Brief note on the main legal disputes with Nikolai Maximov and related parties
Courts have ordered Nikolai Maximov to pay NLMK and Maxi-Group a total of over 14 billion rubles
Maximov demands Maxi-Group repay 1.4 billion ruble loan
In November 2007, as part of his SPA with NLMK, Maximov committed to allocate 7.3 billion rubles in financing for Maxi-Group’s investment programme from the funds received from NLMK for selling the business. He signed the financing contract with Maxi-Group in January 2008.
Nevertheless, Maximov failed to direct the funds towards the investment programme. Taking advantage of having operational control over Maxi-Group, he spent 1.4 billion rubles as he saw fit within a month of receiving the loan; and demanded the remaining 5.9 billion rubles back, invoking his contractual right to extract loan funds at any given time without any explanation. The loan agreement was approved retrospectively by Maximov himself at an extraordinary meeting of Maxi-Group shareholders, which was held without the participation of NLMK, a controlling shareholder at the time.
The first litigation was initiated by Maximov himself. On 15.01.2009 he filed a lawsuit with the Kirov District Court in Yekaterinburg, demanding Maxi-Group repay a debt of 1.4 billion rubles under the loan agreement; as well as interest and damages that, according to Maximov, exceeded 771 million rubles, or 54%, at the date the claim was lodged.
In turn NLMK, in an effort to protect the proprietary interests of Maxi-Group, filed a lawsuit with the Arbitration Court of the Sverdlovsk Region, demanding the annulment of the loan agreement with Maximov; and the retraction of the decisions of the Maxi-Group shareholder meeting approving the agreement in the absence of representatives of NLMK.
Order #17 AP-5165/2009 GK of the Seventeenth Arbitration Court of Appeal d.d. 08.07.2009 on case А60-37993/2008 annulled the loan agreement.
The court established that Maximov had abused his position as CEO and member of the Maxi-Group board of directors; having entered into a related party transaction in his own personal interests, which led to unfavourable consequences for the company, i.e. accelerated loan payoff and imposing additional damages.
The court also recognized that Maximov was responsible for depriving NLMK of its legal right to participate in the Maxi-Group shareholder meeting and to vote on the approval of the loan agreement; and for completely excluding NLMK from the management of the company.
This was further confirmed by Order #17 AP-7299/2009 GK of the Seventeenth Arbitration Court of Appeal d.d. 02.09.2009 on case А60-6089/2009 that invalidated the decisions passed by the Maxi-Group extraordinary shareholder meeting on 11.02.2008 in the absence of NLMK, the majority shareholder excluded from the management of the company; with decisions being passed by Nikolai Maximov who owned less than 50% of the shares.
Maximov violated his agreement with NLMK, failing to fulfil his commitments to finance Maxi-Group’s investment programme.
Violations related to the placement of Maxi-Group bonds
Courts determined that Nikolai Maximov abused his position as the CEO of Maxi-Group to funnel its funds through his related companies.
Proceedings, resulting in Order #677/10 d.d. 25.05.2010 on case #А60-8398/2009 being issued by the Presidium of the Supreme Arbitration Court of the Russian Federation, exposed the fact that Maximov had been deceiving participants of the securities market; and more specifically Maxi-Group bond owners.
In 2006, Maxi-Group made a bond placement in the amount of 3 billion rubles. The offering statement expressly prohibited the issuer from purchasing any of the bonds using their own funds. In reality, only half of the issue was floated on the market, with the remaining bonds bought out using Maxi-Group funds through related loan agreements with Uralsnabkomplekt, a company that was formally not connected by Maximov but in fact controlled by him. This was later confirmed by Order of the Seventeenth Arbitration Court of Appeal d.d. 27.02.2012 on case А60-1260/2009. Market participants that purchased Maxi-Group bonds and were misled with regard to the results of the offering, were unable to exercise their right to the immediate repayment of bonds that arises in cases where the terms of the offering are violated.
In March 2009, having established the doubtful nature of its Uralsnabkomplekt receivables, one of the Maxi-Group companies filed a lawsuit demanding the annulment of a loan transaction in the amount of 1.45 billion rubles.
The Presidium of the Supreme Arbitration Court of the Russian Federation qualified all these transactions as fraudulent; having identified that the buyer and the issuer of the bonds were related.
Maximov’s subsidiary liability for Uralsnabkomplekt debt
Uralsnabkomplekt’s debt to Maxi-Group companies totalled 6.4 billion rubles; and was not limited to funds used for the illegal bond purchase. The courts established that Uralsnabkomplekt was in fact controlled by Maximov. Subsequently, the company’s bankruptcy manager filed a lawsuit demanding Maximov be brought to subsidiary liability with regard to Uralsnabkomplekt debt to Maxi-Group for the entire amount aforementioned.
When selling the Group, Maximov gave assurances that the receivables were recoverable and stemming from arm's length transactions. As a result, these receivables were accounted for when determining the overall value of Maxi-Group businesses.
The Order of the Seventeenth Arbitration Court of Appeal d.d. 27.02.2012 on case А60-1260/2009 brought Maximov to subsidiary liability with regard to Uralsnabkomplekt debt in the amount of 6.4 billion rubles.
Courts established that one of the goals Nikolai Maximov was pursuing when starting this company was to ensure operational control over an organization that was not formally a part of Maxi-Group; and to create an appearance of it participating in civil transactions as an independent entity.
The company’s liabilities were attributed to production entities that were part of Maxi-Group; whereas the debtor’s receivables were attributed to companies controlled by Maximov; and formally outside the Maxi-Group perimeter; and that at the time of the proceedings were either bankrupt; or had already been dissolved. Using the company’s settlement account, current assets were tunnelled from Maxi-Group to organizations controlled by Maximov personally.
The model set up by Nikolai Maximov, who in actual fact was in full control of the Group’s debtors; and created them to make it seem like they were independently participating in civil transactions; was qualified by the courts as potentially detrimental to the business and its investment processes. This model enabled the artificial accumulation of unrecoverable debt by functioning businesses; before dissolving the artificially created debtor companies through initiating bankruptcy proceedings.
Court orders on annulling the sale of Maxi-Group
Other violations of Maximov’s warranties and representations related to the deal with NLMK were brought to light by the Ural District courts in the course of case #А60-41280/2010 proceedings. The court determined that, contrary to Maximov’s claims that Maxi-Group was a running business and that none of the Group’s companies were facing any risk of bankruptcy, both Maxi-Group itself and OJSC Metallurgic Holding were eligible for insolvency proceedings.
For instance, the courts annulled the gratuitous alienation of OJCS Maxi Investment Company shares from the Group in favour of a company controlled exclusively by Maximov just a few days before the Group was sold off.
Multiple violations of the warranties and representations made by Nikolai Maximov during the sale of Maxi-Group; identified in the course of legal and financial due diligence and confirmed by the courts; served as the grounds for the annulment of the share purchase agreement d.d. 22.11.2007 (see Order of the Moscow Arbitration Court d.d. 07.04.2011 on case #А40-26424/2011).
The glaring discrepancy between Maximov’s warranties and representations and reality was qualified by the court as wilful fraud. The court noted that NLMK had acquired shares in a loss-making business as a direct result of Maximov’s fraudulent actions; which was clearly at odds with NLMK’s declaration of intent at the time of the transaction. Maximov was ordered to refund the advance payment of 7.3 billion rubles to NLMK. This decision was supported by competent courts at all levels, including the Supreme Court of the Russian Federation (see Order #305-ЭС15-1789 d.d. 09.04.2015 on case #А40-26424/2011).