The second most important area of activity in our organization is judicial financial and economic expertises. We have a large portfolio of such works.
One of the most popular areas where financial and economic expertises are applied is bankruptcy cases. Within the framework of such cases, claims for bringing the controlling persons of the debtor to subsidiary liability are singled out separately. That is, when creditors, shareholders or other interested parties prove that the persons controlling the debtor (CEO, members of the board of directors or controlling shareholders) made decisions and carried out transactions, the result of which was not beneficial to the company and caused it significant losses up to bankruptcy.
Such claims can be made not only in the framework of bankruptcy cases. They are also brought as part of claims by minority shareholders (non-controlling) who believe that controlling persons cause some kind of damage to the company and other shareholders, since they cannot receive their share of profits and their dividends in the required amount. Similar are the claims to verify the accrual of taxes in a transaction with an interest from the tax authorities, transfer pricing checks (Transfer pricing). Similar lawsuits are also found in a number of cases when a sale of an enterprise is carried out.
Attracting traders. Pros and Cons
At the beginning of 2022, the ex-management of the petrochemical holding contacted us in order to protect their interests. The holding's enterprises were sold, and the new shareholders decided to file claims to the former owners and directors for damages to the enterprise as a result of the sale of products through affiliated trading houses and trading companies at below-market prices.
Recently, similar cases have been found repeatedly in domestic practice. The first of these was the case The Dulisma Oil Company. Then there were cases against the controlling persons of the company "TolyattiAzot" (ToAZ)" and "Uralkali" - large petrochemical enterprises companies that sell products abroad with the involvement of traders.
Photo: freepik.ru
This is a normal market practice, although there are some nuances. In some cases, the involvement of traders is justified. An international trader performs the function of a sales department in international markets. Accordingly, he receives compensation for his activities in the form of a commission from the products sold. The company, in turn, does not need to maintain a large sales department, but it has the opportunity to effectively sell products in foreign markets thanks to the trader's competencies.
Such a sales scheme is standard for gas, oil and many other commodities, including exchange-traded and over-the-counter ones. At the same time, a number of enterprises really abuse this mechanism – they create affiliated companies that act simply as a "gasket" and do not carry out real economic activity, i.e. they withdraw part of their profits to these companies (traders or trading houses). An enterprise can be owned by different shareholders, and a trader company belongs to only one - the one who actually controls the enterprise, who carries out operational management. Therefore, the part of the profit that should have been distributed among all shareholders is assigned to only one. The consequences of such actions can be both civil and legal, that is, claims and damages, and up to criminal, if such actions qualify as theft or fraud.
The claims are not justified, the calculations are incorrect
The company that contacted us works in the field of petrochemistry and is engaged in the production of synthetic rubbers and antioxidants. The new owners presented claims to the management in the amount of more than 9 billion rubles. The main part of this claim was formed due to additional accrual of profits on agidoles. The opponents also counted deviations for synthetic caoutchoucs, but on a general scale their value was not so significant, although it amounted to about 1.5 billion rubles.
Our analysis showed that the opponents used the method of average selling prices to calculate the loss. We compared sales prices in foreign markets with sales prices to other counterparties, but in the domestic market. Enterprises sold all products to foreign markets through traders, and sales were carried out directly in the domestic market.
We have found that the claims are not justified, and the calculations were made with a significant number of errors. First, a number of incorrect quotations were used for synthetic rubbers to compare sales prices with market prices. Secondly, a significant part of the loss on rubbers was generated by sales during the pandemic. However, during this period, price volatility was extremely high and sales at most enterprises practically stopped. But the analyzed enterprise did not reduce volumes, but even increased them due to the fact that it had the opportunity to buy raw materials at an extremely low price, and sold products in large quantities to the Chinese market. China's market is the largest in the world, and its prices are among the lowest. Thus, the company's sales prices during this period were lower than the global average, but profitability and profit turned out to be higher than average.
There are no other manufacturers of antioxidants in Russia and the CIS
The analysis of antioxidants showed a significant difference between prices on the domestic and foreign markets. Antioxidants are used in a number of technological processes and are included in the specifications of manufacturers of tires, plastics, fuels and oils. This led to the conditional monopoly position of this plant in the Russian market. He was able to maintain very high prices. After all, there are simply no other manufacturers of such antioxidants in the Russian Federation and the CIS countries.
Photo: freepik.ru
Europe, Asia and North America have their own manufacturers of such antioxidants, respectively, stock prices on the world market are significantly lower. They differ from the domestic ones several times. At the same time, the capacity of the entire Russian market is only 25-35% of the volume of the analyzed enterprise for these products. Accordingly, about two thirds of the products are sent to foreign markets.
Of course, the activity of the enterprise for the production of antioxidants is highly profitable even with sales at world prices. The sale of that part of the products that can be absorbed by the domestic market gives super-profitability, however, it is simply impossible to sell products at the same prices on the foreign market. Therefore, the company prefers to produce a lot of products and get a large total profit than to produce a small volume of products only for the domestic Russian market. After all, the domestic market of our country cannot consume more products – it simply does not need such an amount of antioxidants.
The financial and economic examination showed the absence of losses
Opponents recalculated all sales to foreign markets at domestic prices. Moreover, their calculation was made with mistakes - they took into account sales in our market with value added tax and did not take into account the difference in the logistics premium to prices. As part of the financial and economic expertise, we presented a review of the conclusion of the opponents with recalculation according to their own methodology, but with the elimination of mistakes made. The corrected calculation showed no losses.
We have also prepared a Conclusion with an alternative calculation, using not only the average price method, but also the method of the subsequent sale price. With the help of lawyers, inquiries were made to trading companies, which provided information on the prices of subsequent sales of products. This information allowed us to establish that the products were sold at a certain margin, but the margin of traders was quite normal and amounted to about 5-7% of revenue. It should be borne in mind that traders bought the products in full, paying for them in advance. Accordingly, traders were not a "fictitious paper", but advanced and bought out the plant's products at their own expense, and then sold them on international markets with a trade margin corresponding to the functions performed and ensuring the expediency of the functioning of this trade organization.
The comparison of the transaction price with the market price should only be in the range
Another important methodological point was the proof and justification that it is impossible to compare the sale prices for a particular transaction simply with the quotation for the corresponding day. We have proved that the prices of products, even those with stock quotes, have a certain degree of volatility. That is, for the same products, on the same day, prices from different manufacturers may differ from the average quoted level. And that's okay. For example, a quote on some day may be set at 1000 rubles, but some manufacturers sell products for 850-900 rubles, some for 1100 rubles.
We have analyzed various quotations for the same products over a long period of time. Based on this database, a confidence interval was calculated, on the basis of which an acceptable range of deviations for the products in question was established in the amount of about 20%.
Losses can be calculated only if the price of a particular transaction goes beyond these deviations, or if throughout the entire study period it can be observed that the sale takes place at prices at the level of the minimum limit of this range.
Our analysis showed that on specific days the plant could sell products cheaper than quotes, but the next day sales could be more expensive than quotes. And if you look at the result for the entire analyzed period, the deviation of sales prices from quotations was no more than 0.5-1%, and the actual sales prices on average turned out to be even higher than the quoted ones.
Our analysis allowed clients to defend their position in court
As a result, we proved that for the entire period there were no such situations when sales took place at prices significantly beyond the range of acceptable deviations. Opponents, when they considered a loss, considered all sales at prices cheaper than quotations as creating a loss to the enterprise, and they did not take into account sales at prices above quotations at all.
Thus, only one side of the process was taken into account, while the other side was not taken into consideration. Our research has allowed clients to defend their position in court, and we have gained additional competencies in this kind of economic research.