through Steven Gee QC was that governing the guarantees and the payment obligations, “the applicable law was Russian, being the law with which the guarantee was most closely connected”. The High Court rejected that, concluding that JFC had itself opted for UK law and UK jurisdiction for its 2008 contract with Star, and with an earlier one in 2006. The London rulings also indicate that JFC was wrong on Russian law. They add to the suspicion on Star’s part that it was not Russian law, but Russian telephone justice, that may have been the objective of the St. Petersburg moves.
A professor of law at Moscow State University, Ivan Zenin, testified in a report for JFC in the London proceedings. He claimed that although JFC had signed the guarantees, Star had not signed another document constituting an “acceptance”. For that reason, Zenin argued, there wasn’t, under Russian law, an enforceable contract of guarantee. That was wrong, according to Justice Teare, who ruled there had been “an exchange of documents between the parties…It is very difficult to accept, notwithstanding Mr Zenin’s arguments to the contrary, that in Russian law such an exchange does not result in a binding guarantee.”
In addition to revealing JFC’s attempt at using the Russian courts to avoid paying on its contract, the court papers open up unusual evidence of how Kekhman does his banana business using offshore trading intermediaries. Thus, it is revealed that in June of 2010 a cargo of 156,192 boxes of bananas was shipped from Ecuador by a JFC subsidiary, Bonanza Fruit Co. SA Corbonanza. Part of the fruit cargo was intended to be delivered and sold to a Libyan company in Tripoli, Altafadul. But by the time the Libyans opened their boxes, the bananas were unfit for sale. The Libyan buyers then sought compensation.
According to the facts spelled out last month in the High Court by Justice Nicholas Chambers, JFC claimed that before its cargo had reached Libya, it had been sold to another company called Garold Projects Ltd. This entity appears to have no relationship with JFC, Bonanza, or Kalistad, the vessel charterer. So the Libyans arrested the vessel, the Avelona Star, to enforce their demand for compensation. Through Kalistad, JFC said it had no responsibility for what had happened, and that liability to Libyans was owed, not by JFC, but by Star, the owner and operator of the delivery ship. JFC then issued its September 15, 2010, termination of charter contract, adding that blame for “deteriorating of cargo quality, commercial and reputational losses” was entirely Star’s.
A month later, the cargo’s German insurer paid the Libyans $600,000 and the vessel was released from Tripoli.
Fast forward by nine months and three additional rulings by the High Court to August 23, 2011, when Justice Chambers issued a 21-page judgement on the case .
The judge concluded that JFC “guaranteed the performance of the charter parties and it is liable for any failure in such performance.” Kalistad had “wongfully repudiated” its agreement, Chambers said, and as result, the JFC group owed Star $16.245 million in loss of profits, unpaid hire, unpaid pilot fees and port charges, and other losses.
JFC claims that it hasn’t seen the ruling.
Star’s chief executive Simon Stevens has warned publicly that Russian companies found culpable in the UK courts are on notice that “those who renege on their commitments will properly be held to account.” JFC’s attempts to use the Russian courts to shield itself from contract liabilities have also been taken to task by Star executives, and by the British judges.
In parallel, another major Russian shipping company facing millions of dollars in UK High Court-orders is state-owned tanker fleet operator, Sovcomflot, run by Sergei Frank. It is claiming that a pending appeal of three High Court rulings of last December and March, awarding legal costs, fees and indemnities against the company, can be delayed until the appeal is heard in October. Justice Andrew Smith, the High Court judge in the Sovcomflot case, has also ruled against JFC in the London litigation, dismissing JFC’s rationale for proceeding in a Russian court as “difficult to understand.”
A source close to Star told Fairplay: “It was their nominee charterer who agreed English law in the contract. They have received a large syndicated loan from several banks earlier this year, and [the September 6 default] is more a case of can pay, won’t pay.”
JFC’s website does not refer to the Star Reefers claim or the court judgements. The most recent performance indicator published by JFC is four years old: “In 2007 JFC Group sold almost 500 000 tonnes of fruit and vegetables. Almost 70% of this was bananas. JFC Group controls more than 25% of the Russian banana market and almost 15% of all imported fruit. According to independent research conducted in 2007 the Group’s banana brand Bonanza! was the most popular banana brand in Russia.” The company’s international credit rating is reported from Standard & Poors as CCC+/Negative; that too appears not to have been updated since the start of the London litigation.
A JFC source declines to say what JFC’s revenues, earnings and profit and loss line currently are. “Unfortunately, the information for half-year periods is not disclosed. JFC Group’s revenue for 2010 amounted to $718.381 million; net income totaled USD 3.54 million.”
If revenues and earnings are not significantly better this year, the size of the High Court payment order may tip Kekhman’s balance-sheet into loss.
Andrei Semyonov, JFC’s spokesman, told Fairplay in Moscow: “at the moment JFC Group has not received any court ruling from London. JFC Group is a Russian company, and therefore any claims to it should be examined in Russia under Russian law. But the sad practice of aggressive expansion of British jurisdiction into many countries, including cases against Russian companies has been long and well known….If this case was heard in a Russian court, we can assume with high probability that the outcome would have been different.”
Lawyers close to the case say JFC and its London lawyers, Swinnerton Moore, had decided not to appear at last month’s hearing before Justice Chambers. After notification of the judgement, they did not lodge an appeal by the court deadline last week.
As for JFC’s financial condition, Semyonov told Fairplay it is now being financed by state-owned Bank of Moscow on better terms than EBRD was offering. “The negotiations with EBRD were held a year ago,” according to Semyonov, “and we failed to reach an agreement acceptable for both parties. JFC Group decided to take advantage of more favorable credit terms proposed by a number of commercial banks.”
“During the past 12 months the Group received a syndicated loan of $138 million. In August the group also reached an agreement with Bank of Moscow. The Bank set a credit limit of $ 150 million for JFC Group. The first tranche amounting to $93.1 million for the period until August 29, 2014. The funds are used for refinancing the loans and replenishing the working capital.”
An earlier statement from JFC, dated March 29, 2011, told the market that “JFC Group Co. Ltd. [sic] is pleased to announce the successful closing of a new Club facility coordinated by Raiffeisen Bank…” JFC said it was being loaned $88 million and Rb1.5 billion ($50 million) from a syndicate including Sberbank, the state savings institution of Russia. Also participating were the Russian affiliates of Societe Generale (France), Unicredit (Italy) and Amsterdam Trade Bank. The interest rate is a high one – LIBOR plus 4.25% to 6%, “depending on the leverage ratio of the Group”.
According to Kekhman, “this deal once again confirmed the confidence of the banking community in the solid market position of the company and its stable financial standing.”
The banks do not comment on the due diligence they conducted prior to the loan agreement, or the security pledges for the loan. It is not possible to report whether the banks, including the EBRD, have verified how title to JFC’s banana shipments changes during the shipment process, before reaching their destination.
On May 31 of 2010, the Russian affiliate of Nordea Bank of Denmark agreed to lend JFC $15 million. Although Nordea said “no security is envisioned in the facility agreement”, the Danes may have judged that JFC banana transportation by Maersk gives the bank recourse in case of default or covenant breaches.
A source close to the London litigation told Fairplay that investigation has recently revealed that title to operating assets of JFC in Russia may have been transferred to foreign shelters in recent months. There has been no response from JFC for a request to clarify the details.