The Moscow City Arbitration Court issued a ruling declaring bankrupt and initiating bankruptcy procedures against Maxi-Group.
This decision was based on a report prepared by E. Ryndenko, the external administrator, following an external observation procedure introduced by the court on February 18, 2011. This report confirmed the estimation given by NLMK, as well as by the independent international appraisals firms, PWC and American Appraisal, supporting arguments in favor of Maxi-Group’s insolvency: the Company is incapable of restoring its solvency and is subject to bankruptcy; there are good reasons to believe that actions had been taken in relation to Maxi-Group prior to it being acquired by NLMK in 2007 that can be qualified as premeditated bankruptcy. The administrator also noted that he had prepared a statement for the law enforcement authorities based on the gathered evidence.
The outcome of today’s hearing could have made a solid argument in the International Commercial Arbitration Court (ICAC) proceedings on NLMK Vs. Maximov dispute regarding the price of Maxi-Group shares. In February 2011 NLÌÊ submitted a petition for temporary suspension of the proceedings in ICAC until the completion of the Maxi-Group bankruptcy hearing by the Moscow Arbitration Court. The ICAC arbitrators, however, disregarded the Maxi-Group bankruptcy hearing as “irrelevant”, issuing a ruling on March 31, 2011.
The decision to nullify the SPA of the Maxi Investment Company OJS shares came into force this week. The Maxi Investment Company was Maxi-Group’s senior creditor for c. RUR4.4 billion at the date of the transaction. It was to this entity that NLMK had transferred the RUR9.7 billion stabilization loan. The illegal transaction was made using these loan funds, and had been the subject of various court hearings for three years.
Under the Framework Agreement (Appendix #3), the Group companies did not make or execute any transactions involving or aimed at the disposal of any important assets starting from January 1, 2007. Nonetheless, on November 16, 2007 (during the deal process for Maxi-Group asset sale to NLMK), 100% of Maxi Investment Company shares were sold to an outside entity – Light House LLC (90% owned by N. Maximov). In point of fact, the Company was sold virtually free of charge as Light House LLC used funds received in the course of one business day from Maxi-Group as a result of transit transfer transactions made in one day to cover the RUR500 million price of shares.
Under the court award, the transaction to dispose liquid assets – Maxi Investment Company – was made at a stage when Maxi-Group was already suffering from an unhealthy balance sheet structure, insolvency, and was displaying signs of bankruptcy. These actions can be qualified as premeditated bankruptcy.
At the date of the NLMK deal, N. Maximov, Maxi-Group’s sole shareholder, failed to present accurate and comprehensive data on Maxi-Group’s financial standing to the new shareholders. Later, due diligence revealed that Maxi-Group’s actual financial liabilities were some RUR8.3 billion in excess of the liabilities declared by Maximov (RUR54.3 billion Vs. RUR46 billion).
The assortment of facts revealed after the deal closure pointed to Maxi-Group’s (burdened with over RUR25 billion in short-term debts) displaying every sign of bankruptcy as at the beginning of 2007, with no objective financial capacity to settle its obligations.
Measures taken by NLMK and Maxi-Group management allowed stabilizing the operations of all key Maxi-Group companies; restoring Maxi-Group’s solvency, however, proved impossible.
This happened following Maximov’s second shareholder’s actual refusal to adhere to the Agreement and participate in the Company’s joint financing, as well as the multiple deeds of crime committed by Maximov and his managers and revealed by legal audits. These inflicted RUR multi-billion losses on Maxi-Group and the Group companies.
These circumstances, under the existing laws and for the purpose of protecting the interests of Maxi-Group creditors, forced NLMK to file for Maxi-Group’s bankruptcy with the Moscow City Arbitration Court.