Avanesov v Shymkentpivo

This is an application by the Defendant (“SP”) to set aside a judgment entered in default of acknowledgement of service dated 31 July 2013 and a further judgment on an assessment of damages dated 11 April 2014, which together total some US$14.5 million inclusive of interest.

The Claimant (“Mr Avanesov”) is a Russian citizen now domiciled in Switzerland. SP is a Kazakh company and one of the largest beverage producers in Kazakhstan. It has at all material times been wholly owned by a Kazakh businessman, Mr Tokhtar Tuleshov (“Mr Tuleshov”). Mr Tuleshov was also the sole shareholder and sole director of another company registered in Kazakhstan, TOO Darhan Holding (“Darhan”). In April 2011 SP merged with Darhan, becoming its successor in title and assuming its rights and liabilities.

In July 2007 Darhan entered into two share purchase agreements with Mr Avanesov under which it agreed to purchase the shares in two BVI companies, J.A.Y. Resources Inc. (“JAY”) and Nealet Industries Inc (“Nealet”) for a total sum of US$32 million. JAY and Nealet were the beneficial owners, through intermediate companies, of shares in OJSCB Uzpromstroybank, a leading commercial bank in Uzbekistan (“the Bank”).

Darhan paid instalments totalling approximately US$ 18.2 million but failed to pay the remaining instalments. The default judgments are for the balance of the price under the JAY share sale agreement, title in the shares having been transferred, and for damages for the non performance of the Nealet share sale agreement, title in the shares not having been transferred, totalling approximately US$11.3 million plus interest. SP’s case in a nutshell is that the purchase agreements were for transfer of a controlling majority stake in the Bank whereas, as Mr Avanesov knew but concealed, the indirect shareholdings in the Bank had been, or were imminently to be, diluted such that what was acquired was a non controlling minority stake; and that accordingly SP is not liable for the sums claimed by Mr Avanesov but is entitled to rescission of the share sale agreements and repayment of the US$ 18.2 million paid and/or damages for breach of contract and/or misrepresentation and/or mistake.

The application is made pursuant to CPR Rule 13.3 which provides:

“(1)

…the Court may set aside or vary a judgment entered [in default of acknowledgement of service] if

(a)

the defendant has a real prospect of successfully defending the claim; or

(b)

it appears to the court that there is some other good reason why –

(i)

the judgement should be set aside or varied; or

(ii)

the defendant should be allowed to defend the claim

(2)

In considering whether to set aside or vary a judgment entered [in default of acknowledgement of service], the matters to which the court must have regard include whether the person seeking to set aside the judgment made an application to do so promptly.

(Rule 3.1(3) provides that the court may attach conditions when it makes an order.)”

Accordingly there are two principal issues on the current application. The first is whether SP can show that it has a defence with a real prospect of success. The second issue is whether, if so, the court should exercise its discretion to set aside the judgments, having regard amongst other things to whether the application was made promptly.

Prior to the share sales in question, JAY held 33.43% of the voting shares in the Bank. These were held through five English companies, Everard Ventures Limited, Agas Industries Limited, Solent Advisory Services Limited, Keswick Consulting Limited and Grozerin Financial Limited. Everard Ventures was the 100% owner of an Uzbekistan company, British Glass Group LLC which held 7.39% of the voting shares in the Bank. Agas Industries owned Shurat Dangara, an Uzbekistan company which owned 7.62% of the voting shares in the Bank. Solent Advisory Services was the owner of Brentwood & Co Ltd, an English company which held 6.37% of the voting shares in the Bank. Keswick Consulting was the owner of Addison Ventures Ltd, an English company which held 6.68% of the voting shares in the Bank. Grozerin Financial was the owner of Fortis Securities Ltd, an English company which held 5.38% of the voting shares in the Bank.

Nealet held 17.68% of the voting shares in the Bank through three subsidiaries, A & D Trade Ltd (an English company), Crawley Continental Ltd (an English company) and Deltora Group LLC (an American company). A & D Trade was the owner of an Uzbekistan company called Mirobid Dangara, which held 7.29% of the voting shares in the Bank. Crawley Continental was the owner of Asset Management Trust, an Uzbekistan company which held 7.36% of the shares in the Bank. Deltora Group held voting shares in the Bank directly.

The Bank was publicly listed on the Tashkent Stock Exchange, on which its shares were traded. Under Uzbekistan law there were four stages which the Bank needed to go through in order for new shares to be issued:

In the present case, at an AGM on 11 May 2007, some 2 months before the share sale agreements were signed, the Bank’s shareholders approved the issue of a further 4.5 million voting shares, the effect of which would be to increase the issued voting share capital from 10.8 million to 15.3 million. This would dilute JAY and Nealet’s combined 51.12% voting stake to 36.08%.

At a meeting of the supervisory Board of Directors of the Bank on 29 June 2007, just under a month before the share sale agreements, the directors approved the issue of 4.5 million further voting shares, together with 500,000 non voting shares.

The bank registered the new share issue of 5 million new shares with the Regulator on 24 August 2007.

The Bank issued a prospectus dated 25 September 2007 inviting offers for the purchase of the new shares.

The 4.5 million new voting shares were taken up. As a result of subsequent further share issues over which Darhan and SP had no control, the indirect shareholdings of JAY and Nealet in the Bank have been diluted to 5.14%.

There is much dispute in the evidence about the course of negotiations for the agreements and what followed. Mr Avanesov’s evidence is that matters started in May 2007 when he was already negotiating for a sale of the shares in JAY and Nealet to Gazprombank. An enquiry came from Mr Farhad Tulyaganov, through an employee at the Bank, as to whether he was interested in selling to another purchaser. There was an initial meeting in Tashkent in May 2007 attended by, amongst others, Mr Artikov, an associate of Mr Avanesov, and Mr Tulyaganov, who according to Mr Avanesov’s evidence represented that he was a friend of and acting for Mr Tuleshov. At that meeting Mr Artikov confirmed that Mr Avanesov was willing to sell his shareholding for US$ 36 million and that it was a controlling stake. Following that meeting Mr Artikov sent Mr Tulyaganov documents relating to the shareholders to enable the proposed purchasers to do due diligence.

The evidence on behalf of SP denies any knowledge of such a meeting. According to Mr Tuleshov, the first approach came in June 2007 from a Mr Muminov, whom he understood to be a deal broker acting on behalf of Mr Avanesov. Mr Muminov indicated that the latter was willing to sell his 51% controlling interest in the Bank. Mr Tuleshov’s evidence is that Mr Muminov subsequently telephoned him and told him that the purchase price was US$30 million and made clear it was a “take it or leave it” offer. Mr Mukhatov’s evidence refers to the total price under the two agreements as concluded as being US$30 million, although it was in fact US$32 million.

It is common ground that a figure of $30 million or $32 million represented a price per share which was over three times as much as the price quoted on the Tashkent Stock Exchange at the time (about US$ 1.57 per share). The evidence on behalf of SP is that this premium reflected the common understanding that what was being negotiated for was the purchase of a controlling voting stake. Mr Tuleshov’s evidence is that he was only interested in acquiring a majority voting stake, because in Uzbekistan there is only a limited concept of minority shareholder rights or of directors being required to take into account the interests of minority shareholders, such that in practice there is no effective protection for the interests of minority shareholders. This was not disputed in the evidence advanced on behalf of Mr Avanesov.

Mr Tuleshov’s evidence is that following the call from Mr Muminov making the US$ 30 million offer, he asked his finance team to review the Bank’s balance sheet, and based on their feedback, he concluded that the offer was reasonable. He thereupon telephoned Mr Muminov back to agree the purchase price. The evidence on behalf of Mr Avanesov denies any knowledge of Mr Muminov or his authority to act on behalf of Mr Avanesov, and, as will appear, is inconsistent with this version of events.

SP’s evidence is that following agreement, Mr Tuleshov asked Mr Kravchuk, Darhan’s then in house counsel, to finalise the deal documentation, following which Mr Kravchuk and another had a meeting with Mr Karakhanyan acting on behalf of Mr Avanesov in Tashkent in the middle of July 2007 to discuss the deal, during which Mr Karakhanyan provided some documents comprising the balance sheet of the Bank and depository certificate showing the shareholdings of the various JAY and Nealet subsidiary companies, but Darhan’s representatives were not permitted to take any documents away with them. The evidence on behalf of Mr Avanesov is that no such meeting took place.

There was a meeting in Moscow in mid July 2007 attended by Mr Kravchuk representing Darhan, and by Mr Avanesov and his associate Mr Artikov, amongst others. Mr Avanesov’s evidence is that it was at that meeting that he learned that the purchaser was Darhan, controlled by Mr Tuleshov, and that he offered to reduce the price to US$ 32 million provided that the deal was closed within 30 days. Mr Avanesov’s evidence is that at that meeting he confirmed that he was selling a controlling stake in the Bank. The evidence on behalf of SP confirmed the occurrence of this meeting but raised a dispute about who attended.

It is common ground that there was then a meeting at Mr Avanesov’s offices in Moscow on 27 July 2007 to finalise and sign the deal documentation. Mr Kravchuk represented Darhan. SP’s evidence is that Mr Muminov was also there. SP’s evidence is that during the meeting before the purchase agreements were signed, Mr Avanesov made absolutely clear that he was selling a 51% majority voting stake in the bank in response to Mr Kravchuk’s request that the draft SPAs should be amended so that they expressly stated the number and percentage of voting shares that the Jay and Nealet subsidiary companies owned in the Bank; that Mr Avanesov was not willing to delay and put pressure on Mr Kravchuk to sign the purchase agreements there and then; and that Mr Kravchuk did so but only on the express understanding that additional agreements would subsequently be entered into clarifying the voting shareholdings in the Bank held by the JAY and Nealet subsidiaries. Mr Mukhatov deposes, on information from Mr Kravchuk, that Mr Kravchuk specifically asked about “potential share issues” and was met with the obvious point that there was always a possibility of share issues in the future, which he understood to mean when Darhan was the majority controlling shareholder. Mr Avanesov’s version of the conversation is that he was asked about previous share issues and said that the Bank’s requirement for capital was always growing because of the need to develop business and to maintain a controlling stake it would be necessary to buy shares in any new issue. At the 27 July 2007 meeting Mr Kravchuk signed both the JAY and Nealet agreements on behalf of Darhan pursuant to the power of attorney given to him by Mr Tuleshov.

In his first witness statement, Mr Avanesov said “… it is true I confirmed that I was selling a controlling stake in the Bank at the meetings referred to above”, which would include the 27 July meeting, as well as the mid July Moscow meeting.

The JAY agreement, numbered 30-1, (“the JAY SPA”) identified Mr Avanesov as the owner of the shares in JAY and the beneficial owner of the first tier subsidiaries, Everard, Agas, Solent, Keswick and Grozerin. It provided for purchase by Darhan of the shares in JAY for a total sum of US$ 20,926,916.22. It said nothing about the shareholdings of the second tier subsidiaries in the Bank. The price was payable as to 10% (i.e. US$ 2,092,691.62), within 5 banking days from the signing of the agreement, with the balance to be paid 30 days thereafter. Clause 2.4 envisaged that in the intervening 30 day period, (which SP contends meant 30 banking days), Darhan was to have the opportunity to check the financial and business activities of the JAY subsidiaries and their ownership rights. Under clause 6.1 title in the shares was to pass one day after receipt of the full purchase price. Clause 9 provided that the JAY SPA was governed by English law with disputes subject to arbitration in London.

The Nealet agreement, numbered 30-2, (“the Nealet SPA”) was dated 27 August 2007 but it is common ground that that was a mistake. The evidence suggests that it was signed on behalf of Darhan at the meeting on 27 July, but was not signed by Mr Avanesov until 10 August 2007. It identified the Nealet first tier subsidiaries Deltora, A & D Trade and Crawley Continental. It provided for purchase of the shares in Nealet for a total sum of US$ 11,073,083.78, with a 10% instalment falling due within 5 banking days and the balance 30 days thereafter. It was otherwise on materially equivalent terms to the JAY SPA.

Although it was SP’s evidence that Mr Kravchuk made a request at the meeting on 27 July 2007 for further detail of the holdings in the Bank by the indirectly owned subsidiaries, Mr Avanesov’s evidence was that supplemental agreements were not requested until 30 July 2007.

On 30 July there was an additional agreement to the JAY SPA which identified the indirect subsidiaries (British Glass, Shurat, Brentwood, Addison Ventures, and Fortis Securities) and their respective percentage shareholding of stock in the Bank of 6.49%, 6.69%, 5.59%, 5.86%, and 4.72%. These were percentages of the holdings in both voting and non voting shares. The percentages were accurate only in so far as there had not been and would not be any dilution as a result of the share issue which had already been the subject matter of shareholder approval at the AGM in May and the board of directors’ resolution in June.

On 6 August 2007 Darhan paid the first 10% instalment due under the JAY SPA of US$ 2,092,691.62.

On 10 August 2007 the parties entered into an additional agreement in relation to the Nealet SPA. In the same way as the JAY additional agreement, this identified the indirect subsidiaries holding shares in the bank and their relevant proportions totalling 12.8% of the Bank’s shares. Again the figures given were only accurate on the footing that there was no dilution as contemplated by the shareholder approval at the AGM in May and the board of directors’ resolution in June.

In an undated addendum signed by Mr Avanesov, details of the voting and non voting shareholdings of the indirect subsidiaries were set out for both JAY and Nealet, giving the percentages of the Bank’s total shareholdings for each indirect subsidiary. The total percentage of 51.12% of the voting shares was specifically and expressly identified as the total at the foot of the final column.

Between 21 and 23 August 2007 Darhan paid the 10% instalment under the Nealet SPA totalling US$ 1,107,308.38.

On 12 September 2007, the parties entered into additional agreement no 3 to the JAY SPA. This amended the payment terms under the JAY SPA such that US$ 15 million of the balance remained to be paid in accordance with the terms of the original agreement (i.e. within 30 days of payment of the 10% initial instalment) with the remaining US$ 3,834,224.62 to be paid by 28 September 2007.

Also on 12 September 2007, a “service agreement” was executed between Darhan and Ximex Executive Ltd, a company owned or controlled by Mr Avanesov. The service agreement provided in substance for Ximex to lend funds to enable JAY, via British Glass, to acquire a further 2.3 million shares in the Bank, for some US$ 3.6 million, which was equivalent to the current listed share price of $1.57 per share. SP’s evidence is that Mr Tuleshov was still unaware of the new issue and wanted to purchase an additional shareholding at what was perceived to be an advantageous price. Mr Avanesov’s evidence was that the service agreement came about because in September 2007 he told Mr Kravchuk of the impending public offer, and that the agreement was entered into in order to bring the shareholding controlled by Darhan back up to a majority stake. Mr Kravchuk denies that he was told about it. The number of shares is indeed such as would have brought the total holding of JAY and Nealet to 51.12% if one includes an additional 4.5m new voting shares, which might be thought to support Mr Avanesov’s evidence that this was its purpose. On the other hand, there is no explanation why Mr Avanesov chose to reveal the new issue at this stage, when all that had changed since the date of the SPAs was the registration with the Regulator. On behalf of SP it was submitted that since Darhan had agreed a price based on acquiring a majority stake of 51.12%, it is improbable that it would simply have agreed to pay $3.6m more to acquire the same stake if and when told of the share dilution, and that the true explanation for the number of shares involved was that Mr Avanesov was worried that Darhan would soon learn that it was not acquiring a majority stake and was simply extracting extra money to provide what he knew Darhan thought they were already acquiring under the SPAs.

Mr Avanesov alleges that the service agreement was preceded by two further agreements which demonstrate that SP knew of the share dilution. The first is dated 7 September 2007 and purportedly signed by Mr Kravchuk. It provides for payment of US$3,530,000 under the JAY SPA to be postponed until 1 January 2008. This is odd because the outstanding sum under the JAY SPA was in excess of US$18 million. It went on to provide that Asset Management Trust Co, a Nealet subsidiary, should purchase an additional 2,250,000 shares, equivalent to 15.0345% of the total voting shares, so that the total voting shares “would remain unchanged equal to 51.1175%.” Mr Kravchuk denies knowledge of any such agreement and says that his signature is a forgery. Mr Avanesov’s solicitor says that a certified copy of the agreement was sent to him in late 2011, which on Mr Avanesov’s case was before SP had raised any complaint about the dilution of the shares, with the result, so it was argued, that any forgery or fabrication was improbable because it would have to have been made before knowledge of any complaint about dilution. On SP’s case the dispute as to dilution of the shareholding had already been aired at a meeting in April 2011 so that the existence of such a document later that year does nothing to buttress its authenticity. The second agreement is dated 12 September 2007 and cancels the 7 September agreement. It is purportedly signed by Mr Tuleshov. Mr Tuleshov says that it is a forgery.

On 14 September 2007, Darhan paid Mr Avanesov US$ 15m under the JAY SPA.

Mr Avanesov alleges that on 15 September 2007 he was sent by Mr Kravchuk a SWIFT confirmation to demonstrate that the balance of the purchase price due under the JAY SPA of US$ 3,834,224.62 had been paid and that he authorised transfer of the JAY shares as a result; and that control of the JAY subsidiaries passed to Darhan from that point onwards. On behalf of SP it is disputed that Mr Kravchuk sent such a confirmation. The balance of the price under the JAY SPA of US$ 3,834,224.62 was not paid. SP’s evidence is that it received the share certificate in relation to all the JAY shares in March 2008 out of the blue from Mr Avanesov’s administrators, GSL. The document bears a date in March 2008.

On 28 September 2007, there was a further supplementary agreement number 4 to the JAY SPA which amended the date of the payment of the balance (i.e. US$ 3,834,224.62) to 28 October 2007. This agreement provided that title in the JAY shares would nevertheless be deemed to have passed from Mr Avanesov to Darhan on 28 September 2007.

On 28 September 2007, there was also a supplementary agreement number 2 to the Nealet SPA amending it to provide that the balance of the purchase price (i.e. US$ 9,965,775.40) should be paid on 28 October 2007.

Thereafter no further sums were paid under the JAY SPA or the Nealet SPA or the service agreement. The evidence on behalf of SP is that this was because of financial difficulties, not because of any dilution in the shareholding of which SP was at this stage still unaware. SP’s evidence is that it only became aware of the dilution in the shareholding at some time in about 2010 or early 2011. Mr Tuleshov says that once Darhan obtained the JAY share certificate in March 2008, he instructed his staff to review the status of the JAY subsidiary companies, shortly after which the staff encountered difficulties in establishing a dialogue with the directors of the JAY subsidiary companies, who ignored Darhan’s representatives and said that Mr Avanesov had not given them authority to transfer control and that they were not empowered to take decisions themselves. As a result, a number of criminal complaints were made and proceedings commenced in Uzbekistan. The evidence on behalf of SP is that Mr Kurmanbekov, Darhan’s in house counsel on matters of Uzbek law, started in October 2010 to take proactive steps to resolve the difficulties concerning gaining control over the JAY subsidiaries, and that some time after that he discovered the prospectus on the Uzbekistan Stock Exchange website which confirmed that a share dilution had taken place. The prospectus, which is dated 25 September 2007, may or may not have been on the website at around the time at which it was published.

On behalf of Mr Avanesov, it is submitted that the vagueness of SP’s evidence of when it discovered the share dilution undermines its credibility, especially as Mr Tuleshov’s evidence is that one of the reasons he wanted to buy a controlling stake in the Bank was to facilitate payments in Uzbekistan for his trading enterprises, which might have been expected to lead to the discovery shortly after the purchase of the shares at the latest. But this forensic point is diminished in weight by SP’s evidence that it failed to pay the balance of the price in September and October 2007 because of the global economic downturn leading to financial difficulties which lasted several years; and by the countervailing oddity that Mr Avanesov’s evidence does not suggest that he sought payment of the outstanding balance of more than US$ 11 million over the course of the following years, despite (on his case) ceding control of the JAY subsidiaries for which over US$3 million was outstanding. On the contrary, he says he had no contact with Darhan until April 2011 when a meeting was instigated by Darhan.

The meeting in April 2011 took place at the Grand Mir Hotel in Tashkent attended by, amongst others, Mr Karakhanyan on behalf of Mr Avanesov and Mr Kurmanbekov on behalf of SP/Darhan (which merged on 21 April 2011). There are disputed accounts of the meeting. Mr Mukhatov’s account in his first witness statement, purportedly on the basis of a detailed conversation with Mr Kurmanbekov, was that it was to discuss “the dispute”, that the parties discussed settlement, but did not agree and the negotiations terminated. He did not identify what the dispute was or say that a complaint was made at the meeting about the share dilution. Mr Avanesov responded in his evidence that the meeting was not to try to resolve any dispute because there was no dispute: SP/Darhan had simply failed to pay. Mr Karakhanyan’s account of the meeting was that that there was no complaint about share dilution or the share issue, and that what happened was that SP/Darhan’s representatives said they would not pay and demanded transfer of the Nealet shares, failing which they threatened to kill Mr Avanesov. In his second witness statement Mr Mukhatov (who was not at the meeting and had not at that time yet joined SP) rebutted the suggestion that there were threats to kill but confirmed that no complaint was made at the meeting about dilution of the shareholding because no one at SP was aware of it at that stage. Inconsistently with this, a witness statement from Mr Kurmanbekov, dated and served the same day as Mr Mukhatov’s second witness statement, deposed that Mr Avanesov’s representatives at the meeting offered to pay SP/Darhan US$ 1 million, and then US$ 3million, to settle all claims, acknowledging that Mr Avanesov was in the wrong because SP/Darhan had not been provided with the controlling interest which it thought it was buying, as a result of the share issue which Mr Avanesov had known about all along. Mr Kurmanbekov said that the offer was rejected and a larger sum was demanded by SP, which resulted in a breakdown in negotiations. In the course of the hearing Ms Leahy on behalf of SP said on instructions that what Mr Mukhatov said in his second statement was simply a mistake. The state of this evidence is unsatisfactory, but it does not enable me to accept the submission made on behalf of Mr Avanesov that I should conclude that no complaint was made at this time. This is one of many oddities in the evidence on which it would not be safe to form any final, or even provisional, view on the limited evidence put before me for the purposes of this application.

By a letter of 12 December 2011, Collyer Bristow LLP (“Collyer Bristow”), solicitors for Mr Avanesov, wrote to Darhan at the registered address of Darhan and SP in Kazakhstan, claiming the outstanding sums of US$ 3,834,224.62 under the JAY SPA and US$ 9,965,775 under the Nealet SPA, together with interest, and threatening proceedings in the English Commercial Court in default. A second letter of the same date made claims under the Service Agreement. These letters were received by SP and are to be found on SP’s files. SP did not respond.

On 6 November 2011, Mr Avanesov issued the Claim Form in the present proceedings. On 14 November 2011, Christopher Clarke J made an order permitting service out of the jurisdiction on SP in Kazakhstan. There were delays in service, which are explained in a witness statement of Rhory Robertson of Collyer Bristow. In summary, the Kazakh process server instructed was slow to respond and to carry out translations. The process server confirmed that the Claim Form and supporting documents had been served on SP at its registered office by courier on 30 January 2013 and received by an individual called Mezina. When Mr Robertson reviewed the Russian translations he found errors, and decided that service should be effected again with the use of local solicitors. An affidavit of service confirms service of the Claim Form and supporting documents being delivered to SP by DHL at its registered office on 15 May 2013, again being signed for by a person called Mezina. Mr Mukhatov deposes on behalf of SP that it has no record of receipt of these documents and they are not to be found in its files.

On 18 July 2013, Mr Avanesov made an application on paper for judgment in default of acknowledgement of service. On 31 July 2013, I made an order that:

The evidence of Mr Robertson of Collyer Bristow is that on 2 September 2013, the default judgment was served on SP at its registered office in Kazakhstan by courier, as is evidenced by the DHL receipt, again signed for by a person named Mezina. Mr Mukhatov deposes that it was received by post at the end of September 2013. Although the exact date does not matter, I regard the evidence of Mr Robertson as more likely to be reliable because it is supported by the DHL evidence and no order had been made at that stage permitting postal service.

On 25 October 2013, Mr Avanesov issued an application for the assessment of damages in respect of the Nealet SPA pursuant to paragraph 2 of my order dated 31 July 2013.

Process servers on behalf of Mr Avanesov attempted to serve the application notice, with translation, on SP at its registered office in Kazakhstan. On 5 December 2013, and again on 24 December 2013, when service was attempted, the secretary stated that there was no one named Tuleshov employed by SP and that she would not accept service of the documents.

Accordingly on 21 February 2014, Mr Avanesov obtained an order from Leggatt J that he could dispense with formal service of the application notice and proceed to fix a date for the hearing of assessment of damages under the Nealet SPA. Leggatt J ordered that Mr Avanesov should give notice of the hearing, when fixed, by sending the application and documents relied on in support by ordinary post, which would constitute good service. In accordance with Leggatt J’s order, on 26 February 2014 Collyer Bristow sent notice of the date of the hearing by post to SP at its registered address. On 3 March 2014 Collyer Bristow sent a copy by post of the application bundle. It is clear from subsequent correspondence that the latter was received and came to the attention of SP’s management at the time, and there is no reason to doubt that the same is true of the letter notifying the date of the hearing. SP did not respond to either communication.

The hearing of the assessment of damages took place before Mr Robin Knowles CBE QC sitting as a Deputy Judge of the High Court, on 11 April 2014. SP did not respond to the application or participate in the hearing. On 11 April 2014 Mr Knowles QC gave judgment in favour of Mr Avanesov under the Nealet SPA for damages assessed in the sum of US$ 7,517,644.44 plus interest.

The order of Mr Knowles QC was sent to SP at its registered office in Kazakhstan by post on 22 April 2014 and sent at the same time to English solicitors, Field Fisher Waterhouse LLP (“FFW”), now Field Fisher LLP, who had given notice of being instructed by SP to Collyer Bristow on 11 April 2014.

SP issued the application to set aside the default judgments on 20 May 2014, and served it the following day.

The test is the same as that for summary judgment under CPR Part 24, although the burden of proof is reversed. The relevant principles were summarised by Lewison J, as he then was, in Easyair Limited v Opal Telecom Ltd [2009] EWHC 339 (Ch), in a formulation approved in a number of subsequent cases at appellate level, including AC Ward & Sons v Catlin (Five) Limited [2010] Lloyd's Rep. I.R. 301and Mellor v Partridge [2013] EWCA Civ 477:

There are many disputes in the evidence about the negotiations for the SPAs and the subsequent history which cannot be resolved on an application of this nature. I have not identified all of them. Despite the submissions on behalf of each party that its version of events was more credible, I find it impossible at this stage to draw any conclusions about the disputed questions of fact, resolution of which can only fairly be made upon full investigation with the benefit of disclosure and oral evidence at trial. Taking the evidence on behalf of SP at its credible highest, there is a realistic prospect of it establishing that:

Whether those matters will be established is, of course, a matter for investigation at trial. However, if established, they are capable of supporting a defence to the claim under a number of legal headings. There would arguably be a breach of the express or implied terms of the contract that what was being sold was an indirect 51% voting stake in the Bank and/or that such a stake would continue to subsist pending transfer of the JAY and Nealet shares to Darhan and could not be diluted by a new share issue in the meantime. There would be an arguable case in misrepresentation, that Darhan was induced to enter into the SPAs by representations by or on behalf of Mr Avanesov that what was being sold was a 51% voting stake in the Bank and/or that Mr Avanesov had no grounds to believe that the stake had been or would imminently be diluted, whereas the true position was that the subject matter of the sale was a stake which had been or would imminently and inevitably be diluted, as Mr Avanesov knew. This is the kind of case in which a failure by a party to speak may, in the light of the whole of his conduct, amount to an implied representation (see Chitty on Contracts 31^st Edn at paragraph 6-104). It would be arguable that Darhan entered into the SPAs under a mistake of fact, namely that it was buying a 51% voting stake which had not been diluted and would not be diluted in the imminent future; and that this was a mistake of which Mr Avanesov was aware and of which he took unfair advantage. The prospects of these arguments succeeding cannot be dismissed as being fanciful.

In the circumstances it is not necessary to address the further contention made by SP that Mr Avanesov has continued to control the JAY subsidiaries and wrongfully received the benefit of dividends in relation to their shares in the Bank; or SP’s alternative claim that it is entitled to an account of the dividends so received and to set off their amount against Mr Avanesov’s claim.

Despite the able submissions of Miss Weaver on behalf of Mr Avanesov, I do not feel able to characterise the defence as weak or flimsy. Without the benefit of a full investigation at trial, with the benefit of oral evidence following disclosure, all that can be said is that it is a realistic defence whose ultimate strength cannot be assessed at this stage.

In Standard Bank PLC v Agrinvest International Inc [2010] EWCA Civ 1400 Moore-Bick LJ emphasised the enhanced importance of making the application promptly as a relevant factor, resulting from the introduction of explicit reference to it in Rule 13.3(2):

“[20] Before the introduction of the Civil Procedure Rules judgment could be entered in default of notice of intention to defend under O.13 of the Rules of the Supreme Court. Applications to set aside default judgment were governed by O.13, R.9, which provided as follows:

“without prejudice to Rule 7(3) and (4) the court may, on such terms as it thinks just, set aside or vary any judgment entered in pursuance of this Order.”

[21] The authorities relating to setting aside default judgments laid considerable emphasis on the desirability of doing justice between the parties on the merits. Delay in making an application to set aside rarely appears to have been a decisive factor if the defendant could show that he had a real prospect of defending the claim against him. Thus in J H Rayner (Mincing Lane Limited) v Café Norte S.A. Importadora e Exportadora S.A. [1999] EWCA Civ 2015 judgement was set aside after 7½ years on the applicants’ showing that they had a defence with a real prospect of success.

[22] The Civil Procedure Rules were intended to introduce a new era in civil litigation, in which both the parties and the courts were expected to pay more attention to promoting efficiency and avoiding delay. The overriding objective expressly recognised for the first time the importance of ensuring that cases are dealt with expeditiously and fairly and it is in that context that one finds for the first time in Rule 13.3(2) an explicit requirement for the court to have regard on an application of this kind to whether the application was made promptly. No other factor is specifically identified for consideration, which suggests that promptness now carries much greater weight than before. It is not a condition that must be satisfied before the court can grant relief, because other factors may carry sufficient weight to persuade the court that relief should be granted, even though the application was not made promptly. The strength of the defence may well be one. However, promptness will always be a factor of considerable significance, … and if there has been a marked failure to make the application promptly, the court may well be justified in refusing relief, notwithstanding the possibility that the defendant might succeed at trial.”

It is established by a number of first instance decisions (see eg Newland Shipping & Forwarding Ltd v Toba Trading FZC [2014] EWHC 1986 Comm), and was common ground before me, that an application to set aside a default judgment pursuant to CPR Rule 13.3 is an application for relief against sanctions to which CPR 3.9(1) applies. That rule provides that:

“On an application for relief from any sanction imposed for a failure to comply with any rule, practice direction or court order, the court will consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need-

(a)

for litigation to be conducted efficiently and at proportionate cost; and

(b)

to enforce compliance with rules, directions and orders. ”

As is well known CPR Rule 3.9 falls to be applied in accordance with guidance set out in Mitchell v Newsgroup Newspapers Ltd [2014] 1 WLR 795 and Denton and Others v T H White Limited (De Laval Limited Part 20 Defendant) [2014] 1 WLR 3926. In Altomart v Salford Estates (No.2) Limited [2014] EWCA Civ 1408 Moore-Bick LJ usefully summarised the principles in Mitchell and Denton in the following terms at paragraphs [19] and [20]:

“More recently the rigour of the decision in Mitchellhas been tempered by the decision in Denton. In that case the court recognised that Mitchell had been the subject of criticism and, while holding that the guidance it provided remained substantially sound, sought to explain in rather more detail how it should be interpreted and applied. In doing so it identified three stages of enquiry: (i) identifying and assessing the seriousness and significance of the default which engages Rule 3.9; (ii) identifying its cause; and (iii) evaluating all the circumstances of the case including those specifically mentioned” [i.e. the need for litigation to be conducted efficiently and at proportionate cost and the need to enforce compliance with the Rules]”

Rule 13.3(2) requires “regard to be had to whether the application is made promptly”. I see little difference in the approach to this consideration from that required by the first two stages of the Mitchell/Denton approach, being an assessment of the seriousness and significance of the default and the reasons for it. Promptness is not to be measured by reference solely to the length of time which has passed before an application is made, but also by reference to the reasons for the delay. If the application is made as soon as could reasonably have been expected in the circumstances, it will have been made promptly even if made a considerable period after the defendant first became aware of the judgment. Conversely an application made a short time after notice of the judgment may not be prompt if it could reasonably have been made earlier. In Regency Rolls Ltd v Murat Carnall [2000] EWCA Civ 379 at paragraph [45] Simon Brown LJ posited the test as whether the applicant had acted with all reasonable celerity in the circumstances. Moreover the consideration of promptness in Rule 13.3(2) does not involve a binary exercise in which a line is to be drawn between promptness and its absence with the defendant’s conduct simply placed on one side or other. If promptness would have required an application within a week, an application made after two weeks and one made after two years would both lack promptness, but they would not fall to be treated equivalently. The inquiry is not merely whether the application is prompt but how prompt it is. The length of the delay and the reasons for it have to be examined not just to enable an answer to be given to the question whether the application has been made promptly, but equally in assessing what weight is to be attached to a lack of promptness in the exercise of discretion.

Accordingly I consider the exercise of the discretion by adopting the three stage Mitchell/Denton approach, the first two stages of which address promptness.

There are two judgments and therefore two relevant periods of delay. The default judgment of 31 July 2013 was served by courier on 2 September 2013. I infer that it came to the attention of senior management shortly thereafter. There was a period of over 8 months before an application was made to set aside that judgment. The default judgment of Mr Knowles QC on the assessment of damages dated 11 April 2014 was sent by post to SP on 22 April 2014 and copied to FFW the same day. There was a period of about a month before the application to set aside the judgments. The relevant period might more properly be considered to be about 6 weeks running from the date of the judgment, 11 April 2014, given that SP was aware of the hearing and the evidence in support in advance and could have inquired about the outcome. 8 months is a very lengthy delay. A month or six weeks is a significant delay. Both are serious in the context of a period of 21 days expressly set out in my order of 31 July 2013 as the time for making an application, and in the context of the public interest in finality of judgments which should normally require an application to set aside to be brought within days of being on notice, rather than weeks or months, save in exceptional circumstances.

The explanation for the delay is contained in the two witness statements of Mr Mukhatov. He says that upon receipt of the default judgment, he was instructed by Mr Tuleshov to take action to investigate the English claim and to see whether that claim, together with the Uzbek proceedings, could be resolved through commercial negotiation; that he therefore instigated further settlement discussions by asking Mr Kurmanbekov to contact Mr Karakhanyan to organise a meeting, which took place on 19 November 2013 at the Grand Mir Hotel in Tashkent. Mr Mukhatov says he attended the meeting with Mr Kurmanbekov on behalf of SP, and Mr Karakhanyan and Mr Akhmedov attended on behalf of Mr Avanesov; and that no agreement was reached and the negotiations terminated. Mr Avanesov’s evidence denies that any such meeting took place. Mr Mukhatov says that once it became obvious that negotiations were unlikely to lead to a resolution satisfactory to both parties, he asked SP’s external counsel to obtain English law advice; that the external counsel contacted FFW in December 2013, but that the relevant Russian speaker at FFW was on paternity leave and therefore not able to revert until late January 2014; that thereafter the process of locating relevant documentation and information in order to obtain legal advice on SP’s position caused further delays. This took a significant amount of time because Mr Mukhatov had not himself been at SP at the time of the events in question, Mr Kravchuk no longer works at SP and having suffered a serious heart attack in 2009 is difficult to contact because he travels a lot in order to receive medical treatment abroad. In addition FFW would not go on the record for SP without monies on account, which required prior approval of the National Bank of Kazakhstan, who in turn required a copy of the engagement letter. The original version of the engagement letter provided by FFW did not comply with the National Bank’s requirements and went through a number of iterations. The final engagement letter and payment of monies on account took place on 10 April 2014.

Drawing the threads together, the emphasis which must be given under Rule 13.3(2) to the promptness of the application, or lack of it, and under Mitchell and Denton to the seriousness of the default and the reasons for it, militate strongly in favour of refusing the application. The application was not made promptly. The delay of about 8 months in respect of the first judgment and about a month or six weeks in relation to the second judgment was lengthy, serious and highly culpable. The specific considerations which Rule 3.9 requires to be given weight point to the same conclusion: the need for the efficient conduct of litigation, and the need to ensure compliance with court orders and the rules, is not served by indulging a defendant like SP who has deliberately ignored the 21 day timetable set out in my order of 31 July 2013 and deliberately failed to engage in the proceedings until it perceives a risk of enforcement of the judgments. There is nothing in the interests of justice in the particular circumstances of this case which points to a different conclusion. The prejudice to Mr Avanesov if the judgments are set aside is significant. In all the circumstances the establishment by SP of a realistic defence is not sufficient to justify setting aside the judgments notwithstanding that the sums involved are large.

The application will be dismissed.