JSC BTA Bank v Granton Trade Ltd & Ors

The Appellants are defendants in an action brought by the Respondent bank, which is registered and operates in Kazakhstan. I shall refer to it hereafter as “the Bank”. The Appellants are all said to have participated in sham transactions pursuant to which the Bank’s former Chairman and majority shareholder, Mukhtar Ablyazov, defrauded the bank of US$1,031,263,000. The Bank is pursuing litigation over a wide front in an attempt to recover a still greater sum, US$1,428,840,000, which is said to be the total amount of which it has been defrauded by Mr Ablyazov. Various of the interlocutory skirmishes in the litigation have attracted wide publicity. This is another interlocutory skirmish. It has resulted in judgment being entered against the Appellants in favour of the Bank for US$1,031,263,000 without there having been a trial of the claim.

That outcome has come about because the Appellants failed to comply with an Order made on 24 August 2010 by Christopher Clarke J in the Commercial Court, requiring them to set out certain information and to produce documentation evidencing the same. The Order provided that unless the Appellants complied therewith by 3 September 2010, they should be debarred from defending the proceedings and the Bank should be at liberty to enter judgment or, as appropriate, apply for judgment against them.

The Appellants filed an affidavit within the time required in purported compliance with the Order. On 10 December 2010 Christopher Clarke J found that the Appellants had failed to comply with the Order. Nonetheless, he granted relief from the sanction prescribed for non-compliance, conditionally in the case of Appellants 1-5 and 8 and unconditionally in the case of Appellants 6 and 7, Incompro and Perspective. The information not provided by 3 September 2010 and which alone, as the judge then thought, placed Incompro and Perspective in breach had in fact been provided by 10 December 2010.

After the making of the December Order the Bank discovered further documents which, they contend, demonstrated that the Appellants had misled the court in their application for relief from sanctions. The Bank applied for revocation of the Order granting relief from sanctions.

Christopher Clarke J heard the Bank’s application over two days on 30 and 31 August 2011. At the hearing the Appellants also applied for a fresh exercise of discretion in their favour to relieve from sanctions in the event that the judge considered that his first order should be set aside. This application had been in no way foreshadowed to the Bank but the judge nevertheless entertained it.

On 4 October 2011 the judge handed down a long and careful judgment, [2011] EWHC 2506 (Comm). The judge considered that the court had been very seriously misled on the occasion when it granted relief against sanctions. The consequence was that that order should be set aside. He declined to exercise his discretion to grant further relief against sanctions. He entered judgment against the Appellants in the terms which I have already set out.

Rix LJ granted the Appellants permission to appeal on limited grounds. Broadly they relate to the manner in which the judge should have approached the exercise of deciding whether the court had been misled. Before us the grounds narrowed to essentially one point. It was said that the judge should not have decided whether the court had been misled on the basis of the affidavit and documentary evidence alone without directing a trial of the issue, or directing that resolution thereof should itself await trial of the action. Rix LJ refused permission to appeal in respect of the judge’s fresh exercise of discretion and that application was not pursued.

In view of the limited ambit of the ultimate challenge to the decision I can deal very briefly with the facts. A full account can be found in the judge’s judgment. Miss O’Sullivan, for the Appellants, accepted that if it was appropriate to resolve the issue on an interlocutory application, and if the appropriate standard of proof was the balance of probabilities, then the judge was entitled to conclude that the court had been seriously misled. She did not suggest that in such circumstances the judge was wrong to revoke his earlier order and to enter judgment for the Bank.

Until February 2009 the Bank, a Kazakh joint stock company, was majority owned by Mr Ablyazov. It has since in effect been part-nationalised, although a minority stake, about 25%, is held by western interests.

The Bank contends that Mr Ablyazov defrauded it in two ways. First, it says that between November 2007 and August 2008 Mr Ablyazov channelled US$1,428,840,000 from the Bank to companies ultimately owned and/or controlled by him. This was done by a series of loans, described in the pleadings as “the Unlawful Loans Scheme”, purportedly for the purpose of replenishing capital. The loans were unlawful under Kazakh law being made to connected counterparties without the necessary declaration of interest.

In April 2008 the Kazakh monetary authority, the FMSA, discovered this high volume of loans, which exposed the Bank to considerable credit risk. Following a report from it Mr Ablyazov and Mr Zharimbetov, then First Deputy Chairman of the Bank’s Management Board and Chairman of the Credit Committee of the Bank which had approved the loans, agreed with the FMSA to reduce the Bank’s exposure to such lending. The Bank contends that Mr Ablyazov proceeded to do so by defrauding the Bank again, this time by means of “the Misappropriation Scheme”. The judge described it thus:-

“7.

Between the end of October and the end of November 2008 the Bank lent to Granton, Aldridge, Branden and Zafferant (“the Borrowers”) over $1 billion pursuant to a number of loan facilities. The credit applications stated that the facilities were for the purchase of oil and gas equipment. The Borrowers purportedly entered into 16 contracts pursuant to which the Seventh to Twelfth defendants (“the Intermediaries”) undertook to find and deliver such equipment. In October and November 2008 the Credit Committee approved financing limits for the Borrowers and the Bank entered into general credit agreements with them. The Borrowers then applied for letters of credit and the Bank entered into letter of credit agreements with them. The Bank then issued letters of credit and made Payments totalling $ 1,031,263,000 to accounts of the Intermediaries held at Trasta.

8.

The contracts for the supply of equipment were shams. The Intermediaries never had any equipment to sell and it was never intended that they should deliver any. Of the $1,031,263,000 paid to the Intermediaries $972,195,871.84 was transferred by the Intermediaries to the Recipients and applied to repay the Unlawful Loans.

9.

All the companies involved in both Schemes, save for Loginex, were off shore companies, registered in either the British Virgin Islands or the Seychelles. Loginex is an English company. The Loans were only made because Mr Ablyazov controlled the Bank and was able to implement the Unlawful Loans and Misappropriation Schemes with the assistance of Mr Zharimbetov. The Loans were shams, not being intended, in the case of the Unlawful Loans Scheme, for working capital for the Borrowers but to provide liquidity to Ablyazov companies, nor, in the case of the Misappropriation Scheme, to finance the purchase of equipment, but to pay back the monies advanced under the Unlawful Loans Scheme. Mr Ablyazov’s link to the Recipients and the Borrowers was never disclosed to the Bank as it ought to have been.

10.

The net effect of the Schemes was that the Loans which had concerned the FMSA were, for the most part, repaid. But the money for repayment was provided by the Bank and the Real Borrowers kept what they had received.”

Granton, Branden, Aldridge and Zafferant, the first four Appellants are “the Borrowers”. Appellants 5-8, Forest, Incompro, Perspective and Maden, are all “Intermediaries”.

The Appellants are sued on the basis that they have misappropriated just over US$1billion from the Bank. The sham loans with which they were involved are all likewise said to have been unlawful under Kazakh law, upon which the Bank relies. In the alternative the Bank relies upon English law, and seeks damages and/or equitable compensation in respect of the wrongful actions or omissions of the Appellants.

The Appellants filed a Defence. It is said that the beneficial owner and ultimate controller of each of the Appellants is, and was at all material times, i.e. between September 2008 and December 2008, Georgy Timichev. It is said that he, acting through his representative Mukhtar Kuatbekov, entered into an agreement with the Bank acting by a managing director, Kairat Sadykov. This was “the Bank Assistance Agreement”. Pursuant thereto the Intermediaries received sums which they passed on to companies identified by the Bank to whom the Bank could not, pursuant to its regulations and policies, make direct advances. This Agreement was said to have been understood by Mr Timichev and the Appellants to be for the benefit of the Bank. It was also understood that the sums would be repaid directly or indirectly to the Bank by the ultimate payees. There were further alleged features of the Bank Assistance Agreement, in particular a “Future Loan Understanding”, which it is unnecessary to explore further.

I gratefully adopt, with appropriate adaptation, the judge’s description of the history of the proceedings:-

“16.

On 9^th June 2010 Mr Gavin Kealey QC (sitting as a Deputy Judge of the Commercial Court) granted a freezing order against, among others, the [Appellants] (the “Freezing Order”). Under paragraph 9 (i) of the Freezing Order each of the [Appellants] was ordered:

“(b)

to the best of its ability after making reasonable inquiries, [to] provide the answers in writing to the questions set out in Schedule D; and

(c)

[to] supply to the [Bank’s] solicitors copies of all documents in its control (which for these purposes shall mean documents which are or were in its physical possession and/or to which it has a right to possession and/or to which it has a right to inspect or take a copy) which evidence the matters set out in … (b) above).”

17.

As well as requiring information as to what had become of the funds alleged to have been misappropriated Schedule D required, inter alia, the following information to be provided within 5 working days of service:

“3.

For the period 1 September 2008 to the date of answering these questions:

a)

Who is the legal owner of the shares of the [Appellant]?

b)

Who is known to be or understood to be (stating which applies) the beneficial owner of the shares of the [Appellant]?

c)

Who gives instructions to the directors or agents of the [Appellant] concerning the decisions and actions they should take and generally concerning the activities of the [Appellant]?

d)

Who is known to be or understood to be (stating which applies) the person who ultimately controls the [Appellant]?

e)

Does anyone else other than the directors have power to act on behalf of the [Appellant] and, if so, who and how/why?"

19.

Between 9^th June and 3^rd August 2010 there was no compliance with the disclosure provisions of the order. On 4^th August 2010 the Bank issued an application for an “unless” order.

20.

On 9^th August 2010, a letter was sent by iLaw to Hogan Lovells, the Bank’s solicitors, purporting to provide the requisite information on behalf of Granton, Branden, Aldridge and Zafferant i.e. the Borrowers. Their shares were stated to be owned by different legal owners, but Mr Timichev (whose name appears in some documents transliterated as Heorhi Tsimichau) was said to be:

(i)

the beneficial owner;

(ii)

the person who gives instructions as in question (c); and

(iii)

the person in ultimate control

of each of these [Appellants]. It was said that no one other than the directors had power to act on behalf of the companies. Documents evidencing these answers were to follow.

21.

On 10^th August 2010 Hogan Lovells wrote to iLaw and drew attention to a number of significant deficiencies in the evidence provided in their letter of 9^th August, including the fact that no information had been provided in relation to any of the Intermediaries; no affidavit had been sworn; the answers failed to account for the fact that various individuals were known to have held powers of attorney to act on behalf of some of the Borrowers; and no documents had been produced. On 13^th August 2010 Blair J adjourned the Bank’s application for an “unless” order to enable the Respondents to address these deficiencies.

22.

This led to a fax from iLaw dated 18^th August 2010 which (among other things) confirmed that, according to their instructions, Mr Timichev was known and understood to be the beneficial owner and ultimate controller of Granton, Branden Aldridge and Zafferant and had signatory powers to act on their behalf. To the best of their clients’ knowledge at the date of the letter the Borrowers did not have valid powers of attorney “allowing them to make actions with the assets, money rights and other ownership rights of the Borrowers”.”

It was against this background that the judge made the Order of 24 August 2010 to which I have referred at paragraph 2 above. Again I gratefully borrow the judge’s description thereof:-

“23.

On 24^th August 2010, following a hearing on 20^th August 2010, I found that, despite the additional information that had been provided by iLaw, the Respondents had failed to provide the information required under the Freezing Order. Insofar as their ultimate beneficial ownership, control and direction were concerned, the information provided about Granton, Branden, Aldridge and Zafferant had not been confirmed in an affidavit and no information had been provided about the other Respondents at all.

24.

I ordered that, in the case of each Borrower, unless it served an affidavit setting out the information provided in relation to it in iLaw’s faxes of 9^th and 18^th August 2010 and exhibiting the documents referred to in paragraph 9 (1) (c) of the order of Gavin Kealey, QC, and the information specified in a Schedule to my order, by 3^rd September 2010, it should be debarred from defending these proceedings and the Bank should be at liberty to enter judgment or, as appropriate, apply for judgment against it. The Schedule required, inter alia:

“(c)

In respect of each of [the Borrowers]:

…

(ii)

Full particulars of the basis on which Georgy Timichev is authorised to act on behalf of the relevant Respondent and/or to act as the signatory of the relevant Respondent’s account or accounts at Trasta;

(iii)

Confirmation and full particulars of any and all persons authorised to act on behalf of the relevant Respondent, whether as director or under any other authority including Powers of Attorney”

25.

In the case of Forest, Loginex, Incompro, Perspective and Maden, I ordered that, unless each of them served an affidavit setting out the information specified in 9 (1) (a) and (b) of Mr Kealey’s order and exhibiting the documents referred to in paragraph 9 (1) (c) by the same date, the same consequence would follow.

26.

On 13^th September 2010 Longmore, LJ, refused permission to appeal, expedition and a stay.”

The affidavit of 3 September 2010 in purported compliance with the Order was sworn by Mr Denis Silyutin, a Moscow lawyer. He exhibited powers of attorney dated 30 June 2010 on behalf of all the Appellants, signed by Mr Timichev, and gave an address for him in Belarus. He said that in relation to each of the Appellants Mr Timichev was (i) the legal and beneficial owner, (ii) the sole director, (iii) the instructor of its agents and (iv) the person who ultimately controlled the company. Thus what had been said by letter of 9 August 2010 as to the exclusive role played by Mr Timichev in relation to these companies was both repeated and reinforced, Mr Timichev now being said to be the sole director of each of the appellant companies.

The documents discovered by the Bank after the making of this Order demonstrate, so the Bank contends:-

“. . . that, whilst Mr Timichev was presented to the Court as the owner and director of all the Respondents and, indeed all the Borrowers and Intermediaries, and the person who instructed the companies’ agents, in truth they were controlled and directed by a Mr Syrym Shalabayev, who is Mr Ablyazov’s brother in law, under the auspices of two companies: first Eastbridge Capital Limited and, secondly, Euroguard Assets Ltd. Given the link between Mr Shalabayev and Mr Ablyazov it is, the Bank submits, legitimate to infer that the person who ultimately owns the Respondents is not Mr Timichev but Mr Ablyazov.” (Judgment paragraph 38)

However, as the judge pointed out at paragraph 40 of his judgment, the Bank does not for present purposes need to establish that Mr Ablyazov is the ultimate beneficial owner of the appellant companies. It is sufficient to show that they have falsely claimed to be owned, controlled and directed by Mr Timichev when they are controlled by Mr Shalabayev, at least in part. The judge concluded that that is indeed the case. He came to that conclusion as a result of an exhaustive and rigorous examination of the documents, the detail of which he sets out extensively in his judgment and which it is unnecessary to reproduce here. He applied the ordinary civil standard of the balance of probabilities.

The principal question which we have to resolve on this appeal is whether the judge should have determined this issue on an interlocutory application or whether he should have directed a trial thereof. Miss O’Sullivan submitted that the judge was obliged to direct a trial of the issue, or to defer its resolution until the trial of the action, unless he was satisfied that the suggestion that the court had not been misled was fanciful.

The same submission was made to the judge. He rejected it in these terms:-

“122.

Whether a Court granting relief against a sanction imposed for breach of an interlocutory order has been misled and should revoke the order on that account is likely to be an issue which it will be necessary or appropriate to determine before trial. If that issue is only to be determined before trial in cases in which, on the material presented, the suggestion that the Court was not misled was fanciful, the coercive powers of the Court would be unacceptably diminished. Were it so, a person ordered to produce information as to the whereabouts of assets but who failed to do so could, when required to do so as a condition of relief from forfeiture, escape sanction so long as he provided an affidavit which could not be regarded as fanciful, even though the Court was satisfied (a) that it was highly probable that what was said was untrue; and (b) that there was no unfairness to the defendant in reaching that conclusion.

123.

If it is to revoke its order the Court must be satisfied, to the civil standard (having regard to the nature of what is alleged), that it has been misled, or that there has been a change of circumstances, the nature and extent of which is such that, having regard to all relevant considerations, the right course is to revoke relief. It must also be satisfied that it can fairly reach that conclusion. It will need to consider whether, before doing so, it needs to direct the trial of an issue or the cross-examination of witnesses or the production of documents; or whether the resolution of the issue must or should await the trial.”

I entirely agree with the judge. The judge was not concerned with an application to strike out a claim, either as being unsustainable or as a result of a failure to give proper disclosure. In the former case, at any rate where it is said that the factual basis for a claim is entirely without substance, it may only be appropriate to strike out where the claim can be said with confidence to be fanciful – see per Lord Hope in Three Rivers District Council v The Bank of England, [2003] 2 AC 1 at 260/261 paragraph 95. In the latter case, leaving aside instances of flagrant abuse of process, the touchstone for relief will usually be whether the conduct of the defaulting party has jeopardised a fair trial or prevented the court from doing justice – see Logicrose Ltd v Southend Football Club The Times 5 March 1988; Raja v Van Hoogstraten [2006] EWHC 1315 (Ch) and Arrow Nominees v Blackledge [2000] BLCL 167.

The judge was referred to and considered the latter line of authority when deciding, in August 2010, whether it was appropriate to make an order in unless form. As he rightly pointed out at paragraph 162 of his October 2011 judgment, there is no analogy between, on the one hand, an order striking out a defence and, on the other hand, revocation of an order giving relief against the sanction of debarment of a defence. In the latter case “the court is concerned with the effect of non-compliance with an order granting conditional relief from a sanction imposed for non-compliance with an earlier unless order” – judgment paragraph 162.

The jurisdiction in question has already been considered by this court in Marcan Shipping (London) Ltd v Kefalas [2007] 1 WLR 1864. That was a case where a judge in the Commercial Court made an order that, unless the Claimant gave disclosure of specified documents and provided security for the Defendants’ costs by a specified time, the action would be dismissed. The order was not complied with and the action was dismissed. The court rejected an argument based on the decisions in Logicrose, Raja and Arrow Nominees to the effect that a claim should not be dismissed for failure to comply with an order in unless form unless the breach is so serious as to prevent there being a fair trial. As Moore-Bick LJ pointed out at page 1877C, it must be assumed that at the time of making the unless order the court considered all the relevant factors and reached the decision that the sanction should take effect in the event of default. If it is thought that the court should not have made an order in those terms in the first place, the right course is to challenge it on appeal. Here the appellants sought permission so to challenge it but permission was refused. Accordingly I consider that at paragraphs 122 and 123 of his judgment the judge directed himself entirely correctly, both as a matter of principle and in accordance with the authorities. In particular I note that the judge asked himself whether he could fairly reach the conclusion, on the material before him, that the court had been misled, or whether before doing so he needed to direct the trial of an issue or the cross-examination of witnesses or the production of documents or whether the resolution of the issue must or should await the trial of the action. In relation to these considerations he took into account that Mr Timichev had chosen to produce no factual evidence in response to the evidence put in by the Bank (other than a repetition of the assertion of beneficial ownership) and that it was plain that he had no intention of giving evidence until, perhaps and possibly, a time of his own choosing. There was therefore no point in ordering him to attend for cross-examination. These were conclusions to which the judge was entitled to come on the basis of the evidence before him. The judge was not obliged to direct the trial of an issue or to direct that the resolution of the issue whether the court had been misled should itself await trial of the action, in circumstances where there was before him no other evidence which would tend to undermine the clear conclusion to be derived from a careful study of the evidence which was before him, to the effect that the court had indeed been seriously misled.

Before us Miss O’Sullivan submitted that an examination of the whole of the Bank’s evidence at trial might demonstrate that the Bank is unable to prove that the court has been misled. However she was unable to suggest that there would be evidence from any witness which would falsify the picture painted by the Bank. As it happens the Bank has, since judgment was given against the Appellants, given disclosure in the ongoing action to Mr Ablyazov and the other co-defendants. That disclosure was not received by the appellant companies. Mr Philip Marshall QC, for the Bank, told us that the documents disclosed contained no reference to Mr Timichev. In my judgment it speaks volumes that the Appellants have not in the interim and for the purposes of this appeal sought sight of the Bank’s disclosure. I note also that there were various persons working at Eastbridge and Euroguard as well as Mr Syrym Shalabayev who came forward to give witness statements in the context of committal proceedings against Mr Ablyazov but have not done likewise either in the application before the judge or in the context of this appeal. Given the extent of the role of Eastbridge and Euroguard as described by the judge, this omission again speaks volumes.

Miss O’Sullivan had a wholly discrete argument to the effect that the judge had been wrong to conclude that Incompro has misled the court. There is nothing in this point. The evidence before the judge showed that the appellant companies had always been operated as a group and in a similar manner. In the absence of any evidence to the contrary the judge was entitled to conclude that Incompro was administered in the same manner as its associated companies.

The Bank applied to adduce fresh evidence directed both to the Incompro point and more generally but in my judgment they have no need of it and it is unnecessary to rule on the application.

I would dismiss the appeal.

I agree.

I also agree.