On the morning of 30 July 2025, the High Court of London announced that PrivatBank had prevailed in all of its claims against the former owners Messrs. Kolomoskiy and Bogolubov. Our companies IRE USA Inc and Thomas & Simonova, Ukraine was retained to support this litigation with accurate valuations of assets and testimony concerning disputed appraisal methodologies. On all points of dispute, we prevailed. Decisions taken by the London Court are available to the public and attached here.
The Court found the valuation reports prepared by Ukrainian appraisers working on behalf of Messrs. Kolomoskiy and Bogolubov to be unacceptable for numerous reasons that are set out in the Court’s decision.
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
347
Asset Transfers: value of the Stadium
- The credit value attributed to the Stadium was UAH 1,517 million (i.e. its Original 2016 Value), which was based on a combined market and cost approach to valuation assessed by UCE in a report prepared in 2015. Its Restated 2016 Value was assessed as at 31 December 2016 in a report prepared by Sinex Firm LLC (“Sinex”) in January 2019 at a figure of UAH 16 million. Sinex adopted an income approach to its valuation, but neither of the experts relied on it. The value attributed to the Stadium by Mr Thomas was UAH 125 million as at a valuation date of 6 June 2016, being the date of transfer to the Bank. The value attributed to the Stadium by Mr Kolomoisky’s expert (Mr Kaczmarek), was UAH 1,544 million. He based his opinion on (and adopted the figures contained in) a report prepared by Veritas dated 18 August 2016, which valued the Stadium as at 30 June 2016 and applied a cost approach. The Veritas figure was the same as the amount described in the EY November 2016 Report as the NBU verified amount. The difference between the parties’ respective valuations was therefore UAH 1,418 million and the amount by which the Bank claimed that the credit value exceeded its true value was UAH 1,392 million.
- As at the date of the Asset Transfers, the Stadium, which was completed in 2008, was the home of FC Dnipro. It was a 31,000 seat stadium which was originally built to comply with the requirements for holding UEFA and FIFA games. The evidence demonstrated that the per capita use of the Stadium had dropped off quite sharply over the previous five years. Although the number of games was holding relatively steady at between 15 and 20 per annum, the average attendance per game was in steady decline dropping from 19,509 in 2012 to 7,307 in 2016. Consistently with this evidence, no European football club games were played at the Stadium after the Russian invasion of Crimea in 2014. Although the FC Dnipro team itself continued to participate in the Europa League, it played its games in Kyiv because UEFA had taken the view that it was too dangerous to allow the Stadium to host European games.
- The experts took completely different approaches to valuation of the Stadium, which explained the dramatic differences in value which they arrived at. Mr Thomas took an income approach, i.e., a DCF valuation. He did so because he considered the Stadium to be an income-generating asset. Mr Kaczmarek considered that there was insufficient information to conduct an income based DCF valuation and that there were no appropriate comparables to which suitable adjustments might be applied in order to enable a market approach. He therefore said that a cost approach to valuation was the correct way of reaching a fair or a market value and to that end he simply adopted the conclusions of the Veritas report which stated that the construction costs in euros was €65 million. This implied a UAH cost of UAH 696 million at a December 2008 exchange rate and UAH 1,755 million at a December 2016 exchange rate.
- There was no real issue that a cost approach involves ascertaining the current cost to replace the relevant asset. It is described in the following way in IFRS 13:
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
348
“From the perspective of a market participant seller, the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. That is because a market participant buyer would not pay more for an asset than the amount for which it could replace the service capacity of that asset. … Obsolescence encompasses physical deterioration, functional (technological) obsolescence and economic (external) obsolescence…” - Mr Kaczmarek also said that an assessment of fair value does not prioritise the cost approach over any other approach but instead requires the valuer to utilise the technique that is most objective and least subjective, by maximising the use of observable market based inputs when executing each valuation technique. Put another way, he said that a valuer should make use of the approach that maximises the use of observable inputs and minimises the use of unobservable inputs. In his view this means that the cost approach is most appropriate for the Stadium because it best achieves that end. The Defendants relied on the fact that this was the methodology which they said that the NBU’s 2016 validation of Veritas’ valuation accepted was appropriate.
- Mr Kaczmarek’s preference for the cost approach used by Veritas was also based on what he said would be the reluctance of a willing seller to sell the Stadium at a price less than the cost of its construction, less depreciation if applicable. In relying on the Veritas 2016 report he noted that it (a) employed historical cost data taken from the agreements and contracts used to construct and equip the Stadium indexed to 2016, (b) calculated the accumulated depreciation to be deducted by reference to depreciation tables and (c) valued the usage rights of the land underlying the Stadium by reference to the adjusted price of comparable land plots.
- For his part, Mr Thomas said that a cost approach was unsatisfactory because a knowledgeable and willing buyer will pay for a real estate asset an amount based on what they can earn from the operation of the asset. He said (and on this he was supported by IVS 2013) that the cost approach is normally used where there is no evidence of transaction prices for comparable property and no identifiable actual or notional income stream accruing to the owner of the relevant interest. He did not consider it appropriate to adopt the cost approach in this case, not just because the Stadium was capable of generating income, but also because there were sufficient observable inputs to undertake an income based valuation.
- Mr Thomas’ general criticism that the cost approach was inappropriate to value an income generating asset was illustrated by a passage in IVS 2013 (p.67 para C22) which said the following about the costs approach:
“This approach is generally applied to the valuation of real property interests through the depreciated replacement cost method. It is normally used when there is either no evidence of transaction prices for similar property or no identifiable actual or notional income stream that would accrue to the owner of the relevant interest.” - This was said by the Bank to be more particularly the case where the reason for adopting it was what the Defendants advanced as a presumed refusal by the seller to sell the Stadium for less than the amount it cost to build. It was also said by the Bank that it was inappropriate to assume that the hypothetical buyer would be a person who already
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
349
owned a Dnipro-based football club for whom the Stadium would have a value over and above the income it can generate. This criticism was developed in the Bank’s closing submissions by focussing on the fact that it was common ground between the experts that a fair market value is concerned with a hypothetical transaction between a willing seller and a willing buyer. It was said by the Bank that the Defendant’s hypothetical seller is not a willing seller because it would not be motivated to sell the asset at market terms for the best price attainable in the open market after proper marketing, whatever that price may be (the IVS 2013 definition of a willing seller). - The Defendants submitted in closing that Mr Thomas agreed that, in addition to ticket sales a football club would also earn revenues from such things as TV rights and merchandising which would not be reflected in a bare income analysis of the Stadium alone. They extrapolated from that an argument that it was illogical for Mr Thomas to ignore the intangible benefits which might accrue to the owner of the Stadium on the grounds that they would not accrue to a bank which was not itself operating a football team, because it would be able to sell on to a purchaser who wanted a football team to play at the Stadium. It was said that this meant that the Stadium’s value needed to include those valuable intangible benefits derived from the fact that a purchaser would be a person who wished to make money not only out of the income stream which flows directly from the Stadium but also indirectly from those other intangible benefits as well.
- The Bank said that, even if this was correct so far as an occupying football club was concerned, this was not relevant to a valuation of the Stadium itself. The pool of potential buyers was not limited to football clubs. It also included property development companies, local authorities or other third parties who might wish to rent out the Stadium to a football club or for other sporting events. On the other side of the equation, TV rights for games played and merchandising were available to a football club independently of the Stadium. While there might in principle be a revenue stream of what Mr Howard called intangible benefits, they flowed from the business and activities of the club itself not the Stadium it occupied, and if those were to be taken into account it would be necessary to take into account what a club has to pay (such as wages to players) as well as what it can earn from such benefits. None of the valuers had taken any of that into account.
- I was persuaded that, as a matter of principle, Mr Thomas was correct on these points. I do not accept Mr Kaczmarek’s evidence that a willing seller as defined will hold onto an asset in the hope that someone will turn up and pay the cost price for it. He might be motivated by a desire not to sell at less than cost price if he can, but that does not make him a willing seller – it just makes him the holder of an asset which is now worth less than the amount it cost him to build. I also note that Mr Thomas’ view is consistent with the way that EY explained the position in the EY November 2016 Report. They had carried a desktop review of the Stadium, but recommended a revaluation: “From our point of view the value calculation must include the income base approach, as the cost approach for a stadium does not reflect the property’s market value.”
- As to the Defendants’ submission that the hypothetical buyer would be a person who already owned a Dnipro-based football club for whom the Stadium would have a value over and above the income it can generate, I agree with the Bank’s submission that this was another way of saying that synergies from the ownership of a club might mean that an enhanced price may be obtainable from a special purchaser. On that basis, I think
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
350
that the Bank was correct to submit that what such a purchaser might be prepared to pay is not market value because it does not disregard all elements of special value to a particular willing buyer and does not limit itself to the value to an assumed willing buyer, who is not a special purchaser and who will therefore (as Mr Thomas put it in cross-examination) “want to recover their investment by earning income”. - In Mr Kolomoisky’s closing submissions, reliance was placed on some of Mr Thomas’ answers in cross-examination in support of a suggestion that a willing buyer of the Stadium might pay more than a valuation which only reflected the Stadium’s direct income earning potential. It was asked rhetorically: why in those circumstances should it nevertheless be valued solely on that basis? I did not read Mr Thomas’ evidence in the way contended for by the Defendants. Nothing which Mr Thomas said detracted from the basic proposition that, whether or not a particular category of purchaser might be able to enhance its total return by combining a club with the Stadium does not affect the appropriate valuation of the Stadium itself, which was the only asset which the Bank took on to its balance sheet in 2016.
- Mr Thomas also criticised another of Veritas’ explanations (likewise adopted by Mr Kaczmarek) for why it had refused to apply the income approach. In some respects it amounted to another way of putting a similar point. It had said that an income approach was extremely time consuming to compute because it is necessary to take into account a multitude of different nuances and details specific to football stadiums. It also did not account for the social consequences of an asset like the stadium including “growth of national pride, solidarity, happiness, joy and harmony”, an increase in the number of those going into sports and the consequential increase in the overall health of the nation, improvement of the sports results of the host team and the increased interest in the city. These of course are social consequences which may enure to the benefit of Dnipro generally, but as Mr Thomas pointed out (and I agree), the income generating capacity of the Stadium is more relevant to a potential buyer than social benefits of that type.
- Mr Kaczmarek criticised Mr Thomas’ income approach on the basis that he also had used unobservable inputs, because the “notional” data for some of what he had taken into account when calculating his EBITDA figure was highly uncertain. Mr Thomas did not dispute that there was indeed some uncertainty in relation to some of the figures he had put forward, but said that his inputs were in fact sufficiently observable from the public sources from which they were drawn. Mr Kaczmarek also objected to Mr Thomas’ valuation on the basis of the disparity between it and the valuation conducted by UCE in 2015 and Veritas in 2016, a criticism which the Bank said was unfounded not least because Mr Kaczmarek himself had identified a number of flaws in UCE’s valuation, including the fact that it did not explain the assumption that the highest and best use of the Stadium was as office space for rent rather than as a football stadium.
- For his part, Mr Thomas also criticised the quality of the evidence on which Veritas had relied as to the historical construction costs of the Stadium. He said that there was no analysis to substantiate or verify those costs and that they therefore had to be treated as unobservable, which Mr Kaczmarek himself had said were unsuitable as inputs when carrying out a valuation based on a cost approach. In particular, it became apparent during the course of the evidence that some of the costs which were included in Veritas’ base figures were highly unreliable and in some respects significantly overinflated. Thus one of the exercises which Veritas carried out in order to arrive at its cost based valuation was to index the actual construction costs by 370% over the period 2008/9 to
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
351
2016 to reach its notional present construction cost of UAH 1.125 billion, which Mr Thomas said was unreliable because too much of the value came from the indexation process. This seems to me to be a fair criticism as was the rather more obvious point that some of the figures for the costs of equipment which were included in the construction costs were absurd – the evidence contained schedules itemising costs to be taken into account such as potato peelers said to have a 2016 indexed cost of UAH 120,000 and a Samsung TV said to have a 2016 indexed cost of UAH 2.8 million - Mr Thomas also said that no proper adjustment had been made to account for depreciation and that the Marshall & Swift tables which had been used by Veritas appeared to relate to garages, industrials and warehouses, which were inappropriate for an asset such as the Stadium. I agree that the approach adopted by Veritas made little sense because the same depreciation was applied to all of the assets being valued as component parts of the whole on the basis that Veritas assessed the standard service life of the whole of the Stadium as 50 years. This then led to a figure of 5% for physical, functional and economic depreciation without any attempt to depreciate the various elements of the cost included in the original construction figures by reference to a realistic assessment of their true service life. This too seems to me to be a point which is well-founded.
- However, Mr Kaczmarek’s more fundamental point in answer to Mr Thomas’ valuation was that nobody would construct a stadium for a capital sum which was at least twelve times more (the sum quoted in euros was €65 million) than the value it might ultimately achieve based on an income approach (the sum quoted in euros was €5 million). While Mr Kaczmarek accepted that it is not unusual for a real property development to sell for less than the amount it cost to build, the gravamen of his criticism of Mr Thomas’ evidence was that the disparity in the present case is very significant indeed. I agree that the disparity is indeed striking, but I also think that it becomes much more explicable when taking into account the substantial reduction in attendance and the attendant revenues since 2012, together with the inability to use the Stadium for the UEFA-related purposes for which it was constructed (with the high tickets prices that might then have been anticipated) because of the security situation following the invasion of Crimea. The considerations I outlined in paragraph 1418 above point to a probability that, even if the Stadium might have been worth its cost price immediately after construction based on anticipated attendance and usage as at 2008 (for which figures were not available), there would have been a dramatic fall off in value in the light of its prospects for profitable use some eight years later.
- It is evident that measuring the impact of these kinds of consideration is very difficult if a cost approach alone is used to value an asset. But I accept the Bank’s submission that the way in which this should have been approached from a valuer’s perspective was to give proper consideration not just to the extent to which the elements within the construction costs of the Stadium should have been depreciated at a much greater rate, but also and probably more significantly to the issue of economic depreciation or obsolescence. Mr Thomas accepted that Veritas referred to economic obsolescence, but he said that even though they had done so, it was apparent from the tables they used that they had not carried out this exercise by using the tables. Mr Kaczmarek accepted that, on a proper reading of the Veritas report, its authors did not identify that it had had any regard to this important consideration, but he sought to say that the reason they may have done so was simply because they did not think that any figure was appropriate.
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
352 - I did not find Mr Kaczmarek’s evidence on this point to be very satisfactory. I have little doubt that, in so far as the Veritas report did not take into account economic obsolescence, both that report and Mr Kaczmarek’s adoption of it, would have been deficient for this reason alone. Mr Kaczmarek suggested that it may have been taken into account, but was not considered by Veritas to be material. I do not think it is possible to make that assumption, because there was no proper explanation that that is what they had done (and that that was their view) but in light of my conclusion that the value of the Stadium was significantly impaired by the economic obsolescence apparent from the kinds of consideration I have identified, some mechanism was required to measure it. In the absence of proper comparables, I agree with the Bank’s submission that this throws a valuer back onto taking an income approach for the purposes of estimating the necessary adjustment for economic obsolescence in a cost approach valuation. This is a very similar exercise to the DCF valuation carried out by Mr Thomas.
- It was common ground between the experts (anyway after their cross-examinations) that any such exercise should proceed on the basis that the highest and best use of the Stadium was as a sports stadium and that Mr Thomas had identified most of the sources of revenue in carrying out his valuation. Against that background, Mr Thomas analysed the Stadium’s annual revenue from ticket sales and the potential rental return from the office and storage space within the Stadium, based on five comparable properties on the market in Dnipro in 2015 and 2016. He also added in the potential income stream from parking spaces, advertising and other events in the Stadium assuming three non football events per year, consistent with a report by a sports consultancy, based on an average hire price of UAH 300,000 per event. He then deducted operating costs of UAH 3.6 million per annum of which 1/3 were staff costs (based on the number of employees, his knowledge of the staff structure of Ukrainian businesses and wage categories for the sports industry), and 2/3 were other operating costs. All of these figures were supported by extraneous evidence. This led to an EBITDA of UAH 18.9 million capitalised by applying a rate of 15% and led to a market value of UAH 125.4 million.
- It was not really in issue that all of the inputs on which Mr Thomas relied were based on credible evidence derived from verifiable sources. Mr Kaczmarek also accepted that any TV revenue would not be an intrinsic revenue stream associated with the Stadium itself. However, he said that Mr Thomas had not considered all the potential revenues, because he did not include naming rights of the Stadium and he should have included a higher number of non-football events per year. He said that ten rather than three was a more realistic figure based on the survey relied on by Mr Thomas. The answer given by Mr Thomas to these criticisms was that he had been unable to identify any market in Ukraine for corporate branding of the type suggested by Mr Kaczmarek, and that the market for non-football events was very limited because of the priority which had to be given for football, the competition from another stadium in Dnipro for other outdoor events and the relatively inhospitable climate for some types of outdoor events for up to six months of the year. There was no evidence-based answer to Mr Thomas’ view on this aspect of his valuation and I consider that the assumptions he made in relation to them were reasonable.
- The principal costs which then went into Mr Thomas’ EBITDA calculation for the purposes of his DCF valuation were also accepted by both experts. They were the costs
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
353
of employees, maintenance expenses and utilities. Again, there was no evidence-based challenge to the figures which Mr Thomas used for costs or expenses. It follows that the arithmetical exercise undertaken by Mr Thomas to reach his income approach to valuing the Stadium was based on sound foundations and in my judgment adopts the right methodology for valuing the Stadium. - Mr Thomas also put forward a single cross-check for his valuation in the form of the price achieved for the sale of a 34,000 seat stadium in Odessa called the Chernomorets stadium by the DGF in 2020. This stadium had been built in 2011 and was sold at auction to a US company for UAH 194 million. He said that it was slightly newer and slightly larger that the Stadium and was sold three and a half years after his 2016 valuation date. Nonetheless, and although he did not put it forward as a direct comparable, he considered that in general terms it was consistent with his valuation as a general cross-check.
- In cross-examination, Mr Kaczmarek did not accept that it was “not a bad cross-check” or that it was “certainly the best cross-check we’ve got”; indeed he said it was a terrible cross-check, partly because the buyer was thought to be buying into a lot of litigation as the former owner (who was not the actual seller) had refused to give up operational control and partly, if somewhat inconsistently, because the buyer may in fact have been a front for the original owner. Whichever was closer to the truth, there was therefore what Mr Kaczmarek called “a lot involved in this transaction that I think causes me to have some concern about its reliability”.
- Whilst recognising that the sale of the Chernomorets stadium is far from perfect as a cross check, I accept Mr Thomas’ evidence that it is of some assistance. It is not a direct comparable, but I think that the disparity between the price achieved for the Chernomorets stadium in 2020 and the valuation of the Stadium advanced by Mr Kaczmarek is so significant (the Stadium was said by him to be worth almost eight times as much) that it points to him having taken an unrealistic approach to his valuation and supports the Bank’s argument that it was based on a flawed methodology.
- In all of these circumstances, I am satisfied that Mr Thomas’ income approach is the most appropriate methodology with which to value the Stadium at the time of the Asset Transfers and that the inputs which he used for that purpose were both reasonable and founded on sufficient evidence. I am also satisfied that the cost approach adopted by Mr Kaczmarek is unreliable and reaches an unrealistically inflated value for the Stadium. The errors in this approach were made worse by a failure to take sufficient account of an appropriate rate of physical and functional depreciation and what appears likely to have been the absence of any recognition of economic obsolescence.
- I therefore find that the best evidence available confirms that at the time of the Asset Transfers a fair market value of the Stadium was the figure assessed by Mr Thomas, i.e. a sum of UAH 125,418,459. That is the figure arising out of the transfer of the Stadium for which the Bank must give credit in its claim against the Defendants for the losses which it sustained in consequence of the Misappropriation.
Asset Transfers: value of the Training Centre
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
354 - The credit value attributed to the Training Centre was UAH 670.5 million (i.e. its Original 2016 Value), which was based on a combined market and cost approach to valuation as at 9 April 2015 assessed by UCE in a report prepared in 2015. Its Restated 2016 Value, assessed as at 31 December 2016 in a report prepared by Sinex in January 2019 was UAH 142 million; Sinex adopted an income approach for its valuation.
- The value attributed to it by the Bank’s expert (Mr Thomas) was UAH 105 million, as at a valuation date of 6 June 2016, being the date of transfer to the Bank. The value attributed to it by Mr Kolomoisky’s expert (Mr Kaczmarek), was UAH 332 million. This was the figure which was then described in the EY November 2016 Report as having been verified by the NBU. He based his opinion on a report prepared by Veritas dated 18 August 2016 which valued the Training Centre as at 30 June 2016 and applied a cost approach. The difference between the parties’ respective valuations was therefore UAH 227 million and the amount by which the Bank claimed that the credit value exceeded its true value was UAH 565 million.
- The Training Centre is located at Mykhailo Didevych (Pionersky) Lane 14 and 12, Dnipro, Dnipropetrovsk Oblast and consists of a complex of recreational facilities comprising four training fields, an indoor arena, two main buildings (with offices, living space, a gym, pool, sauna and showers) and additional structures. Its focus is on football and it can used by amateur, semi-professional and professional sports teams for a fee. It was built in 1971, and two additional buildings were constructed in 2005. It was built on two plots of land together amounting in size to approximately 12 hectares.
- As with the valuation of the Stadium, the principle disagreement between Mr Thomas and Mr Kaczmarek related to the appropriate methodology for carrying out the valuation. Mr Thomas contended that the Training Centre was an income generating asset and so an income approach was appropriate, while Mr Kaczmarek adopted the cost approach which had been used in Veritas’ August 2016 valuation. Veritas adopted a cost approach because it said that:
“It is impossible to use the income approach in this case because Training ground was developed not for profit purposes, therefore, the concept of its design is based on the values that would meet the achievement of the club’s sports goals.” - Many of the same interconnected issues which arose in relation to the valuation of the Stadium also arose in relation to the experts’ valuations of the Training Centre. The first issue related to the approach which the Defendants took to identifying the correct hypothetical seller and the correct hypothetical purchaser of the Training Centre. They posited that the seller would have to be a person who was not prepared to sell the Training Centre for less than the cost of its construction (whether or not it was responsible for its original construction) and the purchaser would have to be the owner of a football club in Dnipro. It was suggested that, in such a situation, a prospective purchaser would be faced with two alternatives: one to construct its own facility and the other to pay the seller the cost which they would have to incur in constructing a similar facility if they had to do it themselves.
- As with the case of the Stadium, I agree with the Bank that this is a false basis on which to proceed. The purchaser contemplated by the Defendants would not be a willing purchaser, because it has special purchaser status which should be (but on the
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
355
Defendants hypothesis would not be) disregarded for valuation purposes. Likewise, the seller contemplated by the Defendants would not be a willing seller, because it would be a particular type of seller who has predetermined for extraneous reasons the price at which it is prepared to sell. - The second connected issue related to Mr Thomas’ evidence that the highest and best use for the Training Centre (on which he then based his income approach valuation) was as a sports tourism complex with on-site accommodation. The Defendants challenged Mr Thomas’ view that the Training Centre fell within the sports tourism sector on the grounds that it was not at the date of valuation being used as a sports tourism business, but rather was being used as a training ground for FC Dnipro. The highest and best use for the Training Centre which had been adopted by both UCE and Veritas in their 2015 and 2016 valuations was as a football club training facility. Veritas said that the reason for this was that the Training Centre was “a unique specialised property which was not intended for gaining a profit”. Mr Howard adopted that highest and best use in his cross-examination of Mr Thomas.
- Mr Kaczmarek took a slightly different line (although he had referred to the Veritas conclusion on this issue earlier in his own report). He said that he disagreed with Mr Thomas’s view that the highest and best use for the Training Centre was as a sports tourism property, but the real extent of any disparity with Mr Thomas’ opinion was unclear because in his view the highest and best use would be as what he called “a membership-oriented sports club” where additional income could be achieved through “one time use fees” and leasing fees for the pool and football fields. He therefore differed both from the position which the Defendants appeared to take in challenging Mr Thomas’ evidence and from Mr Thomas, describing his differences with Mr Thomas as “very different business models”.
- Mr Kaczmarek then went on to explain that he considered that far more income could be generated for the training centre if it was marketed to local residents on a membership basis whilst also leasing other assets to both members and non members. He did not consider that tourists to Dnipro were the primary target market. He said that:
“In this sense, the Training Centre would operate more akin to a private sporting club where the club would supplement its monthly membership fees from non-members for the use of its facilities and members for the use of fees on a reservation basis.” - However, although Mr Kaczmarek referred to far more income being generated from the Training Centre if his usage was adopted, he did not then quantify the consequences of the difference in view he had with Mr Thomas. He did not do so because he said that his opinion on usage did not cause him to consider that an income approach to valuation based on that use was appropriate. He said that no studies had been performed whether in 2016 (or at any other time) to develop a potential cash flow model sufficient to enable an income approach to be implemented. On the same point, the Defendants also submitted that Mr Thomas’ own approach to an income approach valuation was misguided, because it did not include any actual income data relating to the use of a sports centre as a sport tourism complex.
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
356 - It is not in issue that the Defendants were correct to say that there was no data evidencing the actual inputs in relation to the Training Centre, although the Bank contended that the only reason it was not available was that it was not provided by the Individual Defendants, notwithstanding that it was ultimately owned and controlled by them. This inevitably meant that there was uncertainty in relation to the inputs to be taken into account, a consideration which was accepted by Mr Thomas as being relevant to his valuation.
- Furthermore, Mr Thomas also accepted that, as at the date of valuation, the Training Centre was not being used as part of sports tourism business, but in his view this did not detract from the fact that for valuation purposes the Training Centre’s usage was best characterised as a sports tourism complex with on-site accommodation. On that basis, he went on to calculate what he called an anticipated profit in the form of an:
“operating cash flow generated for a period of 1 year, converted into a capital sum by applying a capitalization rate that reflects an adequate return on invested capital appropriate for the type of commercial operation and location as of the date of valuation. In accordance with this approach, the operating income is defined and considered as the EBITDA of the asset. Accordingly, operating income is equal to gross revenue earned minus all costs incurred in the operation of the assets.” - The inputs he used for that purpose were notional figures for the price charged per person per day for the package of services, including accommodation, offered by the Training Centre and the total number of visitors likely to use these services throughout the year. In the absence of actual information he determined a median price per person per day for that package and a normalised annual occupancy rate by reference to comparable properties.
- This pricing data was derived from 27 properties in 12 different countries with facilities generally similar to those of the Training Centre and led to a conclusion that the median price per person per day for all 27 was UAH 1,060 It was driven by general market demand for sports training and recreation applicable in all countries including Ukraine, rather than by specific reference to football. He also took into account the income generating value attributable to the on-site accommodation having regard to data relating to occupancy rates, which he assessed at 65%. He then deducted assumed operating expenses by an analysis of EBITDA profit margins for companies operating in comparable emerging markets to reach a 42% EBITDA profit margin which he then capitalised at a rate of 15%. He accepted that there was uncertainty in relation to his inputs but was of the view that his approach was both reasonable and robust given the limited information available to him.
- Mr Kaczmarek’s reliance on the Veritas valuation was based on what he said appeared to him to be a proper implementation of the cost approach. I shall come on to some of the problems with the way that it was implemented, but I also think that there is real substance in Mr Thomas’s principled rejection of the use of a cost approach in the first place. I think he was right to conclude that the cost approach is generally only applicable to the valuation of real property where there is either no evidence of transaction prices for similar property or no identifiable actual or notional income stream and that this was not the case in relation to the Training Centre. Mr Thomas’ view on this question of principle was also supported by the EY November 2016 Report. It said about both the valuation used by the Bank when taking the Training Centre onto its books as part
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
357
of the Asset Transfers (the UCE valuation) and the Veritas valuation described as “verified by the NBU” as follows: “this value calculation must include an income approach, as the cost approach does not capture the property’s true market value”. - It was Mr Kaczmarek’s evidence that different valuers might have made different assumptions, but said that nothing in his review of the work done by Veritas suggested that their parameters were unreasonable. He also said that Veritas had maximised the use of observable inputs “drawing wherever possible on historical cost information related to the valuation object itself”. For this reason he concluded that it was unsurprising that the NBU chose to approve the Training Centre valuation report produced by Veritas. The Bank did not accept that the NBU had approved the Veritas report in the sense assumed by Mr Kaczmarek, and for that reason his reliance on what the NBU had done was inappropriate but, irrespective of that, one of the more striking aspects of Veritas’ (and therefore Mr Kaczmarek’s) application of the costs approach was that, on its own terms, it provided little certainty in ascertaining the current cost to replace the relevant asset, which as I explained in the part of this judgment dealing with the value of the Stadium, is the principal objective which the cost approach is intended to achieve.
- In this context, the Bank mounted a sustained attack on the exercise which Veritas itself had carried out. The figures Veritas had used for the original construction costs were wholly notional and were derived from what Mr Thomas called “cost estimates derived using statistics taken from a Soviet-era cost manual produced by the State Committee of the USSR Council of Ministers for Construction in 1969” known as the UPVV, which were then indexed to the date of valuation in 2016. In Mr Thomas’ view there were many problems with this approach. They included the fact that the original costs figures were entirely notional and were based on parameters relevant to a Soviet communist economy in 1969 which bears no relation to a Ukrainian market economy in 2016 (25 years after the collapse of the Soviet Union). Veritas also omitted from their indexation tables a period of six or seven years between 1984 and 1991.
- Other aspects of the Veritas cost approach which were criticised by the Bank included the addition of a developer profit of 26% and the manner in which the Marshall & Swift depreciation tables were used to depreciate the assets to which the cost approach was being applied. One example of a surprising approach to depreciation drawn out in cross-examination of Mr Kaczmarek was that there were some assets in respect of which their 44 year actual term of use was 4 years in excess of their 40 year regulatory term of use, but they were only depreciated by 30%. It was also clear from Mr Kaczmarek’s evidence that the Veritas report made no assessment of the highest and best use for the Training Centre and did not account for economic obsolescence. He explained this omission on the basis that Veritas may have considered that the facilities were in very good shape, but I find it difficult to accept that evidence (which the Bank criticised as being partisan and self-serving) on the basis that there was no indication in their report that this was a view they in fact took.
- Having regard to all of these considerations, I consider that the evidence adduced from Mr Thomas is to be preferred to that adduced from Mr Kaczmarek, based as it was on his adoption of the Veritas report. There is no doubt that there was a significant degree of uncertainty in Mr Thomas’s valuation, but I am satisfied that he adopted the correct methodology for estimating a fair market value at the time of the Asset Transfers, and
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
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that the inputs he used were reasonable for the valuation he carried out based on the usage he assumed and sufficiently robust to support his conclusion. - I therefore find that the value of the Training Centre at the date of the Asset Transfers was the figure attributed by Mr Thomas: UAH 104,919,540. That is the figure arising out of the transfer of the Training Centre for which the Bank must give credit in its claim against the Defendants for the losses which it sustained in consequence of the Misappropriation.
Asset Transfers: value of the Airfield - The credit value attributed to the Airfield was UAH 366 million (i.e. its Original 2016 Value), which was based on a report prepared by UCE in 2015 applying a market and income approach to the value of the Airfield as at 18 June 2015. Its Restated 2016 Value, assessed as at 31 December 2016 in a report prepared by Asset Expertise in February 2019 was UAH 3.6 million; Asset Expertise adopted what it called a combined comparable and income approach for its valuation. The value attributed to it by the Bank’s expert (Mr Thomas) was UAH 5.7 million as at a valuation date of 6 June 2016, being the date of transfer to the Bank, using a weighted market and income approach. The value attributed to it by Mr Kolomoisky’s expert (Mr Kaczmarek), was UAH 34 million. He based his opinion on a report prepared by Kreston GCC Advisors LLC (“Kreston”) dated 5 August 2016 which valued the Airfield as at 1 July 2016 and applied a cost approach. This figure was also described in the EY November 2016 Report as the NBU verified figure. The difference between the parties’ respective valuations was therefore UAH 28 million and the amount by which the Bank claimed that the credit value exceeded its true value was UAH 360 million. It is striking that the UCE report was wildly in excess of the other valuations, and the valuation it gave was rejected by both experts.
- Mr Thomas said that the description of this asset as the Airfield was a misnomer, although he continued to refer to it as such to avoid confusion. He said that the assets which comprise the “Airfield” are a series of 33 buildings situated on two land plots. The buildings were described as being in poor, satisfactory or (in one instance) good condition. The land on which the warehouses were located did not function as an operational airfield at the valuation date and had not done so for more than a decade. The Government land cadastre disclosed that the ownership and property rights in the land belong to the regional government, Dnipropetrovsk District State Administration.
- There are two main issues which arise. The first is that Mr Thomas limited his valuation to the buildings and the land beneath the buildings, and excluded the remaining land on the site which was not transferred to the Bank. Mr Kaczmarek took a different approach because his valuation included a figure attributable to the whole of the two plots of land on which the buildings were situated. In large part this difference in approach explains the differences in the valuations of the two experts.
- Mr Thomas’ explanation for his position was that, although both the buildings themselves and what he called the usage rights of the land beneath them were transferred to the Bank and could be transferred on to a new owner as part of a sale, he considered that it was unlikely that the usage and ownership rights to the additional
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
359
land on which the buildings did not sit could be transferred. He drew support for that opinion from his understanding of the mortgage agreement dated 1 June 2016, pursuant to which only the buildings on the Airfield were pledged to the Bank by Agroaviadnipro LLC as part of the Asset Transfers, while the remainder of the land was only used by the mortgagor with the benefit of what he called usage rights under the terms of a lease granted in November 2007. These usage rights were not transferred or transferable to the Bank. - Mr Kaczmarek took a different view, because he said that it was reasonable to conclude that there was inherent value associated with the land plots as a whole, not least because it would appear to be impossible to construct improvements on the land if the land use rights were not owned or possessed. That strikes me as being a rather circular argument. It is not at all obvious why that is the case given the extent of the land not covered with buildings even if they are spread out. It also ignores that what matters for present purposes (and indeed the purposes for which the contemporaneous valuations were carried out) is the extent of the property actually mortgaged to the Bank as part of the Asset Transfers, and in respect of which the Bank as mortgagee would be able to exercise ownership rights on enforcement of its security. He also said that any issue as to the extent of the rights was inconsistent with the contemporaneous valuations in which both Kreston (in 2016) and later in the year EY gave value to those land use rights.
- The experts agreed that the ownership of the land other than the land under the buildings themselves is a factual matter, and ultimately not a matter for them. I take the same view. In my view, the best and most relevant evidence is to be found in the terms of the mortgage agreement pursuant to which the Bank acquired its rights over the Airfield as part of the Asset Transfers. This agreement makes a clear distinction between what it calls the Mortgaged Property (clause 7) on the one hand and the two plots of land on which the Mortgaged Property was situated (clause 8) on the other. This other land covered a substantially greater total area (139.1037 hectares divided into 2 separate plots of 137.96 hectares and 1.1437 hectares) than the area of land on which the buildings comprising the Mortgaged Property were constructed. Mr Thomas said that the built land amounted to only 4,520 square metres, i.e. less than half a hectare.
- The property charged to the Bank, which is the subject matter of the mortgage agreement, is (as it name implies) the paragraph 7 “Mortgaged Property”. It is described as a complex at the Airfield address, registered as separate, demarcated property with its own immovable property registration number. The other land is described in paragraph 8 as being the two land plots with two separate cadastre numbers on which the Mortgaged Property is situated. It is not itself Mortgaged Property as defined. This emphasises the distinction of two separate properties, each with their own separate registrations, only one of which was transferred as Mortgaged Property. It is expressly provided that “no other pledge shall be given hereunder”. It follows that the land on the Airfield other than the complex of buildings falling within the definition of Mortgaged Property was not effectively transferred to the Bank as security under the terms of the mortgage agreement.
- However, the mortgagor also had rights to use those parts of the land at the Airfield site which were not part of the Mortgaged Property pursuant to the terms of the lease agreements with the local authority. I accept it is possible that there was inherent value in those usage rights, but the evidence does not demonstrate that those rights were
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Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
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transferred to the Bank, whether by way of security pursuant to the mortgage agreement or otherwise. For that reason alone, the Kreston valuation (and its adoption by Mr Kaczmarek) is deeply flawed because it values an asset which I find not to have been the subject of an effective transfer to the Bank. - In any event, even if that were to be wrong, it is impossible to tell from the Kreston valuation how the valuers went about quantifying the prospective rental stream from the whole of the Airfield, which was the method they used for valuing the land usage rights. While Kreston calculated a rental value per square metre of warehouse space which they regarded as comparable to the buildings on the Airfield, it is not clear how they then quantified the value per hectare of the unbuilt land. Mr Akkouh suggested in his cross-examination of Mr Kaczmarek that the value for the whole site was assessed by reference to the rental value per square metre of warehouse space, which would have been absurd, because only a very small proportion of the total area was built on. I am not convinced that the assumption on which this part of his cross-examination was based is correct, but it is striking that although Mr Kaczmarek had adopted the Kreston report as his own evidence, he was unable to explain what they had in fact done.
- The second main issue has a much more limited impact (just short of UAH 2 million) on the valuation. The disagreement was whether to adopt a weighted market and income approach, which is the approach adopted by Mr Thomas having determined that the highest and best use for the buildings was warehouse storage, or a cost approach which is adopted by Mr Kaczmarek, based on the Kreston report. A similar divergence of view in relation to the application of the cost approach arose in relation to the Airfield as had arisen in relation to the Stadium and the Training Centre.
- It was Mr Kaczmarek’s position that there was insufficient information to implement the income approach and that the cost approach was to be preferred because it was reliant on more observable inputs than the income approach. Mr Kaczmarek gained support from the EY November 2016 Report, because they said that they thought that the cost approach with an asset depreciation test should have been used as the primary basis for the valuation. Indeed they then went on to say that the Kreston report may have substantially understated the fair value of the land use rights, i.e. the full 137.96 hectares and not just the buildings:
“In our view, the value estimate for the land found by capitalising additional income in Report 2 [Kreston Report], should have been double checked using the sales comparables approach to ensure it matched up to market prices. Our desk review looked at sales prices for similar plots of land on the market. We did not make an assessment and did not make detailed calculations, but we want to note that the market price range for farm land is 1.4 – 4.6 dollars per square metre and industrial use – 1.6 – 3.6 dollars per square metre (for areas with comparable location and size). Considering the above, the value of the land plot alone may be between UAH 40 and 180 million.” - Mr Kaczmarek’s opinion was that, because there was no historic income or cost date from the property itself, and because there was no evidence as to whether or not property-specific data would cause an increase or decrease in an income based valuation, Mr Thomas’s valuation was notional and could not give rise to a sufficient level of confidence to establish what he called a compliant fair value measurement.
Approved Judgment
Mr Justice Trower
JSC Commercial Bank Privatbank-v-Kolomoisky and others
361 - Mr Thomas said that the income approach was justifiable because the buildings, which was all he thought it appropriate to value, were capable of generating an identifiable income stream in the form of observable market inputs, while the market approach was also justifiable because the assets being valued were very common and there was a substantial market for their sale and rental, utilising their highest and best use. The market approach assessed the rental stream from five assets with a similar location and in a similar physical condition and, adjusting for matters such as the surface area of the comparable, gave rise to a valuation of UAH 6.15 million. The income approach was derived from a comparables-based median rental value of c.UAH 19 per sq m per month and arrived at a figure of UAH 5.41 million after appropriate adjustments and capitalisation. His final weighted valuation attributed 40% from the results of the market approach and 60% from the results of the income approach.
- I think that Mr Thomas’ assessment was based on sufficiently reliable input data and I prefer his evidence on this issue. It seems to me that the more commonplace the asset, the higher the level of confidence the valuer can have in the use of market-based input figures, thereby making less significant the fact that actual figures for the historic use of the relevant building may not be available. I also think that it is possible to take into account (without relying on it in its own right) that in the event the Airfield was sold at auction in August 2020 for a figure of UAH 6.2 million.
- I also consider that, even if a cost approach were to have been the best way of making a reliable valuation of those parts of the Airfield which were transferred to the Bank as part of the Asset Transfers, the evidence demonstrates that the way in which Kreston (and therefore Mr Kaczmarek) used the cost estimates suffered from the same deficiencies as the costs approach relating to the Training Centre. In short I think that as with the Training Centre, Mr Thomas was justified in his opinion that “I do not consider that the parameters on which the UPVV cost estimates are based provide a reliable comparable to the market costs that would have existed in the (free market) economy in Ukraine in 2016”.
- I therefore find that the best evidence supports the Bank’s case that the value of the Airfield at the date of the Asset Transfers was the figure attributed by Mr Thomas: UAH 5,708,758. That is the figure arising out of the transfer of the Airfield for which the Bank must give credit in its claim against the Defendants for the losses which it sustained in consequence of the Misappropriation.
Asset Transfers: value of the Aircraft - The credit values (i.e., the Original 2016 Values) attributed to the nine aircraft totalled US$163 million. This appears to have been based on nine reports prepared in August 2016 by Veritas, which the experts called by the Bank and Mr Kolomoisky both said were unreliable because of the methodology and data inputs which were used. The value attributed to the nine aircraft by the Bank’s expert (Ms Razzhivina) was US$69 million. The value attributed to them by Mr Kolomoisky’s expert (Mr Seymour), was US$84 million. The difference between the parties’ respective valuations was therefore US$15 million and the amount by which the Bank claimed that the credit value exceeded their true value was US$94 million
