Kazakhstan Kagazy Plc & Ors v Zhunus & Ors

On 2 August 2013 HHJ Mackie QC granted a world-wide freezing injunction in the sum of £100m in favour of the Claimants against the First and Second Defendants, Mr Baglan Zhunus and Mr Maskat Arip (“the Injunction”) and in support of the Claimants’ fraud claims against them. On the same day the Claim Form was issued and permission was given to serve the Second and Third Defendants out of the jurisdiction.

On 13 August 2013, Particulars of Claim were served. These were amended on 28 August 2015.

On 2 September 2013, Mr Arip applied to set aside the Injunction on the grounds of material non-disclosure and no good arguable case on the merits in two respects, first because the claims of all the Claimants except the First Claimant were time-barred, second because one particular fraud claim called Astana 1 had no sufficient merit and third, because the First Claimant’s loss on its claim was merely reflective of that suffered by the other Claimants.

Those applications were heard over 3 days following which Judge Mackie QC delivered a lengthy reserved judgment (“the First Judgment”). He held that (a) the Claimants other than the First Claimant had a good arguable case on limitation (i.e. that they were not time-barred) (b) there was no good arguable case to support Astana 1, and (c) that there was no good arguable case for the First Claimant’s claim. He also held that there was no material non-disclosure or if there was any at all, it was not such as to lead to a discharge of the Injunction. He therefore continued the Injunction in the reduced sum of £72m (i.e. excluding the sums claimed in Astana 1).

Both sides appealed and in a judgment given by the Court of Appeal (consisting of Longmore, Jackson and Elias LJJ) on 2 April 2014, the Second Defendant’s appeal and the First Claimant’s cross-appeal (on reflective loss) were dismissed (“the CA Judgment”).

Before describing the applications now before me it is necessary to summarise the claims (now) of the Second to Seventh Claimants, to whom I shall refer collectively as “KK”. I refer to all the Claimants together as “the KK Group”. I take my summary largely from the First and CA Judgments.

The First Claimant ("KK Plc") is a company registered in the Isle of Man and the ultimate parent company of a substantial group of companies and limited liability partnerships in the business of logistics, recycling, and paper and packaging manufacture in Kazakhstan ("the KK Group"). KK Plc is the ultimate owner of the Second to Seventh Claimants, each of which is incorporated in Kazakhstan. KK Plc is quoted on the main board of the London Stock Exchange. In September 2009 Mr Tomas Werner acquired a 23.9% shareholding (with the right to another 4.7%) in KK Plc. In November 2009 he became Chairman of KK JSC, the Second Claimant and in April 2010 Chairman of the Board of KK Plc. Since April 2013 he has been the CEO of KK JSC.

Mr Zhunus was director and chairman of the board of KK Plc from its incorporation in the Isle of Man on 5 March 2007 until April 2008. He was also indirectly the beneficial owner of 50% of the shares in KK Plc until its IPO in July 2007 and then of 23.9% of the shares until September 2009 when he sold them to Mr Werner. He was director and chairman of the board of the Second Claimant ("KK JSC") between 2003 and 14 July 2009.

Mr Arip was director and CEO of KK Plc from its incorporation until April 2008. He was indirectly the beneficial owner of 50% of the shares in KK Plc until its IPO and then likewise the owner of 23.9% of the shares until September 2009 when he sold his shares to a Mr Gerassimov. He was director and CEO of KK JSC between October 2003 and July 2009. He is from Kazakhstan but is no longer one of its citizens having acquired dual Cyprus and St Kitts and Nevis nationality.

A Third Defendant Ms Dikhanbayeva was the finance director of KK JSC between 2001 and 29 April 2008; then both finance director and a board director of KK JSC from 29 April 2008 to 14 July 2009. She was chairman of the board of KK JSC from 5 September 2008 to 14 July 2009. No freezing injunction was sought against her.

KK (and Mr Werner on their behalf) say that there have been two large frauds, known in this action as the PEAK and the Astana 1 and Astana 2 frauds, by which the Defendants have stolen something over US$135 million from them.

KK describe this as follows. KK JSC together with the Third Claimant ("PEAK") and the Fourth Claimant ("PEAK Akzhal") contracted with a purportedly independent construction company, Arka-Stroy LLP, for the development of a logistics centre and industrial park at three sites in the outskirts of Almaty, the former capital of Kazakhstan. KK JSC, PEAK and PEAK Akzhal paid Arka-Stroy, more than 21 billion Kazakh Tenge ("KZT) - approximately US $167.5 million. KK say that only one site (that at Akzhal-1) saw any development. This consisted of the erection of 14 warehouse buildings (some of which are second-hand) and the construction of associated infrastructure, which was contemporaneously valued at most, by a certificate issued to the Kazakh Government by Arka-Stroy, at KZT 3.2 billion (US$25.32 million). KK say that even this sum appears to have been paid in part by at least US $6.8 million from PEAK Akzhal.

KK say that an analysis of Arka-Stroy’s accounting database (“the Arka-Story Database” – see below) carried out by Grant Thornton as part of the recent investigations which led to the initial application for the Injunction shows that 99% of Arka-Stroy's income, throughout its existence, consisted either of payments from the KK Group or payments by entities controlled by Mr Zhunus and Mr Arip. The KK Group, after borrowing considerable sums from Alliance Bank, paid a total of US$167.5 million into Arka-Stroy. US$167.1 million then flowed out from Arka-Stroy into the hands of entities controlled by the Defendants or their associates. There is a net payment in to Arka-Stroy by KK JSC, PEAK and PEAK Akzhal of at least US$100.2 million. Giving Arka-Stroy credit for the value of the development at Akzhal-1, KK say that they have been defrauded of some US$81.68 million.

KK say that the Fifth, Sixth and Seventh Claimants paid substantial sums to a construction business which then paid large sums to entities controlled by Mr Zhunus, Mr Arip or their associates. KK say that funds were circulated for no apparent commercial purpose. KK say that they did not get the development they paid for, but a useless expanse of Kazakh grassland littered with unfinished piling works and unused construction materials.

KK say that the Astana fraud had two "Limbs", Astana 1 and Astana 2. Astana 1 was preparatory in nature and consisted of the Defendants causing the Fifth Claimant to purchase the Sixth Claimant (“Astana JSC”) and its subsidiaries (collectively “Astana Group”) for some US$39.3 million more than they were worth. This was said to be a preparatory step towards Astana 2, because Astana Group owned the land outside Astana which was to be the site of the alleged development and because acquisition of Astana Group brought with it a pre-existing credit facility with the DBK Bank The losses caused to the Fifth Claimant as a consequence of this purchase are alleged to arise from the excessive sums paid for Astana Group (which is said to have been effectively insolvent at the time). Astana 2 is, on the Claimants' case, a re-run of the PEAK Fraud.

Mr Zhunus served a Defence on 27 January 2014. Put very broadly he says, among other things, that he had a non-managerial role at KK, at all times acted honestly and in good faith and did not receive any illicit monies or partake in any frauds. He pleads an extensive limitation defence. Mr Arip and Ms Dikhanbayeva served a Defence on 6 February 2015. In summary they assert that the construction contracts in relation to PEAK were genuine and that Arka-Stroy was unconnected with the Defendants, that there were proper reasons why the works were not completed and that they did not benefit personally from payments made by Arka-Stroy. They say that the acquisition the subject of Astana 1 was made in good faith. They say that the Contracts the subject of Astana 2 had been planned by the Sixth Claimant and that there was no personal benefit. Overall, they say that the Claimants had suffered no loss and deny fraud. They too, plead an extensive limitation defence.

However, for the purposes of the previous and these applications they concede that KK has a good arguable case of fraud against them in respect of the frauds Astana 2 and PEAK. I shall refer to them collectively as “the Claims”. They do not now constitute the entirety of the action because a further claim has been added which is irrelevant for present purposes.

By the present applications, all Defendants seek summary dismissal of the Claims under Part 24 on the basis that there is no real prospect of the Claimants avoiding being time-barred under Kazakh Law. In the alternative, they seek at least the discharge of the Injunction on the basis that there is no good arguable case that the Claims are not time-barred and/or because of deliberate and material non-disclosure.

It will be seen at once that the present applications, at least in form, mirror precisely the previous applications which failed at first instance and on appeal. However the Defendants say that as a result of certain documents obtained earlier this year, referred to below, and in the light of further evidence from Mr Werner dealing with them in response to these applications, the picture as to what he knew or should have known back in 2009 and early 2010 is different from what it appeared to be before and it casts a different light on earlier matters raised before Judge Mackie QC and the Court of Appeal. It is thus said that the outcome now should be in the Defendants’ favour. For this reason, in order to obtain the full context for this judgment, it is necessary also to read the First and the CA Judgments, albeit I make extensive references to them below.

SP Angel Corporate Finance LLP (“SPA”) is a firm of financial advisers who provided services to KK from about September 2009 onwards. When Mr Gerassimov wanted to dispose of his shares shortly after acquiring them, it was agreed that SPA would purchase them which it did in October 2009. SPA later exited from KK following a dispute which was resolved in 2012. It has not provided any evidence voluntarily to either side in this case but following an application made by the Defendants for disclosure an order was eventually agreed and made on 16 July 2015 in this Court. It is in wide terms. SPA had to disclose, for the period 1 October 2009 to 31 July 2010,

Pursuant to that order SPA disclosed some 200 documents, out of which the Defendants have focussed on 9 to support the present applications. But in fact two of them in particular are key from the Defendants’ point of view although some reference to another is required as well. I refer to such documents as “the New Documents”.

Article 180 of the Kazakh Civil Code sets a three year limitation period and states that “the running of the statute of limitations begins from the day when the person became or should have become aware of a violation of his rights.” The burden of proof (of no actual or constructive knowledge) rests upon the claimant under Kazakh law. As with Judge Mackie QC, both sides agree the following for present purposes: “If the Claimant unreasonably failed to make inquiries with respect to the reasons of damage when by law he was expected to take reasonable measures to make such inquiries, the court may hold that he should have been aware of what he would have been able to discover through such investigations.”

As to what particular level of knowledge is required, neither side relied upon any specific materials but it was common ground, and if not, it seems plain to me, that such knowledge does not have to be of every last detail of the fraud as opposed to its essential nature and scope, as well as the identity of the perpetrators. In practical terms it would be when the party possessed of the actual or constructive knowledge has enough to mount a case.

Since these proceedings were issued on 2 August 2013, it is common ground that if the Claimants had the relevant knowledge by 1 August 2010, the Claims would be time-barred.

The Defendants contend that the Claimants ought to have known of the frauds by 1 August 2010 and that there is no good arguable case or even a real prospect of successfully showing, to the contrary.

The test under Part 24 of showing a real prospect of success (which is equivalent to a serious issue to be tried in the language of ordinary injunctions) is a lesser level of putative success than good arguable case although the difference is “incapable of definition” according to Parker LJ in Derby v Weldon (no. 1) [1990] Ch 48,57. In a well-known passage Mustill J described it thus in The Niedersachsen [1983] 2 Ll 600 at 605: “..a case which is more than barely capable of serious argument, and yet not necessarily one which the Judge believes to have a better than 50 per cent change of success.” While the issue of good arguable case always requires careful attention and scrutiny (like any other issue) the resulting outcome is to some extent a matter of judicial impression.

By definition, the decision as to whether there is a good arguable case is taken at an early stage when all the facts may not be known and where it is often impossible to make anything approaching a definite finding of fact. Where the exercise involves examining heavily disputed facts, the problem may be acute. As Longmore LJ put it in the CA Judgment at paragraph 25: “No findings on the facts are required and the court is astute to avoid resolving issues of fact which will fall to be determined at a full hearing later in the litigation.”

Further, and in the particular context of the existence or otherwise of a good arguable case on “ought to have known” (or not) for the purpose of the Kazakh law of limitation, Cooke J observed at paragraph 47 of his judgment in Alliance Bank JSC v Arip and others [2015] EWHC 714 (Comm)

A similar note of caution is sounded in relation to disputed facts in connection with an application to set aside an injunction for material non-disclosure. As Toulson J (as he then was) put it in Crown Resources v Vinogradsky 15 June 2001:

For reasons which will become plain when I deal with the matters in issue here, there is little doubt in my mind that, despite the force of the submissions of Mr Howard QC for the Second and Third Defendants, I am being asked to embark upon just such a preliminary trial.

Even before Judge Mackie QC there was a “mass of evidence” and a very close analysis of documents much of which was more relevant to trial than the applications before him. Since then there have been four further witness statements for the Claimants and three more for the Defendants. In addition I have read (and considered) substantial skeleton arguments from the Claimants and Defendants together with three additional “speaking” notes produced by Mr Howard QC in his reply submissions, and the oral arguments which took 2.5 days.

It is not necessary for me to deal with each and every point which has been raised in the parties’ extensive submissions. Rather, I deal in this judgment with the essential points.

In his First Affidavit, Mr Werner explained how his discovery of the frauds had come about. I intend here to summarise only the matters which bear upon the present applications. First, he says that he only became a director of KK JSC in November 2009. Mr Zhunus was a director of KK JSC until August 2009 and Mr Arip was a director until around that time also. KK was in a parlous financial position by then with its banks seeking to enforce debt claims against it and there was a need to restructure the debts. SPA had been brought in to assist this.

According to Mr Werner’s Second Affidavit, it was SPA which had become aware of some peculiar movements of cash relating to KK’s land and property investments and it was they (working with KK’s management at the time) who recommended that PWC be instructed. But while there were questions over KK’s cashflow “fraud by the former shareholders was not suspected and PWC did not report this as a conclusion”.

A report from PWC (“the PWC Report”) was commissioned in November 2009 to look at KK’s cashflow. At various points it was referred to as a “forensic report” and both sides made submissions about the correctness and significance or otherwise of such a label. To my mind, however, none of that matters; what the report considered is plain from its contents. The draft report dated 3 December 2009 is entitled “Limited financial review of cash flows within the period January 2007-September 2009”. (The draft version was the one used at the hearing. The final report does not materially differ.) It recited that KK had received $273.5m from the IPO, $171.8m by way of finance, $39.5m from bond issues. Over the same period it spent $405.1m. PWC’s objective was to identify major cashflows and their business reasons. The conclusion of the executive summary was that there were “questionable transactions” which included the following:

$48.4m on the purchase of Astana Contract Group, because its book value was only $2.7m although it was revalued at the time of acquisition to $78.1m (this is Astana 1);

$57.4m on construction in progress from related parties which included Arka-Stroy LLP (the alleged vehicle for the Peak Fraud).

PWC recommended that subcontractors be analysed to see if related parties were still being used and also to assess their pricing. There should also be a technical exercise to see if construction works claimed to be carried out was carried out and reviewing the tendering process and a retrospective due diligence on Astana to identify fair value of assets and liabilities of the group. Of those recommendations KK did not at the time conduct the technical exercise, it did analyse subcontractors and it performed new valuations of the group companies. The PWC Report was disclosed on the without notice application for the Injunction not least because it featured in Mr Werner’s First Affidavit.

At paragraph 50, Mr Werner said that from November 2009 he was engaged with the restructuring “believing that the business had been honestly managed.” At paragraph 54 he said that at November 2009 he did not at that time suspect fraud let alone fraud on the scale which has now been discovered and still thought the Defendants to be honest people; his concern was that there were “serious underlying mismanagement issues to be addressed.” And in paragraph 125 of his Second Affidavit he said that while there were questions regarding KK’s cashflows at the time, fraud by the former shareholders was not suspected.

It was only in 2011 when KK made a small profit for the first time that Mr Werner turned to investigating past transactions. After protracted enquires a breakthrough was made in March 2013 when the Arka-Stroy Database was discovered, secretly embedded within KK’s own databases, which led to showing that it was a sham “Trojan Horse” company operated for the benefit of the Defendants. It was not simply a related party because of a connection to certain KK employees as PWC had noted.

As part of the Executive Summary of the First Affidavit, paragraph 14 stated that in relation to the Peak Frauds the compelling evidence came in March 2013 with the discovery of the Arka-Stroy Database. In paragraph 15 he says that the Defendants caused the KK companies to take out significant loans for the purpose of construction projects. In paragraph 16 he said that a similar scheme to the Peak Fraud was carried out at Astana. In paragraph 18 he said that:

It is clear from later passages in relation to the Peak Fraud that at least part of these “returned monies” came from Arka-Stroy having emanated originally from loans made by Alliance Bank JSC. See for example his paragraph 110.

As for the discovery and nature of the Astana 2 fraud, this requires a more detailed articulation in the light of the matters now alleged against Mr Werner. Some particularisation or clarification of what was said in Mr Werner’s First Affidavit will be found in the Particulars of Claim served shortly after. They of course were not before Judge Mackie QC on the without notice application but I do not believe this makes a difference here. Where necessary I cross-refer below to the Particulars of Claim below.

On 28 January 2008 and prior to their acquisition by KK, the Sixth Claimant (“Astana Contract”) and Seventh Claimant (“Paragon”) had taken out a loan for US$56.7m from the Development Bank of Kazakhstan (“DBK”) See paragraph 153 and paragraph 39c of the Particulars of Claim. In his summary of Astana 2 at paragraph 141 Mr Werner said that it involved the disbursement of funds by DBK out of the DBK Loan directly to suppliers of equipment and services against fraudulent certificates which overvalued work or supplies or both. At paragraph 150 Mr Werner said that the loan was partially drawn down by contractors and funds were misused and misappropriated.

At paragraph 151, he said that the fraudulently procured disbursements were made by DBK directly to alleged contactors. However it has “now become evident that certain of these alleged contractors were related or closely connected to the First and Second Defendants; certain payments were made for works which were fraudulently overvalued and others were for works not done at all”. The evidence for this was only obtained by KK for the first time when it received in January 2013 a copy of a confidential audit report commissioned by the Almaty Financial Police.

According to paragraph 155 and paragraph 52 (part of the Background Section), the DBK loan was the subject of the Financial Police Investigation which was to see if there had been theft from DBK through Astana Group and other KK companies. To take one of the contractors involved by way of example, GS, the report disclosed that GS received large sums of money from bank funding, it paid large sums to companies managed by associates of Mr Zhunus and Mr Arip, it returned sums to Arip for no obvious reason and once paid, it left the site in a useless condition. See paragraph 157.

It transpired that the involvement of the Almaty Financial Police had come about because KK JSC (by its General Director) had made a complaint following a meeting in February 2011 between Mr Werner and DBK’s Chairman at which the latter expressed the suspicion that DBK had been defrauded by Mr Zhunus and Mr Arip over its lending to Astana. See paragraph 96 of Mr Werner’s Second Affidavit.

To return to Astana 2 in a little more detail, it was stated by way of overview in paragraph 152 that US$24m was disbursed on the Astana Project when, at best the total value of the work done was US$3.28m. At paragraphs 156-188 Mr Werner gives the detail of the payments and disbursements. This may be summarised as follows: there were two payments to the contractor called GS. They amounted to US$15.9m according to the First Affidavit. The Particulars of Claim puts the figure at US$18.46m in paragraph 40. The difference (here and in respect of the other claims) seems to be because of a difference in the exchange rates used. Some $10m of this was returned by GS to Astana JSC. So there was a net payment of US$5.9. But given the very limited value of the work done (against total contract sums of some US$47m) there was a net loss of at least US$2.6m. The Particulars of Claim state in paragraph 40 that both payments came out of the DBK Loan. The First Affidavit does not state this explicitly in respect of the first payment but I assume it should have done.

There were also payments (not from the DBK Loan) to another company called Regul though most if not all of this was returned to KK.

A further US$5.3m from the DBK Loan was disbursed to another company called TESS of which US$4.8m was an overpayment because of the lack of work done. The Particulars of Claim put the figure paid from the DBK Loan as $4.45m. The total DBK disbursements come to just under US$23m.

Finally there were payments to GS Construction and NSA but it is not suggested that any of these came from the DBK Loan. There were, in time, substantial payments back to KK.

The Particulars of Claim summarise the net losses on Astana 2 in paragraph 46 (b) as US$6.72 to GS, US$3.9m to TESS and US$3.58 to GS Construction/NSA. These total US$14.2 after credit is given for any returned sums. Paragraph 46 (d) says that as a party to the DBK Loan, Paragon was exposed to a liability because of “the fraudulent misuse of the DBK loan”. The loss is given as US$14.2m. Although in the amendment, paragraph 46e pleads that Astana Contract’s losses (of US$14.2m) represent 25% of the total of the DBK Loan which would be right if one takes US$14.2 as a proportion of the total loan of US$56m.

In the loss section of the First Affidavit, at paragraph 211 Mr Werner says that Astana Contract and Paragon, as the parties to the DBK Loan “have been exposed to a liability of some $24m because of the fraudulent misuse of the DBK Loan.” I return to this paragraph when considering some of the Defendants’ submissions, below.

The other feature to be mentioned at this stage is that in 2012, proceedings were issued in New York against Alliance Bank JSC (another funder of KK) and Mr Zhunus and Mr Arip by Phoenicia Capital LLC, a corporate vehicle owned and/or controlled by a Mr John Khabbaz, and by that stage a minority shareholder in KK Plc, alleging in very general terms, fraud against those Defendants. It was said to be a derivative action on behalf of KK Plc. Following the issue of a motion by the Defendants to strike out the claim on the grounds that there was no serious case against them, the proceedings were withdrawn on 9 November 2013. In July and August 2012 there had been discussions between Mr Werner and Mr Khabbaz about this complaint, and which, in an earlier version, Mr Werner was to be named as a Defendant, too. I shall refer to these proceedings as “the New York Action”. The existence of it was disclosed at the without notice hearing for the Injunction and it was another of the matters before Judge Mackie QC and the Court of Appeal.

Judge Mackie QC described the issue thus:

There were, in total, 5 particular matters which the Defendants said had not been properly disclosed to the Court and which, when analysed showed that KK knew or ought to have known about the frauds now complained of, by August 2010. They were the PWC Report, the New York Action, what was called the Norton Rose Advice, the Arka-Stroy Database and the Financial Police investigation.

It is necessary to say a little more about the Norton Rose Advice matter. This arose because of an invoice narrative to KK from the records of Norton Rose, who had been instructed in relation to the KK restructuring. It is plain from various documents that the party liaising with, and instructing Norton Rose on behalf of KK was SPA. Dated 4 January 2010, the narrative read: “Liaising with Cyprus lawyers and KK, analysis of duties and liabilities of directors and shareholders in connection with an alleged misappropriation of funds.” Judge Mackie QC required further information about this which led to a Note from KK’s then Counsel dated 8 November, a witness statement of Mr Crestohl of their then solicitors dated 13 November 2013 and a Note in response from the Defendants’ then Counsel dated 14 November. Judge Mackie QC said in paragraph 53 that the picture remained unclear and that:

Having rehearsed what each side said about these matters and in some cases giving some observations of his own in paragraphs 42-58 he then gave his conclusions on each of them in paragraphs 59 – 62 to the effect that the Defendants’ submissions about the effect of them did not hold water. He then ended with the following general paragraphs which it is necessary to cite in full in the light of submissions now made to me:

The “qualifications” made in Mr Werner’s later Affidavits, though not articulated by Judge Mackie QC, must have included the fact that before 2013, he had some awareness of the Defendants being made the target of a claim in fraud since that is what the New York Action in 2012 was about and the complaint to the Financial Police was actually made by KK JSC. And thus Judge Mackie QC’s reference to the “essential substance” of Mr Werner’s evidence.

Judge Mackie QC also had to deal with the non-disclosure argument in respect of limitation which is the only aspect relevant to the present applications. He dealt with that in paragraphs 87 – 95. As to the PWC report and in respect of the points made that it identified losses due to over-payment on construction contracts, contracts with related parties and over-payment for the Astana Group and its recommendation for further investigation, Judge Mackie QC observed that it did not name or point the finger at the Defendants. There was a fierce controversy over its significance which could not be resolved until trial, and he referred back to the dicta of Toulson J in Crown Resources (see above). He mentioned that the Defendants had put their case high alleging that Mr Werner had given false evidence. There was some non-disclosure in relation to the Financial Police matter. He could not resolve issues about how the Arka-Stroy Database came to light. On the New York Action the Defendants, as Defendants in that action, knew about it anyway and the allegations from each side on the paperwork here could not be resolved until trial. He therefore held that there was no non-disclosure which he could determine save in respect of the Financial Police which was relatively minor and did not warrant setting the Injunction aside.

The Court of Appeal, Longmore LJ, in rejecting the appeal, stressed the need to avoid a mini-trial on applications such as this. See paragraphs 22 and 23 (where he also said that the appeal was no more than a re-run of the arguments made to Judge Mackie QC on an application which was far heavier than it should have been) and 45 and 46. There was no disagreement with these observations voiced by either Elias LJ or Jackson LJ who himself observed at paragraph 55

Having summarised the rival contentions, Longmore LJ in paragraphs 19-24 set out in detail why Judge Mackie QC’s conclusion as to limitation could not be challenged, stating in paragraph 22 that he had made an evaluation of a mass of material which should not be interfered with unless obviously wrong. On non-disclosure he cited with approval the dicta of Toulson J in Crown Resources referred to above and dealt extensively, and in detail (in paragraphs 35-49) with the 6 non-disclosure points raised which relate to the claims relevant here, as set out in paragraph 37. At paragraph 49 he referred to the “wide discretion” of the Judge on matters of non-disclosure. Some submissions were made before me about his statement in paragraph 39 that the Claimants did not have to disclose suspicions as opposed to awareness (see also his paragraph 24). Jackson LJ agreed with Longmore LJ. So did Elias LJ although he expressed some reservations about the “suspicions” point for the reasons given in paragraph 69. However, for the reasons appearing below, this is not a matter I need to address. Jackson LJ, in agreeing with Longmore LJ, added that there was a “very real possibility” that the Defendants’ limitation defence will prevail at trial.

I deal first with the factual issues which arise out of the New Documents and Mr Werner’s evidence in relation thereto. My conclusions thereon will affect all the applications now made for reasons which will become apparent. I then analyse those applications in the light of what I have said about the facts.

Although in the applications before me and in written submissions, the Defendants highlighted 9 particular documents out of the 200 disclosed by SPA, in oral argument and in particular in the speaking notes and in his reply submissions, Mr Howard focused on just two emails which he said were both key and made out (together with Mr Werner’s evidence when dealing with one of them) the essence of their case for dismissal of the Claims and discharging the Injunctions. I deal with each in turn.

This is an email from Mr Werner to John Mackay and others at SPA. It is dated 15 November 2009 and thus I refer to it as “the November Email”. Although only one small part is under scrutiny (which is shown underlined for identification) it is necessary to set it all out for context:

Continue with a disciplined focus on cash. We have to make sure that the company generates enough cash in the next month a half to finance its operations and advisors. I think that Bruce is doing a fantastic job here, and I encourage him to continue to keep a strict discipline. One thing that worries me is level of theft at operational level - the only short term solution I see is to involve operational management into the cash management process. Bruce what do you think?

Continue developing the Business Plan. The meeting next Wednesday with PwC will be crucial to asses where we are and give PwC revised guidelines to complete the Plan in time and they way we need it.

Work on the future of the company. It is obvious that banks and bondholders will not agree to a restructuring based solely on the hope that the economy improves, but on a plan that guarantees the financial and industrial future of the company - we need a partner. It is also obvious that nobody will want to commit before a restructuring is agreed but we have to bring that partner to the negotiating table (eg in form of an MoU) so that banks/bondholders buy into our future ...

Raise our profile: it is clear that part of the future of the company rests on exploiting the fact that we are "the only industrial company in Kazakhstan that is listed in London". Ivo should start working on our case asap.

Raise equity: nobody will invest equity in the company now, but the former shareholders should reinstate part of the funds they withdrew. They will obviously not do this if not forced to, so the forensic report becomes crucial to identify a "smoking gun". In the meantime it is also important that their covert financial support stops - Bruce I need your help here.

Thomas to meet with PWCs forensic team in Moscow on Tuesday

Thomas to assume Chairmanship of the JSC on Wednesday

John to call/meet with Tau/other funds Monday/Tuesday

John to discuss PR action plan with Ivo on Monday/Tuesday

John and Thomas to decide who will identify further industrial partners

Bruce to review with Thomas financial flows to shareholders on Wednesday

Team to meet PwC on Wednesday

Team to meet with Selim (Capital Partners) on Wednesday

John and Bruce to meet with Siddiqui on Wednesday/Thursday

Thomas to meet with Nurlan on Thursday/Friday

Thomas to meet with Baglan in London to buy-out his shareholding

At this time the PWC report was being done but it had not yet been produced. The draft came through on 3 December.

The Defendants point to the underlined section of the November Email and said that this showed that Mr Werner was aware, at that early stage, of misappropriation by the former shareholders ie Mr Zhunus and Mr Arip and hence the frauds contrary to his initial evidence.

Mr Werner addressed the November Email (and the other documents relied upon by the Defendants) in his first witness statement (WS) of 18 September 2015 (“TW1”). His previous evidence was all in the form of Affidavits. At paragraph 48 he explained that on acquiring his shareholding in KK in September 2009 he had intended to rely upon Mr Gerassimov as his “local partner”, the latter having acquired Mr Arip’s shares on 11 September. He had been identified as a successful businessman who would help Mr Werner but in the event his stay was brief – he left in November 2009 and Mr Werner now says he was assisting the Defendants in their frauds. In paragraph 50 Mr Werner recounts that the first few months were chaotic and he was still flying into Almaty every two weeks as he did not yet have a base there. The immediate problems were falling cash levels, the ensuing defaults by KK on its loans and threats by the lenders of enforcement and

In paragraph 70 he says that these concerns had been raised by Mr Gerassimov.

In paragraphs 68 to 73 Mr Werner addresses the November Email. In paragraph 70 he says that he did not remember this email nor had he read it when preparing his previous evidence, and no other emails around that time use the same phrases or shed light on it. However he deduces that he was referring to Mr Gerassimov’s concerns about the recirculated funds from the DBK Loan. It was clear from his wording that his inference, though with no proof or certainty, was that this had been done with the knowledge or consent of the former shareholders hence his reference to them. But he was not referring to the frauds because he did not know of them, then, had he known of the massive frauds they would have been referred to appropriately and not as one small part of this email [the last in a lengthy line of other matters] where the only fraud expressly referred to was petty theft. Moreover later documents such as the Steering Committee minutes and SPA’s letter to the Board in late October would have mentioned the frauds. Any knowledge or suspicion of the frauds now alleged would have been a priority if known or even suspected.

At paragraph 71 he says that the use of the words “forensic report” does not mean it was an investigation into fraud or anything like that. I agree not least because one can see exactly what it was and was not. See paragraph 35 above.

Mr Werner says in paragraph 72 that his reference to a smoking gun, he believes, was to the DBK Loan Issue – the PWC work was meant to bring clarity to what happened to KK’s cashflows including the DBK loans “in a way which would allow us to persuade former shareholders to rectify the misallocated loan money.” In paragraph 73 he explains that the covert financial support from Mr Zhunus and Mr Arip was something told to him by SPA. It was not large and Mr Gerassimov and others locally had initiated it to relieve KK of some financial pressure. He felt that the former shareholders had done well out of KK in the good times but left it “a basket case”. It would be appropriate to have them put something back, but transparently. The reference to Bruce in point 6 of the action points was again back to the DBK Loan.

The key issues arising out of the November Email are:

What in truth, did it mean and

What is the effect of Mr Werner’s evidence in this part of TW1 on what he had said before, and

What as a result of that does it say about what he knew or ought to have known at the time?

As to what this part of the email meant, the Defendants say that the only sensible reading is the suggestion that the former shareholders had indeed misappropriated monies and they should pay it back and the PWC Report might be relied upon to implicate them. They say that the different explanation given by Mr Werner does not hold water which, here, means that he was lying in his evidence. They are not suggesting that he was confused. This is consistent with the submission that he deliberately misled the Court both initially and indeed on the previous applications as to his true state of mind or knowledge as to the existence of any fraud.

I agree that Mr Werner’s explanation is not very clear and if the object of the remarks was the misallocation of monies back within KK (i.e. to pay off other loans) the use of the word “withdrew” is not very apt. On the other hand if Mr Werner meant as the Defendants suggested, then the notion that they should reinstate only “part” of what they dishonestly took in the fraud makes little or no sense. One also needs to bear in mind that Mr Werner’s starting point was that he did not recall this specific email and no others around the time assisted on what it was about. I do not accept that this explanation goes nowhere because he did not expressly state that he could not recall the “issue” over the recirculation of the DBK Loan as distinct from the email itself. But if this was what he meant at the time and in fact the matter went no further, then I can see how it would not loom large at that stage and so be something easily remembered. It is true that action point 6 also refers to a review of cashflow but it is not clear if this happened (PWC were of course reviewing cashflow and certainly SPA has produced no document about it).

One also has Mr Werner’s evidence in paragraph 73 that in general he thought it right that the former shareholders should put something back, and transparently; there is nothing implausible in that. Finally there is the wider context. At that time (November 2009) there are no other documents clearly implicating the former shareholders emanating from or sent to Mr Werner. And he says he never raised the frauds then because he did not know of them. There is a suggestion – and it is no more than speculation – that perhaps, while he knew, he did not want to make a big issue of it lest it scared off potential new shareholders but there is no evidence of this and I disregard it. Finally the explanation of the smoking gun reference I can see as plausible – if PWC did identify clear breaches on the DBK loans which could be laid at the former shareholders’ door then that might well be the pressure point needed to encourage them to put some monies back into KK. I also thought there was force in what he said in his paragraph 70 as recited in paragraph 68 above.

The Defendants make a general point about documents. They say that for Mr Werner to say, in support of his version of events, there were no other documents saying otherwise around this time (ignoring for the moment the SPA Email) carries no weight because the court does not know what other documents there may be that have not been disclosed. But it is important to recall that SPA was subject to a sweeping disclosure order and having disclosed 200 documents, there is no evidence that they did not comply properly with it. It is said, though not on this precise point, that, for example, there must have been documents about the PWC Report once produced but that is not necessarily so. All such points are matters for trial, not now.

Indeed a perusal of all the preceding paragraphs shows that these are the sort of considerations which a Court usually makes after a trial when dealing with competing arguments over a witness’s credibility, not after interlocutory applications such as these (however lengthy). At this stage, it is quite impossible for me to find as a fact (for in truth this is what I am being asked to do) that the November Email is itself the smoking gun which impugns Mr Werner’s credibility to such an extent that he is actually making up a story to conceal his own suspicion and belief that the former shareholders had fraudulently misappropriated sums, and which he chose to convey to SPA by a sidewind as it were. It does not therefore, itself, render his earlier statements about there being no suspicion of fraud etc, false. The points made by the Defendants are cross-examination points, and they may turn out at trial to be strong ones, but they are not conclusive here. For present purposes therefore I proceed on the basis of Mr Werner’s explanation. In so doing I have to, and have, taken account of the Defendants’ reliance and submissions on the other key document, an email from SPA dated 19 January 2010 (“the SPA Email”) which I deal with below and also an email from SPA to some PR consultants called BGR (“the December Email”) which the Defendants say needs to be considered when assessing the November Email.

This is not from, or to Mr Werner. It is relied upon because Mr Mackay said he wanted a chat with “Ivo” at BGR following an article on DBK in a website called Central Asia Monitor which was also somewhat negative about KK. He said “We would like to correct what we fear is a generally held belief that we are a front for the old (and corrupt shareholders). We would like it to be accepted that the new management is transparent western style (ie no bribes)…”

The Defendants’ suggestion is that here is another piece of evidence showing that SPA and Mr Werner suspected or thought that the former shareholders were guilty of fraud against KK. Even without Mr Werner’s explanation I do not see that. It is clearly about a perception held by the public, or a part of it and the corruption would seem fairly obviously to refer to an “old” style of doing business which involved the taking of bribes. This is indeed what Mr Werner says in paragraphs 81 and 82 of TW1 where he also exhibits a copy of the offending article. The article also refers to the immorality of companies taking out huge loans and then not paying them back. It further makes adverse comment on the sale of shares in KK to offshore companies which in fact implicated Mr Werner and SPA (as new shareholders) who used offshore corporate vehicles to hold the shares. Viewed in context and in the light of Mr Werner’s explanation, therefore, there is nothing adverse to KK’s case at all in the respects which are before me and in particular with regard to the November Email.

One then turns to this document. It is from Mr Mackay of SPA to SPA’s own insurers. It reads:

The Defendants contend that this shows that SPA believed that previous shareholders may have caused assets to be purchased at over-value (i.e. Astana 1) and may have authorised payments for contracts not fulfilled (i.e. Astana 2 and Peak). They submit that such a belief was the belief of KK either by attribution in law of such knowledge to the company or (and this was the main focus of their case at the end) SPA must have discussed, and shared, this belief with Mr Werner whose knowledge is accepted also to be that of KK. There is no evidence from SPA about this email as it is not willingly assisting either side. But in paragraph 85 of TW1, Mr Werner says that he did not know about this email or Mr Mackay’s enquiry – the latter point is a fair one since SPA’s concern was its own potential liability. And in addition, Mr Werner again points out that SPA did not mention any such belief at the Board Meeting of 30 April 2010, to approve the 2009 Accounts.

Leaving aside for the moment any arguments about attribution, I do not consider that it follows that if SPA had this belief it “must have” been shared with Mr Werner or indeed have come from him initially. First, the fact is that there is no other document from SPA dealing with such a belief (including the November Email which on any view is not expressed in the same terms). If that belief was really “out there” and it was a real talking point, one would expect to find some reference to it in documentary form. Second it is in my view entirely possible that this was something that SPA (as opposed to Mr Werner) wanted to air from an insurance point of view, to protect fully its own position given the state of KK then.

Of course one is entitled to ask where the belief came from. One possibility is that it is connected with Norton Rose because there is a brief and very general advice email dated 4 January 2010 on director’s duties which was a response to a request from Angelica Philips at Norton Rose, dated 31 December, which referred to conversation about PWC’s [it is common ground that the reference in the email to E & Y is a mistake] analysis of the KK Accounts and that “There might be a possibility of misappropriation of the Company funds”. These documents were exhibited to the WS of Mr Crestohl referred to above and so were before Judge Mackie QC prior to the First Judgment. The evidence suggests that the party liaising directly with, and instructing, Norton Rose, was SPA which was in charge of the restructuring process which was why Norton Rose was instructed in the process. That “possibility of misappropriation” is what may have been carried forward to the SPA Email, this time for the attention of the insurers. Here, it must also be remembered that Mr Werner has already given evidence that he was not aware of the Norton Rose narrative – see paragraph 30 (c) of his Fourth Affidavit.

And in turn, although there was much debate about it in the materials submitted to Judge Mackie QC after the hearing but before the First Judgment, this email at least suggests that Norton Rose had been given some inkling of the PWC report even if they did not read or were given a copy. But it is not necessary to come to any firm view at this stage. Any inferences to be drawn, or not drawn, from the PWC report and the Norton Rose documents have already been considered by Judge Mackie QC in the First Judgment. Once more, if the Defendants are right and SPA’s belief was discussed with and/or shared by Mr Werner, it means that he is now lying in saying otherwise. I am not prepared so to find at this stage and indeed I can see how SPA may not have discussed it with him. Again, all of this is a matter for trial.

As for attribution, although there are issues between the Kazakh law experts on this, the Defendants accepted for present purposes that SPA’s knowledge could be imputed to KK, or more accurately, KK JSC, only if that knowledge is possessed by an appropriate governing body of the company or someone specially authorised for that purpose. Article 7.1 of its charter says that the managerial bodies of the company were the general Meeting of Shareholders the Board of Directors and the sole executive body being the General Director. SPA does not constitute any of these. Article 7.2 permits the company to establish other bodies as well but there is no evidence of the formal establishment of any other such body and certainly not SPA itself. It is true that SPA representatives were on the Steering Committee. As explained in the minutes of the first meeting on 23 October 2009, its purpose was to “oversee the restructuring and review process”. The minutes also record the external advisory team being SPA supported by Norton Rose and accountants yet to be reported. Shareholders like Mr Werner could attend Steering Committee meetings but would not be members of it. It is hard to see how this body can be said to have been appointed by KK JSC for the purpose of acquiring knowledge or information about any fraud. Its actual purpose was entirely different. The fact that one of its members had its own concerns to be addressed as a matter of caution (i.e. SPA) is neither here nor there. On that basis I cannot see how it can be said that there is not a good arguable case that the knowledge of SPA (such as it was, as distinct from belief) was not without more to be attributed to KK JSC.

Whether taken separately or together I do not see that the key items in the New Documents mean that Mr Werner did indeed have a knowledge, belief or suspicion, back at the end of November 2009 or early 2010 that Mr Zhunus and Mr Arip had misappropriated monies from KK JSC along the lines of the fraud now pleaded. Or, to put it more accurately, I do not find that they show that KK JSC has no good arguable case of establishing the lack of such knowledge, belief or suspicion.

The effect of this conclusion is two-fold. First it weakens the Defendants’ case on misrepresentation and non-disclosure (see below). And second it weakens their submission that KK JSC no longer has a good arguable case on not being time-barred.

However, the Defendants contend further that irrespective of the New Documents Mr Werner’s evidence in TW1 about the DBK Loan itself shows that he deliberately misrepresented the position at the outset and/or now means that from a limitation point of view KK JSC ought to have known of the fraud by 1 August 2010.

I deal first with the state of the evidence. On any view, Mr Werner has now made clear that he was aware of a concern expressed by Mr Gerassimov about recirculation of some of the monies from the DBK Loan and it was something for which he felt the former shareholders were responsible at least to some extent, since he wanted them to put some money back into the company because of it. That is actually the extent of it, according to him and certainly there is no evidence of any actual pursuit in correspondence or otherwise of the former shareholders on this basis or the finding of the “smoking gun” in the PWC report. Nor are there further documents from SPA on the point. I have set out at paragraphs 33 to 52 above what Mr Werner said about discovering the frauds initially and the qualifications made to that subsequently.

The Defendants contend that on a proper reading of that evidence Mr Werner was clearly stating that every element of the conduct complained of, including the return of monies from the DBK Loan was only discovered in 2013. For example paragraph 18 is cited as being part of that narrative. I do not accept this. Paragraph 18 is actually part of the executive summary and an additional point at that.

Mr Howard QC made a discrete point which was that paragraph 211 of the First Affidavit (quoted in paragraph 51 above) showed that Mr Werner was treating the recirculation point as part of the fraud on KK so it is not as if it was something merely concerning DBK. I do not read that paragraph like that when it is read with all the earlier paragraphs and indeed when the equivalent points in the Particulars of Claim are considered. The fraudulent use is surely, or principally, the abuse of the loan by disbursing it to contractors who did little or no work as per the Peak Fraud. Of course, some of those monies came back but credit is given for this in the claim.

Moreover in the paragraphs dealing with the matter in detail the clear thrust was the import of the Arka-Stroy Database in respect of the Peak Fraud and the findings in the audit report commissioned by the Financial Police that some of the contactors were related to Mr Zhunus and Mr Arip and that the payments were for overvalued or non-existent work in respect of Astana 2. I do not believe that Mr Werner’s belief, such as it was about the DBK returned loans explained in TW1, means that what he said in substance in his First Affidavit was wrong or misleading. I do not accept that it meant that he was misleading the Court when he said that the business had been honestly managed and directed (he later said mis-managed), that he did not suspect fraud or thought that the Defendants were honest and acting in the best interests of the company – still less deliberately, which is the Defendants’ submission.

Indeed an important part of why the Defendants say that his evidence then must have been false is their submission that the New Documents show that he knew that Mr Zhunus and Mr Arip had improperly withdrawn monies i.e. had misappropriated them, that he thought they were corrupt and believed that they may have caused the purchase of assets at over-value or authorised payments for work not properly completed (see the speaking note – “What was misrepresented and not disclosed”). But I have rejected that as a finding, above. Inevitably, therefore, this weakens the Defendants’ point here.

But the Defendants also say that ignoring the New Documents, if Mr Werner knew that there was recirculation, it followed that he knew the contactors were corrupt or acting improperly, the loan (certainly as against DBK) was being misused, that all of this happened under the watch of Mr Zhunus and Mr Arip and ergo he knew that they had been acting in dishonest breach of duty. Moreover this was a serious non-disclosure because all of this happened in the course of the events which constituted the Astana 2 fraud in particular. It is of course possible to postulate something like this, especially after the event. But I do not think it realistic because it simply does not follow, without more, that this is what he thought at the time, being a time, moreover when according to him he had no knowledge whatsoever of the essential frauds involved in Peak and Astana 2 and his mind was engaged at this “chaotic” time with issues of non-payment of debt and enforcement – see paragraph 66 above and see also paragraphs 87 - 93 of TW1 which detail the level of crisis within KK and the firefighting required to deal with it.

Moreover, it does not necessarily follow that monies coming back from contractors necessarily indicates corruption on their part. It all depends on why they came back.

Once more, while there are strong cross-examination points, they do not and cannot entail my finding at this interlocutory stage that Mr Werner made the misrepresentations alleged.

Given the conclusions reached in relation to the New Documents in paragraph 85 above, a significant part of the Defendants’ submissions on limitation must fall away because the foundation of knowledge or belief in the essential frauds complained of said to be shown by the New Documents, is not there, or at least there is a good arguable case it is not there.

Of course, the Defendants also say that the evidence in TW1 means that there is now a basis for saying that KK ought to have known of the frauds by 1 August 2010. This is because his belief about the recirculation of the DBK Loans as engendered by Mr Gerassimov means that he should have acted upon it there and then and had he done so and set in train all the enquiries which later occurred, the frauds themselves and the proof he needed would have emerged much earlier. In other words this belief would have been the “tipping point”, in the light of everything else, which should, objectively, have set him going. I do not accept this. This belief, or suspicion falls far short of belief in or suspicion about the actual frauds or their essence and should not be viewed as the trigger for making the enquiries that were made much later. It must be remembered that while the recirculation has now been placed into the context of Astana 2, as described above, it does not mean that this dimension must have been known or even suspected at the time. On any view – and this is the critical point – it cannot be said that because of this belief about recirculation, KK JSC can have no good arguable case any longer, that it is not time-barred.

Accordingly, whether taken together or separately, the points made about the New Documents and the evidence in TW1 do not alter the limitation position from what it was before Judge Mackie QC and in the Court of Appeal. The good arguable case of not being time-barred remains.

It is therefore unnecessary for me to pronounce upon KK’s fallback position which is that KK has a good arguable case that the limitation period should be extended under A185 of the Kazakh Civil Code or should be disregarded by operation of s2 of the Foreign Limitation Act 1984.

Since I have found that the good arguable case remains, it follows, a fortiori that there is no conceivable basis for saying that KK does not have a real prospect of success on the same issue.

In the light of my conclusions above, I do not consider that there has been any material non-disclosure. Certainly none that can be found on the facts at this interlocutory stage. I would only add this: if (contrary to what I have found) there was material non-disclosure because Mr Werner at least should have mentioned the fact that he had been made aware of Mr Gerassimov’s concern about the recirculating money back in November 2009 and his view about Mr Zhunus and Mr Arip’s responsibility for it (as set out and explained in TW1), I would have exercised my discretion not to discharge the Injunction much as Judge Mackie QC did in relation to the issue of the making of the complaint that led to the Financial Police investigation – see paragraph 58 above – and even taking that non-disclosure into account as well. It would have been a non-deliberate non-disclosure and not one significant enough to justify discharge.

First, since at the hearing a more focused approach was taken to the New Documents actually relied upon there is no need for me to deal with those which were not, save to say that in my view, having considered the detailed answers to them given by Mr Werner in TW1, I would not have seen them singly or collectively as dislodging KK’s good arguable case.

Next I should record that a considerable amount of time at the hearing was spent going over issues and arguments that had been raised and made before Judge Mackie QC and the Court of Appeal, for example the significance of the PWC Report and the New York Action. The charge of now engaging in a “re-run” was rejected on the basis that such matters now (and previous conclusions thereon) had now to be viewed in a very different light because of the New Documents and the evidence in TW1. However, that outcome has not happened because of my conclusions on those matters, stated above.

Equally, much time was spent on a detailed exegesis of what Judge Mackie QC meant or should be taken to have meant in his paragraph 64 when dealing with the evidence of Mr Werner quoted above at paragraph 56. But the thrust is clear. There is a good arguable case in support of the essential substance of Mr Werner’s evidence which is sufficient for present purposes. That does not mean that it might not be dislodged at trial having regard to the strong points made against it by the Defendants. But that is for another day. This remains the position in my view.

In fact the language used by Judge Mackie QC in paragraph 64 was “ a much better argument” which Longmore and Elias LJJ thought was too high a test because it went beyond good arguable case. But that, if anything, helps KK, not the Defendants.

The Defendants’ various applications must be dismissed. I will hear Counsel on all post-judgment matters at the handing down of this judgment.