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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Kazakhstan Kagazy Plc & Ors v Zhunus & Ors  EWHC 3618 (Comm) (20 November 2013)
Cite as:  EWHC 3618 (Comm)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| (1) KAZAKHSTAN KAGAZY PLC
(2) KAZAKHSTAN KAGAZY JSC
(3) PRIME ESTATE ACTIVITIES KAZAKHSTAN LLP
(4) PEAK AKZHAL LLP
(5) PEAK AKSENGER LLP
(6) ASTANA – CONTRACT JSC
(7) PARAGON DEVELOPMENT LLP
|- and -
|(1) BAGLAN ABDULLAYEVICH ZHUNUS
(formerly BAGLAN ABDULLAYEVICH ZHUNUSSOV)
(2) MAKSAT ASKARULY ARIP
(3) SHYNAR DIKHANBAYEVA
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:
What the action is about
The PEAK fraud
The Astana Fraud
The Second Defendant's grounds for seeking to set aside the Injunction
Freezing Injunctions- the law
"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."
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."
(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.
"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."
"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.
"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."
What were the Claimants aware of by August 2010-and what should they have been aware of?
"... 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. "
New York litigation
"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."
Norton Rose advice
"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."
Limitation – conclusion of the Court
Does the First Claimant have a good arguable case against the Defendants? - Reflective loss.
"(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];
(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."
"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  PNLR 37 at paragraph 36.
" 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.
Do the Claimants have a good arguable case against the Defendants? - Astana 1
"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."
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.
"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
Non disclosure -Astana 1
The Claimants' ability to pay damages
Publicity and discretion
Sitting in private
Note 1 Neuberger LJ was citing Chadwick LJ in Giles v. Rhind  1 Ch 618 who had added
the italicised text. [Back]
Note 1 Neuberger LJ was citing Chadwick LJ in Giles v. Rhind  1 Ch 618 who had added the italicised text. [Back]