- The consequences of reneging on the representations and warranties pledged by Maximov
With regard to representations and warranties pledged by N. Maximov in accordance with the Agreement, the ICAC arbitration panel has not considered it ‘necessary to tackle the issues on whether any representations and warranties had been pledged [by N. Maximov] and what had been their relevance in law', and reckoned such issues 'irrelevant in the context of the stated claim'.
At the same time, in accordance with the terms and conditions of the Maxi-Group Share Purchase Agreement, N. Maximov had a right to claim confirmation of the purchase price only under the condition that the representations and warranties presented by him in connection with the transaction were true.
In defiance of the presented representations and warranties N. Maximov has:
- significantly marked down the level of external indebtedness of the Maxi-Group companies;
- suppressed the fact that he settled transactions outside the course of normal business with the aim of funnelling resources from Maxi-Group to people employed by N. Maximov, among others, directly in the course of the transaction with NLМК;
- concealed a presence of artificial credit indebtedness of Maxi-Group against related persons;
- suppressed the fact that a number of group companies were insolvent;
- concealed the presence of criminal cases investigating illegal enterprise;
- suppressed the fact that essential documentation relating to a number of key industrial objects was missing;
- destroyed a considerable amount of the primary accounting documentation of Maxi-Group.
Taking into account the scope and nature of the revealed violations, N. Maximov has taken up an attitude during hearings in ICAC that he does not consider himself bound by the appropriate regulations of the Agreement, since the Annexes comprising his representations and warranties regarding the order of governing Maxi-Group, have not been signed by him directly. This attitude is beneath any criticism, since the text of the Agreement comprises multiple references to the aforementioned Annexes, they form an integral part and key mechanism of the Agreement, which makes N. Maximov’s argument senseless.
It is important to understand that owing to the critical state of Maxi-Group’s finances, immediate action concerning its rehabilitation had to be taken The transaction for acquisition of controlling interest was therefore effected within a short period of time, without making changes to management or conducting adequate verification measures that would be normal in such circumstances. The major and indispensable condition of effecting the transaction, and the only real mechanism of defence for NLМК, were the representations and warranties of N. Maximov on the financial standing in the Maxi-Group companies.
A renunciation by N. Maximov of his own representations and warranties has taken place in the context of multiple and essential violations of such representations and warranties, which is confirmed by the multiple judgments of the courts. Having left these circumstances without due legal treatment, the ICAC arbitrators have actually deprived the transaction of its conventional character for NLМК and developed a construction not supported by any rational explanation contemplating payment of the multi-billion price by a party for an asset with absolute indifference to its quality.