Aleksei Egorov, partner of the law firm S&K Vertikal commented events involving OAO “Baltiysky Zavod”.

14 September 2011

“Baltiysky Zavod”, one of the largest and the oldest shipbuilders in Russia shall be obliged to pay over 20 million euros to Swedish shipping company Stena RoRo. Today the Supreme Arbitration Court of the RF delivered the final judgment concerning the dispute that lasted for four years. Experts believe that, given the current financial hardship of the shipyard, recovery of debt may lead to bankruptcy. However, it will hardly allow the company to take away the huge land plot on Vassilevsky Ostrov.

Experts believe that the above decision is not only an important legal and economic precedent, but also as a political precedent able to boost western investor confidence in the Russian legal system. However, some of them stated that the Russian Themis always adopts an impartial attitude toward businessmen who have some misunderstanding with state authorities. In this case the party concerned is Sergey Pugachev, the former senator and banker.

This being said, “Baltiysky Zavod” has entered into the contract for construction of two ocean rollers for Swedish navigation as early as in 2005. The contract contained an option: company’s right to order up to four vessels of the same class at a fixed price, as well as the penalty to be paid by contractor if the latter fails to fulfill such order. The parties agreed to resolve potential disputes in the Arbitration Court at the Stockholm Chamber of Commerce.

Public disorder

However, the new owner, which took possession of the Petersburg shipyard in August, 2005, felt it inexpedient to construct rollers. Tell the truth, new managers notified their Scandinavian partner of their decision to abandon construction of rollers only one year later. Stena RoRo filed a claim against the shipbuilding facility with the Stockholm arbitration court seeking recovery of a forfeiture of 20 million Euros, and the claim was satisfied. This being said, lawyers hired by OAO “Baltiysky Zavod” partially acknowledged the claims of the Swedish company.

However, the customer had some trouble in getting this sum. According to law of nations, an arbitral decision is irreversible, but the domestic court (i.e., the state arbitration) should issue a writ of execution. However, the Russian Themis concluded that the decision adopted in Stockholm contradicts “basic concepts of the RF legal system”.

Moreover, when refusing to issue a writ of execution, the judges stated that recovery of required amount from the strategic enterprise “may lead to the bankruptcy of the enterprise and damage sovereignty” and it “contradicts public order of the Russian Federation”.

At the same time “Baltiysky Zavod” pushed forward to the counter-attack: average shareholders (owning up to the thousandth of one percent of shares) filed a claim with the Russian arbitration court aimed at invalidating the contract with Stena RoRo. According to complainant party, former managers abused their rights and entered into the contract containing knowingly impossible conditions, which include underpricing. At the same time the enterprise didn't even carry out an appraisal of costs associated with construction of rollers, and the cost calculation was made based on zero percent profit.

Today both disputes were handled by the Presidium of the Supreme Arbitration Court of Russia (VAS). Lawyer Lyubov Yerigo representing Stena RoRo has pointed out that OAO “Baltiysky Zavod” is unwilling to perform their contractual obligations and that unwillingness is the sole reason for the conflict. Besides, the arguments about abusing were considered to be unsound by representatives of the Swedish company: “The contract price was knocked-down compared to what? The case contains no proofs of underpricing,” stated the lawyers.

Andrei Grigoriev, the representative of the shipbuilding facility tried to convince court that OAO “Baltiysky Zavod” cannot be blamed for non-performance of thecontract. At the same time, managers of the plant, who represented the former owner, have knowingly entered into an impossible contract to “satiate” the plant with contracts and to sell shares at higher price.

Judges were surprised by position of shipbuilders and shareholders. Vassily Vitryansky, the vice-chairman of VAS, couldn't understand why they deemed the contract impossible and found it the reasonable cause to invalidate the contract. “Why do you refer to “Baltiysky Zavod” as if they were a third party? Didn't they sign the contract?” asked Vassily Vitryansky, but he got no reply. Moreover, shareholders who actively defended the interests of their enterprise couldn't explain their personal financial interests (after all, the company has not been paying dividends for many years).

After almost two hours of disputes VAS has completely affirmed the claim of the Swedish company, and found the contentious contract fully legal. It also obliged the St.-Petersburg arbitration court to issue the writ of execution, so as to recover 20.3 million euros in favor of Stena RoRo AB.

It's a wash-out

Experts are positive about the judgment delivered by VAS, “Domestic experience shows that should your contract stipulate that all disputes shall be resolved by some European court, you shall be compelled to deal with “innovative” handling of legal matters in domestic courts, all the same. Your Western court shall naturally resolve the dispute in accordance with the law, however, the award shall be performed in Russia, one way or another,” explained Andrei Ippolitov from the law company Pen&Paper. “A domestic court may well deny such award referring to some mythical “public policy”. It is mythical since the category is based on no accurate objective criteria.”

The lawyer also emphasized that the Russian courts defended the interests of a commercial entity (this “strategic enterprise” is not even a SUE or MOE). “Unfortunately, the judgment delivered by VAS is unlikely to affect the attitude (of the western companies) towards the Russian court system and, consequently, to making business in this country. The western companies long ago understood that Russia is the country of “risky land management”. They insure risks and include potential costs into the ultimate cost of goods, while domestic end consumers are compelled to pay for these costs,” stated Andrei Ippolitov.

This being said, recovery of this big sum may prove the final nail in the coffin of the old shipyard established in the middle of 19th century. Shareholders of Baltiysky Zavod, who defended its interests in court, also stated that decision of the Steno RoRo may result in bankruptcy of the enterprise. Andrei Grigoriev has also made no secret of the current financial hardship of the shipyard, its shares being pledged to the Bank of Russia as security for the 32 billion rubles credit.

According to recent financial report, the enterprise is unprofitable. It already shows signs of insolvency, such as backdated wages, etc. A number of suppliers and partners (including Rosenergoatom) have filed claims with the court, and part of the property (even vessels under construction) was seized. Moreover, a bankruptcy petition was filed against OAO Baltiysky Zavod with the arbitration court.

The press-service of the enterprise provided no comment as to the decision of the highest court and its consequences, “What are you talking about? We are facing another task- we shall cast the bell tomorrow,” said Gregory Shapovalov, the Head of PR department. He also said that numbers quoted in the financial report were “deceptive”.

Plants to workers, land to developers

The land plot with total area of 60 ha facing the Bolshaya Neva Quay may be considered the most valuable asset of the shipyard. “Of course, the plot is very attractive, first of all to residential developers, and I am not referring to residential property of economy class,” believes Andrei Boykov, investment adviser at NAI Becar.

However, experts see many disadvantages as well. For instance, the area is too large, so no single investor can make the best use of it. “Should several businesses make investments into it, such plan shall necessitate some efforts of municipal administration, to ensure for the benefit of all investors,” believes Andrei Boykov. Moreover, they will be compelled to spent huge amounts of money on land recultivation: Baltiysky Zavod is a hazardous plant, where nuclear reactors are manufactured. Given all circumstances, one can only make a very rough estimate of the value of this land plot: USD 100-150 million.

However, it is unlikely, that developers shall obtain such an attractive land plot, even should the shipyard be declared bankrupt. The point is, the shipyard is a strategic enterprise, specialized in building steam generators for nuclear icebreakers. Moreover, it is a sole shipyard in Russia equipped with building ways for air capable ships, etc. According to Aleksei Egorov, partner of the law firm S&K Vertikal, the law forbids to alienate certain types of the property meant for activities involving performance of works related to State defense order, during external management of such enterprise. “The land plot can hardly be sold during external management,” stated the expert. Andrei Boykov is confident that “No developer shall take any actions until all legal issues are solved.”

The session of the Arbitration court of St.-Petersburg and Leningrad region concerning bankruptcy petition filed against OAO Baltiysky Zavod is scheduled on October, 3.

Anton Odynetz, Kira Obukhova  

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