England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
HIS HONOUR JUDGE MACKIE QC
[2013] EWHC 3618 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		2nd April 2014

Lord Justice Longmore:

1. This is an appeal by Mr Arip (the Second Defendant) against the refusal of HHJ Mackie QC to discharge a freezing injunction which he had himself granted at a without notice hearing on 2^nd August 2013. He did, however, reduce the amount originally frozen by the injunction. There is also a cross appeal. The appeals raise points on the Kazakh law of limitation, the English (and Manx) law of reflective loss and the duty of disclosure on without notice applications. For the reasons that follow I would dismiss both the appeal and cross appeal, insofar as it relates to the issue of reflective loss and costs below.

The parties

2. 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". In 2009 Mr Tomas Werner acquired substantial shareholdings in KK, became Chairman of KK Plc and, later Chairman also of KK Jsc.
3. 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. He is the First Defendant in the proceedings and the freezing injunction was originally granted against him as well as against Mr Arip but has now been replaced by an undertaking on terms offered by him. He has played no part in the appeal.
4. Mr Arip, the Second Defendant (and Appellant) 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 and then likewise owner of 23.9% of the shares until 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.
5. A 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. No freezing injunction was sought against her.

What the action is about

6. KK (and Mr Werner on their behalf) 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.

The PEAK fraud

7. 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 LLP, for the development of a logistics centre and industrial park at three sites in the outskirts of Almaty, the former capital of 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 (that at Akzhal-1) 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.
8. KK say that an analysis of the Arka-Stroy database carried out by Grant Thornton as part of the recent investigations which led to the applications to the Commercial Court in August 2013 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, after borrowing considerable sums from Alliance Bank, paid a total of US $167.5 million into Arka-Stroy. US $167.1 million then 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.

The Astana Fraud

9. 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.
10. KK say that the Astana fraud had two "Limbs". Limb 1 was preparatory in nature and consisted of the Defendants causing the Fifth Claimant to purchase the Sixth Claimant and its subsidiaries for some US$39.3 million more than they were 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 because acquisition of the Group brought with it a pre-existing credit facility with the DBK Bank. 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 is said to have been effectively insolvent at the time). Limb 2 of the Astana fraud is, on the Claimants' case, a re-run of the PEAK fraud. The judge considered that KK had not made out a good arguable case on Limb 1 of this fraud and it was for this reason that the amount of the sum frozen was reduced.

The Defences/Attacks on the Injunction

11. Mr Arip disputes the claims in their entirety. The judge observed that, although the alleged fraud was huge, its structure was relatively straightforward so one might have expected Mr Arip to indicate how this is all a misunderstanding. Since Mr Arip makes a jurisdictional challenge to the proceedings, he is not yet under any obligation to file a defence but, for the purposes of the discharge application, he accepted before the judge and accepts before us that there is a good arguable case that he defrauded KK in the manner alleged by them.
12. Mr Arip's case on this application is, however, that by virtue of the Foreign Limitation Periods Act 1984, the claims of the Second to Seventh Claimants are subject to a limitation period under Article 18 of the Kazakh Civil Code of 3 years from the date when they became (or should have become) aware that their rights had been violated. Accordingly, he says he has a defence against those Claimants. He says further that KK Plc itself has no claim at all because any claim is only a reflection of the loss suffered by the second to seventh claimants.
13. KK say in response that, as made clear in their original application to the judge, 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 of Arka-Stroy's data base (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). 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 it 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.
14. Mr Arip says further that Mr Werner on behalf of KK misled the Court in his affidavit sworn on 31st July 2013, for the purpose of the without notice hearing, as to how and when he came to be aware of the claims now advanced. He says that KK represented that they had no suspicion that Mr Arip had defrauded KK when they had in fact suspected Mr Arip for some time, as the existence and the extent of a 2009 Price Waterhouse Cooper report and some New York proceedings show. He says that these suspicions should have been disclosed at the without notice hearing and, if they had been, the judge would have been more cautious about granting any injunction since Mr Arip would have a powerful argument that any claim was time-barred. He also says that the judge was lulled into a false sense of security by being told that any claim by KK Plc was subject to an unexpired six year limitation period under Manx law when, in fact, any such claim was not fairly arguable as a result of the English (and Manx) doctrine of reflective loss.
15. Apart from the contentions in relation to Astana 1, and the reflective loss point, the judge rejected these arguments. He held that there was a good arguable case that the claims of the KK companies apart from KK Plc were not time-barred. Nor did he consider that there had not been full and frank disclosure, save in minor respects which did not affect the exercise of his discretion to continue the injunction.
16. It is common ground that, in order to maintain the freezing injunction, KK must at least show that they have a good arguable case. Normally if a judge of the Commercial Court decides that a claimant has a good arguable case, this court would not interfere with that conclusion unless (which is unlikely) he makes an error of law in coming to that conclusion. As the judge pointed out (para 36) the issue of good arguable case depends in the present case on the awareness of the claimants and that must be the awareness of Mr Werner. Mr Arip has the delicate task of arguing that, although he denies that he was fraudulent in any way, Mr Werner was aware, or ought to have been aware, of a fraud which, according to Mr Arip, never took place. Mr Werner's case, as set out in para 14 of his affidavit of 31^st July 2013 is that compelling evidence of fraud against the KK Group emerged in March 2013 following the discovery on KK Group 1C data back-ups of crucial evidence relevant to the PEAK fraud. He says further that a particular employee on 4^th March 2013 provided him with copies of the 1C databases of inter alia, Arka-Stroy, the allegedly independent contractor who had supposedly carried out substantial works in Almaty. This database showed transfers of substantial sums to companies controlled by Mr Arip (and Mr Zhunus) as stated in the report of 25^th July 2013 of Grant Thornton who had been retained to carry out a forensic analysis of the database attached to the Arka-Stroy 1C system and its bank statements. The judge (para 40) recorded Mr Werner's evidence that he did not come to suspect fraud on the part of Mr Arip until March 2013; until then he believed he was dealing with "ordinary (i.e. honest) mis-management by the middle and lower management".
17. It is important at the outset of the consideration of the rival submissions in this case to be clear that the court has to consider whether KK have a good arguable case that Mr Arip is liable to them; if there is no such good arguable case the injunction cannot be supported. For this purpose one must look not only at the claimants' case but also at any suggested defence. A claim that is time-barred cannot constitute a good arguable case, however strong the facts of the case may be in the claimants' favour.
18. It is also important to say that, as Mr Mark Howard QC for Mr Arip made clear in his submissions, Mr Arip does not say that Mr Werner or KK were in fact aware that KK had been defrauded by Mr Arip. The allegation is merely that he ought to have been aware of that (supposedly non-existent) fact.

Good arguable case? (1) Time Bar

19. The question is whether KK can show that there is a good arguable case that they have a non time-barred claim. Mr Arip's case is that KK in general and Mr Werner in particular ought to have been aware by August 2010 that Mr Arip had defrauded the company by reason of the following facts and matters:-

i) Mr Werner had in November 2009 commissioned the accountants, Price Waterhouse Cooper ("PWC") to prepare a review of KK's cash flows in the period January 2007 to September 2009. They reported in December 2009 that there were "questionable transactions" including at least $57,000,000 for construction work in progress paid to Arka-Stroy in respect of which they recommended that management should engage preferred engineers to "assess the value of investments" made;

ii) Any reasonable recipient of that report would have employed such engineers or himself visited the relevant sites to assess the value of work done and would have referred the matter to the Group's auditors (BDO);

iii) once that was done it would be apparent that there were questions to be asked of Arka-Stroy on whose behalf at least one relevant contract had been signed by Mr Arip;

iv) it can be assumed that, if questioned, Mr Arip would have been as non-committal as he has been in the face of the court; and

v) if all these reasonable things had been done, KK and Mr Werner would, well before 1^st August 2010 have become aware of Mr Arip's frauds; since they did not do these reasonable things they ought to have been so aware and the claim brought on 1^st August 2013 was therefore time-barred.

20. To this Mr Arip adds other matters:-

i) the fact that KK were sufficiently concerned to instruct Norton Rose to advise about the "possible duties and liabilities of directors and shareholders in connection with an alleged misappropriation of company funds" apparently in the context of the PWC report; and

ii) the fact that KK supported (and partly paid for) a derivative action brought by a KK shareholder in New York in 2012 in the course of preparation for which Mr Werner expressed the view on 31^st July 2012 that the defendants in the case (including Mr Arip) had defrauded KK. It was said that, since there was no indication that KK had discovered any new material between August 2010 and 31^st July 2012, Mr Werner's view that Mr Arip had defrauded KK could and should have been arrived at by August 2010.

21. All these matters were considered by the judge who reached the following conclusions about them:-

"63. 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, [and] 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.

64. 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." [than Mr Arip has]

22. The judge has here made an evaluation of a mass of material and this court should not interfere with that evaluation unless it is obviously wrong or the judge has misdirected himself in some way. Commercial judges have great experience in assessing what is and is not a good arguable case; indeed this judge has expressly (and justifiably) relied on his own long experience as a solicitor in one of the leading City firms in coming to his conclusions.
23. Mr Howard on Mr Arip's behalf summarised his attack on the judge's conclusions by saying that:-

i) KK were on notice of questionable transactions as a result of the PWC report;

ii) KK were told to look at the physical evidence of construction and, if they had done so, would have appreciated that very little work had been done;

iii) Mr Arip was in control of the projects as a director of KK JSC;

iv) it must have been obvious that a fraud had been committed on Mr Arip's watch; and

v) it must have been obvious that that could not have happened without Mr Arip's involvement.

This is no more than a re-run of the arguments, submitted to the judge, who recognised that they have some force. It is the fifth step of the argument which is the most difficult and I decline to second-guess the judge's conclusions. It is very important that applications to discharge freezing applications do not turn into mini-trials; parties are often tempted to anticipate the real trial on these applications but that temptation must be firmly resisted. The application took 3 days before the judge and, in my view, was a far heavier application than it need or should have been. As is evident from Barnstaple Boat Co Ltd v Jones [2008] 1 AER 1124 the English court has quite enough difficulty in establishing when the relevant English time limit begins for a fraud action. It was there held to be unsuitable for summary decision. It cannot be any easier for a court dealing with a Kazakh time-limit. Unless the position is very clear, it cannot be determined on an interlocutory application.

24. I would add two further comments. First, even if one were minded to accept Mr Arip's arguments as to what KK should have done after receiving the PWC Report, it is difficult to see that KK could have done more than suspect (perhaps strongly suspect) that Mr Arip had defrauded them. What Mr Arip will have to show at trial is that KK "ought to have been aware" that he had defrauded them which is different from saying that KK ought to have suspected that he had defrauded them.
25. The second comment relates to the judge's decision that KK had "a much better argument" than Mr Arip. I would, with respect, say that this sets the hurdle a little too high. It was established in Pertamina [1978] QB 644 that the appropriate test to be met by a claimant seeking a freezing injunction was that of "good arguable case". We were not referred to any authority which has changed that test. "Much the better of the argument" has recently emerged as a test on applications for service out of the jurisdiction. But I see no reason why that test should apply to freezing injunctions where ex-hypothesi (or subject to any jurisdictional challenge) the defendant is properly before the court. But the fact that the judge may have applied a slightly higher hurdle than he need have done does not in any way affect his conclusions.

Good arguable case? (2) Reflective Loss

26. It is sensible to deal next with the cross-appeal and the arguments on reflective loss since they are part of KK's "good arguable" case. Mr Michael Brindle QC for KK submitted that the question of limitation as a defence to the second to seventh claimants' case was something of a side show because KK Plc could in any event sue and had the benefit of the 6 year limitation period allowed by Manx law.
27. Mr Howard's response was that, as held by the judge, KK Plc's claims were the same as those of its subsidiaries whose loss was the true loss and that KK PLC had no independent loss of its own. According to the principle of reflective loss, therefore, as set out in Prudential Assurance Ltd v Newman Industries [1982] Ch. 104 and approved by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1 KK Plc had no good arguable case of its own.
28. The judge recorded in paragraph 71 of his judgment that KK did not contest the proposition that KK Plc had no claim which could not (subject to time bar) be brought by one of its subsidiaries (and is in fact brought by them in the current proceedings). Although Mr Brindle sought to persuade us that KK PLC might have a separate claim for account of profits, that is somewhat doubtful. In any event, this court should not go behind the concession apparently made for the purpose of these interlocutory proceedings and recorded by the judge.
29. Mr Brindle's main argument had two prongs. First he submitted that the principle of reflective loss did not apply if the subsidiary companies could not bring a claim in their own name because, for example, any such claim was time-barred. Secondly he said that there was an exception to the principle if the inability of the subsidiary companies to sue arose from a lapse of time which was caused by a defendant's wrongful act.
30. On the broad question whether time-bar on its own is sufficient to defeat the principle Mr Brindle had a somewhat elaborate argument, based on Lord Millett's speech in Johnson v Gore Wood to the effect that, if the subsidiaries' inability to sue was not caused by any act or fault on the part of the subsidiaries, the principle did not apply. This falls down both on the facts and on authority. If the position is that the reason why the subsidiaries cannot sue is that they ought to have been (but were not) aware that their rights had been violated and are, for that reason, time-barred, they cannot say that their inability to sue is no fault of their own. Moreover in Day v Cook [2002] 1 BCLC 1 this court decided that the principle of reflective loss applied to prevent a claim against a solicitor brought by a shareholder for diminution in the value of his shareholding in a company whose own claim against the solicitor was statute-barred. That was a domestic time-bar but the position can hardly be different if the time-bar is a foreign one rather than a domestic one.
31. For the purpose of his second argument Mr Brindle relied on Giles v Rhind [2003] Ch 618 in support of his proposition that, if Mr Arip's continuing fraud had successfully prevented the fraud from being detected and that, as a result, the subsidiaries' claim had become time-barred, the reflective loss principle does not apply. The rationale of this exception to the general irrecoverability of reflective loss is that the defendant must have made it "impossible" for the subsidiary to pursue its remedy against the wrongdoer. In that case Mr Rhind had left the relevant company taking with him confidential information. In breach of contract he set up a rival business and diverted the company's most lucrative contract to himself or his nominee. As a result the company went into administrative receivership and had to discontinue its proceedings against Mr Rhind because he obtained an order for security for costs with which it could not comply. In prefatory remarks Waller LJ said (para 19):-

"… if the court were satisfied that the destruction of the company was so complete and Mr Rhind's conduct such that the company simply had no ability to bring any claims, that would eliminate any concerns."

When he came to his disposition of the appeal he said (para 34):-

"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 actually had. It seems hardly right 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 him from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody."

32. Likewise, Chadwick LJ said (in para 69) that Lord Bingham in Johnson v Gore Wood had not addressed the question whether a shareholder could recover for reflective loss in circumstances where the wrong done to the company had made it impossible for the company to pursue its own remedy against the wrongdoer. He also observed (in para 79) that the company had not settled its claim but had been forced to abandon its claim by reason of impecuniosity attributable to the wrong which had been done to it.
33. The Giles v Rhind exception is thus very limited. I do not consider it can be said that Mr Arip's fraud, even if cleverly concealed, made it impossible for the subsidiaries to sue or disabled them from suing. They have now done precisely that. It is, I have already said, well arguable that the claims are not time-barred but, if they are, it is only because the subsidiaries ought to have been aware that their rights had been violated.
34. I conclude therefore that on the evidence before him on this application the judge rightly held that KK Plc had no good arguable case.

Non Disclosure or Misrepresentation by KK?

35. The judge was faced with a great number of complaints of non-disclosure in relation to, among other things, the circumstances of the discovery of the Arka-Stroy data base and of the purchase of the Astana Contract Group. The judge upheld some limited aspects of the complaints but, as a matter of discretion, nevertheless decided to maintain the injunction in a lesser amount thinking that Mr Arip had put his case far too high (para 91). He also observed (para 35) that the more complex the case the more fertile the ground was for raising non-disclosure arguments. This observation is supported by the fact that Mr Werner had to devote no less than 82 paragraphs of his second affidavit to this aspect of the case.
36. As long ago as 1990 Sir Nicholas Browne-Wilkinson V-C asked this court for guidance about the right approach to be taken to the inevitably lengthy hearings which were then growing in relation to non-disclosure in respect of freezing and search and seizure orders, see Tate Access Inc v Boswell [1991] Ch. 512, 533H-534D. I am not aware that this court has ever answered that cri-de-coeur and we did not receive any argument which would enable us to do so authoritatively in the present case. The judge adopted the approach of Toulson J (as he then was) in Crown Resources AG v Vinogradsky (15^th June 2001) for cases of any magnitude and complexity and I am content to do the same:-

"… issues of non-disclosure or abuse of process in relation to the operation of a freezing order ought to be capable of being dealt with quite concisely. 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 (pages 4-5 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 22)."

37. Before this court, Mr Howard made a more focused attack on KK's failure to put the matter fairly before the judge at the without notice stage. He submitted that Mr Werner should have stated

i) what KK's conclusions were on receiving the PWC report, whether their suspicions were aroused and the reasons why they decided to consult Norton Rose;

ii) whether the result of consulting Norton Rose was that KK's suspicions of misappropriation were allayed; and, if they were not allayed, why KK apparently failed to taken any steps to deal with the problem;

iii) to the extent that he was not himself in charge of KK's affairs in 2009, but that SP Angel were (as indicated in para 63 of the judgment), why that was so;

iv) why SP Angel took matters no further while they were managing KK's affairs;

v) the content of his discussions with Mr Khabbaz which led to the institution of the New York proceedings;

vi) what his explanation was for saying on the one hand in 2012 that Mr Arip was guilty of fraud and on the other that he had no suspicions about Mr Arip until the discovery of the Arka-Stroy database in 2013;

vii) the strength of the case against KK Plc about reflective loss; this omission meant that the judge did not realise how vital the issues of Kazakh limitation were.

Even this list of complaints risks a certain amount of overkill.

38. It is important once again to remind oneself of the legal position in Kazakh law which is that KK had to begin proceedings within 3 years of the date when they "ought to have become aware that their rights had been violated". That is emphatically not within 3 years of the date when they suspected that their rights had been violated. The precise moment at which "suspicion" becomes "awareness" may well be difficult to pinpoint in any particular case, but, for the purposes of the non-disclosure argument, the distinction is a vital one.
39. The first two of Mr Howard's complaints are complaints that Mr Werner ought to have disclosed his suspicions for the purpose of the without notice hearing. But suspicions are legally irrelevant to the question of the Kazakh time-bar. The judge was told that there was a possible defence based on a Kazakh time bar and was told in outline what the law of Kazakh limitation was. Mr Werner's evidence that until March 2013 he believed he was dealing with mis-management by middle and lower management was part of his evidence that he did not until that time have reason to suspect Mr Arip (and Mr Zhunus). The implication of this is that he had no reason to be aware of fraud by Mr Arip (or Mr Zhunus) until that time.
40. The same is true about Mr Howard's third and fourth complaints; when it was alleged that action should have been taken in the light of PWC's report of "questionable transactions", it emerged that it had not been commissioned by Mr Werner personally but by KK Group's case management team and SP Angel Corporate Finance LLP ("SP Angel"), KK Plc's then financial adviser. The case management team had been put in place by KK Plc's former shareholders who largely remained in place until late 2010/early2011. Mr Werner said (para 124 of his second affidavit) that SP Angel had become aware of some peculiar movements of cash and that they and KK Plc wanted to have an understanding of these movements as a prelude to discussions with KK's bankers. This was the reason why the PWC report was commissioned; it was not intended to be a forensic financial analysis, fraud was not suspected and the report did not report any such suspicion, albeit that it did refer to "questionable transactions".
41. In these circumstances it does not seem to me that the involvement of SP Angel was a matter for disclosure at the time of applying for the injunction. The most that can be said is that the KK Group ought to have been more suspicious than they were after the receipt of the report. But suspicions were, as I have said, not a matter for disclosure in any event.
42. The fifth and sixth complaints relate to proceedings taken in the form of a derivative action by a shareholder in New York. It is necessary to say a little more about these proceedings (which were in any event disclosed to the judge) in order to explain the more focused attack on non-disclosure which is now being made in this respect. The relevant shareholder was a company called Phoenicia Capital LLC ("Phoenicia") whose guiding mind was its managing director Mr Khabbaz who had been persuaded to invest a considerable amount in KK Plc. He did suspect that there might be fraud on the part of Mr Arip and other ex-shareholders/directors in the KK Group. He decided that Phoenicia should take proceedings and Mr Werner for KK agreed to contribute to their costs in March 2012. Mr Khabbaz caused an initial complaint to be drafted which named Mr Werner as a defendant. In a supposedly conciliatory e-mail to him of 25^th June 2012 Mr Khabbaz complained that Mr Werner should have sued the former shareholders in the light of the PWC review of 2009 and asserted that Mr Werner was in breach of fiduciary duty in not doing so, but suggested that they should move together against the former shareholders. Mr Werner on 31^st July 2012 said that he was not satisfied with a second draft complaint removing him as a defendant in name because he thought the naming of John Doe as a defendant would enable him to be reintroduced as a defendant. He concluded the e-mail by saying:-

"It defies any legal logic that I am supporting a complaint that potentially accuses me of fraud. If sued my problems would be compounded by knowingly letting myself be accused with allegations that I knew were false and we could both be accused of conspiracy by the defendants by making allegations that are not true.

Take me out completely, or otherwise sue me if you think that I acted fraudulently – which I think you don't, otherwise why would you offer me a partnership and so much of your professional knowledge and personal affection.

Any other logic is convoluted, weak and can turn against both of us if challenged. Let us pursue a clean and defendable strategy, sue those we know have acted fraudulently and defend ourselves with the facts on our side.

Please call me to discuss."

43. It seems that Mr Khabbaz and Mr Werner patched up their differences sufficiently to enable proceedings to be served in New York on Mr Arip and others and that KK did make a substantial contribution to the cost of the proceedings. In the end Mr Werner became dissatisfied with the way in which Phoenicia's lawyers were handling the proceedings and, for one reason or another, they petered out and are no longer extant.
44. Mr Howard now submits that this e-mail exchange should have been disclosed as well as the proceedings themselves because the e-mails were relevant to the question whether KK and Mr Werner ought to have been aware in August 2010 of that of which they were apparently aware in August 2012. He says secondly that Mr Werner (and thus KK) made a positive misrepresentation to the judge at the without notice hearing on 2^nd August 2013 by saying that it was only in March 2013 that they came to suspect Mr Arip had been fraudulent when they had approved the issue of the New York proceedings against him and others in August 2012.
45. The first of these submissions cannot possibly be right. Of course, the existence of relevant proceedings in foreign jurisdictions should be disclosed on a without notice application (as indeed they were). To say that pre-action discussions of the strength or weakness of the case in those proceedings should also be disclosed carries the concept of disclosure far too far. No doubt the e-mails can be said to have some relevance to the question whether KK ought to have been aware by August 2010 that their rights had been violated. But that is the very issue in the action which will have to be resolved in due course. It is a good illustration of Toulson J's dictum in Crown Resources that it is in general inappropriate to set aside an injunction for non-disclosure when going into the question of non-disclosure means attempting to resolve issues in the action itself; provided the court is made aware of the issues in general terms, it is not necessary to produce material which may later be deployed in cross-examination.
46. The second submission has a good forensic ring to it but again it goes to facts which are themselves in issue in the action. Also one has to have a sense of realism. The judge knew that proceedings alleging fraud against Mr Arip had been instituted and had later fizzled out in New York. If follows that Mr Werner must have thought a case could be made out for the purposes of a New York court in August 2012. He also knew that Mr Werner was saying in England that he only suspected Mr Arip once Arka-Stroy's database had been in March 2013 found concealed in KK Jsc's computer programmes. He then decided that there was no reason not to accept Mr Werner's English evidence at this stage of the proceedings. To say that the e-mail of 31^st July 2012 shows that Mr Werner was misrepresenting his state of knowledge to the judge is going too far. Mr Werner may in due course be held to have minimised his state of mind on the application for the freezing injunction but I cannot accept at this stage that he misrepresented it. He may just as well have been exaggerating his state of mind in New York in August 2012. This is the stuff of cross-examination not for debate on a paper application to discharge the freezing injunction where cross-examination has not been sought and (if sought) would almost certainly have been refused.
47. The judge dealt with this quite shortly in para 94 of his judgment, no doubt because of the large number of non-disclosure complaints pursued before him. He said:-

"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."

48. The seventh complaint was made to the judge who rightly said (para 86) that the non-disclosure was obviously unintentional and did not affect his view of non-disclosure in general.
49. The judge has a wide discretion in relation to matters of non-disclosure, particularly if he himself made the initial freezing order. His decision in this case was well within the margin of discretion allowed to him and I would not interfere with it.
50. There was also a cross-appeal by KK from the order of the judge that the costs of the hearing before him should be reserved. Since KK maintained the injunction as a result of the hearing, KK says it should have the costs (or part of the costs) of that hearing. This was essentially a matter for the judge's discretion. If KK were to fail in their claims, there might be a lot about which to argue in respect of the freezing injunction. I would not interfere with the judge's discretion.

Conclusion

51. In all these circumstances I would dismiss both the appeal and the cross-appeal, insofar as it relates to the issue of reflective loss and the costs below.

Lord Justice Jackson:


 


52. I agree that the appeal and cross-appeal (insofar as it relates to reflective loss and costs) must be dismissed for the reasons given by Longmore LJ. The claimants ("KK") are entitled to a freezing injunction.
53. Having said that, I regard the arguments raised by Mr Howard as formidable. There is a very real possibility that the Defendants' limitation defence will prevail at trial on the basis of Kazakh law (the effect of which is agreed between the parties). It is only by a narrow margin that KK's case is strong enough to support their entitlement to a freezing injunction.
54. This whole litigation leaves me uneasy. The essence of the limitation defence is that the Defendants' fraud was so obvious that KK ought to have discovered it and issued proceedings before 2013. If the Defendants ultimately succeed on that defence, they might then have achieved the 'perfect' fraud. The money which has been stolen (over $100 million) will become irrecoverable as a consequence of the judgment of the English court.
55. This is a case in which there are many unanswered questions. KK allege that the Defendants are fraudsters and thieves. The Second Defendant alleges that Mr Werner is lying. There is a suggestion that some senior staff within KK have been colluding with the Defendants: see Mr Werner's first affidavit, paragraphs 62 to 69. The Court of Appeal at the present interlocutory stage cannot, and is not required to, resolve any of these questions.
56. The principal losers are the creditors of and investors in KK. They may think it appropriate to take a close interest in this litigation.

Lord Justice Elias:

57. I agree with Longmore LJ that both the appeal and the cross appeal (insofar as it relates to reflective loss and costs) should be dismissed. As to the latter, I agree entirely with the reasoning of Longmore LJ, but I wish to add some observations with respect to the appeal.
58. So far as the limitation period is concerned, Mr Howard QC, counsel for Mr Arip, advanced cogent arguments why KK (by which I include all the companies in the group) ought to have been aware of the alleged fraud at the latest by August 2010, well before they actually became aware of it (on their case) in March 2013. He points to a number of factors to support that inference, including in particular the fact that the PWC report alerted suspicions which a reasonable person ought to have followed up, perhaps by involving the auditors; and that anyone visiting the sites where the logistics centre and industrial parks were due to be developed by Arka-Stroy would inevitably have appreciated that the work under the construction contracts was not being performed. Mr Howard submits that any proper investigation would surely have revealed fraudulent wrongdoing by Mr Arip, and the judge was wrong to hold otherwise.
59. I see much force in these submissions. However, in my view there are three factors in particular which powerfully support the Respondent's argument that we should not interfere with the judge's conclusions on this point. First, it is inherently unattractive for the Appellant to submit that the fraud should have been manifestly obvious and yet at the same time to assert that he has a complete defence to the allegation (albeit that he has not condescended to reveal it even in bare outline). Indeed, there is a logical difficulty in submitting that a claimant ought to have been aware of wrongdoing even though there was none. The contention has to be that in so far as KK had grounds for alleging fraud (albeit mistakenly), they were present, and manifestly so, by August 2010 at the latest.
60. I recognise that Mr Arip is not obliged to reveal his defence at this stage even where – perhaps particularly where – serious fraud has been alleged, and his failure to do so cannot be held against him: see Behbehani v Salem [1989] 1 WLR 723,735 per Woolf LJ, as he then was. But the court is in my view permitted to have regard to the fact that the Appellant is asserting that what should have been an obvious inference from the facts would in fact have been an entirely mistaken one. It inevitably casts doubt on how compelling that inference must have been.
61. Second, an allegation of fraud should not be made without cogent evidence. This is not simply a professional obligation of lawyers; nobody should allege dishonesty lightly. The court should not readily conclude that fraud ought to have been apparent unless it is satisfied that the evidence would plainly justify the allegation. That is always a high hurdle, and the ability of the court confidently to reach that conclusion is compounded when the determination has to be made at the interlocutory stage on the basis of disputed facts and inferences.
62. Third, as Longmore LJ pointed out in Lakatamia Shipping Company Limited v Nobu SU Limited [2012] EWCA Civ 1195 para 27, in a judgment with which the Master of the Rolls and Sullivan LJ agreed, the Court of Appeal ought to respect the instincts of experienced commercial judges on the question whether there is a good arguable case and should only interfere if it is plain that the judge was wrong.
63. The judge below applied the good arguable case test. He treated this as requiring KK to show that it had "much the better of the argument". That is indeed how the courts have come to construe that concept when considering whether to order service out of the jurisdiction. The judge quoted from the recent judgment of Lloyd LJ in VTB Capital v Nutriek International [2012] 2 Lloyd's Rep 313, paras 99-100, where his Lordship had applied that test in a jurisdiction case. Its origin is the judgment of Waller LJ in Canada Trust Company v Stolzenberg (No. 2) [1998] 1 WLR 547,555G and it has since been approved in a number of Privy Council decisions: see Bols Distillieries BV v Superior Yacht Services Ltd [2006] UKPC 45 and AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2011] UKPC 7.
64. The judge held that KK had satisfied that test. However, in case he was wrong about that, the judge also relied upon a modification of the test suggested by Teare J in Antonio Gramsci Shipping Corporation v Aivars Lembergs [2012] I.L.Pr 36 (Comm) paras 34-48, namely that where the claim depends on disputed facts, a court can find that there is a good arguable case notwithstanding that it may be unable to form the view that one party had much the better of the argument. The Court of Appeal in that case recited the judge's reasoning without adverse comment but it was unnecessary for it to decide whether it was correct: see [2013] EWCA Civ 730; [2013] ILPr 36 paras. 15-19.
65. I confess that even allowing for the significant hurdles facing Mr Arip in relation to the limitation defence, I have considerable reservations as to whether the judge could properly find that KK has "much the better of the argument". But I think that the judge was entitled to conclude, assuming that the alternative Gramsci principle is correct, that this provided a proper basis for continuing the freezing order.
66. In fact, however, I respectfully agree with Longmore LJ that the judge may well have been putting the test too high. I doubt whether he was right to follow the jurisdiction cases. The traditional test adopted in the case of freezing orders is that laid down by Mustill J in Ninemia Maritime Corporation v Trave Shisfarhtsgesellschaft m.b.H. Und Co.K.G. (The Neidersachsen) [1983] 2 Lloyds Rep 600, when he said this:

"In these circumstances I consider that the right course is to adopt the test of a good arguable case, in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the Judge believes to have a better than a 50 per cent chance of success."

This "good arguable case" test was accepted by Kerr LJ in the Court of Appeal in that case as the minimum which a claimant must show (see [1983] 1 WLR 1412, 1417) and whilst there was no express approval of Mustill J's explanation of what that test involved, the court expressed no disagreement with it. Moreover, that particular formulation was recently cited with approval by Longmore LJ in the Lakatamia Shipping case (para. 25). I am far from satisfied that it is the same as the "much the better of the argument" test adopted by the judge.

67. It is true that in adopting the good arguable test Mustill J was following the decision of Lord Denning in Rasu Maritima S.A v Perusahaan Pertambangan Minyak Dan Gas Bumi Begara (The Pertamina) [1978] QB 644, and Lord Denning had in turn adopted it in the context of a freezing order because he thought that the jurisdiction test was appropriate, at least where the case involved a foreign defendant (see p.661G). But there have been developments in the law relating to jurisdiction since, and although a claimant in both jurisdiction and freezing order cases must establish a "good arguable case", the policy considerations are different in the two situations and it is far from obvious that this inherently flexible concept must have the same meaning in each context. Indeed, even in jurisdiction cases the good arguable case test only goes to the question whether the claim falls within one of the grounds set out in PD6B para.3.1. We are concerned with the merits of the case, and so far as they are concerned, a claimant in a jurisdiction case has only to show that there is a serious issue to be tried: see Seaconsar Ltd v Bank Markazi [1994] 1 A.C.438, 457 per Lord Goff of Chieveley.
68. There is, therefore, reason to suppose that the judge applied too stringent a test. However, we heard no argument on that point and it would not be right to express a concluded view on it. But assuming that the appropriate test is that approved in Lakatamia, I have no doubt that KK has an argument on limitation which is more than barely capable of serious argument, even if it cannot be said that it has much the better of the argument.
69. I turn to the non-disclosure issue. Longmore LJ, at para. 37 above, has referred to the seven matters which the appellant alleges were not disclosed on the without notice application when they ought to have been. Longmore LJ says that the argument with respect to the first four of these cannot succeed because they only go to suspicion of wrongdoing and not the question of awareness of wrongdoing. It may be correct to say that they go only to suspicion, but I respectfully doubt whether that of itself automatically takes them outside the scope of matters which may need to be disclosed. The test under Kazakh law is whether the claimant ought to have been aware that he had a legal claim; he does not actually have to have been aware of it. It seems to me that matters which raise suspicions and put him on inquiry may well need to be disclosed at the without notice hearing in order to enable the court to have some understanding of the potential strength of the limitation defence, at least where that defence is framed as in this case.
70. Having said that, the duty to disclose cannot mean that a party must rehearse before the judge at the without notice application a detailed analysis of the range of possible inferences which the defendant may seek to draw in support of his limitation defence. That is particularly so when both the existence and the relevance of the underlying facts are disputed. As the judge below noted (paras. 87 and 90), the Respondents identified the existence of the limitation period in Kazakh law as the first line of a potential defence, and they referred to the PWC report and indicated that it might be used to show that they had not acted soon enough, albeit that no reference in that context was specifically made to the limitation defence. The judge was satisfied that there was adequate disclosure in the circumstances, and he was particularly well placed to make that determination given that he was also the judge who heard the original without notice application.
71. I recognise that another judge may well have come to a different view on this issue given that there was a failure to make full and fair disclosure. There was the admitted non-disclosure of the reflective loss defence, a matter of some significance, as the judge recognised, because it gave the impression that the limitation defence was of no great relevance since KK would have a claim under Manx law in any event. The judge also accepted that some of the documents in the New York litigation ought to have been disclosed sooner than they were. In addition there was a failure to disclose various matters with respect to the Astana 1 claim, and indeed the judge amended the freezing order to reflect that fact.
72. But overall the judge was satisfied that such failures as there were, in respect of PEAK and Astana 2 at least, were unintentional and ultimately not material. In my view that conclusion did not fall outside the legitimate range of decisions available to him. I do not believe that he can be said to have exercised a judgment which was plainly wrong.
73. Accordingly, notwithstanding the attractive and forceful submissions of Mr Howard, I would dismiss both aspects of the appeal. I should add that I also associate myself with the remarks of Jackson LJ.
Addendum to the Judgment 16 April 2014

An Addendum by the court:

74. The first defendant, Mr Zhunus, has (subsequent to judgment) asked the court to make clear that he had already served a substantive defence to the claim of fraud made against him well before the appeal was heard or determined.