Kazakhstan Kagazy Plc & Ors v Zhunus & Anor

This is another appeal in litigation brought by the claimant Kazakh companies against the former chairman of the board (“Mr Zhunus”) and the former chief executive officer (“Mr Arip”) of the first and second claimants for alleged fraudulent misappropriation of the companies’ assets. On 10^th February 2016 the claimants and Mr Zhunus settled their dispute and all further proceedings have been stayed except (inter alia) for the purpose of carrying the settlement into effect. At the same time as serving his defence in the proceedings Mr Zhunus served a contribution notice on Mr Arip and the third defendant who was at the material time, the finance director of the second claimant. No permission was required for doing so. When Mr Arip and the third defendant served their defence, they did not at that time serve a contribution notice against Mr Zhunus. They later discovered that the proceedings against Mr Zhunus were to be settled and then sought permission (as required by rule 20.6(2) of the Civil Procedure Rules) to serve a contribution notice on Mr Zhunus seeking (if they were themselves held liable) to rely on allegations made by the claimants against him as establishing Mr Zhunus’ liability to the claimants. They also sought a worldwide freezing injunction against Mr Zhunus so as to ensure that he did not dissipate his assets, prior to any judgment being obtained. Leggatt J refused to give permission for the service of the contribution notice as drafted by Mr Arip and the third defendant because they did not make any assertion of fraudulent conduct against Mr Zhunus apart from relying on the (stayed) allegations made by the claimants. Since there were thus no proceedings in existence to support the application for the freezing order, he declined to make a freezing order as well, although he said that, if he had granted permission to issue and serve the contribution notice, a freezing injunction “could … properly have been granted”. The second and third defendants now appeal, while Mr Zhunus contends that, even if the appeal succeeds, no freezing injunction should be granted.

I take this from the judgment adopting the judge’s numerical abbreviations of the parties.

The three main claims pleaded in the particulars of claim are, in summary, as follows:-

Mr Zhunus served a defence on 27^th January 2014. In summary, he asserted that his role in the KK group was essentially a non-executive and not a managerial one, that he was not responsible for the relevant transactions, that he at all times acted honestly and in what he believed to be the best interests of the group, and that he did not receive any illicit payments.

D2 and D3 served their defence on 6^th February 2015. In summary, they largely admit that they were involved in the decisions to enter into the relevant transactions but assert that those were commercial decisions taken in what were perceived to be the best interests of the KK group at the time and not in furtherance of any fraudulent scheme. D2 and D3 deny that there was any fraud or that they personally benefited from the transactions.

There is a further defence of time-bar. All the claims are governed by the law of Kazakhstan, which has a three year limitation period. Each of the defendants has alleged that the claims are time-barred on the basis that the claimants knew or ought to have known of the material facts more than three years before this action was commenced.

When they began these proceedings on 2^nd August 2013, the claimants applied without notice for a freezing order against Mr Zhunus and D2. Orders were made freezing their assets worldwide up to an amount of £100 million, later reduced to £72 million.

On the return date, the freezing injunction against Mr Zhunus was replaced by equivalent undertakings given by him to the claimants and the court. D2, on the other hand, applied to discharge the injunction against him, arguing that the claimants had no good arguable case because of his limitation defence. That argument was rejected by Judge Mackie QC sitting as a judge of the Commercial Court and also, on an appeal, by this court, [2014] EWCA Civ 381.

There has since been another challenge to the freezing orders, in which this time Mr Zhunus took part. In August 2015 all three defendants applied for summary judgment based on new evidence which was said to demonstrate that the claimants had knowledge of the material facts by 1^st August 2010 (i.e. more than three years before this action was begun), with the consequence that the claimants had no real prospect of succeeding on their claims against the defendants. D2 also applied for the freezing injunction against him to be discharged and Mr Zhunus applied to be released from the equivalent undertakings on the ground that there was no good arguable case that the claims were brought before the limitation period expired.

In a judgment given on 27^th October 2015 those applications were dismissed by His Honour Judge Waksman QC, who also gave directions for trial. The trial has been listed to begin in April 2017, with a time estimate of 12 weeks.

Section 1 of the Civil Liability (Contribution) Act 1978 (“the 1978 Act”) provides as follows:-

“Entitlement to contribution

(1)

Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).

(2)

A person shall be entitled to recover contribution by virtue of subsection (1) above notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, provided that he was so liable immediately before he made or was ordered or agreed to make the payment in respect of which the contribution is sought.

(3)

A person shall be liable to make contribution by virtue of subsection (1) above notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, unless he ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right on which the claim against him in respect of the damage was based.

(4)

A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.

....

(6)

References in this section to a person’s liability in respect of any damage are references to any such liability which has been or could be established in an action brought against him in England and Wales by or on behalf of the person who suffered the damage; but it is immaterial whether any issue arising in any such action was or would be determined (in accordance with the rules of private international law) by reference to the law of a country outside England and Wales.”

Section 2(1) of the Act provides that, in any proceedings for contribution under section 1, the amount of the contribution recoverable from any person “shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”.

The judge accepted (para 29) that, if the claimants had not settled with Mr Zhunus, D2 and D3 could deny any dishonesty on their part but advance an alternative case that, if the claimants established that they had indeed been fraudulent, they were entitled to a contribution from Mr Zhunus based on his share of the responsibility for the losses caused. But he held (para 38) that once the claimants had settled with Mr Zhunus no case was being advanced which D2 and D3 could adopt as an alternative to their primary position and their claim to contribution was therefore bound to fail. It would therefore be wrong to permit the issue of the draft contribution notice. He then turned to the question whether, if he was wrong about that, it would be appropriate to grant a freezing injunction (or, more accurately, to order the continuation of the undertakings given to D2 by Mr Zhunus). He dismissed contentions by Mr Zhunus (1) that no injunction should be granted to someone who, if he needed the contribution notice, would be relying on his own fraud and (2) that, since no cause of action had yet arisen, it was wrong to grant a freezing injunction at this stage. He then concluded that, if D2 had been able to obtain permission to serve the draft contribution notice

“a freezing injunction could … properly have been granted against Mr Zhunus in order to prevent a judgment on that claim from being frustrated.”

D2 and D3 now appeal, with the permission of Jackson LJ, the refusal to permit their contribution notice to be issued. Mr Zhunus resists that appeal and, by a respondent’s notice, says that the decision was correct, in any event, because no freezing injunction should be granted in favour of alleged fraudsters in support of a contribution claim who, on the hypothesis that they are liable to the claimants, have to rely on their own fraud (and thus do not have clean hands) and because no cause of action has yet arisen.

At the outset of his submission for Mr Zhunus, Mr David Head QC said that the judge’s decision was the exercise of a discretion and/or a case management decision with which this court should not interfere. For my part, I cannot accept that; the judge treated all the questions he had to decide as questions of principle, although he obviously regarded the background facts as important. This court should pay him the compliment of doing the same and it was, indeed, the question of principle that persuaded Jackson LJ to grant permission to appeal. He said:-

“At trial D2 and D3 will say that if Cs prove the facts alleged against D2 and D3, it follows that D1 is liable to pay a contribution towards D2 and D3’s liability to Cs. I would have thought that they are entitled to argue that on the basis of their (currently draft) contribution notice.”

Paragraph 1 asserts that the claimants have advanced claims against D1, D2 and D3 in respect of alleged fraudulent and/or wrongful conduct. Paragraph 3 says that D2 and D3 deny the claims against them. Paragraph 4 says that, if D2 or D3 are found liable to any of the claimants on the basis of conduct which has been alleged to have been carried out jointly with D1, D2 and D3 will seek contribution. Paragraph 5 then says that, in seeking such contribution, D2 and D3 will rely on facts and matters alleged in the amended particulars of claim itemising “in particular but without limitation” alleged facts in the Peak fraud, the Land Plots fraud and the Astana fraud. Paragraph 6 says that D2 and D3 will also rely on facts and matters alleged in the amended reply again itemising “in particular and without limitation” certain further alleged matters in that reply. Leggatt J held that the notice was adequately particularised but declined to permit the notice to be issued because, since the settlement, neither the claimants nor D2 nor D3 “are currently making a factual case of any kind against Mr Zhunus” (para 40).

I agree with the judge that the contribution notice is adequately particularised and agree with him further that D2 and D3’s current primary factual case is not a case against Mr Zhunus but rather the case that there was no fraudulent conduct at all. But I regret I cannot agree with the judge that they are not currently entitled to formulate an alternative case that, if D2 and D3 are held liable and there was fraudulent conduct, Mr Zhunus was fraudulent as well. It is, as Mr Twigger QC pointed out, common for a defendant to assert that he is not liable to a claimant but alternatively that, if he is liable, a co-defendant or part 20 defendant is liable as well. The mere fact that that co-defendant settles with the claimant should not make any difference to that convenient course and section 1(3) of the 1978 Act expressly provides that proceedings for contribution can be initiated or continued

“notwithstanding that [a co-defendant] has ceased to be liable in respect of the damages in question since the time when the damage occurred”

(see also Logan v Uttlesford District Council 14^th June 1984, 1984 WL 988961). As it seems to me, the judge’s decision defeats the spirit, if not the letter, of that enactment.

The judge appears to have accepted that in principle section 1(3) of the Act meant D2 and D3 were not prevented from claiming contribution from Mr Zhunus but said (para 30):-

“However the effect of the settlement and stay of the proceedings is that the claimants are no longer pursuing, and are prevented from pursuing, the claims which they have pleaded against Mr Zhunus.”

He then said that it was not “necessary”, in determining D2 and D3’s liability, to decide whether Mr Zhunus would have been liable to the claimants adding that each defendant was alleged to be liable on the basis of his or her own acts or omissions. This may be true, although Mr Twigger was able to point out that both the amended particulars of claim and the reply alleged that D2 and D3 acted jointly with Mr Zhunus in pursuing much of the conduct that is alleged to have been fraudulent. But it does not follow from all this that D2 and D3 should be prevented, at this stage, from alleging that, if they are held liable, Mr Zhunus is also liable for the reasons given in the stayed claim. Mr Zhunus himself served a contribution notice without permission as he was entitled to do. It should not be a requisite of granting permission for the service of a contribution notice that determination of liability on the part of D2 and D3 should necessarily mean that Mr Zhunus is also liable. If the claimants rely at trial on documentary evidence showing joint activity of D2, D3 and Mr Zhunus, it may turn out that Mr Zhunus would, but for the settlement, have been held liable but that cannot be determined now one way or the other. It seems odd, moreover, that D2 and D3 should be refused the permission for which they have to ask the court merely because the claimants and Mr Zhunus have settled the disputes as between themselves. It seems even odder that, if D2 and D3 had issued their contribution notice at the time they served their defence, it would now have to be struck out as the judge envisaged (para 41).

The judge was heavily influenced by the fact that, while D2 and D3 were loudly protesting their innocence, they could not assert that Mr Zhunus was himself fraudulent and would not be in a position to put any positive case to Mr Zhunus, if he should give evidence at the forthcoming trial, that he had in fact been fraudulent. This, with respect, seeks to cross too many bridges in advance. The Commercial Court will first have to decide whether all issues are to be tried together (a possibility currently ruled out by the judge’s decision but which will not necessarily occur if permission to serve the contribution notice is granted) and then it will have to be seen whether Mr Zhunus will give evidence. If he does it will not be beyond the powers of the court to protect Mr Zhunus from any unfairness that might arise from the alternative case being pursued by D2 and D3.

Lastly the judge (para 40) thought it would be an improper use of the court’s process for D2 and D3 to commence a claim for contribution against Mr Zhunus, when neither they nor the claimants are currently making a factual case against Mr Zhunus; he compared it with a case in which a claimant institutes proceedings which he has no intention of pursuing such as Arbuthnot Latham Bank Ltd v Trafalgar Holdings Ltd [1998] 1WLR 1426. This is rather a bootstraps argument; it can be said of any alternative case that it is not being pursued “currently” but only “conditionally”. That does not mean that there is no intention of pursuing it and it is not, to my mind, equivalent to an abuse of process.

I would therefore allow this appeal and allow D2 and D3 to serve their draft contribution notice. The question therefore arises whether a freezing injunction could properly be granted against Mr Zhunus in aid of that contribution notice, it having already been held that the claimants have a good arguable case against him and that there is a risk that, without such injunction, he will dissipate his assets. That injunction has, as I have mentioned, been replaced by undertakings which have, pending this appeal, been extended so as to apply to any proceedings brought by D2 and D3.

The judge said that if D2 had obtained permission to bring a claim for contribution, a freezing injunction could properly have been granted against Mr Zhunus in order to prevent a judgment on that claim from being frustrated. Subject to the questions of principle raised by Mr Zhunus’s respondent’s notice (the arguments about clean hands and the absence of a cause of action), it would not be right for this court to go behind that conclusion. Mr David Head QC for Mr Zhunus submitted that the judge’s conclusion that such injunction could “properly” be granted did not mean that he had exercised his discretion. But I cannot accept that; the matter was argued before the judge and there was ample material to support his conclusion, not least that the claimants had, before settlement, satisfied the court of the arguability of their case and the risk of dissipation. I turn, therefore, to the questions of principle argued by Mr Head and will deal first with the argument of no cause of action.

The argument is that D2 and D3 have no cause of action until they have been held liable (or agreed) to pay compensation to the claimants, as per section 10 of the Limitation Act 1980 which provides (1) that no action to recover contribution by virtue of the right contained in section 1 of the 1978 Act is to be brought after the expiration of two years from the date on which that right accrued and (2) that such date is the date of judgment or arbitration award or agreement.

The judge dealt with this argument in an exemplary fashion which I find impossible to criticise. He acknowledged that there had to be existing proceedings (which presuppose the existence of a cause of action) in order to support a freezing injunction. He said that section 10 of the Limitation Act did not address the question of the time when a person is entitled to seek contribution. He said further that there are always at least 3 possible answers to the question “when does a cause of action accrue?” and concluded that, for the purpose of a freezing injunction, the requirement of a cause of action is that an applicant “should have a right to commence proceedings claiming the substantive relief in aid of which the injunction is sought”.

Mr Head submitted that this was inconsistent with a long line of authority beginning (obiter) in The Siskina [1979] AC 210 and continuing through Siporex Trade SA v Comdel Commodities Ltd [1986] 2 Lloyd’s Rep 428, 436, Veracruz Transportation Inc v VC Shipping Co In (The Vera Cruz) [1992] 1 Lloyds Rep 353, Zucker v Tyndall Holdings Plc [1992] 1 WLR 1127 and Fourie v Le Roux [2007] 1 WLR 320 at para 30, all of which required that there be an accrued cause of action before a freezing injunction could be granted.

These authorities were not, however, considering cases in which it was appropriate for proceedings to be issued, despite the absence of a cause of action in its strictest sense. The whole thrust of the authorities is that there must be a right to institute proceedings before relief in the form of a freezing injunction can be granted. As Lord Bingham said in Fourie v La Roux (para 2), freezing injunctions are not an end in themselves. “They are a supplementary remedy, granted to protect the efficacy of court proceedings, domestic or foreign” and (para 3) by no means the least important safeguard for a defendant is that

“the claimant should identify the prospective judgment whose enforcement the defendant is not to be permitted, by dissipating his assets, to frustrate.”

Lord Scott (para 31) pointed out that, once proceedings have been or are about to be commenced in either England or a foreign state that settles the question of jurisdiction (in its strict sense) to grant a freezing injunction. It must follow that there may be cases in which an injunction can be granted even if a cause of action (in its strict sense) does not yet exist, if it is nevertheless possible to issue proceedings as it is with contribution notices. Alternatively, one can say that if a co-defendant is entitled to issue and serve a contribution notice, he has a cause of action for so doing. Either way it is obvious good sense that in a proper case a freezing injunction can be issued in support of a valid contribution notice and obviously inconvenient if it cannot be so issued.

Mr Head was able to point to authorities such as Steamship Mutual Underwriting Association v Thakur Shipping Co Ltd [1986] 2 Lloyds Rep 439 in which the claimants sought a declaration that, in the event of a number of contingencies occurring at some future date, the defendant would be liable to the claimants and a freezing injunction was refused because the contingencies had not yet occurred. But there the contingencies would not even have occurred by the time the declaration was made which makes it very different from the present case. In this case if D2 and D3 are held liable and if D1 is also held liable, all relevant contingencies will have happened before judgment is given. It cannot be right that Mr Zhunus should be able to dissipate his assets meanwhile.

I have been more exercised by this argument of Mr Zhunus. The judge felt able to dismiss the argument (para 51) because any misconduct on the part of the applicant had to be connected with the relief sought rather than with the underlying substantive merits of the case. This prompts the reflection that the equitable maxim (that he who claims equitable relief must come with clean hands) may not cover the whole ground. The argument may be better expressed by saying that one fraudster (which, ex hypothesi, D2 and D3 will have been proved to be by the time contribution proceedings are being considered) should not be entitled to freezing relief against another fraudster. The court would never order an account between two highwaymen who successfully rob passengers crossing Bagshot Heath, see Upsdell v Stewart (1773) Peake 255 per Lord Kenyon.

But this argument would mean that neither Mr Zhunus nor his co-defendants could ever obtain relief against each other and it is too early to be certain that that will be the result. The judge pointed out (para 31) that no conspiracy is alleged and even if he was not quite right to proceed on the footing that there was no allegation of joint misconduct, it may turn out the misconduct of one party was more substantial than that of another. In such circumstances it is impossible to say that contribution would never be ordered. The possibility was indeed contemplated in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 in which there were four wrongdoers who had either defrauded the claimants or knowingly assisted in the fraud. Both Rix J and the House of Lords assessed the gravity of their fault and the potency of their casual contribution for the claimants’ loss. Perhaps not surprisingly they decided that there should be a substantial measure of equality in distributing the burden of liability but the actual orders made took account of the extent to which each defendant had respectively benefited, so different orders were made as against different defendants. In refuting the suggestion that it was a greater evil that a dishonest solicitor (who had compensated the claimants) would escape from liability than that a large amount of money should be retained by one of the other dishonest defendants, Lord Nicholls of Birkenhead said:-

“The Contribution Act casts upon the court the task of adjudicating upon a just and equitable distribution of the burden of liability between all manner of wrongdoers.”

Thus there can be orders for equitable contribution between fraudsters (especially if one of them has benefited more than the other) and there cannot be any blanket denial of any recovery.

In these circumstances the court cannot know what the ultimate “just” result will be and the ring should be held meanwhile. Whether Mr Zhunus seeks to rely on the clean hands maxim or any wider principle of denying benefits to those who act fraudulently, it is appropriate to maintain the position by either imposing a freezing injunction or extending Mr Zhunus’ current undertakings, for the benefit of D2 and D3.

I would therefore allow this appeal and ask counsel to draw an appropriate order.

I agree.