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Cite as: [2013] EWHC 3618 (Comm)

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Neutral Citation Number: [2013] EWHC 3618 (Comm)
Case No: 2013 FOLIO 1055


Royal Courts of Justice
Strand, London, WC2A 2LL

B e f o r e :



- and -




Michael Brindle QC, Stephen Nathan QC, Jonathan Miller and Harry Adamson (instructed by Zaiwalla and Co) for the Claimant
Andrew Fletcher QC and Alec Haydon (instructed by Cleary Gottlieb Steen & Hamilton LLP) for the Second Defendant
Hearing dates: 29 to 31 October 2013



Crown Copyright ©

    Judge Mackie QC:

  1. This is the hearing of the Second Defendant's application dated 2 September 2013 to discharge a Freezing Injunction of an amount up to £100 million which I granted on 2 August 2013. The grounds are non-disclosure and failure to establish a good arguable case. The Claimants seek continuation of the injunction until final judgment or further order, or the grant of a new injunction in its place on the same terms. The injunction against the First Defendant has been replaced by an undertaking on terms. No injunction was sought against the Third Defendant.
  2. The hearing finished almost two weeks ago. I have deferred giving judgment as the parties wished to make written submissions on one point.
  3. The parties

  4. The First Claimant ("KK PLC") is a company registered in the Isle of Man and the ultimate parent company of a substantial group of companies and limited liability partnerships in the business of logistics, recycling, and paper and packaging manufacture in Kazakhstan ("the KK Group"). KK PLC is the ultimate owner of the Second to Seventh Claimants, each of which is incorporated in Kazakhstan. KK PLC is quoted on the main board of the London Stock Exchange. I shall, except where it is necessary to distinguish between the Claimants, call them "KK"
  5. The First Defendant Mr Zhunus was director and chairman of the board of KK PLC from its incorporation in the Isle of Man on 5th March 2007, until April 2008. He was also indirectly the beneficial owner of 50% of the shares in KK PLC until its IPO in July 2007 and then of 23.9% of the shares until September 2009. He was director and chairman of the board of the Second Claimant ("KK JSC") between 2003 and 14th July 2009.
  6. The Second Defendant Mr Arip was director and CEO of KK PLC from its incorporation until April 2008. He was indirectly the beneficial owner of 50% of the shares in KK PLC until its IPO of 23.9% of the shares in September 2009. He was director and CEO of KK JSC between October 2003 and July 2009. Mr Arip is from Kazakhstan but is no longer one of its citizens having acquired dual Cyprus and St Kitts and Nevis nationality.
  7. The Third Defendant Ms Dikhanbayeva was the finance director of KK JSC between 2001 and 29th April 2008; then both finance director and a board director of KK JSC from 29th April 2008 to 14th July 2009. She was chairman of the board of KK JSC from 5th September 2008 to 14th July 2009.
  8. Evidence

  9. The evidence before the court consists of twenty-six lever arch files of documents (including, mercifully, a core bundle) and numerous affidavits. There are four from Mr Tomas Werner, director, shareholder and former Chairman of the First Claimant and CEO of the Second Claimant, two from Mr McGregor, General Counsel of the First Claimant, one from Ms Reddy, one from Ms Burbeza and six from Mr Crestohl, all of the Claimants' solicitors and one from Mr Kuzmenko, Head of IT at the Second Claimant. There are two from Mr Maksat Arip, the Second Defendant, five from Mr Gadhia and two from Mr Sarkar of his solicitors, two each from Mr Manghi, former Chairman of the First Claimant and Mr Holland a director of CBRE, surveyors and valuers in Kazakhstan, two from the Third Defendant and one each from Mr Zhangurov, an IT administrator and Mr Khasanov, currently head of the programming and engineering side of IT at the Claimants. In addition there is expert evidence of Kazakh law in various forms from Mr Sariev, Mr Telemtayev and Professors Didenko and Suleimenov. There is undisputed evidence from Isle of Man lawyers, Simcocks, that Manx law is the same as that of England in relevant respects. Mr Arip also relies on expert accounting evidence from Mazars.
  10. What the action is about

  11. KK say that there have been two large frauds, known in this action as the PEAK and the Astana frauds, by which the Defendants have stolen something over US$ 135 million from them. The Defendants deny the frauds altogether.
  12. The PEAK fraud

  13. KK describe this as follows. KK JSC together with the Third Claimant ("PEAK") and the Fourth Claimant ("PEAK Akzhal") contracted with a purportedly independent construction company Arka-Stroy for the development of a logistics centre and industrial park at three sites in the outskirts of Almaty, in Kazakhstan. KK JSC, PEAK and PEAK Akzhal paid Arka-Stroy, more than 21 billion Kazakh Tenge ("KZT") - approximately US $167.5 million. KK say that only one site saw any development. This consisted of the erection of 14 warehouse buildings (some of which are second-hand) and the construction of associated infrastructure, which was contemporaneously valued at most, by a certificate issued to the Kazakh Government by Arka-Stroy, at KZT 3.2 billion (US $25.32 million). KK say that even this sum appears to have been paid in part by at least US $6.8 million from the Fourth Claimant.
  14. KK say that analysis of the Arka-Stroy database carried out by Grant Thornton as part of the investigations this year that led to the applications to this court shows that 99% of Arka-Stroy's income, throughout its existence, consisted either of payments from the KK Group or payments by entities controlled by Mr Zhunus and Mr Arip. The KK Group paid a total of US $167.5 million into Arka-Stroy. US $167.1 million flowed out from Arka-Stroy into the hands of entities controlled by the Defendants or their associates. There is a net payment in to Arka-Stroy by KK JSC, PEAK and PEAK Akzhal of at least US $100.2 million. Giving Arka-Stroy credit for the value of the development at Akzhal-1 KK say that they have been defrauded of some US $81.68 million.
  15. The Astana Fraud

  16. KK say that the Fifth, Sixth and Seventh Claimants paid substantial sums to a construction business which then paid large sums to entities controlled by Mr Zhunus, Mr Arip or their associates. KK say that funds were circulated for no apparent commercial purpose. KK say that they did not get the development they paid for, but a useless expanse of Kazakh grassland littered with unfinished piling works and unused construction materials.
  17. Mr Werner says that the Astana fraud had two "Limbs". Limb 1 is preparatory in nature and consists of the Defendants causing the Fifth Claimant to purchase the Sixth Claimant and its subsidiaries for some US$39.3 million more than it was worth. This is said to be a preparatory step in the Astana fraud, because the Astana-Contract Group owned the land outside Astana which was to be the site of the alleged development and acquisition of the Group brought with it a pre-existing credit facility with DBK. The losses caused to the Fifth Claimant as a consequence of this purchase are alleged to arise from the excessive sums paid for the Astana-Contract group (which was effectively insolvent at the time). Limb 2 of the Astana fraud is, on the Claimants' case, a re-run or attempted re-run of the PEAK fraud which has led to losses on both limbs of US $53.5 million in all.
  18. Mr Arip disputes the claims in their entirety. He has not explained why in any detail. Although the alleged fraud is huge its structure is relatively straightforward so one might have expected Mr Arip to indicate how this is all a misunderstanding. That is something which in itself I do not have regard to at this stage for the reasons given by Woolf LJ in Behbehani v Salem [1989] 1 WLR 723,735A-D. Mr Arip points out that no other Defendant has yet had an obligation to put in a Defence. Mr Fletcher QC and Mr Haydon for Mr Arip also submit that their client is at a distinct evidential disadvantage. The entire case is concerned with property located in Kazakhstan and events which took place there between 2005 and 2009. Mr Arip is no longer resident there. A detailed response to the allegations, which concern not only payments made by the Claimants, but the value of work carried out by third parties on land in Kazakhstan, will require full access to the documentation and to the relevant sites (neither of which Mr Arip has), and a chance to undertake a proper detailed response with appropriate expert evidence, with an opportunity to obtain factual evidence from witnesses in Kazakhstan, many of whom apparently remain in the Claimants' employment.
  19. Mr Arip concedes for the purpose of this application that there is a good arguable case against him on the PEAK and Astana Limb 2 frauds, subject to two defences. He submits that there is no good arguable case in respect of three matters in all, first the impact of the reflective loss principle on the claims of KK PLC, secondly the effect of limitation on the claims of the Second to Seventh Claimants and thirdly the first limb of Astana, known as Astana 1.
  20. The Second Defendant's grounds for seeking to set aside the Injunction

  21. Mr Arip says that there have been serious non-disclosures and misrepresentations to the Court by KK on their ex parte application which were highly material to the Court's decision to grant an injunction. I cannot summarise this concern coherently without first recording briefly why KK say they made their application when they did.
  22. KK say that the events in issue mainly took place between 2006 and 2009, but it was only in March 2013 that evidence implicating the Defendants in the fraud was discovered by the present management of the KK Group, with the discovery (held in a separate and independent part of the KK JSC server which is not visible nor accessible except with special access and which is not synchronized with the rest of the KK server ) of an accounts package and database of a construction business called Arka-Stroy LLP. This database was analysed by Grant Thornton, who produced a forensic report of their findings. That report shows Arka-Stroy to have been a "Trojan Horse in the KK Group camp". Arka-Stroy's only significant economic activity consisted of extracting money from the Claimants and paying it out for the benefit of the Defendants and their relatives/associates. KK say that Arka-Stroy was managed by the Second Defendant although purported to be (and was held out by the First and Second Defendants as being) an arm's length company in its dealings with the KK Group.
  23. Mr Arip says that Mr Werner misled the Court in his affidavit sworn on 31 July 2013 as to how and when he came to be aware of the claims now advanced. KK failed to disclose that the potential claims had been known to KK for some time, as the existence and the extent of a PWC report and of some New York proceedings show, that the Arka-Stroy database said to have been 'discovered' and the cause of matters coming to light this year was sitting there waiting to be accessed and that the claims of the Second to Seventh Claimants are time barred as they know and should have disclosed. It is said that disclosure of the principles of law at the outset would have led the Court not to grant relief. In addition, the evidence and application put the case at its highest, and either failed to refer to important matters at all (such as the impact of the reflective loss principle) or down-played them (such as limitation) or failed to point out significant weaknesses (such as in relation to what is referred to below as Astana Limb 1). Other matters relevant to the exercise of the discretion were not mentioned, such as the likely effect of the injunction on the proposed bid for Exillon (a quoted company with which Mr Arip is concerned), the intention to publicise the grant of the injunction, and the doubt that KK would be able to meet any substantial award on the cross-undertaking).
  24. KK's response through Mr Brindle QC and his team is set out below. KK say essentially that these criticisms are wrong and unfair. In particular the PWC report was produced and carefully explained to the court. It is common ground that a fair expert report on Kazakh law was produced and relied on. KK say that allegations about the New York proceedings (which were disclosed at the outset) are misconceived.
  25. It follows that questions of good arguable case are interlinked with issues of what KK should have disclosed. Counsel approached this overlap in two different but reasonable ways. I shall try a third by dealing with good arguable case first.
  26. Freezing Injunctions- the law

  27. The requirements for good arguable case and the approach to disclosure do not seem to be in dispute so I take them, edited somewhat, from the skeleton argument of Mr Fletcher QC and Mr Haydon who act for Mr Arip.
  28. While proof to the civil standard of the balance of probabilities is not required, KK must show that, on the material available to the Court, they have "a much better argument" than Mr Arip that judgment will, in due course, be obtained. In VTB Capital v Nutritek International [2012] 2 Lloyd's Rep 313, Lloyd LJ [99 –100], Lloyd LJ considered the term good arguable case:
  29. "Good arguable case" in this context means that the claimant has a much better argument than the foreign defendant. Further, where a question of law arises in connection with a dispute about service out... and that question goes to the existence of the jurisdiction (eg whether a claim falls within one of the classes set out in paragraph 3.1 of Practice Direction 6B), then the court will normally decide the question of law, as opposed to seeing whether there is a good arguable case on that issue of law."
  30. One of the difficulties arises out of the fact that at this early stage in proceedings, as pointed out in Mr Gee QC's book on Commercial Injunctions (2006), the court wishes to achieve "its great object viz abstaining from expressing any opinion upon the merits of the case until the hearing."
  31. In Antonio Gramsci Shipping Corporation v Aivars Lembergs [2012] I.L.Pr 36 (Comm), the issue whether there was a "good arguable case" arose again in the context of a challenge to the Court's jurisdiction. Teare J. decided that in a case where the claim would turn on resolving issues of fact on which there was conflicting evidence, if the parties' arguments were equally plausible [42], the court may be unable to form the view that one party had "much the better of the argument" but could nevertheless find that there was a good arguable case for the acceptance of jurisdiction [34-48]. His reasoning was summarised without adverse comment by the Court of Appeal: see [2013] ILPr 36 [15-19].
  32. When assessing whether there is a good arguable case, account must be taken of potential defences available to the Defendants including limitation defences.
  33. The Court only has to consider whether the Claimants have the better of the argument at this stage. No findings on the facts are required and the Court is astute to avoid resolving issues of fact which will fall to be determined at a full hearing later in the litigation.
  34. The relevant principles relating to disclosure are not in dispute. Bingham J stated in Siporex Trade SA v. Comdel Commodities Ltd [1986] 2 Lloyd's Rep 428 at 437, that an applicant for a freezing injunction "must show the utmost good faith and disclose his case fully and fairly". This requires the applicant to disclose all material facts and matters and "It is no excuse for an applicant to say that he was not aware of the importance of matters he has omitted to state".
  35. The test for "materiality" of a matter not disclosed (or misrepresented) is whether it was relevant to the exercise of the Court's discretion: a fact is material if it would have influenced the Judge when deciding whether to make the Order at all or in deciding upon the terms in which to make it: see Ralph Gibson LJ in Brink's Mat v Elcombe [1988] 1 WLR 1350, at 1357G.
  36. There is a high duty on the applicant. The principles derived from Memory Corporation plc v Sidhu (No.2) [2000] 1 WLR 1443 (CA) were summarised by Eder J in Elektromotive v Pan [2012] EWHC 2742 as follows:
  37. i. The duty on the applicant in such circumstances goes beyond merely identifying points of defence which might be taken against them, important though that is;

    ii. The applicant has to show the utmost good faith, identifying the crucial points for and against the application and not rely on general statements and the mere exhibiting of numerous documents;

    iii. The applicant has to investigate the nature of the claim asserted and the facts relied on before applying, and has to identify any likely defences. He has to disclose all facts which reasonably could or would be taken into account by the Court. The duty is not restricted to matters of fact but extends to matters of law;

    iv. The applicant also has a duty to investigate the facts and fairly to present the evidence;

    v. There is a high duty to draw the Court's attention to significant factual, legal and procedural aspects of the case;

    vi. Full disclosure has to be linked with fair presentation. The judge has to have complete confidence in the thoroughness and the objectivity of those presenting the case for the applicant; and

    vii. It is the undoubted duty of counsel to draw to the judge's attention weaknesses in his case and to make sure the judge understands what might be said on the other side even if the judge says he has read the papers."

  38. If the court finds that there have been breaches of the duty of full and fair disclosure on the ex parte application, it should discharge the order obtained in breach and refuse to renew it: Blair J. in Russian Commercial Bank (Cyprus) Limited v Fedor Khoroshilov [2011] EWHC 1721 [59].
  39. This general rule is subject to an exceptional discretion to re-grant or continue the injunction: see the frequently cited summary of the relevant principles by Mr Alan Boyle QC in The Arena Corporation Limited v. Schroeder [2003] EWHC 1089 (Ch) [213]
  40. (1) If the court finds that there have been breaches of the duty of full and fair disclosure on the ex parte application, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial.

    (2)  Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order.

    (3)  That jurisdiction should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

    (4)  The court should assess the degree and extent of the culpability with regard to non-disclosure. It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order. Equally, there is no general rule that a deliberate breach will attract that sanction.

    (5)  The court should assess the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court. In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.

    (6)  The court can weigh the merits of the plaintiff's claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff's case is allowed to undermine the policy objective of the principle.

    (7)  The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

    (8)  The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence.

    (9)  There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances.

  41. Christopher Clarke J. summarised the position in Linsen International Ltd v Elspeth Shipping Corporation [2010] EWHC 303 (Comm) [at 60-63],
  42. "Whether or not such a sanction should be imposed depends on the circumstances including
    (a) the seriousness of the breach;
    (b) whether it was intentional, or resulted from indifference, inadvertence, or a thought-out but erroneous decision;
    (c) whether disclosure would have made any material difference to the outcome of the application;
    (d) whether the material before the Court taken as a whole makes it inequitable to continue or renew the order (in which case any question as to the effect of ?non-?disclosure is likely to merge with the question whether, in the light of all the material the injunction should be continued);
    (e) general considerations of equity."
  43. In a case of this magnitude and complexity I also find extremely valuable the following guidance from the then Toulson J in Crown Resources AG v Vinogradsky & ors (unreported 15th June 2001):
  44. "Speaking in general terms, it is inappropriate to seek to set aside a freezing order for non-disclosure where proof of non-disclosure depends on proof of facts which are themselves in issue in the action, unless the facts are truly so plain that they can be readily and summarily established, otherwise the application to set aside the freezing order is liable to become a form of preliminary trial in which the judge is asked to make findings (albeit provisionally) on issues which should be more properly reserved for the trial itself." (page 5 of the transcript)
    "Secondly, where facts are material in the broad sense in which that expression is used, there are degrees of relevance and it is important to preserve a due sense of proportion. The overriding objectives apply here as in any matter in which the Court is required to exercise its discretion." (page 6)
    "I would add that the more complex the case, the more fertile is the ground for raising arguments about non-disclosure and the more important it is, in my view, that the judge should not lose sight of the wood for the trees." (page 7)
    "In applying the broad test of materiality, sensible limits have to be drawn. Otherwise there would be no limit to the points of prejudice which could be advanced under the guise of discretion." (page 24)

    Do the Second to Seventh Claimants have a good arguable case against the Defendants?- Kazakh law of limitation.

  45. The First Claimant claims, except in very minor respects, under Manx law, the limitation provisions of which are the same as under English law. There is no limitation issue on that claim but Mr Arip says that the reflective loss principle bars it. It is common ground between the parties that the applicable limitation period under Kazakhstan law, which governs the claims of the Second to Seventh Claimants is three years. Proceedings were issued on 2 August 2013 so the question is whether the limitation period had been triggered by 1 August 2010. The English Court will apply the Kazakh limitation period because of Section 1(1) of the Foreign Limitations Periods Act 1984.
  46. Article 180 of the Kazakh Civil Code states, in respect of the 3 year limitation period:
  47. "The running of the statute of limitations begins from the day when the person became or should have become aware of a violation of his/its rights. Exceptions to this rule are established by the Civil Code and other legislative acts."

  48. Accordingly the Claimants have to prove (the burden under Kazakh law being on them to do so) that, by 1 August 2010, they were not, and should not have been, aware of the relevant violation of the rights of the Second to Seventh claimants.
  49. The question of awareness is at the heart of this aspect of the dispute and there is disagreement amongst the experts as the helpful digest prepared by Mr Arip's team makes clear. At a late stage of the hearing the parties helpfully agreed that for the purposes of this application they would both accept the approach of Professor Suleimenov on the question of what becoming aware of a violation of right is. I will therefore apply it. He says: "If the claimant unreasonably failed to make inquiries with respect to the reasons of damage when by law he was expected to take reasonable measures to make such inquiries, the court may hold that he should have been aware of what he would have been able to discover through such investigations."
  50. Mr Fletcher also says that I should bear in mind what Professor Didenko says on this point: "A claimant should have become aware, when a person of normal legal status and capacity, knowledge and life experience, and with reference to a typical set of circumstances, could or should have become aware of at the moment of violation of his right."
  51. As a result of that common ground being reached I do not consider the alternative submissions of Mr Brindle and his team based on Section 2 of the Foreign Limitation Periods Act 1984.
  52. What were the Claimants aware of by August 2010-and what should they have been aware of?

  53. There is a mass of evidence about this issue comprising the affidavits of Mr Werner asserting essentially that he had no relevant awareness until early this year and the statements of other witnesses addressing events (the details of many of which are strongly disputed) said to show that the Claimants were aware (or should have been aware) of the relevant violations of their rights by 1 August 2010 at the latest. The evidence is also confusing because much of it develops the non disclosure case simultaneously with that of good arguable case and is in cumulative affidavits and statements served over weeks up to the first day of the hearing often toing and froing about factual disputes which I cannot and should not resolve on this application. The documents relied on by both sides have been subjected to very close analysis. This is understandable but much of this will be more relevant to trial than to this application.
  54. The starting point is what the Claimants' outline submissions at ex-parte hearing, at paragraph 44. "The evidence of Mr Werner is that although there was evidence of loss to the company as seen in the PwC report, the events which triggered awareness of the Defendants' fraud were (a) In the case of the PEAK fraud (i) discovery of the existence of the Arka-Stroy 1C accounts and database in March 2013 by the new management which was followed by the investigation which thereafter has taken place and (ii) the disclosure also in March 2013 of the copy email dated 9 October 2009 from the Third Defendant; (b) In the case of the Astana Fraud, the disclosure to [KK] in January 2013 of (i) the Financial Police's report dated 13 June 2011 and (ii) the Police's decision dated 6 September 2009 to open a criminal investigation in respect of the money which had been misappropriated from KK Group and DBK." Mr Werner says that he did not come to suspect fraud of any kind, or involvement of any of the Defendants, until after the provision of the Business Audit Report in January 2013 and the discovery of the Arka-Stroy database in March 2013, until when he believed he was dealing with "ordinary (i.e. honest) mis-management by the middle and lower management".
  55. At the first hearing Mr Nathan said this in answer to a question from me. "The one matter which [the Defendants] may press to the court, if they apply to set [the Freezing Order] aside, is to draw attention to the Pricewaterhouse Report, which is dated December 2009, and say that that had sufficient indications to put the claimant company on to their trail and we say, no, not so. That is an issue which your Lordship cannot resolve at this stage."…
  56. The PwC Report dated 3 December 2009 was commissioned by Mr Werner for KK on 19 November 2009. The Claimants' skeleton does not try to summarise its effect. It is a substantial report described as a 'Limited financial review of cash flows in the periods from January 2007 to September 2009'. There were four sets of recommendations in the Executive Summary. First there should be an analysis of undisclosed related parties as suppliers. That was done. Secondly there should be an expertise to verify construction work (not done) and a review of contracting procedures (done). Thirdly there was to be a retrospective due diligence of the Astana Contract Group to identify the fair value of the group's assets and liabilities. This was not done. Finally there was to be a review of all current assets of the Group. It is unclear whether or not this was done.
  57. Mr Fletcher points out that PwC identified matters which included the following. PwC identified "Questionable Transactions" to a total value of US$170,000,000. The report contained an outline of the construction projects which form the subject matter of the PEAK and Astana Limb 2 fraud allegations. PwC reported that they had obtained the management accounts prepared by local management responsible for these projects and that these "did not reconcile with the financial statements of the group", that they had been informed by Mr Gennady Stepanov (the construction director of Astana-Contract) that suppliers were chosen to do work through an official tender process and that "we requested, but have not been provided with any tender documentation". The Questionable Transactions, included Construction in Progress to the extent of US$ 57,400,000 in respect of work carried out by "related parties" specifically including Arka-Stroy. PwC reported and advised:
  58. "... we have identified a significant lack of detailed qualitative supporting information for the actual work done. We recommend that management engage a professional engineering company to assess the value of the investments made. "
  59. Mr Arip says that had this very specific advice been acted on, it is obvious that the extent of the mismatch between the claimed price and the actual value of the work performed would very rapidly have emerged. Bereke KAB who prepared the report on which the Claimants rely to make their claims appears to have taken no more than about 6 weeks. An investigation in late 2009 or early 2010 would have had the benefit that relevant events were far less stale.
  60. In summary Mr Arip says that the Court should have been told that the PwC Report constituted clear evidence of loss by reason of over-payment in respect of construction contracts with related parties including Arka-Stroy (the PEAK allegation), overpayment for the Astana-Contract Group (Astana1) and payments to GS Construction, a related party, with concerns in respect of the tender process (relevant to Astana 2). The report identified "red flags" as to the involvement of related parties, management accounts not reconciling, failures to provide documentation in response to requests, all in the context of the huge scale of the Questionable Transactions. If as they should have been these matters had been reported to the auditors and followed up the case, if any, against the Defendants would have come to light long ago. Mr Arip produces evidence from the former Chairman of KK PLC that the PWC report disclosed matters that were plainly material and should have been disclosed to the auditors, a position endorsed by Mazars, accountants retained by Mr Arip to give expert evidence.
  61. KK respond that the report made clear, specific, recommendations as to what action should be taken to investigate the matters of concern raised in it. Nothing in the PwC report suggests any fraudulent action on the part of any Defendant. It is only when the PwC report is considered in the glare of hindsight after the discovery of the Arka-Stroy database, that its place in the jigsaw becomes clear. The "mismatch between the claimed price and the value of the work" which, it is claimed, would have become apparent on investigation, would not incriminate any Defendant. There is nothing (without the database information becoming available to the Claimants) to enable the Claimants to link anything to the Defendants and to the entities which received money for their benefit. Likewise, the PwC recommendations would not have led to discovery of the Defendants' fraud. This is because neither the Claimants nor their auditors, are (or can be expected to be) detectives. Like much evidence of fraud, it was discovered by chance and until then there was nothing to suggest to the new management of KK Group that it was out there to be found. Further Mr Werner and his colleagues had a very substantial task in sorting out KK and dealing with pressing claims on its resources until 2013. He points in particular to three years of activity from December 2009 until December 2012 for the purposes of negotiating and finalising the restructuring of all of the KK Group's issued bonds and most of its loans, representing 80% of the revenue and 80% of the EBITDA of the KK Group.
  62. New York litigation

  63. It appears from some draft minutes that on 20 August 2012 a board meeting was conducted by telephone involving Mr John Khabbaz a new investor in KK who also became a director of KK PLC and Joint Chairman with Mr Werner. Item 2 was approval of the issue of a lawsuit by Phoenician Capital (a shareholder of KK PLC) against Alliance Bank and former shareholders (the first two Defendants) on behalf of KK. KK had reached an agreement to fund the case ( as was disclosed in this case in August).Mr Khabbaz referred to a statement of complaint presumably a draft of the Complaint issued in the New York Court a month later, on 21 September 2012. This derivative action which was discontinued later was disclosed by KK when the injunction was applied for.
  64. In response to a question as to the identity of the defendants in the proposed law suit Mr Werner's response was recorded as follows:
  65. "Then Tomas Mateos Werner explained to him that the defendants were two former shareholders of the company and the Alliance Bank. An appointed auditing company revealed the fact that in 2009 the two former shareholders stole over 170 million US dollars from [C1] and details of the crime could be read in the statement of Complaint .... The fact that the former shareholders have been with the Company's Board does not permit the Company or the Board to sue the individuals, since they have been controlled by the Board over the last three years in all decisions made. So the right position is for the Board to reject the proposal to sue the Bank and the two former shareholders. Besides, under jurisdiction of Phoenician Capital it was more suitable to sue these defendants outside Kazakhstan with a better chance for success."
  66. As the evidence developed it became clear that these remarks were wrongly attributed to Mr Werner in the draft minutes as they had been made by Mr Khabbaz. But Mr Arip points to the very existence of the litigation and to Mr Werner's evidence in response that he did not consider the evidence to be sufficient. "I believed that ... the draft Complaint had been formulated, as regards what we have now called the PEAK fraud, in a way which only contained the vaguest pleas of fraud and pleaded a conspiracy based on vague inferences. The reason why the fraud allegations could only be vague at that stage was because Phoenician Capital LLP, along with KK PLC and KK JSC, then lacked the material establishing the PEAK fraud by Arip and Zhunus, as has now been set out in the present Particulars of Claim in this action." He then contrasts this assertion with material which may indicate that the reason KK did not itself take action was concern about lack of jurisdiction in New York, not evidence. That material is offset to a degree-thus in an email at the end of July 2012 Mr Werner writes: "We all started this because I considered that neither myself nor the company had any realistic chance of succeeding by suing the Defendants in effect making things worse for the company, but that you, with your ability to attract New York jurisdiction could do so. I therefore gave you, and I am sure the Board would do so, the full support to launch a derivative lawsuit."
  67. There is also the transcript of the audio recording of the Board Meeting showing that Mr Werner explained that without US jurisdiction there was no possibility of suing the former shareholders and because the board "has a lack of credibility because ... we've been living through the situation for three years .... whereas John being a new shareholder that has just been made aware of the situation ...". This may of course be an indication that Mr Werner had some knowledge of the potential for action three years earlier or simply that he would lack credibility not having been aware of the issue previously.
  68. There is evidence that suggests that the reason for KK not suing in New York was more a lack of evidence than a concern about jurisdiction but, on good arguable case, the litigation is of limited relevance as the question is what KK knew in August 2010 not in 2012.
  69. Norton Rose advice

  70. A further document disclosed from New York (an invoice narrative to KK from Norton Rose) evidences that immediately after receipt of the PwC Report (by January2010) someone representing the Claimants ( perhaps SP Angel the firm who were running KK before Mr Werner took over) obtained advice about "liabilities of directors and shareholders in connection with an alleged misappropriation of company funds".
  71. The skeleton arguments made submissions based on speculation about what lay behind the invoice. Since KK had the means of discovering what all this was about I declined to listen to submissions on a hypothetical basis and asked for the matter to be clarified in writing after the hearing. More information is now available and there are competing submissions about its importance. I am grateful for those but, as I see it, the picture remains unclear. This material would only have affected the outcome of this application if it had showed clearly, which it does not, that in January 2010 the current management of KK were taking up the claims now made against the Defendants in this action. This too remains an issue which I cannot and should not reach conclusions about at this point.
  72. Arka-Stroy database

  73. Mr Arip says that it is clear that had KK acted reasonably in response to the PwC Report, they would have become aware of the database by May 2010 with the result that claims in respect of those violations were statute barred before proceedings were issued in August 2013. There are two routes by which Mr Werner should have been led to speak in 2010 to the KK Group's IT department and Ms Svetlana Zhondelbaeva who was an accountant for Arka-Stroy and is now employed by KK. The first is by simply following PwC's recommendations and the second is by referring PwC's report to the auditors of the KK Group as he was obliged to do before signing off the Financial Statements for the Financial Year 2009. Mr Werner suggests that the discovery of the Arka-Stroy database was the key to uncovering the facts now relied on against the Defendants. Mr Arip points out that it is apparent from Mr Werner's account of his approach to X (Mr Kuzmenko) and Y ( Mr Khasanov) in the IT department that they readily co-operated with his requests for information and that the Arka-Stroy database was revealed within days of them first being approached (X was approached "in late February or early March 2013" and the material was provided on 4 March 2013) . There is no reason to believe that they would not have similarly co-operated at any earlier time – including December 2009, and the Arka-Stroy database was on the KK Group's servers at that time.
  74. KK are dismissive of this evidence and do not mention it in their skeleton. Their position was put by Mr Brindle as follows;
  75. "There is, we submit, my Lord, absolutely no reason why Mr Werner, or indeed anybody else, including Miss Viktoriya Gorobtsova, should have thought that KK's computer system included the Arka-Stroy database. Why should they have even thought for one moment that this supposedly independent company would have all its records on a KK database? It is said: well, it was there, and all you had to do was go and ask Mr Kuzmenko,and all would have been revealed in seconds; that is quite unrealistic."

    Financial Police

  76. In Paragraphs 52 to 53 of his first affidavit Mr Werner refers to investigations by the Financial Police in Kazakhstan generally and to a Business Audit report on lending by DBK Bank to Astana in 2011 which was not drawn to his attention until January 2013 but which then became a significant factor in KK learning of the Defendant's alleged conduct. Mr Arip points out that Mr Werner failed to disclose that on 11 March 2011, KK applied to the Head of the Department for Combating Economic and Corruption Crime (Financial Police) for the City of Almaty for a pre-investigation examination of the use to which the proceeds of loan from DBK obtained by the Sixth Defendant material to the contracts in issue in this case. KK alleged that, if the loan proceeds had been used inappropriately, "it would constitute criminal embezzlement of funds" of which the management of Astana –Contract JSC, TESS and GS Construction must have been aware.
  77. Mr Werner apologises for the non-disclosure stating that Ms Kogutyuk, who must have worked closely with him for some time, did not inform him of the complaint and that it had been overlooked by those searching for documents within the KK Group. Mr Arip says that it is surprising that this was not in Mr Werner's mind given his own contacts with DBK at the time. Mr Arip points out that Mr Werner received the Business Audit Report at the same time as learning of the Police's decision (apparently based on that report) not to prosecute.
  78. Mr Brindle submits that the material point (that the investigations or "pre-investigations" did not reach any incriminatory conclusions) was fairly stated in paragraph 53 of Mr Werner's first affidavit. The absence of further detail is not material non-disclosure - at no point were either the Financial Police in Almaty or Astana investigating the allegations against the Defendants made in these proceedings and the decisions not to investigate further do not exonerate the Defendants. KK also respond that the Business Audit Report was the first document evidencing a connection between Limb 2 of the Astana Fraud and receipt of funds for the benefit of the First and Second Defendants.
  79. Limitation – conclusion of the Court

  80. I have to be more cautious about assessing what the appropriate reaction of a Kazakh business person should be to commercial events within Kazakhstan than I would be when dealing with an English case. It seems surprising that KK did not respond more vigorously to the PWC report and, according to Mr Manghi, that important document should have gone to the auditors. Expert evidence largely confirms that view. Had the report gone to the auditors and been pursued with cooperation from all within KK then these alleged frauds may have come to light. However the main purpose of the report was not to investigate the Defendants but to examine cash flows.
  81. Evidence of how easy it would have been to find a database assumes that there was a reason to look for it. The Claimants have a point. You would not usually expect to find the database of a quite separate business sitting on your own system. I cannot resolve the differing accounts of how in practice the database came to light
  82. The evidence about the New York litigation is confusing and not possible to resolve at this point but its value is limited to what events in 2012 tell us about what KK knew in 2010. It is not uncommon for US business people to turn to litigation more hastily and readily than their colleagues in Europe and elsewhere. There is also a perception that cases may be brought in some US jurisdictions without the evidence required elsewhere- in this case Mr Werner said that he believed that KK had insufficient evidence of the PEAK and Astana frauds without, as it were, the database.
  83. The evidence about the police investigations is still inconclusive and it remains unclear what if any significance attaches to the role of Norton Rose. The other matters relied on are more minor.
  84. According to his evidence Mr Werner and his colleagues had other priorities, beyond looking into past as opposed to future transactions, because of the need to sort out KK's major problems including a restructuring. Moreover Mr Werner says that he and his colleagues were working in an 'atmosphere of obfuscation and concealment' , the Defendants had been running things until late 2009, many of their allies were still with KK, SP Angel Corporate Finance were looking after the Group during a sort of Interregnum. It is also suggested that even now the Defendants have allies within KK. This evidence has yet to be tested but it resonates with the experience of many fraud cases where, once suspicions are aroused, it is difficult or impossible to know who and what to believe and what can be taken at face value. As solicitors investigating such matters know there can be an understandable confusion and paralysis once suspicion of major fraud emerges. It is trite to point out that fraud often looks obvious only after it has been discovered and that it then often points suspicion at a wide variety of potential culprits.
  85. Ultimately the question of what KK was and should have been aware of will turn on the evidence of Mr Werner, the only witness with direct evidence to give at this point, and an evaluation of the circumstantial evidence and of the witnesses (other than the solicitors) who deploy it. That task cannot be carried out now and is a matter for trial. If Mr Werner is telling the truth the relevant Claimants did not know about the alleged frauds by the Defendants until recently. Resolution of the question of what the Claimants should have known will be more complex. But I still have to consider whether the Claimants have a much better argument on the material currently available. On that material, put shortly, I consider that the Claimants have a direct witness who I have no reason to disbelieve as regards the essential substance of his evidence despite the qualifications he has made in later affidavits. Mr Arip deploys some powerful circumstantial material, from a very unattractive starting point, which, at a later stage when developed at trial, may prove decisive but I am looking at the arguments as they stand today. Further the relevant Claimants have a plausible response to the material deployed by Mr Arip. I conclude that on the material available the relevant Claimants do have a much better argument.
  86. If I had not reached that conclusion the relevant Claimants might still have had a good arguable case in what is an unusual situation. Although good arguable case is only conceded for the purpose of this application it is conceded and, on current evidence, would have been found to be established. Mr Arip has to take the consequence of that. It follows that it is assumed that KK have much the better of the argument that Mr Arip engaged in a huge fraud but that (on the hypothesis of this paragraph) I cannot decide whether the Claimants have a much better argument on limitation without resolving a conflict of evidence. The recent Gramsci case referred to above concerned a jurisdiction application, not a freezing injunction, but the issue of good arguable case is common to both areas of procedure. Both the judge and the Court of Appeal saw nothing inappropriate in allowing the court to take jurisdiction despite the fact that a conflict of evidence and the limitations imposed by the interlocutory process prevented the judge from concluding in advance of oral evidence that the applicant had much the better of the argument. If I had not been satisfied that the Claimants had a much better argument I would probably still have concluded that there was a good arguable case and exercised my discretion to continue the injunction to trial subject of course to the other issues I have to consider.
  87. Does the First Claimant have a good arguable case against the Defendants? - Reflective loss.

  88. This issue arises only on the claims of the First Defendant, brought under Manx law, and only if the claims brought by the other Defendants, all under Kazakh law, are statute barred.
  89. It is common ground that Manx law recognizes the reflective loss principle, in precisely the same way as English law. Mr Arip submits that none of the loss or relief claimed by KK PLC in these proceedings is separate and distinct from that which is claimed by the Second to Seventh Claimants, so that all of KK PLC's pleaded claims are barred.
  90. It is common ground that the leading summary of the principle is set out in the judgment of Neuberger LJ in Gardner v Parker [2004] 2 BCLC 54 (CA):
  91. "(1) a loss claimed by a shareholder which is merely reflective of a loss suffered by the company – ie a loss which would be made good if the company had enforced in full its rights against the defendant wrongdoer – is not recoverable by the shareholder [save in a case where, by reason of the wrong done to it, the company is unable to pursue its claim against the wrongdoer[1]];
    (2) where there is no reasonable doubt that that is the case, the court can properly act, in advance of trial, to strike out the offending heads of claim;
    (3) the irrecoverable loss (being merely reflective of the company's loss) is not confined to the individual claimant's loss of dividends on his shares or diminution in the value of his shareholding in the company but extends … to "all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds" and also … "to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder" [save that this does not apply to the loss of future benefits to which the claimant had an expectation but no contractual entitlement];
    (4) the principle is not rooted simply in the avoidance of double recovery in fact; it extends to heads of loss which the company could have claimed but has chosen not to and therefore includes the case where the company has settled for less than it might …;
    (5) provided the loss claimed by the shareholder is merely reflective of the company's loss and provided the defendant wrongdoer owed duties both to the company and to the shareholder, it is irrelevant that the duties so owed may be different in content."
  92. Mr Fletcher and Mr Haydon argue that there is no exception to the application of the principle of "no reflective loss" where the company with the direct claim has lost that claim through the expiry of a limitation period. They cite Day v Cook [2002] 1 BCLC 1 (where the company's cause of action was in fact statute-barred but the principle was still applied to bar the shareholder's claims). See also Barings v Coopers (No 1) [2002] 2 BCLC 364, per Evans-Lombe J at [128]. The principle extends to bar claims for loss of profits and trust remedies provided that a subsidiary could make a claim for no less extensive relief: Shaker v Al-Bedrawi [2003] Ch 350 (CA); Murad v. Al-Saraj [2005] EWCA 959.
  93. I did not understand Mr Brindle and his colleagues to disagree greatly with that, apart from contending that the position may be different where shareholders have lost a right as a result of the application of an unfair foreign limitation period. In argument Mr Brindle did suggest that the first instance cases Mr Fletcher referred to were wrong but they have been taken to be right recently by Morgan J in the unreported case of Sukhoruchkin v Van Bekestein [2013] EWHC 1993(Ch) and there has been no serious attempt to persuade me to depart from them. Put shortly I do not accept that the fact that the limitation period is a foreign one will make any difference unless the Giles v Rhind principle to which I refer below applies.
  94. Mr Arip's Counsel's skeleton contains an impressive analysis of the detail of the claims brought by the Claimants which concludes that the First Claimant has no claim which could not (subject to time-bar) be brought by one of its subsidiaries (and is in fact brought by them in these proceedings). The Claimants do not contest that analysis.
  95. The Claimants say that the reflective loss principle has no application in this case, for three reasons.
  96. First on Mr Arip's case the Second to Seventh Claimants do not have actionable claims. There is therefore no recoverable loss for KK PLC's claim to "reflect". Where a subsidiary suffers loss but has no cause of action to recover that loss, the shareholder may sue in respect of the loss if it has a cause of action to do so: per Lord Bingham in Johnson v Gore Wood & Co [2002] 2 AC 1 HL at 35. They cite George Fischer v Multi-Construction [1995] BCC 310. This reason is, as I see it, not a good one. The principle is concerned with the position at the outset not later on when one potential Claimant has lost its claim and a Defendant invokes reflective loss. George Fischer adds nothing as it is not a case where both shareholder and company had a cause of action, only the former had a ground to bring a claim.
  97. Secondly the Claimants say that the Defendants, by their wrongful conduct, prevented the detection of the frauds and therefore prevented a claim against them. If (which is denied) this has caused limitation to expire then the Defendants are responsible. The Claimants argue that the reflective loss principle does not apply where the defendant has by his own wrongdoing rendered the subsidiary unable to pursue its claim: Giles v Rhind [2003] Ch 618 at 634-635. The case of the Claimants assumes that as a result of the misconduct of the Defendants the subsidiary companies have been unable to bring action in time under Kazakh limitation law. Thus they cite a passage from the judgment of Waller LJ in Giles v Rhind at 633 at 34:
  98. "One situation which is not addressed [in Johnson v Gore Wood] is the situation in which the wrongdoer by the breach of duty owed to the shareholder has actually disabled the company from pursuing such cause of action as the company had. It seems hardly right that the wrongdoer who is in breach of contract to a shareholder can answer the shareholder by saying, 'The company had a cause of action which it is true I prevented it from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody.'" He held that the House of Lords in Johnson had not intended the reflective loss principle to apply where the "wrongdoer has disabled the company from pursuing that cause of action" (paragraph 35). That principle was approved by the Court of Appeal in Webster v Sandersons Solicitors [2009] PNLR 37 at paragraph 36.
  99. The Claimants' case is that it has not been possible to bring a claim until now because of the sophisticated concealment of the fraud by the Defendants. Further the size of the sums extracted by the Defendants meant that the Claimants did not have the resources available to undertake the intensive investigations necessary to uncover the fraud until recently. The Claimants say that where Kazakh law unreasonably operates so as to deprive the subsidiaries of a claim (when they had no knowledge that there was a claim to make) there is no risk of double recovery. Neither is it a situation where the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. But of course the position of the Second to Seventh Claimants is that Kazakh law does not deprive them of such a claim and their perception of the pertinent facts is not consistent with it being impossible for them to bring their claim.
  100. The Giles v Rhind exception is said to be controversial but it is the law – see the discussion in Webster. For the purposes of this application I take the effect of the three judgments of the Court of Appeal on this aspect to be as set out in the head note to the case;
  101. " although in general a shareholder could not recover damages from a wrongdoer for a loss which was reflective of loss suffered by the company in circumstances where the company itself could have recovered in respect of that loss but had chosen not to do so, since the loss to the shareholder in such a case was caused by the decision of the company not to pursue its remedy and not by the wrongdoer's fault, there were no reasons of principle or policy to prevent a shareholder from recovering damages where the wrong done to the company had made it impossible for it to pursue its own remedy against the wrongdoer"

    and encompassed by the italicised words added to the summary in Gardner set out above.

  102. Thirdly KK say that the onus is on Mr Arip to show that the reflective loss principle applies. In order to do so Mr Arip would have to establish complex facts and legal principles, properly determinable only at full trial Shaker v Al-Bedrawi [2003] 1 BCLC 157. At this stage the Claimants say they have (at least) a good arguable case that he will not be able to do so. Where a factual issue arises to demonstrate that all loss is reflective it will not be possible properly to determine the issues until a full trial. I do not see that at this stage the burden of proof makes much difference where Mr Arip (or in reality Mr Haydon) has analysed the causes of action in detail and not been challenged. It would be a reason for not striking an aspect of the case out but it does not as I see it convert this issue into a good arguable case.
  103. The differences between the parties about the law in this context narrowed as the hearing proceeded. If the facts turn out to be as alleged by the Claimants and the Kazakh law is held to be as severe as some of the evidence suggests, the First Claimant has an arguable case to pursue under the exception on the grounds that the Defendant made it impossible for the Claimants to sue in time. But that is a set of circumstances unlike any to which the exception seems to have been applied before. It is also not the set of circumstances which the Claimants currently rely on for their case on limitation. As I see it the law is as submitted by Mr Fletcher, not Mr Brindle. For the First Claimant it is the Giles v Rhind exception or nothing. It follows that on the current case as run by KK the first Claimant has no good arguable case because the reflective loss principle applies.
  104. Do the Claimants have a good arguable case against the Defendants? - Astana 1

  105. I summarised the Claimants' case briefly earlier. It was explained orally at the without notice hearing as follows by Mr Nathan:
  106. "Pricewaterhouse, when they came to value the assets, valued them at just US$ 2.7 million. And the way that that was managed was by the trick of pretending that the occupants of the building – because there was a building there, some warehouses originally there – that the occupant of that was actually solvent and was going to be paying rent. In fact, quite the opposite was true: the occupant was insolvent and wasn't paying rent and there was no prospect of cash flow and everything depended upon the value of the property on the footing that it was going to have a foreseeable cash flow.
    As a result the company was getting valuations based on information which was given by the management as to what was happening. They managed to raise the value of the company's assets from 2.7 million, in reality, to 78 million. So when they said that they bought it for 42 million, they appeared to be buying it at a good bargain. In fact they were buying it at 20 times its value. So the first thing is that the company lost 39 million odd through the purchase of that company.
    The people who must have provided all that forecasted information was the board of [KK JSC]. That is to say [the Defendants].
    There is one exhibit that we put in of one of the valuations from a company from CBRE, which makes plain that the bulk of the value of the property came from the forecast income, that all came from information from the company that is to say from those three."
  107. Mr Werner says in evidence; "For the purposes of the acquisition,[The Defendants], through [KK] instructed valuers, or caused valuers to be instructed, to give valuations based on highly dubious assumptions. ... For example, at page 37 of the CBRE Valuation relating to the Astana Contract, the 60% occupancy rate of the logistics centre relied on for the future cash flow forecast was based on the "Client's information". They justified the acquisition by then revaluing the Astana Group by US$78 million whereas its true value was, as PwC stated in its report, just US$2.7 million."
  108. I take Mr Arip's case on this issue by abridging some passages from his Counsel's skeleton. Mr Arip says that KK fail to make many matters clear including the following:
  109. a. The only valuation report disclosed provided valuations on 3 alternative bases: (1) replacement cost (2) income (3) combined (weighted as to 60% for replacement cost and 40% for income). The combined (or "blended") value was US$ 14.8 m for the assets valued, primarily real estate .These assets comprised part only of the assets listed by PWC .

    b. The "income" approach in that report as explained by CBRE does not record any assumption as to the solvency of the occupant. The assumptions are stated separately

    c. It is misleading to say that the occupancy rate of 60% was based on "Client information": the report states that the occupancy data provided was taken from Astana-Contract's reported results for 2007

    d. There is no evidence in support of his assertion that the 60% occupancy rate assumption was "highly dubious"it is mere assertion. Mr Manghi's evidence is that the figure was correct being derived from the occupancy figures provided by Astana-Contract.

    e. The Claimants also failed to refer to other relevant evidence even though Mr Werner must have been fully aware of all of it:

    i. Mr Werner visited the facilities in 2009 and was impressed,
    ii. At least three reports prepared by independent analysts contemporaneously with the acquisition confirmed the benefit of the transaction, as did a presentation, photographs, and eight other CBRE reports.

    f. Mr Werner also failed to inform the Court that he and the other new directors continued to rely on CBRE's valuations in the financial statements prepared for the year ending 31 December 2009.

    g. Mr Holland does not accept that CBRE's valuations were wrong, and emphasises that he has received no inquiry from KK or its auditors or any bank in respect of them in the nearly 6 years since they were prepared .

    h. Mr Werner also failed to inform the Court that the fair value of Astana-Contract Group's assets was re-assessed for the purposes of the December 2008 Financial Statements. Fresh real estate valuations were carried out by AppraisConsult which assessed the value of the assets as US$177 million (very close to CBRE's valuations).

    i. No motive for the alleged conduct was put forward in either the oral or written submissions.

    j. The Claimants misled the Court by misrepresenting the significance of the references in the PwC Report to the figure of US$ 2.7 million which they refer to as the "true value" of the Astana Contract Group.

    k. The Claimants should have told the Judge that PwC did not themselves express a view on the "fair value" of the Astana-Contract Group and that PwC had recommended "a retrospective due diligence of the Astana-Contract Group in order to identify the fair value of the group's assets and liabilities" but that this recommendation had not been followed-up

    l. The Court should have been told that that KK were proceeding with their claim without the benefit of any professional assessment of the "fair value" of the Astana-Contract Group at the time of its purchase by the Fifth Claimant as this was the premise of the claim that a loss had been suffered.

    m. The Court should have been told that the fair valuation adjustment was supported not by just one valuation produced by qualified and licensed valuers CBRE

    n. The Claimants do not specifically address the complaint that they should have told the Judge that another valuer, AppraisConsult, had reassessed the fair value of the assets of the Astana-Group as at 31 December 2008 at US$ 177 million.

  110. The response of KK is thin. They rely on Mr Werner's affidavits supported by the report of experts Cushman & Wakefield, Veritas Brown. KK say that the Astana-Contract Group was massively overvalued, because bare plots of land were valued as if they had income producing assets on them, when no such assets existed. They claim that this argument receives some support from Mr Arip's own witness, Mr Holland of CBRE, who concedes that "the income-based approach was frequently used to value development land in Kazakhstan during the property bubble". Mr Werner correctly refers to "the true value of the net assets". The Astana-Contract was insolvent (or virtually so) and the overpayment was justified by artificially high valuations after the event. Mr Arip claims that the financial statements signed off by Mr Werner repeat and rely on the CBRE valuations but looked at in context KK are not endorsing a valuation approach but recognising it as a risk. There is however no credible answer to most of the points that Mr Arip raises.
  111. Mr Brindle, albeit when dealing with non – disclosure, said this about Astana 1;
  112. "My Lord, I think one must be realistic about Astana limb 1. If this case was only about Astana limb 1 and there had never been anything else except Astana limb 1, frankly, it is very unlikely this case would have come to you, if that was the only thing. But having discovered the PEAK fraud, the process goes something like this: the PEAK fraud being discovered, the very similar events which constituted Astana 2 are then looked at and reveal what looks like a similar kind of fraud, particularly in the light of the Business Audit report, and then, once one is looking at fraud, one looks again at the Astana 1 situation, and it looks thoroughly fraudulent and that is brought forward. But I accept that that is the way it worked, and that if one is looking at fraud, if one has already got strong evidence of fraud on two counts, another set of events which initially only looked suspicious, would now quite naturally look a lot worse than suspicious in the light of the known frauds. But I accept that Astana limb 1 is, in a sense, a less strong case than the others. I don't accept it is a weak case, I don't accept it is not an arguable case. Whereas the other two, where my learned friend accepts there is a good arguable case, are stronger."

    Astana 1-decision of the Court

  113. This realistic assessment is not the vocabulary of good arguable case. There is no good arguable case on Astana 1. The case requires it to be found that the valuations were the product of the fraud and informed by dishonest information from the Defendants. But the valuations were largely prepared from data other than that provided by the Defendants and the valuers, CBRE, a part of Richard Ellis, largely stand by them for reasons which make sense. The Claimants have used CBRE in the past and have not made criticism of their standards or integrity before. There may well be criticisms of their approach and that of the KK expert may turn out to be more appropriate but that is not the foundation for a fraud claim. The supposed motive for the fraud is obscure. The evidence in support of what is a very serious allegation involving large sums is very limited and at present contains many of the shortcomings identified by Mr Arip. It follows that, regardless of issues of non disclosure, the injunction must be discharged to the extent that it extends to Astana 1.
  114. Non- disclosure.

  115. A starting point is that Mr Arip concedes for the purpose of this application that there is a good arguable case except in relation to Astana 1 and the potential defences of limitation and reflective loss. The allegations of non disclosure relate only to those matters. It is important to bear in mind that disclosure was required of all aspects of the dispute and I bear in mind that the Claimants were not concentrating simply on the areas now criticised when deciding what to disclose across a broad front. It is true that the Claimants took, as they should have done, a significant time to investigate these matters thoroughly before starting action and one might therefore expect disclosure to be particularly careful and well informed. This was not a last minute dash to court to stop an imminent payment being made. Against that as Toulson J pointed out in Crown Resources the more complex the case the more fertile the ground for raising non disclosure arguments. In almost every very large case it turns out, particularly following vigorous debate between the parties, that there are some matters of which disclosure or greater disclosure should, with the benefit of hindsight, have been made.
  116. Non-disclosure-Reflective loss

  117. Mr Arip submits that the reflective loss principle is a complete answer to KK PLC's claims under Manx law. Its potential application was not disclosed on the without notice application. If I had understood that Manx law applied the principle of "No reflective loss", I would not have been so influenced by the repeated reference to claims available to KK PLC and the submission that "Under Isle of Man law, there is no difficulty in relation to limitation..." That submission is correct. Nothing was said about reflective loss and I am afraid that it did not occur to me. With the benefit of hindsight, I would have expected lawyers pleading KK PLC's case to be alive to this issue. If they had been they would have unquestionably disclosed it. It is not a matter that could have occurred to Mr Werner and was obviously unintentional. There is no failure to disclose on this issue which spreads across materially to affect my view of non- disclosure in general.
  118. Non -disclosure-Limitation

  119. The remaining claims are governed by the limitation rules of the laws of Kazakhstan. Mr Arip submits that the differences between the laws were not pointed out to me so I expressly assumed that Kazakh limitation rules were the same as those of English law. That is not correct. As page 39 of the transcript of the 2 August 2013 hearing shows, Kazakh limitation was disclosed as a potential defence and I then speculated about what the position would be in the event of fraud. The Claimants point out that they obtained and drew attention to their expert report on Kazakh law, the Signum Report which is broadly accepted by Professor Suleimenov (who gives expert evidence for the Second Defendant). The limitation provisions were there for me to see and were drawn to my attention in eight paragraphs of the Claimants' outline submissions at Paragraphs 43 to 51. Kazakh limitation law was identified as the first line of potential defence at Paragraph 42. I do not consider that there was a failure to make proper disclosure of this aspect.
  120. Mr Arip submits that there has been serious non disclosure about the factual assumption of concealment by the Defendants and the Claimants' lack of awareness upon which the response to a limitation depends. He says that the failure of the Claimants properly to disclose on their ex parte application the true extent of their awareness of relevant matters (whether acquired through Mr Werner, Ms Kogutyuk or others) on receipt of the PwC Report and their failure to outline the argument that Mr Arip would make of a limitation defence based on that awareness (and such awareness as they should have obtained) is a serious breach of the duty of full and frank disclosure for which KK themselves, not merely their lawyers, are culpable.
  121. Mr Arip says that the Court should have been told that the PwC Report of itself constituted clear evidence of loss by reason of over-payment in respect of construction contracts with related parties including Arka-Stroy (the PEAK allegation); overpayment for the Astana-Contract Group (Astana Limb 1) and payments to GS Construction, a related party, with concerns in respect of the tender process (relevant to Astana Limb 2). It clearly identified "red flags" as to the involvement of related parties, management accounts not reconciling, failures to provide documentation in response to requests, all in the context of the huge scale of the Questionable Transactions. It also made clear, specific, recommendations as to what action should be taken to investigate the matters of concern raised in it.
  122. The Report was disclosed to the Court and attention was drawn to it and its potential significance in written and oral submissions. It did not name the Defendants or point the finger at them. It was expressly drawn to my attention when I asked a question about other matters of disclosure as being something which might be used to show that the Claimants had not moved soon enough although Counsel did not expressly link it to a limitation provision. There is a fierce controversy about the report's implications and significance which the Court, despite the strenuous efforts of the lawyers, cannot and should not resolve until trial. Mr Brindle points out on this aspect and others that as the then Toulson J pointed out in Crown Resources the Court should not find non disclosure where its proof depends upon proof of disputed underlying facts.
  123. Mr Arip's team repeatedly put their case quite high asserting for example that "There is clear, unanswered, evidence that Mr Werner's evidence in this respect is false, as will now be explained." In a sense the greater the degree of dishonesty which Mr Arip attributes to Mr Werner, the clearer the evidence has to be shown to be to warrant such a serious charge.
  124. I cannot and should not make a determination of how much truth there is in Mr Werner's claims about the other pressures on his time when the alleged frauds, on his case, were still not coming to light in order to decide whether there has been non- disclosure about that. As to the admitted non disclosure of aspects of the Financial Police investigations I find that there was at the least the degree of non disclosure for which KK have apologised. There was a regrettable failure by someone to investigate that issue thoroughly.
  125. Someone is not telling the truth about the context in which the Arka-Stroy database came to light but I cannot resolve that at this point.
  126. The New York action and KK's agreement in March 2012 to back it was disclosed in Mr Werner's first affidavit in twelve paragraphs. More documents have come to light about that and they should have been disclosed sooner. However as Defendants in that litigation, the First and Second Defendants in this action would know a lot about it. Both sides have examined the documents in great detail and forceful allegations have been made about them but again these matters cannot and should not be resolved before trial.
  127. The only failures to disclose about this issue which can be identified at present appear to me to be unfortunate but relatively minor and not material enough to justify setting the injunction aside.
  128. Non disclosure -Astana 1

  129. When dealing with good arguable case I have referred to matters which, Mr Fletcher correctly points out, were not drawn to the Court's attention and I agree that most of them should have been. He says that an injunction would not have been granted had these matters been pointed out. I agree. This claim which is almost conceded to be a make weight has never been properly worked through. That is no doubt why there was a failure to disclose relevant matters. That is unfortunate but I do not see the non- disclosure on this issue, given its likely cause, as greatly undermining the case for injunctive relief on the other two causes of action. Whatever its fate in the action as a whole this claim as it stands does not, as I have already pointed out, merit injunctive relief.
  130. Non disclosure-dissipation

  131. The test for dissipation is set out in numerous cases cited by the parties. Essentially, would the refusal of an injunction involve a real risk that a judgment or award in favour of the claimant would remain unsatisfied? The Claimant must provide solid evidence and set out details of what enquiries have been made about the Defendant's business and what information has been revealed, including that relating to its size, origins, business domicile, the location of its known assets and the circumstances in which the dispute has arisen. Mr Arip says that KK has failed to do this fairly or fully.
  132. First Mr Arip argues that KK should have pointed out his public role as former chairman of Exillon, a listed PLC and his continuing role as a consultant in the process of mounting a bid for the remainder of the shares. The Court should have been informed that involvement in this process was likely to have put his financial circumstances under the detailed scrutiny of reputable financial advisers who would have "know your customer", money-laundering, and due-diligence obligations. KK also referred the Court to the fact that the FSA had imposed a fine on Exillon without making clear that they had expressly concluded there was no wrong-doing alleged against Mr Arip personally. I agree that the FSA's remarks about Mr Arip should have been disclosed for fairness but otherwise reject this complaint. Details of the Exillon issues were provided to the court and the implications were clear to me as they would be to any business judge. It is possible to exaggerate the extent to which participation in such transactions leads to a badge of financial probity.
  133. Secondly Mr Arip points out that he had, as long ago as September 2012, been notified of substantially similar claims against him in the New York proceedings. He says that if he was disposed to dissipate assets he would already have done so. No attempt was made to obtain an injunction in England (or, for that matter, anywhere else) in support of the New York proceedings. Whether or not those proceedings were brought in the name of KK PLC, Mr Werner and the KK Group were clearly involved in their preparation. These are possibilities but the New York litigation of itself held no risk of a New York freezing order. This is a factor which should have been drawn to my attention but, against the other evidence, it would have made no difference to my decision.
  134. Mr Arip states that Mr Werner had been the private banker to him and the First Defendant for several years and knew what their assets were and how and where they were held. In fact that relationship ended some time ago and little weight attaches to this point.
  135. Although KK mentioned to me at the first hearing that Exillon had notified the market that Mr Arip had expressed an interest in acquiring shares, they did not, Mr Fletcher complains, make any effort to explain what the effect of obtaining the freezing order might be on Mr Arip's proposed acquisition. The transaction was specifically drawn to my attention (with the public statement then available from Exillon Energy issued 3 days before the application was made). KK make the fair point that provision was expressly made in the freezing order to accommodate what might happen and, as yet, Mr Arip's solicitors have not engaged in the dialogue about this issue which KK have offered to have. There is force in KK's submission that any problems that befall the deal may be connected with the wider dispute rather than the injunction itself.
  136. There is no longer any serious claim by Mr Arip that his financial affairs are not so organised that enforcement of a very large judgment against him might be very difficult. The complexity of those arrangements is of itself not of course a matter for criticism. Having looked again at all the relevant materials I remain of the view that the test for risk of dissipation is met.
  137. The Claimants' ability to pay damages

  138. Mr Fletcher points out that in the absence of fortification of the undertaking, KK's cross-undertaking to pay damages is only as strong as their financial position. He says that when KK represented to the Court that the KK Group was "financially robust" by referring to the 2012 statutory audited accounts, they failed to disclose two key caveats in those financials, which cast significant doubt on the future viability of the Claimant group. First, the management of KK PLC concluded that "a material uncertainty exists therefore casting significant doubt on the Group's ability to continue as a going concern." Further the auditors PwC concluded that there was "material uncertainty which may cast significant doubt about the ability of the Group to continue as a going concern." This was not disclosed although I was taken to the accounts themselves.
  139. Mr Fletcher says that the Court was misled in further respects. Mr Werner said that "KK Group is a financially robust company and holds assets of significant value, subject to the claims by Alliance bank to seize assets of KK Group which thus far (as explained above) KK Group has been able to fend off and subject to claims by DBK Bank to realise pledges given to it." This was "plainly and deliberately" misleading as the KK Group has failed to "fend off" the Alliance Bank claims. The Bank obtained a judgment in the amount of KZT 4.7 billion (over USD 31.3 million) against C3 on 20 March 2013. This debt, which Alliance Bank is now seeking to enforce, is supported by a guarantee from KK JSC and a pledge for the full amount. This has led to the seizure of C3's bank accounts and arrest of its property. KK are also being pursued by DBK Bank in respect of different claims brought by DBK Bank. The Appellate Judicial Panel of the Almaty City Court has ordered foreclosure on property mortgaged by them in the amount of approximately USD 80.6 million. Mr Fletcher refers to other financial problems.
  140. Mr Werner responds that "in 2012 the operations of the KK Group have continued to generate free cash flow; the current cash balance of the Group is approximately US $7 million and is expected to rise to over US $10 million by the end of this year." More significantly Mr Brindle submits that such financial difficulties as KK have are largely the result of what he says are the Defendants fraudulent activities citing paragraphs from Mr Werner's affidavits and Laddie J in RBG Resources Plc v Rastogi [2002] BPIR 1028; "the extensiveness of….. wrongdoing [cannot] be used as a tool for depriving those who are pursuing them of the tools needed to bring them to justice".
  141. I accept that KK might usefully have provided more information about its financial difficulties. But there is accepted to be (subject to the two particular defences I have considered) a good arguable case that Mr Arip defrauded KK of at least US $ 90 million, ignoring as one should Astana 1. Most companies defrauded of such large sums would feel the effects and there is a clear risk that the effect of a fraud may stifle proper efforts to seek redress for it. In this situation, while it is important for full disclosure to be made, the details of the companies' finances are less relevant than they would be on other applications. When granting the injunction it seemed to me that the size and complexity of the case was such that it would be difficult to consider usefully the question of possible fortification without both sides being present.
  142. Non-disclosure- general

  143. I have considered the position issue by issue but finally I look at the situation as a whole, bearing in mind the principles summarised above, in Linsen in particular. Overall I do not consider that it would be just to set aside, on the basis of such non- disclosure as has been identified, those parts of the injunction that will otherwise remain in place.
  144. Publicity and discretion

  145. Mr Arip objects to the press release issued by KK after the injunction was obtained. That publicity has little relevance to the exercise of my discretion and is less inflammatory than is suggested. But it would be fair to Mr Arip for me to point out that to the extent that the press release suggests that the Court has reached any view on the merits of this case it is wrong. The question of whether the alleged frauds took place and if so whether the Defendants were responsible will not be decided until the trial of the action.
  146. Sitting in private

  147. I acceded to Mr Arip's unopposed application to direct pursuant to CPR 39.2(3) (c) that this hearing be heard in private on the grounds that its subject matter is relevant to a pending public takeover bid and it is the considered assessment of the solicitors advising in relation to that transaction that further publicity is likely to cause damage to the bid's success. Having gained more knowledge during the hearing and having considered the decision of the Court of Appeal in Global Torch v Apex Global [2013] EWCA Civ 819, which was not drawn to my attention at the hearing, I consider that I may have made the wrong decision. If the Court is again to be asked to sit in private there must be a fresh application.
  148. Conclusion

  149. The Second to Seventh Claimants have established a good arguable case on the PEAK and Astana 2 alleged frauds but not on the Astana 1 matter. The defence of limitation under Kazakh law does not prevent the case from being a good arguable one. The application of the reflective loss principle prevents the First Claimant's case being a good arguable one on the basis of the facts and law it primarily relies on. There has been non-disclosure by the Claimants on the Astana I matter and about reflective loss. This, as I see it, should not affect the injunction as it applies to other issues. I cannot, given conflicts of evidence and the existence of documents the significance of which can only be evaluated after oral testimony, make a final evaluation of the degree of non- disclosure in this case. There have however been minor non-disclosures by the Claimants on the awareness aspect of the limitation issue. Given the complexities of the case and the size of the disclosure task falling on the Claimants it would not be just to set aside the injunctions on that ground.
  150. It follows from the above, and from my overall evaluation of the justice of the case in the exercise of my discretion, that the injunction should be set aside as regards the First Claimant and the Astana 1 claim but otherwise remain in place. I will of course hear submissions from Counsel about the detail of the Order I should make and about the other matters outstanding on the applications.

Note 1    Neuberger LJ was citing Chadwick LJ in Giles v. Rhind [2003] 1 Ch 618 who had added the italicised text.    [Back]

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