BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Fetter Lane, London EC4A 1NL |
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B e f o r e :
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HARBOUR FUND III, L.P. |
Claimant |
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- and - |
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KAZAKHSTAN KAGAZY PLC KAZAKHSTAN KAGAZY JSC PRIME ESTATE ACTIVITIES KAZAKHSTAN LLP PEAK AKZHAL LLP |
Defendants |
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RUPERT D'CRUZ QC and JAMES EGAN (instructed by Marriott Harrison LLP) for the Second Defendant
Hearing dates: 15-18 and 22 March 2021
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Crown Copyright ©
Mrs Justice Moulder :
Parties
Background
Rehabilitation Plan
"4.3.1. Action against the former shareholders and directors at the High Court of London (hereinafter referred to as the "London proceeding")
In August 2013, KK JSC, some of its subsidiaries, including its parent company Kazakhstan Kagazy Plc (hereinafter referred to as "KK Plc" and collectively - as the "Claimants") initiated the proceeding at the High Court of London against the former shareholders and directors of the Group, Arip Maksat and Baglan Zhunus. The action is based on the assertion that the former directors with the assistance of former CFO Shynar Dikhanbaeva and other directors and managers stole more than USD 200 mln from the Group…
The claimants are represented at the London Proceeding by Allen & Overy LLP ("A&O") and a team of lawyers directed by Mr. Robert Howie. According to the contract made between them and the Claimants on April 2, 2015, A&O and the team of lawyers act as instructed by Mr. Thomas Matheos Werner (Director General of KK JSC and КК Plc) and Hugh MacGregor, legal adviser of КК Plc who work under the London Proceeding on behalf of the Claimants.
Upon approval of the Rehabilitation Plan by the creditors and the court, KK JSC undertakes to provide A&O with a copy hereof (translated to English) and inform that upon its approval, all the material decisions as to any change in the claim amount of KK JSC and its subsidiaries, procedure of transfer and allocation of the funds awarded as a result of the London Proceeding, entering into amicable settlement agreements and any additional expenses other than those mentioned in the Investment Agreement with Harbour Fund III will only be made with the consent of the creditors' committee, which will be confirmed by the minutes of the creditors' committee of KK JSC." [emphasis added]
"… In line with the Investment Agreement, Harbour Fund III finances legal costs only with regard to the PEAK Fraud and Land Plot Fraud, which amounts to some USD 10 mln of expenses. If the action is won at the High Court of London, Harbour Fund III will be paid a charge on success and return on investment. If the case is lost, the Claimants will be released on a need to reinstate the money spent by Harbour Fund III. The charge on success will be calculated with reference to the amount of costs incurred by Harbour Fund III and duration of the proceedings until the case is won…" [emphasis added]
It then set out a table showing the return due to HF3 (in addition to its investment) if the KK Proceedings were successful depending on the time taken from signing the Investment Agreement to receipt of the return.
Variations to the Investment Agreement
i) The 24 March 2017 Disputed Variation Letter provided for an increase in the Aggregate HF3 Commitment to £9,517,000 (i.e., an increase of approximately £2.3 million on the original Investment Agreement).
ii) The 5 April 2017 Disputed Variation Letter provided for an amendment in the terms of the causes of action covered by the Investment Agreement so as to include the Astana II claim (relating to funds received from the Development Bank of Kazakhstan for the construction of a logistics park in Astana).
iii) The 21 April 2017 Disputed Variation Letter provided for a further increase in the Aggregate HF3 Commitment to £11 million, (i.e., an increase of approximately £2.3 million on the 24 March 2017 Disputed Variation Letter and an aggregate increase of approximately £4.6 million on the original Investment Agreement). It also altered the calculation of the HF3 Return and the waterfall under Clause 10.1, so that the HF3 Investment and HF3 Return would rank ahead of the Claimants' Incurred Costs.
Issues for the court
i) Actual authority: Did Mr Tomas Werner (whether as CEO or Rehabilitation Manager) have actual authority as a matter of Kazakh law to enter into each of the Disputed Variation Letters on behalf of KK JSC? (Issue 1: List of Common Ground and Issues)
ii) Ostensible authority: If the answer to Issue 1 above is 'no', did Mr. Werner nevertheless have ostensible authority to enter into each of the Disputed Variation Letters on behalf of KK JSC? (Issue 2: List of Common Ground and Issues)
iii) Intention: Did KK JSC intend to be bound by the Disputed Variation Letters when they were signed by Mr Werner? (Issue 2A: List of Common Ground and Issues)
iv) "Claimants' Legal Costs":
a) Were the Variations Payments made by HF3 in connection with the "preservation of its rights" under the Investment Agreement and accordingly constituted "Claimants' Legal Costs" within the meaning of the Investment Agreement? (Issue 4A: List of Common Ground and Issues).
b) Do the alleged KK Proceedings Payments constitute "Claimants' Legal Costs" as defined in the Investment Agreement? (Issue 5.4 : List of Common Ground and Issues).
c) Do the Alleged Enforcement Costs constitute "Claimants Legal Costs" and/or are they part of the "HF3 Investment" as those terms are defined in the Investment Agreement? (Issue 7.4 : List of Common Ground and Issues)
d) Do the alleged Harbour's Other Costs constitute "Claimants' Legal Costs" as defined in the Investment Agreement (Issue 6: List of Common Ground and Issues)
v) Breach of contract claim:
a) Was it an express term of the Investment Agreement that the Funded Parties would: (i) continue to pay the ongoing legal costs of the KK Proceedings after the 'Agreed Budget' had been exhausted; and/or (ii) negotiate in good faith with HF3 to vary the Investment Agreement so as to increase HF3's aggregate funding commitment; and/or (iii) act reasonably and commercially by entering into such a variation? (Issue 8.1 : List of Common Ground and Issues)
b) Alternatively, was it an implied term of the Investment Agreement that, if the Funded Parties incurred legal fees and expenses in excess of the 'Agreed Budget' without obtaining HF3's prior agreement to increase its aggregate funding commitment, the Funded Parties would be responsible for discharging such liabilities as and when they fell due? (Issue 8.2: List of Common Ground and Issues)
vi) In relation to the Enforcement Costs, is HF3 entitled to claim damages for any breaches of Clause 10.3 of the Investment Agreement or has any such right to damages been excluded by the Investment Agreement? (Issue 9.1: List of Common Ground and Issues)
vii) Unjust enrichment:
a) Is HF3 entitled to recover a sum equal to the Variations Payments in unjust enrichment? (Issue 4B: List of Common Ground and Issues)
b) If the Funded Parties were enriched by any of the KK Proceedings Payments, was any such enrichment unjust? (Issue 11: List of Common Ground and Issues)
Issue 3 (ratification) is no longer pursued.
Factual Evidence
i) Ms Ellora MacPherson who at the material time was General Counsel of HLF and is now its Chief Investment Officer; and
ii) Mr Mark King, HLF's Senior Director of Litigation Funding.
Expert evidence as to Kazakh Law
Issue 1: Did Mr Tomas Werner (whether as CEO or Rehabilitation Manager) have actual authority as a matter of Kazakh law to enter into each of the Disputed Variation Letters on behalf of KK JSC?
i) Did Mr Werner have general authority to act on behalf of KK JSC (whether as CEO or Rehabilitation Manager) on the dates of the Disputed Variation Letters?
ii) Did KK JSC enter into each of the Disputed Variation Letters in its ordinary commercial operations/ordinary course of business?
iii) Was entry into the Disputed Variation Letters necessary to ensure the protection of KK JSC's property and therefore within Mr. Werner's actual authority?
iv) Were the Disputed Variation Letters envisaged by the Rehabilitation Plan that was approved by the Kazakh Court on 16 September 2016?
Did Mr Werner have general authority to act on behalf of KK JSC (whether as CEO or Rehabilitation Manager) on the dates of the Disputed Variation Letters?
i) Prior to the commencement of the KK JSC Rehabilitation, Mr Werner had been KK JSC's CEO.
ii) He was authorised by KK JSC's Creditors' Committee to continue managing the company's day-to-day affairs once it was placed in Rehabilitation. It was during this period that he signed the Disputed Variation Letters.
i) The Rehabilitation procedure to which KK JSC was subject was governed by the Law of the Republic of Kazakhstan "On Rehabilitation and Bankruptcy" (the "Bankruptcy Law") in force at that time.
ii) The powers and obligations of a Rehabilitation Manager set out in the Bankruptcy Law apply equally to a CEO, such as Mr Werner, who is allowed to continue to manage the company's day-to-day affairs. Professor Abzhanov stated at paragraph 25 of his report:
"Authority of a rehabilitation manager.
At the time of the KK JSC rehabilitation procedure in 2017, Article 69 of the Bankruptcy Law allowed for one of two scenarios upon commencement of the rehabilitation procedure: (a) the debtor could be allowed to retain management of its own affairs, in which case the CEO would exercise his ordinary powers but the powers and liability of a rehabilitation manager prescribed by the Bankruptcy Law would also apply to him (although he was not appointed as a rehabilitation manager as such), or (b) a rehabilitation manager could be appointed."
iii) Article 68(2)(1) of the Bankruptcy Law provides that after a Rehabilitation Plan has been approved, transactions falling outside the ordinary commercial operations of the company require the consent of the meeting of creditors, unless those transactions are provided for in the Rehabilitation Plan.
iv) Article 71 of the Bankruptcy Law provides (so far as material):
"Article 71. Authority of the rehabilitation manager
1. The rehabilitation manager has the right to:
1) exercise control over the debtor's property within the scope of the authority established by this Law;
2) request and receive information about the debtor from organisations, state bodies and their officials;
3) participate in relations regulated by the legislation of the Republic of Kazakhstan on rehabilitation and bankruptcy, using the information system;
4) make transactions outside of normal commercial operations by decision of the meeting of creditors, except for transactions provided for by the rehabilitation plan.
5) with the consent of the meeting of creditors, to make decisions that lead to an increase in the debtor's consumption costs, including payment of the debtor's employees.
6) request from creditors documents confirming the basis and amount of the claims filed.
2. The rehabilitation manager must:
1) accept the debtor's property under management and ensure the protection and control of the debtor's property;
2) enter into an agreement with the creditors committee within thirty calendar days from the date of assignment.
3) organize the implementation of the rehabilitation plan.
4) send a petition to the court for amendments and additions to the rehabilitation plan no later than five business days after approval by the meeting of creditors;
5) maintain a register of creditors' claims.
…" [ emphasis added]
Claimant's submissions
i) the competence to make a decision internally within the company.
ii) authority vis a vis a third party to enter into a transaction on behalf of the company.
iii) statutory rules to protect creditors.
The evidence of Professor Abzhanov
"In the context of a rehabilitation procedure, Article 68(2)(1) of the Bankruptcy Law requires the consent of the creditors' assembly for certain transactions of the debtor, however, this requirement is not a limitation on the authority of a debtor's CEO or rehabilitation manager to act on its behalf. This provision is a statutory requirement imposed on the debtor company for the benefit of its creditors during the rehabilitation procedure."
i) the CEO is the company organ that has statutory authority to enter into all transactions with third parties on behalf of the company.
ii) The significance of the CEO's competence under Articles 59 and 60 of the Kazakh law on Joint Stock Companies (JSC Law) is that a company's CEO has sole authority to enter into transactions on behalf of the company with third parties, notwithstanding that another body within the company may be competent to take the underlying decision as a matter of the company's internal management.
iii) Thus, where the CEO has entered into a transaction with a third party on behalf of the company, but has failed to comply with these internal rules, the transaction is nevertheless binding on the company. The transaction is only voidable on the application of a shareholder of the company, and only if the counterparty knew or should have known of the breach of the company's internal procedures.
i) Under Article 165 of the Civil Code where a transaction is entered into by a representative without authority the transaction is neither binding on the principal nor valid unless and until it is ratified by the principal. This is to be contrasted with Article 159 (11).
ii) KK JSC wrongly conflates the concepts of authority and legality; if a company engages in a particular activity without a permit required by law that does not mean that its CEO lacked authority to act on behalf of the company but rather that the company acting through its CEO is in breach of the law. The same is true under the Bankruptcy Law. If a debtor acting through its CEO or rehabilitation manager enters into a particular transaction for which approval from the creditors' assembly is required under the Bankruptcy Law, that does not mean that the debtor's CEO or rehabilitation manager lacked authority to act on behalf of the debtor, but rather that the debtor acting through its CEO or rehabilitation manager acted in breach of the Bankruptcy Law (paragraph 31 of his first report).
iii) The description of the rehabilitation manager's power at Article 71(1)(4) of the Bankruptcy Law merely reflects the general rule at Article 68(2)(1) which states that after the court approves the rehabilitation plan, transactions with the debtor's property outside the framework of ordinary commercial operations with the exception of those envisaged by the rehabilitation plan shall be made with the approval of the creditors assembly (paragraph 33 of his first report).
iv) This is further confirmed by court practice in disputes involving a breach of Article 71(1)(4) and the underlying rule at Article 68(2)(1). Thus, in the case of Mikheyev v Vostokstroyzakaz LLP, the Kazakhstani courts classified a failure to seek creditors' approval for transactions during the rehabilitation period, not as a case of a company's management acting without or in excess of its authority (in which case the transaction would not be binding on the company without subsequent ratification) but as a case of the rehabilitation manager acting in breach of a statutory rule that rendered the transaction voidable on the claim of the creditor pursuant to Article 158 (1) (paragraph 34 of his first report).
The evidence of Professor Ilyasova
i) it follows from Article 71 that the rehabilitation manager can only conclude certain transactions without agreeing them with the meeting of the creditors or creditors' committee and that transactions which fall outside those categories must be agreed with the creditors' meeting pursuant to Article 71 (paragraphs 44 -49 of her first report).
ii) KK JSC has not conflated the concepts of authority and legality. A CEO or rehabilitation manager who enters into a transaction without the required consent of the creditors' assembly or creditors' committee is acting both without authority and in breach of the law (2nd report paragraph 50).
Discussion
The relative experience of the experts
English law
Voidable contract
i) Article 71 is not the source of the rehabilitation manager's authority but merely imposes rules as to how they are to be exercised.
ii) Article 71 is not regulating the relationship between the different organs of company. It is concerned with the relationship between the debtor company and its creditors.
iii) the rehabilitation process is intended to protect creditors' interests in relation to an insolvent company and Article 71 is intended to promote that process.
i) Mikheyev v Vostokstroyzakaz LLP;
ii) United Construction Corporation;
iii) Galkina v Granada Industrial and Commercial Firm LLP;
iv) Shchudro v Makulbayev.
Discussion
"Q….So I suggest that what that shows is that a breach of Article 71.1.4 of the Bankruptcy Law cannot result in a lack of authority for the rehabilitation manager as a result of the breach because if that were the case, then on day one it would not bind the debtor and it would continue not to bind the debtor unless the debtor ratified it. That's right, isn't it?
A. No, I categorically disagree with this position because the authority to conclude the deal is established prior to the deal being effected, being executed, but in terms of invalidity of the deal, that is a consequence of breach when the deal is being concluded and these things cannot be mixed up or conflated. The authority is established before the deal is concluded. Authority does not occur retrospectively, depending on the consequences of a breach when the deal is being concluded. So I categorically disagree with the position of Professor Abzhanov. Authority must be established and determined and defined by the time, by the moment the deal is to be concluded.
Q. But in all the cases we've looked at where claims were made that a transaction was voidable under article 158, if in fact the position had been that the rehabilitation manager simply didn't have any authority to bind the debtor as a result of that breach, if that had been right, then those claimants wouldn't have had to bother invoking article 158. They could simply have said, "This doesn't bind the debtor and it's completely ineffective"
A. I will repeat. Authority and consequences of breaches when the deal is concluded from the point of view of Kazakhstan law are two totally different notions and things and they cannot be conflated or mixed up.
Q. I suggest to you that, as Prof Abzhanov says, one has to understand the consequences of a breach in order to understand whether it goes to authority on not. That's right, isn't it?
A. The consequences of a breach do not affect or influence authority. Consequences of a breach do not vest a person with authority at the time when the deal is only to be concluded in the future. I think that is a totally erroneous approach. The fact that somebody --that nobody contested the deal does not in itself mean that the person breaching a provision of the law whilst concluding a deal suddenly becomes a person vested with such authority. [Day 4 p122-123] [emphasis added]
Is the authority of the CEO unlimited?
" "Judicial practice in Kazakhstan [which] also confirms that a CEO does not have the authority to enter into a transaction without the requisite consent of other bodies of the legal entity"
"Under para. 13.4 of the Partnership's Articles of Association, the directorate (management) shall manage the partnership's property within the limit permitted by its member. Based on the content and meaning of the said rules, any action on by the CEO must be in the interests of the partnership and in accordance with the business profile and objective of its activity, set out in its incorporation documents. At the same time, the matters relating to the core and current business are within the authority of the Directorate, they are approved by the Supervisory Board and shall be presented for the consideration of the sole member of the Partnership (p.8.1, p.9.1 of Articles of Association). However, in breach of the above rule, the CEO entered into transactions on 3 September 2011 to sell the disputed immovable property items (real estate). The sole member of the LLP – the State Department "City of Pavlodar Finance Department" – did not provide its consent to the sale of this property. These transactions were entered into by the decision of the directorate of the Partnership which had no authority to do so." [emphasis added]
"In connection with the fact that the sole participant of VOSTOKSTROYZAKAZ LLP had no legal grounds on which to enter into the agreement on the sale and purchase of the disputed apartment during the rehabilitation period, the transaction should be declared invalid as being at odds with the requirements of legislation."
i) a CEO has power to manage the day-to-day activities of the company and has sole authority to enter into transactions with third parties; and
ii) the management is transferred to the rehabilitation manager
the rehabilitation manager therefore has authority to act as a CEO does.
It was thus submitted for the Claimant that Article 71 is not the "source" of any power but a rule as to how powers are to be exercised. It was submitted that although Article 71 is headed "powers of the rehabilitation manager" that is not because it defines them but because that is the subject matter of the provision. This submission which did not appear to be supported by evidence from Professor Abzhanov brings me to the third issue to be considered in this context namely Article 6 of the Civil Code.
Article 6 of the Civil Code
"Rules of civil legislation should be interpreted in accordance with their literal meaning as expressed in words."
"Q. Just so we're clear, the ambivalence that exists, we say, is as regards the consequence of a failure to obtain creditors' assembly approval where it is required, and you would agree, wouldn't you, that there is ambivalence on that point?
A. As grounds for invalidating a transaction under 71.1.4, the implications are not regarded as grounds. It is sufficient to simply say that no consent of the creditors' committee has been obtained for a transaction that goes outside of the ordinary course of business. It has nothing to do with the legal implications of this." [emphasis added]
Conclusion on Article 71(1)(4)
"…The restriction on authority of the CEO/rehabilitation manager to enter into transactions on behalf of the company does not mean that this authority passes to another person. It means that prior to entering into a transaction on behalf of the company the CEO/rehabilitation manager must obtain the required approval for it from a temporary administrator or the creditors' assembly. The receipt of such approval is not the same as the transfer of authority to the temporary administrator or the creditors' assembly or other person to enter into a transaction. That interpretation of provisions of the RBL does not correspond to the literal interpretation of the said norms."
"The authority of the CEO or rehabilitation manager to enter into transactions during the rehabilitation period is assessed as at the time that the transaction is entered into. It is not dependent on whether a subsequent application is made to invalidate the transaction. In other words, there is a difference between: (i) the existence or absence of authority to contract on behalf of the company (which is assessed as at the date of the transaction); and (ii) the consequence to the company of a CEO or rehabilitation manager entering into a transaction without authority (which is assessed at the date of an application to the court under Art 158(1) and Art. 159(11) of the RK CC, assuming that Kazakhstani law applies to that issue)." [emphasis added]
Whether the Disputed Variation Letters were outside the framework of the "ordinary commercial operations" of KK JSC for the purposes of Article 71(1)(4) of the Bankruptcy Law
Expert Evidence
"I am instructed that at the time of the Disputed Variation Letters, KK JSC had already been engaged in the litigation that gave rise to the Investment Agreement for a number of years, and that the litigation constituted KK JSC's only substantial activity during that period. In my view therefore the Disputed Variation Letters, which provided financing to allow that litigation to continue, should be regarded as being related to "services performed in order to maintain the daily functioning of the debtor, which are of a regular nature". Viewed from this perspective the Investment Agreement and the Disputed Variation Letters secured legal services for KK JSC that were being rendered on an ongoing basis and were designed to ensure that KK JSC could continue to function." [emphasis added]
"The criteria contained in this article do not apply to the deal itself. They apply to the operations undertaken within the framework of a deal or transaction. This is what should be borne in mind as a priority. So if the operations conducted under the aegis or in the framework of the deal comply with the criteria in 116, then they are ordinary commercial operations and transactions that fall under the definition of ordinary commercial operations… My premise is that the transaction is concluded within the framework of ordinary commercial operations and these operations they should comply with the criteria of 116 [Day 4 p17]"
Submissions
i) services provided to the debtor are included within the definition (paragraph 122 and 123 of Claimant's closing submissions);
ii) the day to day business of KK JSC was running the litigation and being a holding company (paragraph 124 of Claimant's closing submissions);
iii) the litigation was part of its daily functioning;
iv) if the litigation was part of ordinary commercial operations, funding such ordinary commercial operations (and variations thereto) must be part of the ordinary commercial operations in the same way that funding of working capital is in the ordinary course of commercial operations (paragraph 128 of Claimant's closing submissions).
"The core activity of the company is investment, issue of own securities, provision of investment services."
It was not the conduct of the KK Proceedings. Thus, Professor Abzhanov's argument that Mr Werner was authorised to enter the Disputed Variations on behalf of KK JSC because they were part of its ordinary commercial operations is manifestly wrong.
Conclusion on "ordinary commercial operations"
Was entry into the Disputed Variation Letters necessary to ensure the "protection" of KK JSC's property and therefore within Mr. Werner's actual authority?
"The rehabilitation manager must:
1) accept the debtor's property under management and ensure the protection and control of the debtor's property;…"
"… The notion of "property of protection" in the context of the provisions of the Bankruptcy and Rehabilitation Law, in my view implies the adoption of measures aimed at ensuring the preservation of the property transferred into the administration of the rehabilitation manager, in order to ensure its use only within the framework of the special regime of rehabilitation procedure." [emphasis added]
Were the Disputed Variation Letters envisaged by the Rehabilitation Plan?
"A. Yes, he had to seek and obtain the agreement of creditors' committee, but the fact that the rehabilitation plan envisaged the possibility of such amendments or variations means that these amendments were envisaged by a rehabilitation plan." [Day 4 p26]
"…all the material decisions as to any change in the claim amount of KK JSC and its subsidiaries, procedure of transfer and allocation of the funds awarded as a result of the London Proceeding, entering into amicable settlement agreements and any additional expenses other than those mentioned in the Investment Agreement with Harbour Fund III will only be made with the consent of the creditors' committee…" [emphasis added]
Conclusion on actual authority
Did Mr Werner have ostensible authority to enter into each of the Disputed Variation Letters on behalf of KK JSC: Issue 2.
Relevant legal principles
"An "apparent" or "ostensible" authority…is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract."
"An agent cannot be said to have authority solely on the basis that he has held himself out as having it. It is, however, perfectly possible for the proper authorities of a company (or, for that matter, any other principal) to organise its affairs in such a way that subordinates who would not have authority to approve a transaction are nevertheless held out by those authorities as the persons who are to communicate to outsiders the fact that it has been approved by those who are authorised to approve it or that some particular agent has been duly authorised to approve it. These are representations which, if made by someone held out by the company to make representations of that kind, may give rise to an estoppel. Every case calls for a careful examination of its particular facts." (emphasis added)
"A number of recent cases in the past decade have moved away from the concept of reasonableness and the issue of whether the party relying on the representation was merely put on enquiry and have focused instead on a more demanding test of whether that party turned a blind eye to evidence showing that there was no authority. Lord Neuberger, sitting in the Hong Kong Court of Final Appeal, stated that a third party is entitled to rely on a representation as to an agent's authority unless they have actual knowledge of the lack of actual authority or if their belief in the agent's authority is dishonest or irrational (which includes turning a blind eye and being reckless). In principle it is inappropriate for the concept of constructive notice to intrude into commercial transactions. See Akai Holdings Ltd (in liquidation) v Thanakharn Kasikorn Thai Chamkat (2010) 13 HKCFAR 479, at [51]-[62]." [emphasis added]
"23. Sixthly, it is a necessary condition of the employer's liability to the third party for the deceit of the employee that the representation, as to the employee's authority in respect of the transaction in question, was relied upon by the third party: Freeman & Lockyer v Buckhurst Park, at p.506.
i) Plainly, there can be no reliance on such a representation if the third party did not have an honest belief in the employee's authority; so too, if the third party turns a "blind eye" to suspicions as to the apparent authority of the employee: see the discussion in Akai, at [49] – [62]. However, the touchstone is honest belief and, possibly, "irrationality" – a point conceded in Akai (ibid) and upon which it is unnecessary to express any concluded view." [emphasis added]
"…there's not some separate test about turning a blind eye, which is a rather opaque phrase anyway; the touchstone is lack of honest belief. If, by turning a blind eye, a party has demonstrated a lack of honest belief, that's relevant. If turning a blind eye means something else, then it's not relevant. So it's lack of honest belief that is the touchstone" [emphasis added] [Day 5 p165-166]
However it seems to me that at [23] Gross LJ expressly contemplated either the lack of an honest belief or, in the alternative, a party "turning a blind eye". Gross LJ cross-referred to specific passages in the judgment in Akai and at [62] of that judgment Lord Neuberger clearly states:
"I conclude that it is open to the Bank to rely on Mr Ting's apparent authority (if he had such authority) unless the Bank's belief in that connection was dishonest or irrational (which includes turning a blind eye and being reckless)." [emphasis added]
"…At the end of that last-cited passage, Lord Blackburn provided a characteristically clear explanation of what constitutes blind eye knowledge, or turning a blind eye when he said this:
"[I]f the facts and circumstances are such that the [judge comes] to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover – I think that is dishonesty."
Reliance
Evidence
Contemporaneous documentary evidence
i) The first stage comprises email exchanges in the period 4 January 2017 to 15 March 2017 which show general representations being made as to the need for creditor approval for amendments to the Rehabilitation Plan and attempts by HF3 to meet with the Creditors' Committee and with ENPF.
ii) The second stage comprises email exchanges in the period 16 March 2017 to 6 April 2017 which suggested that some amendments could be agreed by Mr Werner but amendments to the "terms" required creditors' approval.
iii) The third stage was the correspondence in the period 7 April 2017 to 24 April 2017 which suggested that Mr Werner could sign up to amended terms (previously said to require creditor approval) but not to an amendment requiring new security or guarantees (or the creation of new obligations).
i) On 16 February 2016, Mr McGregor emailed Ms Emerson with a summary of the situation regarding KK JSC's potential rehabilitation and how it may impact the KK Proceedings. At paragraph (c) of that summary, Mr McGregor explained that, once a rehabilitation plan is in place, a company is bound to follow it and corporate resolutions are to be taken by a majority vote of the company's creditors. However, at paragraphs (d) to (e), Mr McGregor went on to explain that it was likely that KK JSC's management would remain in place under the rehabilitation plan, which would be a good thing for the KK Proceedings as it would allow them to focus on the litigation.
ii) Mr McGregor attached to that email a note from Grata Law Firm dated 7 February 2016. That note stated that, following the introduction of a rehabilitation plan, transactions must be approved by the creditors' committee if they are not approved by the plan or if they are outside the scope of ordinary commercial transactions.
The first stage (January – 16/18 March 2017)
i) On 9 January 2017, Mr McGregor emailed Ms Emerson (Director of Litigation Funding at HLF and the case manager at the material time), attaching his comments to a proposed amendment to the Investment Agreement. Mr McGregor stated that the amendment required the approval of the Creditors' Committee.
ii) On 2 March 2017, Mr McGregor emailed various people within HF3 and A&O in relation to the possibility of HF3 funding the Astana 2 claim, stating that: "the provisions of [the Rehabilitation Plan] are sufficiently broad to include Harbour Funding Astana 2 on the same investment terms, but any amendments to [it] would require approval at a full creditors' meeting". [Emphasis added]
iii) On 3 March 2017, Ms Emerson sent an email to, among others, Mr McGregor, proposing an agenda for a conference call scheduled for that afternoon. The agenda included "Process and timings on KK JSC creditors' approval of any change of terms and budget increase". [emphasis added]
iv) On 4 March 2017, an email from Mr McGregor to, among others, Ms Emerson and Ms MacPherson makes reference to section 4.3 of the Rehabilitation Plan (which was again attached). In the same email, Mr McGregor also recommended that HF3 make direct contact with the Creditors' Committee:
"Looking ahead, we think it would be very helpful for Harbour to have direct contact with KKJSC's creditors' committee. In our view they would respond best to a letter, which could then be followed-up with a call or even visit to Almaty. We would suggest the letter includes the following points:
1. Harbour is aware of KKJSC's rehabilitation plan, and has previously met with ENPF's representatives in London. Harbour also understands that ENPF has been provided, under a confidentiality agreement, with a copy of Harbour's Investment Agreement with KK.
2. Trial of KK's proceedings is scheduled to commence on 25 April 2017, and to run until July 2017. Harbour understands from KK's legal team that the build-up to trial (including disclosure, preparation of expert reports and witness statements and interlocutory hearings) has been enormously busy, and therefore expensive.
3. The budget for the proceedings has therefore increased to [GBP12m], from an original budget of GBP8.2m (including GBP1.1m cofunding from KK). In order to continue, the additional funds have to provided – this funding could, potentially, come from KK's operations, creditors, investors or from Harbour.
4. If Harbour are to provide any further funding, this will be on amended terms.
5. Harbour understands that certain minority creditors have suggested that KKJSC's management (Tomas Mateos Werner and Victoria Gorobtsova) be replaced with a court-appointed rehabilitation manager. Harbour strongly recommends that such potentially destabilising action is not taken before or during trial, when it is vital that KK's management and legal team able to concentrate on the proceedings.
6. In the event that KK's management were to be replaced, and KK's legal advisers considered that this would have a material adverse effect on the prospects for the LHC proceedings, Harbour would immediately withdraw funding for the proceedings under either Clause 15 (Termination for Fault) or Clause 16 (Termination for Material Adverse Decline) of the Investment Agreement.
7. Harbour would welcome the opportunity to discuss these matters further with the Creditors' Committee."
v) On 6 March 2017 Mr Tonnby, (at that time Chairman of HLF) sent an internal email copied to Ms Dunn (then Head of Litigation at HLF) and Ms MacPherson stating that:
"…I am VERY unhappy about being in this position at this time
- apparently needing to increase the budget by 3.8m (I do not buy the re-allocation argument as I have not seen anything to suggest that we will not need to spend money on enforcement post a win)
- not being able to improve our terms or get the claimants to share the costs as they are in a procedure where they are subject to bureaucratic claimants
Given the above I think that how we present any decision to continue funding will be paramount as I want better terms and I want to maximise the chance that the bureaucratic claimants participate.
For example I do not think we should tell them what we approve but just what they need to know (their own tactics) to continue for now whilst we reach a better overall agreement. So perhaps all we say is that we pay the security for costs for now by re-allocating budget but that to complete the litigation we will need agreement re terms and funding to be reached with claimants in next week or two (we should be happy to call a meeting with all relevant claimants and get on a plane to a suitable destination: London, Almaty....)… " [emphasis added]
It is clear that the references in that email from Mr Tonnby to the "bureaucratic claimants" are to the Creditors' Committee and not to Mr Werner as Rehabilitation Manager.
vi) On 7 March 2017, Ms Emerson emailed a letter from Ms Dunn to the Creditors' Committee. That letter stated that HLF had been approached to consider providing funding for the £3.5 million additional costs and that:
"[HLF] wish to discuss this with you because if HF3 is to provide any further funding this will have to be on amended terms to reflect the additional risk to HF3".
vii) On 10 March 2017, Ms Emerson and Mr McGregor exchanged emails in order to discuss the possibility of Ms Dunn travelling to meet the Creditors' Committee in Almaty in mid-March (in furtherance of the discussions alluded to in the letter to the Committee dated 7 March 2017).
viii) On 10 March 2017 Mr Werner wrote to HF3. He sent a signed copy of the amendment letter dated 9 March 2017 but stated that he did not have the authority to bind KK JSC to the terms in an amendment letter because:
"material contracts that diverge from KKJSC's rehabilitation plan can only be signed after approval from KKJSC's creditors." [emphasis added]
He continued:
"As KKJSC's rehabilitation manager, I do not have authority to bind the company or its subsidiaries to these amended terms, nor can I validly convene a creditors meeting and seek approval from them within the timeframe set in your letter.
"KK's PLCs board and management will nevertheless undertake to work in good faith to obtain the approval of KK JSC's creditors as soon as possible, because we accept that obtaining extended funding is in the best interest of KKPLC and the rest of the claimants… It is a fundamental term of the rehabilitation plan that Harbour's funding is provided on a "no-win, no fee" basis. We anticipate creditors insisting that any additional funding remains without recourse". [emphasis added]
ix) Between 13-15 March 2017, Ms Emerson and Mr McGregor exchanged a number of emails concerning the proposed meeting between HF3 and the Creditors' Committee. In particular, it is clear from these emails that HF3 were eager to meet with the Committee that week (and in particular ENPF, which accounted for more than 50% of the voting power within the Creditors' Committee) to discuss the proposed amendment to the Investment Agreement in the 9 March letter. It is also clear from these exchanges that the reason the meeting did not take place that week was because ENPF was not ready to meet with HF3 as it needed more time and more information, as referred to in an email of 14 March 2017 from Mr McGregor to Ms Emerson and Ms Dunn:
"…I spoke today with Nazim Baktibaev (deputy director of ENPF's legal department). He told me that he and his team are reviewing the letters and preparing a report for ENPF's board, and that they anticipate providing a response to Harbour's letter by Thursday. Clearly this does not leave time for a meeting in Almaty this week.
I emphasised the importance of ENPF meeting with Harbour as soon as possible, preferably in person or alternatively by video conference. Nazim acknowledged this, but stated that ENPF's new management first wanted to understand more about the claims and arrangements with Harbour, including the increased budget, prior to the meeting. Nazim told me that he had some questions for KK regarding the claims and the budget, and that he would write to me directly regarding these. It is apparent from our discussion that Nazim has been reviewing the letters and other materials provided – it appears that ENPF's management are taking this seriously, but that they want time to understand the issues before meeting with Harbour…".
x) On 15 March 2017, Ms Emerson and Mr McGregor exchanged drafts of a proposed letter to the Creditors' Committee which was intended to "hurry a response from ENPF" and stated, inter alia,
"Following discussions with the current management of the Company about the Company's ability or otherwise to meet its co-funding obligations under the Investment Agreement, HLF writes to impress upon the Creditors' Committee the urgency of meeting to agree the basis on which the London Proceedings should continue and be funded…
To assist in reaching agreement, it is essential that HLF are able to meet with the members of the Creditors' Committee as soon as possible." [emphasis added]
The second stage
" we understood from your letter of 10 March that material contracts that diverge from KK JSC's rehabilitation plan can only be signed after approval of KK JSC's creditors. We require the attached Amendment Letter to the Investment Agreement to be executed as an interim measure, while the process for obtaining such approvals is underway. " [emphasis added]
"…The EPPF is studying your proposal for financing a budget increase. However, you should understand that, being a quasi state structure, we, unfortunately, can not make such decisions in a short time, without appropriate approvals.
Nevertheless, I hasten to inform you that on 24.03.2017. We have a meeting of the committee on problem assets, which will consider this issue and, most likely, the date of the meeting with you will be indicated…" [emphasis added]
"We understood from KK that you have asked for an explanation for why the budget has increased. To respond to this, we have attached to this email a letter from us and a letter from Allen & Overy explaining the reasons for the budget increase.
We have also provided information to KK JSC in relation to our terms and requirements. KK JSC will be providing this information to you before your meeting on the 24th March 2017."
i) On 20 March 2017, in relation to the Amendment Letter dated 16 March, Mr McGregor emailed Ms Emerson, Ms Dunn and Ms MacPherson stating:
"Please find attached our comments on the amendment letter. There are a couple of points we would like to clarify, and a couple of corrections/notes for Harbour.
The Law on Rehabilitation is a new one, and there is room for interpretation regarding many of its provisions, including the scope of the rehabilitation manager's powers.
Once we have addressed these points, Tomas is ready to sign on behalf of KKJSC and KKPLC…" [emphasis added]
ii) On 22 March 2017, in the context of these email exchanges, Mr McGregor emailed Ms Emerson, Ms Dunn and Ms MacPherson. In relation to proposed amended terms, Mr McGregor stated:
"1. Security – given that we still have to work out the details here, could we please remove this provision from the amendment letter? It will of course stay in the annexed terms to be negotiated with creditors, as signed by KKPLC. As KKJSC's rehabilitation manager, Tomas does not have the right to grant new creditors security over KKJSC's assets.
2.Astana 2 SFC – agreed". [emphasis added]
iii) The next day, Ms Emerson acknowledged this email and asked for the relevant terms to be removed from the Amendment Letter.
"Despite our asking for additional terms now, KK JSC could not agree to those terms without the agreement of the creditors. The attached amendment letter brings the additional amounts into the budget on the current terms of the Investment Agreement, but also sets out (in Annex 1) the terms that we will seek to negotiate with the creditors of KK JSC." [emphasis added]
"This would be an introductory meeting– we expect ENPF's management to be friendly and take note of what Susan has to say, but they have not yet reached a final position on Harbour's amended terms. The ENPF team is still studying the information provided earlier this week on the amended terms (including the example return calculation), as well as more detailed information on incurred costs." [emphasis added]
"…Yesterday did not go as I expected because ENPF refused to meet me…
As you can imagine that did not make me happy…
We have three principal …issues which flow from this. The first is around terms, the second around how settlement is discussed and the third how it is approved.
Tomas and Hugh think this should be used to our advantage. Off the record ENPF say they are supportive of what we are doing and want the proceedings to carry on.
As you know [Mr Werner] has signed certain of the documents we have produced in our discussions. He is saying he would sign up to what we have asked for though I question whether security could be offered i.e. he is suggesting he would sign up to the increase in terms we have sought.
He also says he would then agree settlement…
The creditors meeting was farcical. $500 creditors filibustering and doing everything they can to make life difficult for the company, bog them down with inane questions and requests for pointless information…" [emphasis added].
Stage 3
i) On 14 April 2017, Ms Dunn spoke to Mr Werner and Mr McGregor and shortly afterwards emailed several people within HF3 (including Mr Tonnby, Ms MacPherson and Ms Emerson). In her email, Ms Dunn explained that Mr Werner and Mr McGregor had said they would not be able to sign a variation letter because the recourse provisions would put them in breach of the rehabilitation plan:
"So I have asked them to propose what they think is achievable…".
ii) On 18 April 2017, Mr McGregor emailed Ms Dunn, Ms MacPherson, Ms Emerson and Mr Yam (all of HF3) in relation to a draft amendment letter dated 11 April. He repeated the position stated on 14 April that KK JSC would not be able to "approve new security arrangements or guarantees without the consent of KKJSC's creditors". He also included a link to the Kazakh Law on Rehabilitation (in English), drawing attention to Sections 68(2) and 71.
"Harbour requested urgent meetings with ENPF and EBRD, as the major creditors of KKJSC, to discuss the amended budget, revised terms, and conduct of the Proceedings generally. Harbour's Head of Litigation Funding, Susan Dunn, then travelled to Almaty in order to secure a meeting with ENPF and attended the meeting of KKJSC's creditors held on 7th April 2017. Unfortunately ENPF has not been able to confirm the date of the meeting with their management and was not able to meet with Ms Dunn. There is no further information up to date.
Management of the Proceedings frequently requires important decisions to be taken on an urgent basis, including decisions relating to expenditure and settlement. As the majority creditor, holding over 50% of KKJSC's debt, ENPF should play an important role in these decisions. However, it is apparent that ENPF is not prepared to promptly consider and take important decisions relating to the Proceedings. In these circumstances, as the CEO of KKJSC, I consider that I am entitled to continue to manage the Proceedings on behalf of KKJSC and take any decisions necessary to ensure a successful outcome for KKJSC's creditors. This includes negotiating and agreeing to the amended terms required by Harbour for their additional funding." [emphasis added]
i) On 20 April 2017, Ms Emerson emailed Mr Werner and Mr McGregor, suggesting that two amendment letters be executed: one concerning amendments which Mr Werner had agreed to execute, and another with terms which Mr Werner had indicated he did not have the authority to execute without the consent of the creditors, with the latter letter subject to Mr Werner obtaining the necessary consent.
"Following your email of 18 April we discussed your position with the Board and they are not willing to forego the provisions relating to new security arrangements and the guarantee.
As a result, we propose executing two documents, as set out below.
• The first document is an amendment letter incorporating those changes that you have agreed to, namely the additional funding being provided in return for a HF3 recovery of 4 times the investment after repayment on that money only. This includes £575,000 paid as security for costs for Astana 2, £918,000 ATE premium, and the additional £2,348,246 litigation budget.
• The second document is an amendment letter including those provisions which you have indicated you do not currently have the authority to sign and therefore we have made these provisions conditional on conditions precedent being met, those conditions relating to the various consents necessary to give you authority to sign the letter."
ii) On 24 April 2017, Mr Werner replied to Ms Emerson's email of 20 April and copying Ms MacPherson, stating:
"I will proceed with signing the first amendment letter, as soon as I have access to a printer.
Through correspondence sent to creditors over the past month you have made it clear that you were providing additional finance based on new terms. You also made clear that you would not provide additional finance if these terms were not approved. Without this additional funding the company would have been unable to continue proceedings. I therefore think that it is the best interest of the creditors to sign the first amendment letter.
I wrote then that I anticipated it would be very challenging for creditors to accept that you provide this finance with recourse.
The Rehabilitation Plan and the Law on Rehabilitation do not allow me to create new obligations. The terms of the letter are also in breach of our loan agreements with EBRD.
Recourse is additionally against the spirit of our arrangement with creditors, especially EBRD. Creditors have allowed the company to fund the proceedings with funds that should have gone to repay their debt, in the understanding that the new funding we obtained was without recourse. It is my understanding that they would prefer to forego potential recovery from London proceeds if this creates new obligations.
For these reasons I am not going to bind Creditors as proposed by your second letter amended even as if you propose this is subject to their approval." [emphasis added]
The evidence of Ms MacPherson
"I wish to say at the outset that at the time I never had any doubt about the validity of any of the Disputed Variations or Mr Werner's authority to agree them on behalf of KK JSC. I expected the Funded Parties would honour their obligations under them and that, if the KK Proceedings were successful, HF3 would be repaid in full together with a return. Similarly, from the Harbour team's discussions with the Board (at meetings at which I was present), I believe the Board did not have any doubt about Mr Werner's authority in respect of the Disputed Variations. This is because it was never told there was any question about Mr Werner's authority in respect of those variations, and therefore rightly assumed that the variation would be executed with authority. Under no circumstances would additional monies have been released if the Board, myself or any member of the Harbour team had any doubt over the validity of the Disputed Variations or unless we believed that a return applied to that funding." [emphasis added]
"As I explain further below, in March 2017 Harbour made a concerted effort to establish a direct line of communication with the Creditors Committee (and with ENPF and EBRD in particular) at the suggestion of Mr Werner and Mr McGregor. This was to determine whether additional funding would be provided by KK JSC and/or KK JSC's creditors as to whether recourse and security would be provided by KK JSC in the event HF3 funded certain budget increases. In those instances, Harbour was only seeking to engage with creditors on issues which we had been told by Mr Werner and Mr MacGregor required creditor approval (primarily, as explained below, the provision of security and recourse terms) or which obviously required action by creditors (such as the provision of further funding by creditors themselves). We continued to believe that otherwise Mr Werner had general authority to act for KK JSC." [emphasis added]
"I was incredibly frustrated by [what happened at the meeting on 7 April]. The only solace I took from Ms Dunn's update was that ENPF had apparently informed Mr Werner and Mr McGregor that they supported what HF3 was doing and wanted the KK proceedings to continue. She said that Mr Werner had stated that, if funding was not going to be provided by the creditors, he was prepared and able to agree to it being provided by HF3 on the terms that we desired. I understood this at the time to mean that he now considered himself able to agree the security and recourse provisions that he had previously been unable to agree, though as I explain below that was ultimately not the case. Mr Werner had also apparently said that, if the opportunity presented itself, he was prepared and able to enter into a settlement agreement on behalf of KK JSC in the KK Proceedings, and EBRD was supportive of this position. Nothing that Ms Dunn reported back to the Harbour team caused me to question Mr Werner's authority to execute the variation letters which he had executed up to that date, nor did it give me cause for concern going forwards. [emphasis added]
"he would sign up to what we have asked for… i.e. he is suggesting he would sign up to the increase in terms we have sought."
"It was noted that meetings were being held with the major creditors of the claimant companies to discuss a way forward in securing the agreement of the creditors' committee to the increased funding by Fund3 on improved terms."
"Q. You see there's no reference there to seeking its agreement on recourse. It's seeking their agreement on all of the approved terms. That's what the board understood was taking place.
A. This is purely a summary of the board -- this is a summary note. It doesn't reflect every single thing that was discussed about the KK matter at the board meeting. It's simply a summary.
Q. Yes, but your case is, well, this was all a very simple issue, the authority point was a very simple issue because all we were concerned with was recourse. If it was that simple, this note would have said: there is a discussion about the way forward in securing agreement on recourse. And it doesn't. It says: on increasing funding by the fund on improved terms, that means all the terms.
A. Well, I know what followed this. What followed this was the next variation letter, which was about recourse…" [Day 2 p24]
Claimant's submissions
i) close scrutiny of the Rehabilitation Plan would not have told HF3 that Mr Werner lacked authority (paragraph 235 of the Claimant's closing submissions);
ii) the documents in January 2017 related to an early draft of an agreement which was never executed and referred in "vague and general terms" about the need for creditors' approval and was irrelevant to the question of alleged recklessness at the date of execution of the Variation Letters (paragraph 236);
iii) the contemporaneous documentary evidence shows that Mr Werner and Mr McGregor were specific about what Mr Werner had authority to agree to – Mr Werner and Mr McGregor took the position that he could not agree to security and recourse provisions (paragraph 238);
iv) Mr Werner was aware of the scope of his authority and could be relied on to express that accurately. Similarly Mr McGregor was the Group General Counsel and had an understanding of both Kazakhstan bankruptcy law and the rehabilitation procedure which HF3 did not have (paragraph 238.7).
Conclusion on Disputed Variation Letters
Did KK JSC intend to be bound by the Disputed Variation Letters when they were signed by Mr Werner? (Issue 2A)
Were the Variations Payments made by HF3 in connection with the "preservation of its rights" under the Investment Agreement and accordingly constituted "Claimants' Legal Costs" within the meaning of the Investment Agreement? (Issue 4A)
"Claimants' Legal Costs" means all or any of the following:
(a) the reasonable costs incurred by the Claimants in the conduct of the Proceedings consistent with the Agreed Budget and any accepted variation thereto agreed by the Claimants and HF3 in writing including:
(i) the standard costs of the Legal Representatives as set out in the Agreed Budget for each stage of the Proceedings and payable pursuant to, and as defined in, the Legal Costs Agreement;
(ii) the standard costs of the Barristers as set out in the Agreed Budget for each stage of the Proceedings;
(iii) expert fees up to the amounts set out in the Agreed Budget for each stage of the Proceedings;
(iv) disbursements;
(v) out of pocket costs incurred by HF3 in contemplation of this Agreement, including (1) any counsel's opinion, background check fees and valuation advice, (2) the amount of all costs and expenses (including legal fees) reasonably incurred by HF3 in connection with any amendment, waiver or consent requested by or on behalf of the Claimants or specifically allowed by this Agreement, to this Agreement, and (3) the amount of all costs and expenses (including legal fees) incurred by HF3 in connection with the enforcement of, or the preservation of any rights under, this Agreement including the taking of any action pursuant to the Security (if any); and
(vi)VAT or equivalent local tax where applicable.
(b) any Adverse Costs Order made against the Claimant in relation to the Causes of Action…" [emphasis added]
"For the duration of the Proceedings the Claimants undertake to:"
(a) Instruct the Legal Representatives to conduct the Proceedings reasonably and with due regard to the overriding objective set out at rule 1.1 of the English Civil Procedure Rules;
(b) Instruct the Legal Representatives to take all commercially reasonable steps to avoid or minimise Adverse Costs, including taking all steps reasonably required to obtain Adverse Costs Insurance consistent with the Agreed Budget;
I Instruct the Legal Representatives to comply with all orders made by the Court in the Proceedings and the Civil Procedure Rules;
(d) Provide all information, evidence and documents required by the Legal Representatives in order to comply with the above instructions and shall deal promptly (which for purposes of this clause shall mean within seven calendar days unless the Proceedings require response within a shorter time period) and diligently and in good faith with requests by the Legal Representatives to provide statements of truth, witness statements and to search for disclosable documents;
I Devote adequate resources in terms of finance and manpower and otherwise act in good faith to enable the Legal Representatives to conduct the Proceedings efficiently;
(f) Co-operate generally with the Legal Representatives in the conduct of the Proceedings; and
(g) Consult with and keep HF3 appraised of each and every step in the Proceedings, including instructing and requiring the Legal Representatives to copy HF3 on any communications and emails relating to costs, strategy and decision making and any other correspondence it may request to be disclosed from time to time in relation to any step or document in the Proceedings.
(sub-clauses 8.1(a) through 8.1(g) being the "Overriding Objective").
For the avoidance of doubt, breach of this clause 8 shall amount to a fundamental breach of this Agreement."
"5.2… Accordingly the Claimants undertake that they will, and will direct their Legal Representatives… to:
(a) provide, by email, either by their Legal Representatives or otherwise, a written report to [HLF] at least every month…
(b)…give HF3 free access and when requested promptly provide or cause the Legal Representatives promptly to provide copies to HF3 of all material documents produced by or for the Claimants in relation to the Proceedings and any legal and other advice received by the claimants relating to the Causes of Action…
I…
(d) act reasonably and commercially in the prosecution of the Proceedings and listen carefully to the advice of the Legal Representatives
I change the Legal Representatives or Barrister only with the prior written agreement of HF3…
(f) during the conduct of the Proceedings and if considered appropriate by the Legal Representatives, propose mediation with the Defendants…
(g.)…
(h) in the event they receive an offer of Settlement… immediately notify the Legal Representatives and HF3…
(i)…
(j)…
(k)…"
i) To qualify as "Claimants' Legal Costs" the costs in question must be:
"reasonable costs incurred by the Claimants in the conduct of the Proceedings consistent with the Agreed Budget and any accepted variation thereto agreed by [the Funded Parties] and HF3 in writing". [emphasis added]
ii) The requirement that such costs be incurred "consistently with the Agreed Budget and any accepted variation thereto" involved a critical protection for the Funded Parties in the form of control over HF3's investment to which the multiplier would apply.
iii) The Variations Payments were payments made in excess of "the Agreed Budget" in the original Investment Agreement. If the Disputed Variation Letters are deemed invalid, the Variations Payments could not qualify as "Claimants' Legal Costs" because they would not be costs incurred "consistently with the Agreed Budget and any accepted variation thereto agreed by the Claimants and HF3 in writing".
i) "incurred by the Claimants": these are costs incurred by HF3;
ii) "(v) out of pocket costs incurred by HF3 in contemplation of this Agreement…": these are costs incurred in preservation of its rights not in contemplation of the Agreement.
i) Subparagraph (v) would be nugatory if it was restricted to costs incurred by the Claimants; it was obvious that it was intended to catch "potentially something";
ii) The costs identified in (v) such as variations and enforcement cannot be costs "in the conduct of the Proceedings consistent with the Agreed Budget (as varied)";
iii) "in contemplation of this Agreement" means costs "in relation to" the Agreement.
Relevant legal principles
"10. The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning…
11. …Interpretation is, as Lord Clarke stated in Rainy Sky (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (Rainy Sky para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 paras 13 and 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: Arnold (paras 20 and 77)…
12. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: Arnold para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571 , para 10 per Lord Mance. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.
13. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance spoke in Sigma Finance Corpn (above), assists the lawyer or judge to ascertain the objective meaning of disputed provisions." [emphasis added]
"25. What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied." [Emphasis added]
Discussion
Preservation of rights
The preconditions
i) "incurred by the Claimants";
ii) "consistent with the Agreed Budget";
iii) "out of pocket" costs and "in contemplation of" the Agreement.
Conclusion on Claimants' Legal Costs- Variations Payments
Do the alleged KK Proceedings Payments constitute 'Claimant's Legal Costs'? (Issue 5.4)
Do the alleged Enforcement Costs constitute 'Claimants' Legal Costs' and/or are they part of the 'HF3 Investment' as those terms are defined in the Investment Agreement? (Issue 7.4)
"The Claimants warrant and undertake that they shall in a timely manner take all reasonable steps and actions (including pursuing judicial proceedings) to enforce any judgment, award or order or settlement agreement resulting from a Success in Proceedings to receive the Proceeds in full (to include but not be limited to any order for costs) so that they are able to discharge their obligations to HF3 under this clause 10 or clauses 11, 12, 15 and 16. If for any reason whatsoever the Claimants breach this clause 10.3, to the extent HF3 is not aware of such breach at that point in time, the Claimants shall promptly notify HF3 of such breach and HF3 shall be entitled (and the Claimants shall allow HF3) to take over sole conduct and control of all negotiations and proceedings in the event that the Claimants fail to remedy such breach (if it is remediable) within ten (10) calendar days of HF3 requesting such remedy. The Claimants shall provide HF3 with all assistance and cooperation reasonably requested by HF3 and they shall be liable for all expenses, including legal fees and expenses that HF3 incurs pursuant to its exercise of its rights under this clause which shall be an amount recoverable under clause 10.1(c) of this Agreement…" [emphasis added]
"The Claimants shall apply or instruct the Legal Representatives to apply any Proceeds received as a result of Success in the Proceedings, and which it holds on trust ,in the following order immediately upon receipt of such Proceeds:
(a) deduction of all stamp duties, bank charges and currency exchange costs (if any) payable by the Claimants relating to or arising out of any such Success in the Proceedings;
(b) pay to the Claimants, the Claimants' Incurred Costs to be recovered from the Costs Award (if any); where there is no Costs Award the Claimants' Incurred Costs will be recovered under clause 10.1(g).
(c) pay to HF3, the HF3 Investment, first exhausting any remaining Costs Award (if any) and then the remainder proportionately from the Peak Claim Proceeds and Remaining Proceeds. Where there is no remaining Costs Award or no Costs Award, the HF3 Investment shall be recovered proportionately (in accordance with the allocated values) from the Peak Claim Proceeds and the Remaining Proceeds. Where there is only Peak Claim Proceeds, HF3 shall receive the HF3 Investment in its entirety from the Proceeds;
(d) pay to HF3 and the Banker, in their capacity as Trust Beneficiaries, from Peak Claim Proceeds less the HF3 Investment (calculated pursuant to clause 10.1(c)above), the HF3 Peak Claim Return and the Banker Entitlement on a £ for £ basis;…
(e) pay to HF3, in its capacity as Trust Beneficiary, the HF3 Return (less any sums recovered pursuant to clause 10.1(d) above) from any remaining Peak Claim Proceeds (if any) and Remaining Proceeds;
(f) pay to the Success Fee Beneficiaries, in their capacity as Trust Beneficiaries, the amounts due under their respective Success Fee Agreements;
(g) pay to the Claimants any remaining amount of Proceeds, which each Claimant shall receive directly in their capacity as Trust Beneficiaries..." [emphasis added]
i) they are costs and expenses incurred in connection with the "preservation of rights" under the Investment Agreement in that they preserve HF3's rights to have all reasonable steps and actions taken to enforce the judgment in circumstances in which the Funded Parties were in breach of Clause 10.3;
ii) they are costs and expenses incurred in connection with the enforcement of the Investment Agreement in that HF3 is enforcing its rights to take over sole conduct and control of the KK Proceedings pursuant to Clause 10.3.
"HF3 Investment" means the aggregate amount of the Claimants' Legal Costs and Adverse Costs Orders that HF3 has paid or incurred or, in the case of Adverse Costs, provisioned a liability in respect thereof under this Agreement, PROVIDED that for purposes of calculating the 2 to 3.5 times multiple in Schedule 2, the HF3 Investment shall be equal to the aggregate gross amount of the Claimants' Legal Costs so paid, incurred or provisioned by HF3 without giving effect to any subsequent payments received by HF3 (including following an interim recovery under clause 12) or prior discharge of any such amounts or liabilities by the Claimants or any other person."
Were each of the alleged Harbour's Other Costs, costs which HF3 has incurred in connection with the enforcement and/or preservation of its rights under the Investment Agreement? Do the alleged Harbour's Other Costs constitute 'Claimants' Legal Costs' as defined in the Investment Agreement? (Issues 6.1 and 6.4)
Breach of contract claims: Was it an express term of the Investment Agreement that the Funded Parties would: (i) continue to pay the ongoing legal costs of the KK Proceedings after the 'Agreed Budget' had been exhausted; and/or (ii) negotiate in good faith with HF3 to vary the Investment Agreement so as to increase HF3's aggregate funding commitment; and/or (iii) act reasonably and commercially by entering into such a variation? (Issue 8.1)
"(e) Devote adequate resources in terms of finance and manpower and otherwise act in good faith to enable the Legal Representatives to conduct the Proceedings efficiently"
Alternatively, was it an implied term of the Investment Agreement that, if the Funded Parties incurred legal fees and expenses in excess of the 'Agreed Budget' without obtaining HF3's prior agreement to increase its aggregate funding commitment, the Funded Parties would be responsible for discharging such liabilities as and when they fell due? (Issue 8.2)
"3.1 The total amount of the Agreed Budget produced by the Legal Representatives and Barristers is £8,361,048.20."
"3.2 Subject to the terms and conditions of this Agreement and in consideration of:
…
HF3 agrees to invest in respect of the Claimant's Legal Costs as follows:
(e) in January 2016 HF3 shall pay an amount equal to £330,352 in respect of currently unpaid invoices that fall to be paid within the Agreed Budget (the "Initial Invoices");
(f) in respect of all of the Claimants' Legal Costs that fall within the Agreed Budget and that fall to be paid on or after 1 February 2016 other than the Initial Invoices, HF3 and the Claimants shall jointly fund such sums by paying a percentage of the total of the Agreed Budget respectively, of the same promptly when due.
(i) HF3's payments shall be up to a maximum aggregate amount equal to £7,200,000 less sums paid pursuant to preceding paragraph (e).
(ii)The Claimants' payments shall be up to a maximum aggregate of £1,161,048.20 (the "Co-Funding Commitment")
(iii) Each invoice shall be pro-rated, with each of HF3 and the Claimants paying their portion calculated by the product of (A) the value of the invoice and (B) each parties' maximum aggregate as set out at 3.2(f)(i) and 3.2(f)(ii) respectively, divided by the total Agreed Budget less sums paid pursuant to preceding paragraph (e)(the "Co-Funding Arrangement").
The sums payable by HF3 pursuant to this paragraph (f) and the preceding paragraph (e) shall total no more than £7,200,000 and are collectively referred to herein as the "Aggregate HF3 Commitment."
Is HF3 entitled to claim damages for any breaches of Clause 10.3 of the Investment Agreement or has any such right to damages been excluded by the Investment Agreement? Issue 9.1
"The Claimants shall provide HF3 with all assistance and cooperation reasonably requested by HF3 and they shall be liable for all expenses, including legal fees and expenses that HF3 incurs pursuant to its exercise of its rights under this clause which shall be an amount recoverable under clause 10.1(c) of this Agreement". [emphasis added]
Is HF3 entitled to recover a sum equal to the Variations Payments in unjust enrichment? Issue 4B
Submissions
i) if the Disputed Variation Letters are held to be invalid, the Defendant's enrichment would have been unjust because there would have been a total failure of consideration for the Variations Payments.
ii) if the Disputed Variation Letters are held to be invalid, the Claimant's payment of the Variations Payments would have been caused by a mistake of fact, thereby rendering the Defendant's enrichment unjust.
iii) The Defendant did not object to the Variations Payments despite having a reasonable opportunity to do so, and they therefore constituted an unjust enrichment.
iv) The Variations Payments discharged the Defendants' debt, and were paid at the request of KK JSC (via Mr Werner and Mr McGregor).
The ground of "commercial compulsion" is no longer pursued (paragraph 74 of the Claimant's skeleton for trial).
"the state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed to sustain itself." (Sharma v Simposh Ltd [2013] Ch 23 (CA) at [24])
"To succeed in an action to recover money on that ground, the plaintiff has to identify a payment by him to the defendant, a specific fact [or law] as to which the plaintiff was mistaken in making the payment, and a causal relationship between that mistake of fact [or law] and the payment of the money.."
i) the Claimant would have made the payments regardless of whether the Disputed Variation Letters had been signed.
ii) the Defendant did not "freely accept" the Variations Payments because: it did not request them; it had no opportunity to consider rejecting them; and it reasonably believed that the Claimant knew the payments fell outside the scope of the Investment Agreement but proceeded to make them anyway to protect its investment.
Would the Claimant have made the payments regardless of whether the Disputed Variation Letters had been signed?
"- Assuming you and Peter remain happy on merits I wish to continue funding
-I am VERY unhappy about being in this position at this time
- apparently needing to increase the budget by 3.8m (I do not buy the re-allocation argument as I have not seen anything to suggest that we will not need to spend money on enforcement post a win)
- not being able to improve our terms or get the claimants to share the costs as they are in a procedure where they are subject to bureaucratic claimants
Given the above I think that how we present any decision to continue funding will be paramount as I want better terms and I want to maximise the chance that the bureaucratic claimants participate…" [emphasis added]
"…I want better terms and I want to maximise the chance that the bureaucratic claimants participate…"
However he expressly stated that he wanted to continue funding.
Did KK JSC "freely accept" the Disputed Variations Payments?
"[A defendant] will be held to have benefited from the services rendered if he, as a reasonable man, should have known that the claimant who rendered the services expected to be paid for them, and yet did not take a reasonable opportunity open to him to reject the proffered services. Moreover, in such a case, he cannot deny that he has been unjustly enriched."
i) KK JSC was plainly aware through Mr Werner and Mr McGregor, whose knowledge in relation to the KK Proceedings and their funding is to be attributed to KK JSC that HF3 was making the Variations Payments at the time, and indeed they had positively requested HF3 to make those payments. Mr Werner and Mr McGregor at least had power on behalf of KK JSC to object to those payments and request that HF3 cease making them but they did not do so. KK JSC therefore had a reasonable opportunity to reject those payments.
ii) even if the Creditors' Committee were also required to have such knowledge, it is clear that as a matter of fact they did.
i) KK JSC did not request those payments given neither Mr Werner nor Mr McGregor had actual or ostensible authority to request them on its behalf, having regard to the terms of para.4.3.1 of the KK JSC Rehabilitation Plan.
ii) KK JSC was not provided with a reasonable opportunity to consider whether to accept or reject the Disputed Variations Payments as payments on its behalf. The evidence of Mr Baktybayev's in cross-examination was that they were awaiting detailed information from Mr Werner, Mr McGregor and/or HF3 about the Disputed Variation Payments.
i) the creditors funded the additional cost;
ii) the creditors and HF3 each funded an amount of the additional cost;
iii) HF3 funded the additional cost.
The letter stated that if no funding was obtained the London proceedings will discontinue and the claimants may also become liable for the defendants' costs. The letter then continued:
"HLF have been approached to consider providing funding for the £3.5 million additional costs…
We wish to discuss this with you, because if HF3 is to provide any further funding this will have to be on amended terms to reflect the additional risk to HF3…
HLF would like the opportunity to discuss these matters further with the creditors committee please let us know your availability to meet in person in the next two weeks. We are happy to travel to Kazakhstan to do so."
"…The EPPF is studying your proposal for financing a budget increase. However, you should understand that, being a quasi state structure, we, unfortunately, cannot make such decisions in a short time, without appropriate approvals.
Nevertheless, I hasten to inform you that on 24.03.2017. We have a meeting of the committee on problem assets, which will consider this issue and, most likely, the date of the meeting with you will be indicated…" [emphasis added]
"Q. And you appreciated, didn't you, that at this stage the trial was due to start in two weeks' time?
A. We understood that we were placed in a very uncomfortable corner in a very uncomfortable position, and we were left with no time to take a well-thought-out decision. Nevertheless, we would have been willing to look at the documents, had they been provided to us. I think that the key point was for us to even look at something, but we weren't given the opportunity to look at the documents.
Q. So is it a fair summary of your position at the time that you appreciated that the situation was urgent, but you were not able to deal with it urgently?
A. Yes, we understood that in the absence of sufficient information, it would be very hard for us to analyse the situation and to take a well-thought-out decision, especially as in the final analysis we were never given any materials, any documents. Perhaps there was never any intention for us to be provided with any documents." [Day 3 p13-14]
"Off the record ENPF say they are supportive of what we are doing and want the proceedings to carry on."
"….Management of the Proceedings frequently requires important decisions to be taken on an urgent basis, including decisions relating to expenditure and settlement. As the majority creditor, holding over 50% of KKJSC's debt, ENPF should play an important role in these decisions. However, it is apparent that ENPF is not prepared to promptly consider and take important decisions relating to the Proceedings. In these circumstances, as the CEO of KKJSC, I consider that I am entitled to continue to manage the Proceedings on behalf of KKJSC and take any decisions necessary to ensure a successful outcome for KKJSC's creditors. This includes negotiating and agreeing to the amended terms required by Harbour for their additional funding." [emphasis added]
"We send to your attention the signed changes to the agreement with Harbour Fund III (further Harbour) of March 7 and April 22, 2017. Since March 7, 2017, Kazakhstan Kagazy and Harbour Fund III have asked the management of United Savings Pension Fund to organize a meeting and discuss issues of increasing Harbour's budget and funding, but the answer was received only on May 25, 2017, while the hearings in the case began on April 25, 2017. In order not to harm the course of the court hearings, we were forced to sign this agreement on behalf of Kazakhstan Kagazy and Kazakhstan Kagazy PLC, as Harbour could decide to terminate the financing. The plaintiffs would not have been able to continue to participate in the trial without additional funding. As stated in the letter on 18 April 2017, a decision had to be taken under these circumstances and I felt it was in the interests of the creditors to accept additional funding for Harbour" [emphasis added]
"…, due to heavy work schedules it will not be possible for any representatives of HLF or HF3 to travel to Almaty to meet ENPF at this time, or for the next few months. We remain keen to meet with ENPF, and would welcome them at a meeting at our offices in London. Alternatively, we would be happy to hold a meeting via Videocon, if ENPF are amenable to this."
Discussion
i) the budget under the original Investment Agreement had been exhausted;
ii) the trial was going ahead and the Funded Parties were being represented by Allen & Overy ("A&O"), acting on the instructions of Mr Werner and Mr McGregor; and
iii) the trial was being funded by additional funds provided by HF3, or at least if they did not know that then it was the only reasonable inference in the circumstances (paragraph 262 of Claimant's closing submissions).
"…you knew that KK JSC could not afford to pay extra funding?"
A. We knew that KK JSC had problems with financings yes.
Q. And it would then take several more weeks, wouldn't it, or the creditors' committee of KK JSC to meet and take a decision?
A. Probably yes, but given the situation Harbour put us in, we had no other way. This shotgun decision that was expected from us, I mean, nobody asked us to take it, but it was expected, it was described but nobody asked us to take a specific decision and to call the creditors' committee, but perhaps this is what it looked like in Harbour's eyes but ENPF cannot take decisions so frivolously without appropriate analysis and Harbour should have understood that. Harbour was aware of the composition of the creditors' committee and it also knew what ENPF was". [emphasis added] [Day 3 p5]
"We understood that Mr Werner might be minded to make some independent decisions if and when he provided information about that to the committee of creditors, and we also understood that for some reason he was saying that ENPF should be doing something that ENPF should not be doing, ie by suggesting that the committee of creditors and ENPF were the same thing, which was not the case" [Day 3 p19]
"So when you read this letter, you realised he had signed, and so if you hadn't known before, you knew then that the trial that was going on was being funded by new funding from Harbour pursuant to agreed variations agreed by Mr Werner with Harbour in March and April, correct?"
"A. Yes, we became aware from reading that letter that actually behind our backs Harbour and Mr Werner had executed those documents or they exchanged some letters" [Day 3 p24]
Conclusion on unjust enrichment in relation to the Variations Payments
Unjust enrichment -KK Proceedings Payments
i) KK JSC freely accepted the KK Proceedings Payments. For the same reasons as set out above in relation to the Variations Payments, KK JSC was aware through Mr Werner and Mr McGregor that HF3 was making the KK Proceedings Payments. Mr Werner and Mr McGregor had a reasonable opportunity to reject those payments on behalf of KK JSC, but did not do so.
ii) Even if the Creditors' Committee also had to accept the KK Proceedings Payments, it would have been obvious to all the members of the Creditors' Committee that (1) the legal action in the KK Proceedings was continuing, (2) A&O expected to be paid for their services, (3) HF3 was paying those costs and (4) HF3 expected (at the least) to be reimbursed for those costs.
"The proposed terms of the Priorities Agreement have now been superseded by events and, in particular, the Rehabilitation Plan of Kazakhstan Kagazy JSC. The terms previously contemplated are inconsistent with the Rehabilitation Plan and are therefore no longer capable of being agreed by Kazakhstan Kagazy JSC, without the consent of its majority creditors".
"His view is that Harbour's return should be capped at the level of the original Investment Agreement"
"understand the Claimant must get the Creditors' approval to things it now agrees with Harbour which includes the terms of any further funding which HF3 may provide."
"Amendments to the Investment Agreement signed after the date of the Rehabilitation Plan were subject to certain approvals under the Bankruptcy Law. We are not aware if such approvals were obtained."
"7.3 From March 2017 onwards, UAPF became increasingly cautious about being rushed into any decisions because of the limited information Harbour, Mr Werner and Mr McGregor were willing to provide to the Creditors' Committee as a whole. Despite my repeated requests for further information outlined above, most of the information provided to the Creditors' Committee was in summarised form. Further, much documentation was simply not provided either to UAPF or the Creditors' Committee until many months after the event (if at all); for example, when UAPF received the remainder of the Disputed Variation Letters in February 2018 (after the bulk of the costs had been incurred), these were provided under strict confidentiality so that UAPF could not share them with the Creditors' Committee…
7.5 Furthermore, by late 2017 in November and December, a series of orders had been obtained which had the effect of terminating the rehabilitation procedures and placing KK JSC into bankruptcy. As such, given the potentially catastrophic effect bankruptcy might have on KK JSC's creditors (in contrast to KK JSC continuing in rehabilitation), UAPF was more focused from that point on getting KK JSC out of bankruptcy and back into rehabilitation…"
"A. The question of funding was not reviewed, was not discussed. Because it was Allen & Overy that achieved certain positive results, we naturally supported the idea that they should continue. But if prior to this not everything depended on ENPF, at this stage very little depended on ENPF. Because, as far as I understand … this was the bankruptcy stage.
Q. But leaving that to one side, you must have assumed that Allen & Overy were being paid from somewhere?
A. Yes, I think so.
Q. And you knew that until that point, they were being paid from Harbour's funding because the briefing note had told you that?
A. Yes, we understood that.
Q. So you must have assumed that going forward Harbour were going to continue to fund A&O?
A. Yes, we assumed that they were going to try and obtain what they believed that they had the right to under the investment agreement.
Q. So you assumed that they were going to fund the lawyers' fees to continue the proceedings?
"A. They did want to get a return on their investment. " [Day 3 p37]
"Q… so far as you're aware, no other creditors discussed the question of funding with Harbour, and in particular told Harbour not to fund until the bankruptcy manager's letter on 23 April?
A. As I understand it, the creditors were proceeding on the understanding that the funds originally set out in the investment agreement were more than enough for Harbour to receive a handsome return and a profit on its investment." [Day 3 p38]
"Q. And you knew that Harbour was not advancing that further money after the handing down of judgment as a gift; it was expecting reimbursement and a return, wasn't it?
A. I'm not sure I entirely understood what you said when, you referred to a gift, sir.
Q. Well, it was expecting that any further money it advanced would be reimbursed to it, at least, and that it actually wanted a return on top of that as well, didn't it?
A. I'm not in a position to tell you what Harbour were expecting to happen. The way I see it, they had to proceed on the basis of the budget with a view to reducing one's expenses and the return investment is decided upon from day one and when they see that their investment is approaching a limit beyond which they will not be able to receive any return investment, they would presumably just stop funding. If Harbour continued doing something, without sharing with us details as to how the money has been spent, then they expect that all the expenses would be covered by the original compensation plan." [Day 3 p40] [emphasis added]
"…Current status
Trial has been completed and Judgment is due imminently (it is anticipated mid-late November)…
KK have informed us that notwithstanding the budget agreed, there are outstanding fees of £1.2m (of which £380k is for Robert Howe QC and £400k is for Allen & Overy). KK had sought to address this by requesting permission from its Creditors Committee to use a portion of the operating profits of the business to pay the outstanding amount (KK JSC have currently been overpaying amounts owed to the creditors pursuant to the payment plan set out in the Rehabilitation Plan). We were advised by email last Friday and a subsequent discussion (14.11.17) that ENPF (the largest creditor, owed c£62.3million), with the casting vote with the authority to bind the remaining creditors, has refused this request.
Counsel and A&O have confirmed this week they will not do any further work until these outstanding invoices are settled. It is also likely that they will require payments on account for further work done in relation to handing down of judgment, enforcement and appeals.
KK's Rehabilitation
The dominant creditors are ENPF and EBRD although ENPF is the majority creditor who has the casting vote at any creditors meetings and is able to bind the remaining creditors. ENPF are a Kazakh pension fund and are reluctant for the Claimant to self-fund going forward because of a political risk of being associated with funding the claim. We are informed that in addition to refusing the request of KK management (referred to above), ENPF have further indicated that they:
(a) want HF3 to provide further funding but it is not clear on what terms they would agree to do so; and
(b) do not accept the terms of the previous amendments which have been executed by the Rehabilitation Manager; and
(c) want to meet with HF3 in Kazakhstan to discuss this.
We understand the Claimant must get the Creditors' approval to things it now agrees with Harbour which includes the terms of any further funding which HF3 may provide…
Considerations for a way forward
The key objectives are to ensure that (1) Harbour's rights are fully recognised by all other stakeholders and (2) enforcement of a successful judgment is not compromised.
It seems unlikely that the Claimant could fund costs going forward in light of ENPF's position which means that the only feasible solution is for HF3 to provide further funding. Including the outstanding invoices and enforcement action, we expect that further funding in the region of £3-£3.5m would be required.
We are not seeking approval for further funding at this stage but simply raise this as a key factor given the current situation. While the requirement for more funding from HF3 is extremely disappointing, it does provide valuable leverage which HF3 can use to protect its position. Specifically:
• It has prompted ENPF to agree to meet with HF3 (they had previously refused to engage at all with HF3 even when Susan travelled to Almaty) – we consider that HLF should do this.
• We consider as a condition of providing further funding, HF3 should seek agreement from the Claimant and its creditors recognising its rights (including funding provided after the original funding agreement and priority over the creditors), giving HF3 power of attorney to conduct the enforcement proceedings on its behalf and agreement that any proceeds are paid into a bank account of HF3. However, we recognise there are difficulties in achieving this…
We consider that an agreement with the Claimant and creditors would be the best solution to move forward before having to consider more extreme measures. Our views have also considered advice on HF3's position from Byrne & Partners and Baker & McKenzie…" [emphasis added]
Conclusion on unjust enrichment -KK Proceedings Payments