JSC BTA Bank v Granton Trade Ltd & Ors

This is an application by eight of the defendants in the action for an order that service of the claim form be set aside and for a declaration that the Court has no jurisdiction to try the claim against them or that it should not exercise any jurisdiction that it may have.

I set out the essential nature of the claim in my judgment of 24^th August 2010 in the following terms:

“1……The Bank is one of the largest in Kazakhstan. It was effectively nationalized on 2nd February 2009 in the wake of the worldwide financial crisis. Until that date the first defendant, Mr Ablyazov, was the beneficial owner of the majority of the Bank's shares and Chairman of its Board. The second defendant, Mr Zharimbetov, was a close associate of the first defendant and first Chairman of the management board. Both of them have now fled to this country. Various criminal prosecutions are pending against them and others in Kazakhstan. Several sets of civil proceedings are pending against them and those who are said to be their associates in this court.

2 The current proceedings concern what is said to be a scheme of misappropriation by which over a billion United States dollars was extracted from the Bank in late 2008. The scheme was effected through, so the Bank says, the use of the first to fourth respondents to this application who supposedly borrowed from the Bank, and the fifth to ninth respondents, who were the direct recipients of the Bank's advances - the monies being transferred to them at a bank in Latvia pursuant to letters of credit opened by the Bank on behalf of the borrowers in their favour on the basis that they were intermediaries for the purported supply of oil machinery and equipment.

3 The Bank's case is that the whole scheme was a sham carried out by and for the benefit of the first defendant, who used the second defendant as his assistant, and the respondent companies as his vehicles. A summary of the Bank's case is set out at para 20 of the Bank's skeleton argument and in the Points of Claim, to which I refer but which it is unnecessary to recount.

The first four applicants are the four borrowing companies (“the Borrowers”) and the fifth to eight applicants are four of the six intermediary companies (“the Intermediaries”), from whom equipment was supposedly to have been purchased by the Borrowers.

The allegedly fraudulent scheme was very large. According to the Bank payments totalling $ 1,031,263,000 were made by the Bank in November and December 2008.

In order to obtain permission to serve the applicants out of the jurisdiction it was and is necessary for the Bank to establish that they were necessary or proper parties to the Bank’s claim against Mr Ablyazov and Mr Zharimbetov and that England is the natural and appropriate forum for the determination of the claim, distinctly more suitable in the interests of the parties and for the needs of justice than any competing jurisdiction. If that be established it is for the applicants to show that there are special circumstances by reason of which justice requires that service out should nevertheless be refused.

On 9^th June 2010 Mr Gavin Kealey, QC, sitting as a Deputy Judge of the High Court granted the Bank permission to serve the claim form and the Particulars of Claim on the applicants out of the jurisdiction. He did so because it seemed to him (a) that the applicants were necessary or proper parties to the claim against Mr Ablyazov and Mr Zharimbetov against whom there was a real issue to be tried; and (b) that this jurisdiction was clearly the most suitable for the hearing of all the claims against all the parties in the interests of all of them and in the interests of justice.

This is, as Mr Simon Colton for the applicants, points out, an unusual case. The Bank is a Kazakh bank which claims to have been the victim of a fraud directed by two Kazakh nationals in Kazakhstan in breach of their Kazakh law duties as officers of the Bank. It brings claims governed by Kazakh law against those Kazakh nationals and the applicants who have no connection with this jurisdiction. The likely issues, he submits, will involve consideration of the actions of up to two dozen nationals of Kazakhstan; the application of Kazakh law which expressly incorporates the ethical norms of Kazakh society; and many documents most of which are in Russian. Most of the witnesses will be residents of Kazakhstan speaking Russian or Kazakh and not English.

In his helpful skeleton argument Mr Colton has set out in considerable detail the connections to Kazakhstan displayed by almost every paragraph of the Particulars of Claim. The Bank is incorporated in Kazakhstan and licensed by the National Bank of Kazakhstan. Its documented Lending Policy contains restrictions set out in Kazakh legislation and provides for the concept of persons “affiliated” with the Bank to be as defined in that legislation. Mr Ablyazov is a Kazakh national who was born and rose to prominence in Kazakh public life. Mr Zharimbetov is also a Kazakh national born in Kazakhstan, who has held a range of appointments there. At the material time both of them worked at the Bank’s Headquarters in Kazakhstan. Both of them speak Russian and little or no English. None of the applicants have any connection (other than by reason of these proceedings) with England. Mr Timichev who is said to be their beneficial owner, controller and sole director is resident in Belarus and speaks Russian but no English.

The documentation which is said to mask the essentially fraudulent purpose of the scheme was usually prepared in Kazakhstan, written in Russian and considered in Kazakhstan, e.g. the credit applications of the Borrowers; the business plans filed in support; the questionnaires completed by the Borrowers and their balance sheets (although these may have been compiled outside Kazakhstan). The sales contracts between the Borrowers and the Intermediaries provided for delivery of the equipment in Kazakhstan and for payment to be by a letter of credit issued by the bank in Kazakhstan. They were executed in both English and Russian. The Bank relied, in support of its application for permission, on various legal opinions all originally written in Russian, and on general credit agreements made in Kazakhstan subject to Kazakh law and subject to dispute resolution in the Kazakh arbitrazh courts. The approval of the Bank’s Credit Committee was given in Kazakhstan in accordance with Regulations in Russian which required the Committee to operate in accordance with the legislation of the Republic of Kazakhstan and other Kazakh regulations. Its minutes are in Russian. 8 members of the Committee (a majority) approved the relevant loans together with additional bank employees. (On the Bank’s case that approval was given because of the control which Mr Ablyazov and Mr Zharimetov exercised – in Kazakhstan). Reference is made in the Particulars of Claim to a number of Economic Security and Compliance Reports, all in Russian. The Borrowers completed applications for letters of credit in Russian; the agreements between the Bank and the Borrowers under which letters of credit would be issued were in Russian (as were variations to those agreements) and contained numerous references to Kazakh law and provided for all disputes to be resolved in the Kazakh courts under Kazakh law. All the letters of credit provided for payment to be available at Almaty, Kazakhstan. Claims under the letters of credit were addressed to the Bank in Kazakhstan and payments were made by SWIFT message sent from the Bank in Kazakhstan to Trasta Komercbanka in Latvia. Valuations for the equipment were produced to the Bank in Almaty, allegedly in accordance with Kazakh standards. Pledge Agreements were made containing numerous references to Kazakh law and providing for disputes to be settled in Kazakhstan.

In paras 79 ff of the Particulars of Claim the Bank pleads the breaches of Kazakh law upon which it relies as follows:

No defence has been filed but a summary of what appears to be the applicants’ defence is set out in para 9 of the first witness statement of Mr Culbert of iLaw, the applicants’ solicitors:

“(1)

I am instructed that the loans were arranged by the Bank as part of a scheme, in which the Bank asked the Applicants’ beneficial owner and controller (Mr Timichev) to participate, to permit the Bank to make loans to clients who could not otherwise receive loans under the Bank’s regulations. Mr Timichev was asked by the Bank, for its own business purposes, to forward the payments received by the Applicants as ‘loans’ to certain identified companies, “the Ultimate Borrowers”, in circumstances where it was commonly understood that the ‘loans’ would not in fact be repayable. Mr Timichev was led to understand that these funds would be paid (directly or indirectly) by these Ultimate Borrowers back into the Bank’s control. Mr Timichev was assured by the Bank that, in return for his (and his companies’) participation in this scheme, the Bank would provide Mr Timichev’s companies with the funds required for the purchase of the equipment on preferential terms and at lower interest rates at a later stage.

(2)

In the circumstances, the Applicants acted at the request and with the full knowledge of the Bank of all relevant circumstances, for the benefit of the Bank. Assuming that the onward payments by the Ultimate Borrowers were made, which is outside the control of the Applicants, the Bank suffered no loss.

(3)

In any event, the allegations of wrongdoing made against the Applicants would, under Kazakh law, not give rise to any civil claim against them. Rather, the Applicants would be subject to Kazakh criminal processes, ancillary to which there would be the possibility of a claim for reparation by any victim. Accordingly, this claim is an attempt to enforce Kazakh penal law.

(4)

Finally, even if the alleged wrongdoing were proven, they would not give rise to any claim under Kazakh civil law. The Articles of the Kazakh Civil Code cited in the Particulars of Claim would not apply to this situation.”

But for the presence of Mr Ablyazov and Mr Zharimbetov in this jurisdiction, England would not be the appropriate forum for any trial. However, as I have said, in February 2009 both of them fled from Kazakhstan, moved to England and have become presumptively domiciled here. Criminal investigations have been launched against them in Kazakhstan relating, inter alia, to the loans to the Borrowers. Mr Ablyazov contends that the claims against him are politically motivated and has sought asylum here. Both he and Mr Zharimbetov have in other proceedings alleged the absence of the rule of law in Kazakhstan and contend that they would face political persecution if they returned there.

That circumstance fundamentally alters the position. Mr Ablyazov and Mr Zharimbetov are the alleged architects of the fraud. In view of their domicile within this jurisdiction there is no possibility of their applying to stay the proceedings against them and they have no intention of doing so. On 3^rd September 2010 they issued an application for an order that the claim in these proceedings against them should be struck out or permanently stayed on the grounds that it is an abuse of process of the English court and/or that to allow it to proceed would be contrary to English public policy. What is said is that the nationalisation of the Bank was part of a scheme to expropriate Mr Ablyazov's assets and to eliminate him as a political force and that the present claim is a continuation of that scheme. Subject to the outcome of that application (currently due to be heard in January 2011) the claim against them will continue. In those circumstances it seems to me plain, as it did to Mr Kealey, QC, that the applicants are necessary and proper parties and that England is distinctly the most suitable of the competing forums.

As to the former, the applicant companies are all alleged to be controlled by Mr Ablyazov and to be the vehicles by which he fraudulently enriched himself. It makes little sense to decide whether that is so in proceedings which do not have both Mr Ablyazov and Mr Zharimbetov, on the one hand, and the Borrowers and Intermediaries on the other. The same essential issues lie at the heart of the claim against all of them, namely whether there was a massive fraud orchestrated by those two persons using the applicants as the means of carrying it into effect. Proceedings without those two or without the Borrowers and Intermediaries as parties would be incomplete.

As to the latter, England is the forum in which the whole dispute can be tried in circumstances where the court is more likely than any other to have before it the evidence of all the relevant participants. It is fanciful to suppose that Mr Ablyazov and Mr Zharimbetov would voluntarily take part in any claim against them in Kazakhstan (Footnote: ¹). If a judgment was obtained against them in Kazakhstan, I can foresee great scope for dispute as to its enforceability in the light of the allegations which they make about persecution by the Kazakh authorities. It is in the interests of justice in this case that the claim against the applicants should be brought in a court to whose jurisdiction the first two defendants are unquestionably subject and before which there can be no good grounds (assuming good health) for non appearance.

So far as the applicants are concerned, I have considerable doubts as to their real willingness to take part in any trial in Kazakhstan. None of them are domiciled or resident in Kazakhstan. They are incorporated either in the BVI or the Seychelles. Their alleged beneficial owner and current sole director, Mr Timichev, lives in Belarus. His representative in Kazakhstan has apparently destroyed all documents relating to the Borrowers’ assets through fear: see para 33 below. I do not, however, propose to take any account of those doubts because Mr Colton had proffered an undertaking on their part to submit to the jurisdiction of the Kazakh courts.

If the proceedings against Mr Ablyazov and Mr Zharimbetov go ahead as, subject to the strike out/ stay application, they will, and the proceedings against the applicants are heard in Kazakhstan (or elsewhere) there is an obvious risk of inconsistent judgments and of waste and duplication of costs. That is a powerful factor in favour of having the applicants as parties to this litigation: see 889457 Alberta Inc v Katanga Mining Ltd [2008] EWHC 2679 (Comm), para 25; Citi-March Ltd v Neptune Orient Lines Ltd [1996] 1 WLR 1367, 1375-6.

I do not ignore the size of the connection of the case with Kazakhstan, the swathes of documentation which are in Russian, and the fact that the claim is governed by Kazakh law. I do not, however regard those matters as outweighing the considerations to which I have referred or rendering the English court an inappropriate, or less appropriate, forum.

In this respect it is material to take account of the nature of the case which the Bank seeks to make. The Bank’s case, according to its skeleton argument, is broadly as follows:

It is also apparent from the affidavits recently filed by Mr Denis Silyutin, a Russian lawyer with powers of attorney on behalf of the Borrowers and certain Intermediaries, that none of the Borrowers received any equipment and that the money loaned was, almost immediately it was received, advanced on to other off-shore companies without security in circumstances in which “it was commonly understood that the “loans” would not in fact be repayable” such that the value of these further loans as receivables is nil.

So far as the conduct of Messrs Ablyazov and Zharimbetov is concerned, the Bank’s position (as set out in its skeleton argument) is as follows. The facilities were approved by Mr Zharimbetov, as Chairman of the Credit Committee. The Bank contends that such approval could not have been given in good faith and for proper commercial purposes and relies in particular on :

Whilst the contentions summarised in the previous paragraphs will no doubt be the subject of considerable evidence, the scope of the inquiry cannot be regarded as particularly complicated, technical or esoteric; and does not require prolonged consideration of documents. Further, if the Bank’s case be well founded, it seems difficult to suppose that the conduct in question gives rise to no rights under Kazakh law.

Further, from the point of view of the applicants, if their defence is as foreshadowed in Mr Culbert’s witness statement, it involves nothing particularly complicated or esoteric either. On their account the applicants were the vehicles whereby the Bank might make loans in a way which would circumvent its own regulations. On their case, too, the arrangements made with the Bank were not what the documents show. They, and, in particular the agreements for the purchase of equipment and general credit agreements, are, in truth, shams, not intended to take effect in accordance with their terms. The real transaction was a loan by the Bank to unspecified “Ultimate Borrowers”, made in a roundabout manner in order to evade the Bank’s regulations. In those circumstances the fact that most of the documents are in Russian loses much of its significance. They do not reveal the true nature of the transaction anyway.

Mr Colton submitted that it used to be the position that where (a) an anchor defendant was properly sued in this jurisdiction, and (b) some other defendants were ‘necessary or proper parties’ to the claims against him, then the factors which made those other defendants ‘necessary or proper parties’ would weigh heavily towards jurisdiction being exercised over them too, as a matter of discretion. But there was never a fetter on the Court’s discretion, nor any presumption that leave to serve out should be given in respect of any necessary or proper party: The Eras Eil Actions [1992] 1 Lloyd’s Rep 570, at 591. Before the decision in Owusu v Jackson [2005] QB 801 the court was in a position to consider whether the anchor defendant was properly sued in the jurisdiction, before or in conjunction with giving permission to serve another defendant out of the jurisdiction. Where the issues raised in a claim against multiple defendants had a clear connection with a foreign jurisdiction, and no connection with England, forum-shopping by suing one defendant who was domiciled within the jurisdiction, and then joining all the other defendants, would not succeed: the court could and would stay proceedings against the first defendant on the grounds of forum non conveniens.

The decision in Owusu has taken away the court’s ability to prevent proceedings being brought within the jurisdiction against a defendant who is domiciled here. This power to prevent forum-shopping by a claimant has thus been lost in relation to domiciled defendants. Owusu does not, however, decide that proceedings against other defendants, albeit necessary or proper parties to the claim against the domiciled defendant, may not be stayed on the grounds of forum non conveniens (Footnote: ²).

Further, after Owusu, the court should be cautious about attaching the same weight to the desirability of avoiding multiplicity of proceedings because of the danger that, if it is not, foreign defendants with no connection to England & Wales will find themselves forced into proceedings simply because another defendant is domiciled here. Mr Colton referred me to the following passage in Dicey, Morris & Collins in respect of attempts to assert jurisdiction on the basis that the defendant is a necessary or proper party:

“Because the cause of action may have no connection with England, especial care is required before permission to serve out of the jurisdiction will be allowed. In particular, the court should not grant permission under this clause as a matter of course merely because not to do so would mean that more than one set of proceedings would be required.”

In the light of Owusu, the appropriate course for the court to take in a case such as this is, he submits, to consider which is the natural and appropriate forum for the case without regard to Owusu. The court should consider whether, but for Owusu, the entire proceedings would be permitted to proceed in England, or whether the proceedings would more conveniently be heard elsewhere.

I do not accept that the second proposition can be taken as a rule. It fails to distinguish the case in which the anchor defendant is the chief protagonist from the case where he is a minor player. A decision that permission should be granted to serve the protagonist out of the jurisdiction because the minor player is domiciled within the jurisdiction would indeed allow the tail to wag the dog. But if the anchor defendant is the protagonist a decision to allow a minor player to be served outside the jurisdiction may be entirely appropriate. That would be, to continue the metaphor, to allow the dog to wag the tail. Just as it may make little sense to have the venue determined by where the claim against the most insignificant player will be heard, so it may make little sense to have the venue where the most significant will be sued passed over in favour of another jurisdiction to whose jurisdiction a lesser player is subject. I do not mean thereby to suggest that whether or not jurisdiction should be exercised against a foreign defendant is necessarily determined by whether the anchor defendant, or the defendant sought to be joined, fits into some particular descriptive category (“major/minor”; “principal/secondary”); only that a decision as to appropriate forum must necessarily take account of the relative importance in the case of different defendants and particularly those against whom proceedings in England are practically bound to continue.

Mr Colton submitted that it would be wrong, in circumstances where the claim is for around US $ 1 billion against all the defendants, to characterise the applicants as minor, secondary or subsidiary parties and Mr Ablyazov and Mr Zharimbetov as major ones. I do not agree. It is plain that Mr Ablyazov and Mr Zharimbetov are the most significant parties on the defence side. It is they who appear to have brought about the disposition of the Bank’s funds with which the claim is concerned, either to enrich themselves or their associates, as the Bank claims, or in order that the Bank might lend to other persons unknown, as appears to be the gist of the applicants’ case. They and, in particular, Mr Ablyazov, are the persons from whom the Bank has the best likelihood of substantial recovery. Mr Ablyazov is said by the Bank to be worth over $ 1 billion. The Intermediaries say that they have no assets. The Borrowers are said to have (indirectly) interests in oil and gas exploration contracts but their value is wholly uncertain, and in the case of Granton a decision of the Almaty Court dated 15^th January 2010 has set aside the transactions by which it acquired those interests.

Mr Colton further submitted that the Court cannot assume that the applicants are beneficially owned, or controlled, by Mr Ablyazov. The applicants do not accept that that is so and there is no documentary evidence to that effect. I do not make any such assumption. What, however, I do take into account is that (i) that is the case which the Bank is making; (ii) the Bank has well arguable grounds for doing so; and (iii), in consequence the principal, albeit not the exclusive focus of the case will be on what exactly those two were doing. The most important evidence on the defence side may be expected to come from them. Mr Colton submits that such an approach ignores the fact that many people were involved in the decision to make the transfers in question; Mr Zharimbetov was not the sole person who approved the arrangements. On this see para 31-33 below.

Mr Colton set out in an Appendix to his skeleton argument a list of 23 potential witnesses who are based in Kazakhstan, whose names appear on apparently relevant documents, and who appear to have played some part in the impugned transactions (e.g. as members of the Credit Committee or signatories to its decision). He relied on this as a pointer to the unsuitability of a trial in this country.

As to that a number of points arise. Firstly, subject to the outcome of the strike out/ stay application, the proceedings are going to continue against Mr Ablyasov and Mr Zharimbetov, and the Bank will have to adduce the evidence of the witnesses on whom it relies in these proceedings. Secondly, I am sceptical as to whether the evidence of many of the individuals on the list will be important or, in some cases, even relevant. The documentation is, according to both parties, in substantial measure a sham e.g. the agreements for the purchase of equipment and the general credit agreements. In those circumstances the critical question may well be - which sham was it? - and the important witnesses will be those who set it up, in particular Mr Ablyazov and Mr Zharimbetov; together with Ms Tleukulova, a managing director, whose evidence is said to be that the approval of the Credit Committee was in each case a formality, that the minutes were sent, already signed by Mr Zharimbetov, and with no attached documentation, to the members for signing without a meeting. There is reason, therefore, to believe that many of the persons whose names appear on the documents had no, or very little, real role in relation to the transaction. I note also that the applicants, whilst ascribing various intentions to the Bank have not indicated who are the natural persons who had the relevant intentions.

Lastly it is material to note that many (but by no means all) of the documents are already in this country (although not necessarily translated); that, according to the applicants, the documentation relating to the Borrowers’ assets held by Mr Timichev’s representative in Kazakhstan was destroyed because of a “perception in Kazakhstan that those with connections to the former management of the Bank are liable to prosecution by their former affiliates” which might endanger their “life and freedom”.

If the proceedings against the applicants continue in this country it will be necessary for there to be evidence of Kazakh law. Such evidence is obtainable. It will be necessary to have it anyway for the purpose of the claims against Mr Ablyazov and Mr Zharimbetov. Both the solicitors for the Bank and those representing those two (and, to some extent the court) are becoming increasingly familiar with the Kazakh legal issues.

In those circumstances, subject to the question of the effect of the stay application, I have no doubt that England is distinctly the more appropriate forum for the trial of the action against the applicants. Mr Colton submits that, even if I am of that view, I should postpone giving effect to it, either by adjourning the hearing or making any order conditional or suspended, pending the determination of the strike out/stay application. If that application is successful it will have established, he submits, that those defendants should not have been joined and the whole basis for the case against the applicants will have been demolished. The defendants to the claim against whom they are necessary or proper parties will cease, effectively, to be defendants at all, not as a result of some event supervening after the commencement of the proceedings but because the proceedings against them ought never to have been brought.

Mr Philip Marshall QC for the Bank submits that this approach is misplaced. In cases where there is a dispute as to whether the court has or should exercise jurisdiction over someone served or to be served outside the jurisdiction the court has to resolve any jurisdictional challenge at an early stage and on limited material. If jurisdiction is established, it may well be that, later, the case against an anchor defendant fails. The contract with him containing (say) an exclusive jurisdiction clause may turn out not to exist or to be voidable. He may have a limitation defence or one that goes to the substantive merits; or the claim may fail for other reasons. That will not, however, deprive the court of jurisdiction over those who have been added at an earlier stage as necessary or proper parties.

In the present case it is necessary, he submits, for the Court to decide whether, as at the date of the issue of the proceedings, the Bank had a good arguable case that the applicants were necessary or proper parties. That involves deciding whether there is a good arguable case that the stay application will fail so that the applicants will remain parties.

I accept these submissions. They are in my judgment in accordance with the decisions of the Court of Appeal and House of Lords in Canada Trust Co. v Stolzenberg [1998] 1 WLR 547; [2002]1 AC 1 where Lord Steyn observed that a balance of probabilities test would sometimes require the trial of an issue or at least cross-examination of deponents on their affidavit which would be inappropriate in relation to challenges to the jurisdiction which ought to be decided expeditiously. Similarly in The Spiliada [1987] AC 460 Lord Templeman contemplated that arguments regarding forum conveniens should be determined swiftly and with minimum expense (something devoutly to be wished but in practice not often achieved). Neither Lord Steyn nor Lord Templeman envisaged that the determination of a jurisdiction challenge would await the determination of a hearing at which the court would make findings of fact (as is potentially the case here).

Mr Colton submitted that the court’s approach should differ according to whether the ground of opposition to the continuance of proceedings against the anchor defendant was that there was no arguable case on the merits or that the commencement and continuation of the claim was an abuse of process. I am not persuaded that it is right, at any rate in this case, to make any such distinction, particularly where the claim is that the allegations of fraudulent behaviour are both politically motivated and false. The substantive defence and the claim of abuse of process are effectively opposite sides of the same coin.

I am satisfied that the Bank has a good arguable case for resisting the application to strike out or stay. There are, as it seems to me, considerable difficulties in the way of Mr Ablyazov and Mr Zharimbetov establishing that it is an abuse of process for the Bank to seek a resolution of the case in this court. It is debatable whether the allegations about persecution are justiciable. If they are, it is difficult to see how the court could strike out or stay the proceedings unless satisfied that the Bank’s claim to have been defrauded was unsustainable on the facts or why it should be an abuse of process for this Court, which these two defendants recognise as a proper court and whose powers they invoke, to rule on the validity of the Bank’s claims. Further, if the application were to succeed on the ground put forward, namely that there is no effective rule of law in Kazakhstan, even in the courts, Mr Ablyazov would, paradoxically, have established that Kazakhstan was not a place where justice could be obtained, let alone the forum where the case could most appropriately be heard in the interests of the parties and for the ends of justice; in which case England would be left as the appropriate forum, if there is to be a trial at all.

For these reasons I shall dismiss the application.