ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
HIS HONOUR JUDGE MACKIE QC
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE JACKSON
THE RIGHT HONOURABLE LORD JUSTICE ELIAS
| 1) KAZAKHSTAN KAGAZY PLC
2) KAZAKHSTAN KAGAZY JSC
31) PRIME ESTATE ACTIVITES KAZAKSTAN LLP
4) PEAK AKZHAL LLP
5) PEAK AKSENGER LLP
6) ASTANA – CONTRACT JSC
7) PARAGON DEVELOPMENT LLP
|- and -
|MAKSAT ASKARULY ARIP
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Mr Michael Brindle QC & Mr Jonathan Miller, Miss Tetyana Nesterchuk & Mr Varun Zaiwalla (instructed by Zaiwalla & Co) for the Respondents/Claimants
Hearing dates: 18th & 19th February 2014
Crown Copyright ©
Lord Justice Longmore:
What the action is about
The PEAK fraud
The Astana Fraud
The Defences/Attacks on the Injunction
Good arguable case? (1) Time Bar
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 1st 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 1st August 2013 was therefore time-barred.
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 31st 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 31st July 2012, Mr Werner's view that Mr Arip had defrauded KK could and should have been arrived at by August 2010.
"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]
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  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.
Good arguable case? (2) Reflective Loss
"… 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."
Non Disclosure or Misrepresentation by KK?
"… 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)."
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.
"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."
"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."
Lord Justice Jackson:
Lord Justice Elias:
"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  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.
An Addendum by the court: