Alliance Bank JSC v Zhunus & Ors

On 14 November 2014 Flaux J:

In the claims underlying these applications, Alliance contends that in 2008 the Defendants devised and executed a scheme to acquire for their own benefit valuable assets (namely the shares and assets of two Russian companies which owned and operated oilfields formerly known as Krasnoleninskneftegaz-Dobycha (“KNG-D”) and DinyelNeft LLC (“DinyelNeft”)) and in so doing to deprive Alliance of the benefit of these assets as security for borrowing facilities and lending which totalled approximately US$316 million.

The following applications fall to be determined:

Other applications made in respect of the first and third defendants’ positions were resolved by agreement between the parties. The evidence adduced by the parties took the form of affidavits and witness statements, including in particular evidence from Mr Bolgauov, (the senior banker of the legal services division of Alliance), Mr Arip, the solicitors acting for Alliance and Mr Arip respectively and the statement of a Russian lawyer in relation to the enforceability under Russian law of pledges given by Trendall then under the control of Mr Arip.

Proceedings were commenced in this country on 22nd July 2014 with details of the claim set out as follows in the Claim Form:

“1.

Between 2006 and 2007 the Claimant (“Alliance Bank”) lent the equivalent of approximately US$222,000,000 to Simons Holding BV, Argentan S.A., Barnard Commercial S.A. (“the Original Borrowers”) in Kazakhstan to permit them to invest in, among other things, various oil companies (“the Original Loans”). The Original Loans were secured by, amongst other security, pledges in the shares in two of the oil companies, namely KNG-Dobycha LLC and DinyelNeft LLC (“the Original Pledges”).

2.

In about October 2008 the Defendants persuade Alliance Bank that the Original Loans should be replaced by new loans [the Replacement Loans] to Bolzhal Limited LLP, Commerce Business Centre Limited LLP, Caspian Minerals LLP and Holding Invest LLP (“the replacement Borrowers”) and that the amount lend should be increased to the equivalent of approximately US$295,000,000 representing among other things, that the Replacement Borrowers were more reliable counterparties. The Replacement Borrowers were owned or controlled by the Defendants and/or were affiliated with them.

3.

Under the terms of the Replacement Loans the Replacement Borrowers were to provide pledges of the shares in and assets of KNG-Dobycha LLC and DinyelNeft LLC, which were by then indirectly owned by the Replacement Borrowers. Alliance Bank released the Original Borrowers from their obligations under the Original Pledges.

4.

The Replacement Borrowers drew down all of the loan monies. However, they did not provide the security agreed. Instead, the Defendants persuade Alliance Bank to accept as security for the Replacement Loans pledges of shares in OmskGeoTEK LLP, SibGeoTEK LLP and SibirGeoTEK LLP (“the GeoTEK companies”) representing that these shares were more valuable than the shares in KNG-Dobycha LLC and DinyelNeft LLC.

5.

At the same time the Defendants procured that KNG-Dobycha LLC and DinyelNeft LLC should be transferred to subsidiaries of a company which became known as Exillon Energy plc (“Exillon”). The Defendants were shareholders in Exillon. … In December 2009 new shares in Exillon were the subject of an IPO on the London Stock Exchange which valued the company at about £186 million. That value reflected the value of its interest in KNG-Dobycha LLC DinyelNeft LLC. …

6.

None of the money lent under the Replacement Loans has been repaid to Alliance Bank. The Replacement Borrowers are insolvent. The shares in the GeoTEK companies are worthless.

7.

The Defendants conspired to deprive Alliance Bank of the valuable security which it held over the shares in KNG-Dobycha LLC and DinyelNeft LLC and to obtain the value of those companies for themselves.”

The claim form went on to set out a series of actions which were said to be unlawful and to constitute wrongdoing under Kazakh law, with resultant harm to Alliance.

Under the heading of “the pledge of the KNG-D shares”, paragraphs 4-7 of the Particulars of Claim (“POC”) set out the pledge by Kausar Overseas of its 50% holding of the shares in KNG-D to Alliance as security for the obligations of Simons Holding under its loan from the bank. Under the heading “the pledge of the DinyelNeft shares” paragraphs 8-12 set out the pledge by two British Virgin Islands companies, Barnard Commercial SA and Argentan SA of their shares in DinyelNeft in respect of debts owed by them to Alliance under loan facilities. These companies were all linked to the Seisembayev brothers who at that time owned Alliance. The loans were therefore “shareholder-related loans”.

Under the heading “the scheme to free the shares of KNG-D and DinyelNeft from the pledges”, Alliance set out its case that, at or about the beginning of 2008, the defendants developed a plan to acquire for their own benefit the valuable assets represented by the shares of KNG-D and DinyelNeft and, in doing so, to deprive Alliance of the benefit of those assets as security for the borrowing of Simons Holding, Barnard and Argentan. In furtherance of that plan, it was alleged that the defendants took or procured the taking of steps set out in paragraphs 14-40 of the POC with, where necessary, the assistance of persons within Alliance, whose identity was not known to the present management of Alliance. Underlying this allegation is evidence that Mr Arip had stated that he had been in partnership with the Seisembayev brothers and that, prior to February 2009, when the structure of Alliance was changed, employees of Alliance acted at the behest of the brothers, to the detriment of the interests of Alliance.

At paragraph 16, reference was made to applications made in October 2008 by companies owned by Mr Arip for loans from Alliance. The companies in question were Bolzhal Limited LLP (“Bolzhal”), Holding Invest LLP (“Holding Invest”), Caspian Minerals LLP (“Caspian”) and Commerce Business Centre (“CBC”). Details of the loan arrangements were then spelt out, albeit not entirely accurately. For present purposes, the more critical provisions of the Loan Agreements were these:

On or about 24th October 2008 Caspian purchased all of the shares in Kausar Overseas, CBC purchased all of the shares in Barnard and Bolzhal purchased all of the shares in Argentan, with resultant indirect ownership by Caspian, CBC and Bolzhal of Kausar’s 50% interest in KNG-D and Barnard and Argentan’s combined 100% interest in DinyelNeft.

On the same day, 24th October 2008, Barnard, Argentan and Kausar concluded a Memorandum of Understanding or Term Sheet with the company which was later to be named Exillon Energy PLC (“Exillon”), and to be the subject of an IPO on the London Stock Exchange. The Memorandum confirmed the intention of Exillon to acquire directly or through its affiliates the 50% shareholding in KNG-D and the combined 100% holdings in DinyelNeft for the price of $4.069 million. Exillon was also to discharge the indebtedness of those companies to Argentan, Barnard and Kausar. In a supplemental document dated November 28th 2008 the parties confirmed their intention that this indebtedness should be written off.

On 3rd December 2008 Alliance made a further loan to CBC which agreed to provide a 100% shareholding in DinyelNeft as security for fulfilment of its obligations.

On 29th December 2008 Alliance made a further loan to Caspian which agreed to provide security in the form of shares in OmskGeoTEK, SibGeoTEK, SibirGeoTEK and KNG-D.

By the end of December Alliance had released the Barnard and Argentan pledges of shares in DinyelNeft, as their debt to Alliance had been discharged with the monies loaned to Holding Invest, Bolzhal, Caspian and CBC (the “Replacement Borrowers”). There was still outstanding indebtedness of Simons Holdings so that, although a request was made for release of Kausar’s pledge of shares in KNG-D, that pledge remained in being. Alliance nonetheless gave permission for the sale of the KNG-D shares owned by Kausar Overseas to Tredall “without exemption from encumbrance under obligations”. That purchase occurred on or about 30th January 2009.

At this stage, Alliance had such financial problems of its own that it had to be recapitalised by the Sovereign Wealth Fund of Kazakhstan, Samruk-Kazyna by an agreement dated 2nd February 2009. The Seisembayev brothers departed together with much of Alliance’s senior management and a new management team took over in February 2009. Following this, it was discovered that very large shareholder related loans had been made on preferential terms to entities associated with the Seisembayev brothers where there was either no security or inadequate security. The former chairman of the board of directors, Margulan Seisembayev was subsequently convicted of various criminal offences in relation to Alliance’s dealings, as were other members of the management team.

On 3rd February 2009, the day after the agreement reached for the recapitalisation and reconstitution of Alliance’s management, amendments were made to the loan agreements of 24th October with the Replacement Borrowers, but with the existing management still in place. The 24th October loan agreements had provided for specific security to be given and also that, within one month, “the borrower shall provide assets for the pledge in the form of fixed assets, the value of which covers the obligations of the Borrower under this Agreement in full, unless a different value is determined by agreement between the parties” (in translation). Thus the money advanced in October was advanced on the basis of a promise of security but without any security actually being taken. Each of the loan agreements also provided for deferred payment of interest and capital, apparently representing highly preferential terms. The 3rd February amendments were even more favourable to the Replacement Borrowers. New repayment schedules further deferred repayment obligations and article 3.6 of the loan agreements was amended to read as follows:

“Within eight months from the date of signing of this agreement, the Borrower shall provide assets for the pledge in the form of shares of the companies and fixed assets, the value of which covers the obligations of the Borrower under this agreement in full unless a different value is determined by agreement between the parties.” (In translation).

By this amendment, therefore, it appears that the obligations of Caspian to provide KNG-D shares as security and on CBC to provide DinyelNeft shares as security were superseded. This, in Alliance’s submission, was the result of Mr Arip’s collusion with employees of Alliance who were acting in fraud of their employer. It is to be inferred, it is said, that this took place at the behest of the Seisembayev brothers in conjunction with Mr Arip as loans on such terms could not be in the best interests of Alliance.

On 12th February 2009, 2nd April 2009 and 9th April 2009, the 50% shareholding in KNG-D and the 100% holding in DinyelNeft, owned respectively by Tredall, Argentan and Barnard were acquired by subsidiaries of Exillon. It would appear that this put CBC and Bolzhal in breach of article 3.5 of the loan agreements, in which they agreed not to dispose of their assets (which included, through Barnard and Argentan, the DinyelNeft shares) without the consent of Alliance, even if Caspian and CBC were not in breach of their obligation under 24th October Loan Agreements to provide those shares as security to Alliance, by reason of the amendment of Article 3.6.

At paragraphs 32-34 of the POC, it was alleged that Mr Arip represented to the new managing director of Alliance, Mr Balgarin, that the assets of KNG-D and DinyelNeft were of no value as security for the borrowings of the Replacement Borrowers because both companies were exposed to corporate raiding and/or hostile takeovers by local governments. That took place, as alleged in the POC, in April 2009, but in subsequent evidence, the date was said to be March 2009 because it preceded the AppraisConsult valuations of the shares in the three GeoTEK companies. Either at that meeting or subsequently Mr Arip proposed that Alliance should accept a pledge of a 60% interest in each of the GeoTEK companies as the Replacement Security. Alliance contends that Mr Arip’s representation was untrue because, within a few months, the companies were capable of being used as a basis for an IPO on the London Stock Exchange. Moreover, earlier in 2008 they had been valued on a discounted cash flow basis at between $600 million and $1 billion. In reliance upon the misrepresentations, it is said that Alliance agreed to accept pledges of the Replacement Security from Tredall. There were two pledge agreements dated 15th June 2009 and one pledge agreement dated 7th July 2009 in respect of shares in the three GeoTEK companies as security for the obligations of the Replacement Borrowers. The pledge agreements were alleged to be ineffective as a matter of Russian law – all the GeoTEK companies being Russian – and Tredall and four of the Replacement Borrowers, despite demands by Alliance, never put right this defect.

Exillon was admitted onto the London Stock Exchange on 17th December 2009 following an IPO Prospectus published on 14th December 2009. The only two significant assets it owned were KNG-D and DinyelNeft. Over £100 million was raised on the flotation of Exillon and some four years later, in December 2013, Mr Arip sold a shareholding of just under 30% in Exillon for $300 million. At paragraph 41 of the POC, it was alleged that the Replacement Borrowers had no assets of value, had failed to repay the Replacement Loans and would not do so in the future.

It is common ground that the governing law of the torts alleged is that of Kazakhstan. Under article 8 of the Civil Code, the exercise of civil rights by a person must not violate the rights or lawful interest of any other person and it is a requirement to act in good faith, reasonably and justly in dealing with others, to comply with the requirements imposed by law and by moral principles of society, whilst businessmen are also required to comply with business ethics. Contractual obligations must be performed under article 272 and, under article 917, harm caused to individuals and legal entities by the wrongful act of another, including deliberate harm to another person’s rights or economic interests, is to be compensated in full by the person causing the harm. Joint and several liability is catered for in article 932. Additionally, under article 34 of the Law on Banks, a bank’s loan operations are to be executed by the bank’s credit committee in accordance with its rules of credit policy as approved by the Board of Directors whilst under article 35, a bank is not allowed to provide an unsecured loan if the proposed borrower is not reliable and does not have a high credit rating or if the amount exceeds the average net asset value of the proposed borrower in the period between the beginning of the accounting year and the date upon which the loan is made.

The essence of the claim made under article 917 of the Civil Code by Alliance is that, as a result of the allegations pleaded in paragraphs 14-40 of the POC, it has suffered harm. It is said that Alliance made the Replacement Loans to the Replacement Borrowers without obtaining enforceable valuable security and is unable to recover any of the amounts lent. Kazakh law does not recognise the tort of conspiracy but at paragraph 50 of the POC, Alliance sets out, in six sub-paragraphs, wrongful actions within the meaning of article 917 on account of the defendants’ breach of Kazakh civil legal norms.

“50 (1) In exercising their civil rights to control or influence the actions of the Replacement Borrowers with the purpose of freeing the shares in DinyelNeft and KNG-D and the fixed assets of those companies from the pledge to Alliance to which they were subject or should have been subject, the Defendants intentionally violated the rights and lawful interests of Alliance in breach of the norms set out in Article 8.3.

(2)

In their dealings with Alliance, they did not act in good faith, reasonably and justly, and/or they did not comply with requirements imposed by law, and/or the moral principles of society, and/or business ethics in that:

(a)

at all material times, they intended to procure their for their own benefit and at the expense of Alliance the interests in and fixed assets of DinyelNeft and KNG-D that were or should have been pledged to Alliance;

(b)

they never intended that the money advanced under Replacement Loans should be used for the agreed purpose or any legitimate purpose, but instead intended that it be used to repay the Barnard Loan, the Argentan Loan and part of the Simons Holding Loan in order to provide a basis for the request that Alliance should release the shares in DinyelNeft and KNG-D from the pledges to which they were subject, so that the valuable assets of those companies could be used to support the IPO;

(c)

by procuring that the Replacement Borrowers should apply to Alliance for the Replacement Loans, the Defendants represented, expressly or impliedly, that it was their intention and that of the Replacement Borrowers that the monies loaned should be repaid in accordance with the terms of the relevant loan agreements; that representation was untrue because neither the Defendants nor Replacement Borrowers intended that the Replacement Loans should be repaid in accordance with their terms or at all;

(d)

by procuring that the Replacement Borrowers should offer the security described in paragraph 19 above in support of their borrowing, the Defendants represented, expressly or impliedly, that it was their intention that the Replacement Borrowers should provide that security; that representation was untrue, because the Defendants never intended that the proffered security should be provided;

(e)

Mr Arip represented to Alliance, untruthfully, that DinyelNeft and KNG-D did not constitute good security for the Replacement Loans and that it should, instead, take the Replacement Security.

In the premises, the Defendants acted in breach of the norms set out in Article 8.4.

(3)

For the same reasons, the Defendants intentionally caused harm to Alliance by procuring that the Replacement Borrowers should use their rights under the Replacement Loan agreements for a purpose other than that intended and in order to further their plot to remove the encumbrance over the shares in and/or assets of KNG-D and DinyelNeft. In the premises, the Defendants acted in breach of the norms set out in Article 8.5.

(4)

The Defendants procured that the Replacement Borrowers should breach their contractual obligations to Alliance in that:

(a)

they did not use the loan monies for their stated purpose (article 3.1.1);

(b)

they failed to provide the security which they were required to provide within one month (articles 2.6 and 3.6), or at all;

(c)

they disposed of their assets without the consent of Alliance (article 3.5);

(i)

Bolzhal and Commerce Business Centre sold their indirect interests in DinyelNeft to Diamondbridge Limited and Lanach Limited without first obtaining the consent of Alliance; and

(ii)

Caspian Minerals procured that Kausar Overseas should sell its 50% shareholding in KNG-D to Tredall knowing and intending that Tredall should (in accordance with the Memorandum of Understanding) sell on those shares to the IPO Vehicle or to one of its subsidiaries (in the event Vitalaction Limited), without obtaining the consent of Alliance, although Caspian Minerals obtained Alliance’s consent to its proposed sale to Tredall (which was its parent), it did so without disclosing the planned second sale, thus vitiating Alliance’s consent to the first one and having the result that article 3.5 of its Loan Agreement was breached.

The Defendants therefore caused the Replacement Borrowers to violate Article 272. That action of the Defendants was an action which breached the norms set out in articles 8.4 and/or 8.5.

(5)

The Defendants procured that the Replacement Borrowers should apply for the Replacement Loans knowing and intending that those loans would be granted in breach of Alliance’s credit policy because the applications would [be] treated as “shareholder related” and would therefore subjected to no serious credit investigation. Along with those who assisted them inside Alliance, the Defendants therefore cause Alliance to violate Article 34 of the Law on Banks. That action of the Defendants was an action which breached the legal norms set out in articles 8.4 and/or 8.5.

(6)

The Defendants procured that the Replacement Loans should be made on an unsecured basis to borrowers who were neither reliable or of high credit quality. Instead the Replacement Borrowers were no-trading shell companies which were, apart from their shareholdings in KNG-D and DinyelNeft, of no substance; further or alternatively the amounts lent exceeded the average net asset value of each of the Replacement Borrowers in the period between the beginning of their accounting years and the date upon which the loans were made. Along with those who assisted them inside Alliance, the Defendants therefore caused Alliance to violate Article 35 of the Law on Banks. That action of the Defendants was an action which breached the norms reflected in articles 8.4 and/or 8.5.”

The harm caused to Alliance by reason of the wrongful actions is then said to be the total amount of the Replacement Loans as, in the absence of the wrongful actions, those sums would not have been lent to the Replacement Borrowers at all. In those circumstances the sums lent to the Original Borrowers would have been recovered, if necessary by enforcing the security provided which included the shares pledged in KNG-D and DinyelNeft.

On the evidence of Kazakh law adduced by Alliance, it is for Alliance to show a wrongful act in violation of its rights, harm suffered by it and the causal link between the two. In its submissions, both written and oral, Alliance has gone to some lengths to state that its case is based upon the obtaining of the release of the KNG-D and DinyelNeft shares from the Original Borrowers’ pledges, the obtaining of loans for the Replacement Borrowers without giving enforceable valuable security and the harm suffered because of the irrecoverability of those loans. The claim is not a contractual claim against the Replacement Borrowers for failing to repay the loan or failing to provide the security they promised to give, nor for deceit in inducing Alliance to accept the GeoTEK shares as security for the Replacement Loans.

Nonetheless, it is clear that the harm suffered and the loss claimed are intimately connected with the absence of enforceable valuable security and the failure by the Replacement Borrowers to repay the Replacement Loans.

One of the odd features arising out of the history of events is the question of enforceability or unenforceability of pledges over the 60% shareholdings in the GeoTEK companies. In the POC, Alliance said that Tredall had agreed, by three agreements dated 15th June 2009, to pledge the GeoTEK shares as security for the obligations of the Replacement Borrowers. “The pledges were executed but because they were not executed before a Russian notary, were ineffective as a matter of Russian law. Alliance repeatedly demanded that Tredall and/or the Replacement Borrowers corrected this defect but they never did so.” In his evidence before Flaux J, Mr Bolgauov stated that there were two pledge agreements dated 15th June 2009 and one agreement dated 7th July 2009, which he exhibited. The same words which I have already quoted, which appear in the POC, appear in paragraph 48 of his first affidavit.

In her evidence in response, Ms Solomakhina, a qualified Russian lawyer, referred to the mandatory requirement that pledge agreements regarding shares in Russian limited liability companies should be executed in front of a notary and stated that this was introduced by the amendment to Article 22 of the Russian Federal Law on Limited Liability Companies dated 30th December 2008, which came into force on 1st July 2009. She went on to say that, until 1st July 2009 when the amendment came into force, nothing in Russian law required that pledge agreements regarding shares in Russian LLCs be notarised. Pledge agreements regarding shares in Russian LLCs that were otherwise validly executed before 1st July 2009 were effective as a matter of Russian law without notarisation, as the amendment to the Russian LLC law had no retro-active application. That was confirmed by the Presidium of the Supreme Arbitrazh Court of the Russian Federation in clause 19 of its Information Letter dated 30th March 2010. As the pledge agreements in question all related to pledges of shares in Russian LLCs, the Russian LLC Law governed the formalities of granting share pledges in relation to shareholdings in those companies.

In consequence, she stated that the two pledge agreements dated 15th June 2009 (which related to the SibGeoTEK shares and the SibirGeoTEK shares, with much greater attributed value than the OmskGeoTEK shares) did not need to be executed before a notary in order to be effective as a matter of Russian law. The OmskGeoTEK pledge however, if signed on 7th July would be ineffective in the absence of notarisation and would not create enforceable security over the shares in that company. This evidence is uncontroverted.

In Mr Bolgauov’s affidavit in response, he stated that the pledge documents were prepared by Alliance in respect of the GeoTEK companies, but that he did not know when they were actually executed, although the printed dates on them are 15th June 2009 and 7th July 2009. He said that after they had been prepared Ms Dikhanbayeva on behalf of the Replacement Borrowers recommended that Alliance use a law firm based in Russia, MZSP, so as to ensure that there was compliance with all of the relevant formalities. Pursuant to this recommendation, a three-way agreement was then concluded in September 2009 between Tredall, Alliance and MZSP. An engagement letter dated 18th September 2009 between those three entities has been produced. Alliance is described as “the client” whilst Tredall was to be responsible for MZSP’s fees. Clause 1.1 of the terms of engagement reads thus:

“The client hereby retains the Attorney to render legal assistance before October 9, 2009, and the Attorney shall (1) prepare the legal opinion (memorandum) containing the description of the procedure regulating the order of registration of a contract of pledge of a 60% share in the LLC charter capital, and legal expertise of pledge contracts the forms of which were provided by the Client regarding their validity and correspondence with the legislation of the Russian Federation, (2) register the contract of pledge of a 60% share in the charter capital of with LLC OmskGeotek, LLC SibirGeotek, LLC SibGeotek, (3) and negotiate with the notary (not more than 2 meetings) regarding the possibility of notarizing the pledge agreement provided by the Client (hereinafter the “Assignment”).”

It can be seen that pledge forms were provided by Alliance to MZSP for its advice, in relation to the shareholdings in the GeoTEK companies. Nothing in the clause indicates whether or not such pledge agreements had already been executed.

By a letter dated 17th September 2009 (therefore a day before the engagement letter) MZSP wrote to Ms Bagitova, who was the in-house lawyer of Exillon with the subject matter stated as “legal regulation of pledge of shares and notarisation of the pledge agreement of shares in limited liability company”. The letter appears to be framed in entirely general terms without reference to the GeoTEK companies as such. The English translation (which includes definite and indefinite articles) refers to the amendment to Article 22 from July 1st 2009 and its requirement for notarisation of share pledge agreements under its provisions. The letter states that the amendment to Article 22 obliges the notary to carry out various functions within time limits thereafter and that an amendment to the law on LLCs dated 19th July 2009, sets out the need for registration of the share pledge agreement on the joint application of the pledgor and pledgee. In order to notarise the transaction, it was necessary for a series of documents to be provided to the notary, as set out in a list.

At no point does the letter express an opinion that pledges that post-date July 1st are unenforceable (nor that pledges pre-dating it are invalidated). The letter however included the following paragraph (in translation):

“Considering the fact that the requirement for notary certification of pledges [a pledge] did not exist previously, there is an issue of bringing [the] existing pledges in compliance with the form that would allow their registration in the Uniform State Register of Legal Entities. We believe that the best approach is to sign a new share pledge contract before the notary.”

In my judgment, what is being said in relation to pledges which exist at 1st July is that in order to secure registration of them, it would be best to go through the notarisation procedure with a new share pledge.

Mr Bolgauov’s evidence in his third affidavit was that it was understood by Alliance and indicated by Ms Dikhanbayeva that all of the pledges given in relation to the GeoTEK companies were affected by the change in the legislation and that, in order to be effective, all of them needed to be notarised and registered. In the light of the advice received from MZSP, Alliance therefore requested various further documents from the Replacement Borrowers for the notarisation procedure. Those documents were not however forthcoming.

Correspondence between MZSP and Ms Dikhanbayeva in September and October 2009 shows the lawyers seeking documentation from her to enable the notary to certify the security and pledge agreement. Ms Dikhanbayeva asked if there was any news from the bank’s lawyers who reviewed the security and pledge agreements in the light of comments from MZSP. In October it appears that documents had been sent to the notary for approval and, in relation to the OmskGeoTEK pledge, there were inconsistencies in the documents supplied and a requirement that the priority of the various pledges be set out. More than this does not appear from that correspondence.

On 18th November 2009, in a letter, Alliance requested various further documents from Ms Dikhanbayeva “on behalf of the Replacement Borrowers”. It requested that these be provided by 20th November 2009 “in order to register three pledge agreements at the notary and at the authorised bodies in accordance with the current legislation of the RF”. The letter drew attention to the fact that there was no security in place and that the process of registration of the pledges was necessary.

Mr Bolgauov went on to say that none of those documents were provided by the Replacement Borrowers and in consequence a meeting took place with Ms Dikhanbayeva on 15th December 2009. The agenda for the meeting refers to three items. First is the provision of the pledges of the GeoTEK shares and the current position on registration of them. The second item for discussion was the Holding Invest group’s plans for repayment of the debt and the third item related to the question of investment in its projects, which was necessary for development of the oil licences granted to the GeoTEK companies. In the body of the document, Ms Dikhanbayeva is recorded as accepting the indebtedness of the Replacement Borrowers to Alliance and the need for repayment, together with the absence of any security. The translation of the minutes states that she “clarified that Pledge Agreement signed at present between the bank and GK [GeoTEK] should be executed again in front of the notary in RF, due to amendments introduced in the Russian legislation, hence the current agreement is deemed not to be duly executed”. The minutes referred to the form of the pledge agreement as agreed with MZSP which was to register the pledge agreement. She said that issues arose in that context because of the need for the provision of original incorporation documents of the GeoTEK companies. Tredall owned only 60% of those companies and the original documents were held by the other shareholders from whom it would be necessary to obtain such documents. Ms Dikhanbayeva stated that the position would be clarified by 15th January and the agreements would be duly signed and registered. She also stated that the Replacement Borrowers were carrying out no business at all and the only source of repayment of the debt would be the income from the GeoTEK companies which required $60 million worth of investment for construction of the infrastructure and for commencement of production. Attempts were being made to obtain financing which should be completed by May/July 2010.

It was Mr Bolgauov’s evidence that the Russian minority shareholders in the GeoTEK companies had never been asked to register the pledges or to provide original documents. This they had said to the Russian prosecutor, but Alliance itself had never had any direct discussions with them.

It appears that the Replacement Borrowers and Tredall, with the GeoTEK companies, were sold by Mr Arip to Serco Solutions Ltd and Mr Igilikov (one of the individuals who owned Serco) on 24th December 2009 and 20th January 2010. It also appears that, by that stage, the Russian authorities were serving notices asserting breaches of requirements of the various licences which could result in forfeiture of them.

On 6th January 2010 Alliance wrote to Ms Dikhanbayeva seeking information about the assets of the each of the Replacement Borrowers but no answer was received and, in further correspondence in January and February, letters were written to her relating to the Replacement Borrowers’ failures to provide the pledges but as, by this time, Mr Arip’s interest in those companies had ceased, he was not responsible for any absence of reply.

At all events, although subsequently, in the spring of 2010, the new owners of the Replacement Borrowers offered to transfer a 60% shareholding in SibGeoTEK to Alliance in satisfaction of the indebtedness, none of the pledges ever appears to have been notarised or registered and both Alliance and Ms Dikhanbayeva appear to have proceeded on the basis that they were unenforceable. If the licences have expired or been forfeited, as appears to be the case now, the 60% shareholdings in GeoTEK companies are probably, as Alliance has pleaded, valueless. What the position would have been in the second half of 2009 remains uncertain but Alliance had its own security valuation from earlier in the year which it saw as sufficient to cover the indebtedness of the Replacement Borrowers. It has on its own evidence never sought to enforce the pledges because it regards them as unenforceable.

I am prepared to proceed on the basis that Alliance can show that it has realistic prospects of success in pursuing its claims under article 917 of the Kazakh Civil Code, subject to the issue of limitation. There is material before the court to support the allegations made in the particulars of claim by reference to the highly unusual features of the loans of 24th October 2008 and the amendments to them dated 3rd February 2009. The advancement of money without security of any kind, albeit with a commitment to provide security which was initially to be done within a period of one month and then extended for a further eight months, is contrary to normal commercial banking practice and calls for explanation. The other preferential terms of the loans also support Alliance’s case that these were seen as “shareholder related” loans concluded by bank operatives under the influence of the Seisembayev brothers without due and proper regard for Alliance’s best commercial interest.

The Original Borrowers had received an additional $98 million in 2008 and on Mr Sturt’s evidence were not short of cash. There was therefore no reason for any replacement financing and no commercial reason for Mr Arip’s involvement, as an alleged partner of Mr Seisembayev, nor his involvement of a complex of new companies in taking over the loan. On the self-same day as the loan agreements were made, 24th October 2008, the Memorandum of Understanding was concluded between Mr Arip’s IPO vehicle and the owners of the KNG-D/DinyelNeft shares which had been valued earlier in the year at $600 million - $1 billion for a price of $4.069 million.

The KNG-D/DinyelNeft shares were then disposed of to other Arip companies in breach of article 3.5 of the loan agreements in February and April 2009, prior to any agreement by Alliance to accept the GeoTEK shares as substitute security.

There is also evidence in support of the misrepresentation by Mr Arip to Mr Balgarin in March 2009 as to the relative values of KNG-D’s/DinyelNeft’s shares and the GeoTEK shares.

I am prepared to assume for the purposes of this hearing that Alliance has a good arguable case and has raised serious issues to be tried, subject to the issue of limitation. Limitation, however, in my judgment, represents an insuperable barrier for Alliance – a matter which has become clear by reason of disclosure of documents which were not shown to the judge on the ex parte application but which have been produced as a result of demands by the defendants’ solicitors.

The undisputed evidence is that there is a three year limitation period for a claim under article 917 of the Civil Code. The limitation period begins to run from the point when the claimant learns or should have learned that it had suffered harm from an unlawful violation of its rights. As there is no tort of conspiracy in Kazakh law and an agreement between the defendants is only relevant to show joint and several liability of each of them, the focus must be on the individual unlawful acts which are said to give rise to the harm in question. The relevant knowledge is that of the Management Board or Board of Directors, although if an employee or official accountable to the management bodies were to discover the circumstances of the violation of Alliance’s rights, the “should have learned” criterion of article 180.1 of the Civil Code would apply and the limitation period would begin to run from the time of that discovery.

It is virtually self-evident that, if resort has to be made to the “should have learned” criterion, issues of fact are likely to arise which would make it impossible for a court to determine the position without conducting a mini-trial which is not appropriate in the context of issues relating to service out of the jurisdiction or freezing orders. It is however Mr Arip’s case that the documents disclosed clearly show actual full and sufficient knowledge on the part of Alliance of the alleged unlawful acts said to cause harm to it well before 23rd July 2011 in circumstances where the claim form was issued on 22nd July 2014.

The question then arises as to what the relevant knowledge is in the light of the cause of action alleged and the harm allegedly caused. It is clear, on the claimant’s own case, that it was aware that Mr Arip owned the Replacement Borrowers as he told Mr Balgarin that at the meeting which took place in March 2009. Mr Bolgauov’s evidence of what Mr Balgarin told him about the meeting is important. At paragraph 35 of his third affidavit Mr Bolgauov recites what Mr Balgarin told him about the meeting with Mr Arip in 2009, correcting the earlier date given of April 2009 to March, since AppraisConsult was only employed after that conversation, which seems logical enough. Mr Balgarin, the managing director from February 2009 said that:

It is apparent therefore that, on Alliance’s case, in March 2009, the managing director (and the deputy chairman, Mr Adekenov who was also at the meeting) knew that the Replacement Loans had been made without taking any security, that they were “shareholder-related transactions” and that they had not been entered into with due regard for Alliance’s own interests. Both knew that the KNG-D shares and the DinyelNeft shares were not pledged as security at that stage and that Mr Arip and the Replacement Borrowers were not putting them forward as security but suggesting GeoTEK shares instead. Inspection of the 24th October 2008 Loan Agreement and the further loan agreements in December 2008 would have shown a commitment on the part of CBC and Caspian to provide the KNG-D and DinyelNeft shares as security. There is no evidence before the court as to Mr Balgarin’s and Mr Adekenov’s knowledge about this feature of those loans in March 2009.

In the ensuing months however, as appears later in this judgment in relation to the issue of non-disclosure, the Credit Committee met and made various decisions about the security to be provided in respect of the indebtedness of the Replacement Borrowers (and Simons Holdings). The documents show the decision to accept pledges of 60% of the GeoTEK shares as being of sufficient value to cover the indebtedness but to request an additional guarantee from (inter alia) DinyelNeft in respect of that indebtedness.

More importantly however for present purposes, there are a series of Internal Audit Reports in 2009 which were eventually put before Alliance’s board of directors and sent by the acting chairman of the board in February 2010 to the Investigation Group of Agency of Economic and Corruption-Related Crimes (the Financial Police). These reports are revealing and referred to Bolzhal, Holding Invest, Caspian and CBC and culminated in an Internal Investigation Report relating to all of these four companies dated 26th January 2010 or 2nd February 2010. An undated report related to Bolzhal refers to Credit Committee minutes of 24th October 2008 in relation to the loan facilities granted then, minutes of 9th December when the agreed security to be provided within sixty days was changed from shares in Basius Holding to fixed assets of DinyelNeft, minutes of 5th January 2009 referring to the amendment to clause 3.6, minutes of 8th May 2009 accepting the 60% of SibGeoTEK shares as security for the obligations of the Replacement Borrowers on the basis of the AppraisConsult report and finally the minutes of 26th June 2009 where reference is made to the engagement of a law firm to register the pledge of the 60% shares in SibGeoTEK and to the request for an additional guarantee from (inter alia) DinyelNeft. It was pointed out that there was currently no security and no pledge agreement and then a list of “notes/errors/violations” appeared with fifteen sub-paragraphs setting out breaches of the internal regulations of the bank and “the normative acts” of Kazakhstan. At paragraph 1.15 the following appeared:

“No Supplement Agreement to BLA No 122K-08 dated 24th October 2008 was executed, as required by minutes of Credit Committee … dated 8th May 2009 on the substitution of the pledged security. In particular, under the BLA, the obligations were secured by the pledge of the 100% interest in the charter capital of LLC DinyelNeft, whereas pursuant to the decision of the Credit Committee it was to be substituted for the pledge of the 60% interest in the charter capital of SibGeoTEK.”

Reference was thereafter made to the valuation of the 60% share in SibGeoTEK and the fact that AppraisConsult was not on the list of certified independent appraisal companies approved by the Credit Committee and to the 5th January 2009 minutes of the Credit Committee which referred to the decision that “within eight months … the borrower shall apply its best efforts to ensure the pledge of assets in the form of participatory shares and companies and fixed assets for the value covering the Borrowers’ obligations hereunder in full, unless a different value is determined by agreement between the parties”. Because reference was made in this report to the absence of any execution of pledge documents, it is to be assumed that the minutes pre-dated 15th June 2009.

There are audit reports for Holding Invest dated 17th July 2009, for Caspian dated 29th and 30th September 2009 and CBC dated 1st October 2009. These follow a similar format in referring to the minutes of Credit Committee meetings in October 2008 and January 2009 including in particular the amendment to article 3.6 of the October loan agreements and the absence of security, together with a long list of “notes/errors/violations” in relation to “the internal regulations of the Bank as well as the normative acts of the Republic of Kazakhstan”. Reference was again made to the valuation of the 60% shareholding in the relevant GeoTEK company and the absence of AppraisConsult from Alliance’s list of approved certified independent appraisal companies. Attention was drawn in each case to the lack of certainty and inconsistency in the documents relating to the ownership of the relevant GeoTEK company.

In the case of the audit report on the first loan to Caspian, reference was specifically made to the Credit Committee minutes of 24th October and the requirement that Caspian should, within 30 days, produce security in the form of pledges relating to two GeoTEK companies and KNG-D, and to the amendment to article 3.6 of the loan agreement as referred to in the minutes of 5th January 2009. Reference was then made to the minutes of 8th May and 26th June 2009 and the changes in the security sought at that stage, the ultimate requirement being for a pledge of the 60% shareholding in SibGeoTEK, the registration of pledge agreements and the request for guarantees from (inter alia) DinyelNeft. The CBC audit report dated 1st October 2009 drew attention to the minutes of 18th November 2008 and the requirement of a pledge of the share capital of DinyelNeft and the subsequent changes in January 2009, May 2009 and 26th June 2009. Specifically under the list of violations, at paragraph 1.12, the following appeared:

“No supplement agreement to BLA No. 140 K/08 dated 3 December 2008 has been prepared, as required by the Minutes of the Meeting of the Credit Committee of the Head OfficeNo.25 dated 8 May 2009 on the substitution of the pledged property. Namely, the BLA provides for security of the obligations in the form of the 100% participatory share in the charter capital of Dinyelneft LLC, while the Credit Committee resolved to substitute the pledge for a 60% share in the charter capital of SibGeoTEK LLC.”

Internal Investigation Report No. 33 dated either 26th January 2010 or 2nd February 2010 was approved by the Executive Director of Security of Alliance on 2nd February 2010. The report referred to the conduct by Alliance of an internal investigation to determine any illegal actions by the Borrower and other persons towards the bank in relation to the Holding Invest Group of Companies. Reference was made to the loan agreements, to the Replacement Borrowers, and to the fact that the repayment schedules provided for the first repayment to take place in 2013, whilst the total of outstanding principal was $287,738,787. The report stated that, although the intention was that the relevant loans would be secured by pledges by Tredall over the 60% shareholdings in the GeoTEK companies, upon which the Pledge Security Department had, in its reports of 17th April 2009 placed a value of $660,450,112, the pledge agreements, although signed, had not been registered with the competent authorities. The terms of this document are significant in showing the state of knowledge of the Board of Directors and therefore bear extensive citation:

“On 2 July 2009 and 3 July 2009, 100% of shares in each of the above four companies were sold pursuant to sale and purchase agreements, with the title thereto passing to [the Replacement Borrowers] Sh.N. Dikhanbayeva (from M.A. Arip and B.A. Zhunus). The aggregate purchase price of such shares comprised KZT 416,800, which demonstrates that the transactions were made merely on the record and for technical reasons.

…

The audit conducted by the Internal Audit Service identified various violations in the course of the compilation of the loan portfolio in accordance with the Bank’s by-laws and the laws and regulations of the Republic of Kazakhstan. In particular, as regards almost all of the loans, the members of the Credit Committee (A.K. Saparov, R.A. Abdylkasymova, B. Baglan, A. Jailaubekov, B.A. Tasibekov) took a unanimous decision to approve the loans without first obtaining the required reports from the relevant internal departments of the Bank (a legal opinion, a risks evaluation report, an opinion of the security department, an expert opinion) in violation of the Regulation of the Processing of Loan Requests of Legal Entities in the Head Office of OJSC Alliance Bank dated 7 February 2003.

The identified violations include, inter alia, a violation relating to the concentration of powers of the Credit Committee and to the conduct of the appraisal process. The appraisal process in respect of the pledge was only provided in April 2009, whereas the loans themselves were granted in 2008. Moreover, the appraisal of 60% of shares in the share capital of SibGeoTEK LLC was conducted by Apprais Consul LLP, a company that was not include din the list of certified independent appraisal companies approved by the Credit Committee of the Head Office of JSC Alliance Bank.

In relation to the internal review pledges of SibGeoTEK LLC, OmskGeoTEK LLC and SibirGeoTEK LLC, Mrs. Aydana Ersayevna Kabidolanova, currently employed as the Director of the Pledge Security Department, explained that on 17 April 2009 she had examined (Participation in Shares in Companies) Appraisal Reports Nos. 01/02/-01, 01/02-02 and 01/02-03 relating to the security interests offered as security for the said loans. Her Examination Reports noted that the appraisal company, that had conducted the appraisal, was not certified by the Bank. She also explained that the decision on the certification of independent appraisal companies fell within the competence of the Bank’s competent body, namely, the Credit Committee of the Head Office. She also noted that pursuant to the Corporate Standard On Pledge Policy, when examining the Appraisal Reports, the credit departments of the Bank shall compile a set of documents required for the employees of the Pledge Security Department. In relation to the loans, the relevant copies of documents were provided by the Bank’s employee, Mr. B. Kudaybergenov, who in turn, had received the relevant documents from the borrowers. The examination was conducted on the basis of such documents. Given that the principal business of the said companies is the exploration and production of minerals and they are licensed to use subsoil in the Omsk Region of the Russian Federation on 27 March 2009, she and Mr. Yu. Bogday, the borrowers’ representative, visited the location of the assets under appraisal (the oilfields). In evaluating the assets offered as security, she has applied the DCF analysis that is applied for the valuation of subsoil use rights. The said analysis effectively uses future free cash flow projections and discounts them to arrive at the present value as at particular date, called the “valuation date”. Given that there was no information on any transactions for the sale of similar assets, it was impossible to apply the market value method to the valuation. The cost method applied to determine the cost estimate is based on the determination of costs of restoring or replacing the valued asset subject to wear and tear. The cost method is not used for the valuation of shares taking into account the value of minerals.

Mr Bakyt Kudaybergenov noted that, at the time when he held the position of manager at the Corporate Finance Department reporting to the Department’s Director, Mr. S.A. Samidinov, from October 2008 on he was the one in charge of the loans of the Holding Invest Group of Companies. According to him, before that JSC Alliance Bank had already financed Barnard Commercial S.A., Argentan S.A. and Simons Holding B.V., the owners of the Russian companies holding rights to the oilfields in Russia. The said Russian Companies were sold to the Holding Invest Group of Companies, and for this purpose they were granted the loans. The loans were applied to repay the debt of Barnard Commercial S.A., Argentan S.A. and partially, Simons Holding B.V. The company was given a 2-month grace period to provide the security. Following the expiration of the said period an additional 8-month grace period was granted by the Bank, taking into account the complicated process of registration of the pledge, given that the pledged assets were located in the Russian Federation. To conduct the appraisal of the offered security, the appraisers and the representative of the Pledge Security Department undertook a trip to Russia at the expense of the Holding Invest Group of Companies. The relevant pledge agreements were prepared following the appraisal, together with the Legal Department.

At present, Mr Bakyt Kudaybergenov is not employed by the Bank. The explanations given by Mr B. Kudaybergenov demonstrate that the appraisal was only conducted after the loan was advanced and that the pledge was not duly registered during the prescribed term.

According to para. 27 of the Rules of Classification of Assets, Contingent Obligations and Provisions (Reserves) Therefor approved by Resolution of the Management Board of the FSA No. 296 dated 25 December 2006, a loan granted subject to security in the form of commodities, real or personal property located (registered) outside the territory of the Republic of Kazakhstan, is deemed to be unsecured. Since the pledged participatory shares are owned by a resident of the Russian Federation, the loans are 100% unsecured.

Pursuant to the Internal Memorandum of the Internal Audit Service to the Economic Security Department dated 30 October 2009 prepared following the audits conducted by it and on the basis of explanations given by the employees of the Pledge Security Department, the loans issued after the date of the Rules and qualified by the Rules as “insecured (blank) loans” are deemed to be issued in violation of Article 35 of the Law of the Republic of Kazakhstan On Banks and Banking activities, namely of its requirements concerning the provision by the Bank to any single borrower of a blank loan or the assumption of an unsecured contingent liability in the aggregate amount exceeding the average annual value of assets of such borrower less the amount of borrowings received by the borrower from banks and organizations involved in the conduct of banking operations of certain types.

Following the review of the original copies of the pledge documents conducted to determine their fullness and compliance with the Bank’s requirements, it was established that, as at the time of the audit, i.e. from July to September 2009, the pledge agreements in relation to the pledge shares in the Russian Companies were not executed. The negotiations are ongoing with the head and manager of the said Group of Companies, Mrs Sh.N. Dikhanbayeva, concerning the required registration of the relevant agreements in the prescribed form. At present, the pledge agreements are already signed but not yet registered with the competent authorities.

The Internal Audit Service observed 100% of substantially all of the loans were used otherwise than in accordance with their designated purposes. The loans were provided to the said companies for the financing of their working capitals, acquisition of shares in charter capitals and procurement of fixed assets. However, the loan proceeds were actually applied towards full repayment of Argentan’s and Barnard’s loans and partial repayment of the loan of Simon Holdings B.V. The aggregate amount of such repayments comprised US$ 290,560,000 (including interest).

Taking the above into account, one should conclude that the loans of the Holding Invest Group of Companies were issued in violation of the Bank’s internal regulations (Corporate Standards), Resolution of the Management Board of the Financial Market Monitoring Agency No. 296 dated 25 December 2006 and the Law of the Republic of Kazakhstan On Banks and Banking Activities. There are grounds to believe, as a result of the review of the process of granting of the said loans and the utilization and application of the loan proceeds, that damages were caused to the Bank’s interests as a result of certain unlawful actions, namely the issuance of an obviously non-recoverable loan and the unlawful creation of comfort and preferential conditions for the crediting of certain legal entities. In their turn, the Borrowers took the advantage of the Bank’s employees’ failure to perform their official duties and embezzled and misappropriated the Bank’s funds. As a result the Bank has suffered damages in the amount of the issued loans (as at 2 February 2010, the outstanding balance of the principal debt comprised KZT 28,713,000,000 and US$ 52,639,136.46), i.e. of a large scale.

These circumstances testify to an offence provided for by Article 220 of the Criminal Code of the Republic of Kazakhstan (Unlawful Misappropriation of a Bank’s Funds), namely “the application by a bank’s employees of the bank’s own and/or borrowed funds to issue an obviously non-recoverable loan or to make an obviously unfavourable transaction for the bank, or the issue of unjustified guarantees of the bank, or the creation of unjustified preferential conditions for the bank’s clients or other persons, where such actions result in an individual, an organization or the state suffering damages on a large scale”, as well as to the violation Article 177 Fraud i.e. “the theft of another’s property or the acquisition of title to another’s property as a result of fraud or breach of trust”.

On the basis of the above,

I BELIEVE THAT:

1.

The internal investigation relating to the determination of unlawful actions in respect of the Bank is completed.

2.

The factual circumstances of the unlawful actions in respect of the Bank are confirmed.

3.

Given that there is evidence of certain unlawful actions committed against the Bank’s interests and resulting in damages on a large scaled caused to the Bank, it is recommended that the Bank’s management file with the law enforcement authorities an application for the institution of criminal proceedings and prosecution of guilty persons.”

This led to a letter dated 4th February 2010 to the Financial Police, signed by the acting chairman of the board of Alliance and copied to the deputy chairman. It referred to “violations of internal Bank regulatory documents (Corporate Standards) and of the Law on Banks which resulted in loss to Alliance”. The letter incorporated a copy of the Internal Investigation Report of 26th January/2nd February 2010 and the internal audit reports compiled in 2009, to which I have made reference. The letter concluded in this way:

“The Borrowers’ taking advantage of the violated loans provision, misappropriated and dissipated the monies provided by the Bank, without fulfilling their obligations regarding the registration of the pledges – shares in the equity capitals of SibGeoTEK, OmskGEoTEK, and SibirGeoTEK LLC. As a result the Bank has suffered financial loss for the issued loans, i.e. as of 02.02.2010, unpaid principal balance …”

The bank requested the financial police to institute criminal proceedings against those responsible.

It is abundantly clear from these documents that the board of directors of Alliance was aware in February 2010 of the following:

When reference is made to the POC and the way in which Alliance puts its case, it can be seen that the board of directors knew everything it needed to know in February 2010 in order to bring the current proceedings against Mr Arip. Alliance had already come to the conclusion in February 2010 that the Replacement Borrowers had obtained the Replacement Loans in violation of Alliance’s rights (under article 917 and 8.4), had failed to provide security (in violation of article 272) and had persuaded Alliance to accept pledges of the GeoTEK shares as security instead of the KNG-D and DinyelNeft shares. The managing director himself, Mr Balgarin, knew what Mr Arip had told him about the respective value of these shares as security.

On its own case, the only elements of which Alliance could possibly have been unaware at this stage was that the KNG-D and DinyelNeft shares were of potentially significant value, as compared with the lesser value or worthless value of the GeoTEK shares. It is said that it was not until April 2011 that Mr Bolgauov saw the IPO prospectus of Exillon which referred to the oil fields owned by KNG-D and DinyelNeft as the basis for seeking investment but even that is outside the three year period preceding the issue of the Claim Form.

It was not however until October 2011 that Mr Bolgauov prepared organisational charts showing the structure of the various groups of companies and the assets owned by them in the context of what had been pledged by the Original Borrowers and what had been owned by the Replacement Borrowers, namely the KNG-D and DinyelNeft shares, and appreciated that these were never pledged by the Replacement Borrowers as they had been by the Original Borrowers.

On its own case, Alliance discovered that the KNG-D and DinyelNeft shares were valuable in the spring of 2011 but only appreciated that they had previously been pledged by the Original Borrowers in the autumn of that year. Nonetheless it knew from the outset of his involvement of the ability of Mr Arip to pledge such shares in respect of the Replacement Borrowers’ indebtedness.

Alliance however is not pursuing a case for misrepresentation in March 2009 in relation to the respective values of the rival shareholdings in the GeoTEK companies on the one hand and KNG-D/DinyelNeft on the other. The obvious reason for not pursuing such a case is that the minutes of the Credit Committee meetings in May and June 2009 show that Alliance accepted the GeoTEK shares (on the basis of the AppraisConsult valuations, as discounted by their own internal valuations for security purposes) as being of sufficient value to cover the indebtedness of the Replacement Borrowers. There is therefore a virtually insurmountable problem for Alliance in showing reliance and loss as a result of the alleged misrepresentation. Instead, the misrepresentation is merely relied on as an element in showing the dishonest intention of Mr Arip and the Replacement Borrowers in obtaining the loans in November/December 2008 without any intention to repay and no intention to provide security.

The inference of intention however was one which Alliance had already drawn in February 2010 by reference to the matters set out in the Internal Audit Reports, the Internal Investigation Report No. 33 and the letter to the financial police, when speaking of embezzlement and misappropriation. The harm and loss suffered, as pleaded, occurred when the Replacement Loans were made and monies were paid out under them without intention to repay, and implicitly, to provide any effective security. What happened to the KNG-D and DinyelNeft shares, after other security was accepted as sufficient, does not reflect on Mr Arip’s intention to harm. The Exillon IPO only told Alliance what had been done with the KNG-D/DinyelNeft shares which had been substituted as security by the pledge of the GeoTEK shares. The case made by Alliance would be exactly the same if no IPO had taken place at all and the profit which he made is not relevant to the question of his intent to cause harm by obtaining the Replacement Loans with no intention of repayment – with no effective security.

It is not enough to say, as Alliance does, that it needed to put all of the pieces of the jigsaw together in order to ascertain that the security which was originally offered for the Replacement Loans (pledges over the KNG-D and DinyelNeft shares) served as the basis for the London IPO in order to appreciate that it had a cause of action. Long before that, it had come to the view that Mr Arip’s actions had caused it to make the loans with no prospect of repayment, in contravention of the norms of Kazakh law.

In my judgment therefore, Alliance has no prospect of succeeding in its claims because they are time-barred as a matter of Kazakh law. In such circumstances the order for service of proceedings out of the jurisdiction upon him and the freezing order must be discharged.

I need not refer in any detail to the authorities which were cited to me in relation to the question of material non-disclosure on ex parte applications for freezing injunctions or for service out of the jurisdiction. The test of materiality of a matter not disclosed is whether it would be relevant to the exercise of the court’s discretion. A fact is material if it would have influenced the judge when deciding whether to make the order or deciding upon the terms upon which it should be made. The question of materiality is a matter for the court and not the subjective judgment of the applicant or his lawyers.

There is a high duty on the applicant which can be summarised as follows, by reference to CPR 25.3.5 and authorities there referred to:

“(1)

The duty on the applicant in such circumstances goes beyond merely identifying points of defence which might be taken against him, important though that is.

(2)

The applicant has to show the utmost good faith, identifying the crucial points for and against the application and not rely on general statements and the mere exhibiting of numerous documents.

(3)

The applicant has to investigate the nature of the claim asserted and the facts relied on before applying, and has to identify any likely defences. He has to disclose all facts which reasonably could or would be taken into account by the Court. The duty is not restricted to matters of fact but extends to matters of law.

(4)

The applicant also has a duty to investigate the facts and fairly to present the evidence.

(5)

There is a high duty to draw the Court’s attention to significant factual, legal and procedural aspects of the case.

(6)

Full disclosure has to be linked with fair presentation. The judge has to have complete confidence in the thoroughness and the objectivity of those presenting the case for the applicant.

(7)

It is the undoubted duty of counsel to draw to the judge’s attention weaknesses in his case and to make sure the judge understands what might be said on the other side even if the judge says he has read the papers.”

I take into account the comments made in Brinks Mat v Elcombe [1988] 1 WLR 1350 at paragraphs 6 and 7 of the judgment of Ralph Gibson LJ and at pages 1358C-G and 1359C-E in the judgments of the other Lords Justices in the context of the consequences which should be visited or not visited upon the applicant who fails in his duties. The authorities show that the interests of justice must be paramount and that a due sense of proportion is required in relation to the assessment of the seriousness of the breach. Moreover, caution must be observed when the non-disclosure in question depends on proof of facts which are in issue in the action and the court must not conduct a mini-trial.

Having due regard to the principles and admonitions set out in the authorities, I have come to the clear conclusion that there was material non-disclosure on the part of Alliance in the presentation of its application to Flaux J.

The matters which should have been disclosed, but which were not, were matters which were relevant both to the merits of Alliance’s claim and matters which affected limitation. They were material to the judge’s consideration on the without notice application and would, in my view, have influenced his decision, particularly in relation to the latter point, where I have held that Alliance’s case does not cross the threshold of a serious issue to be tried, let alone a good arguable case.

Documents included in the exhibits before Flaux J but not referred to in the presentation to him led Mr Arip’s solicitors to complain of the failure to disclose the AppraisConsult valuations of the GeoTEK companies in April 2009, Alliance’s own security valuations based upon that, the approval of Alliance’s loan committee of the GeoTEK shares as security and the February 2010 complaint to the financial police and the police response. Mr Arip was however able to exhibit the AppraisConsult valuations of the GeoTEK companies and the report from the financial police in his responsive evidence. Alliance’s reply evidence exhibited the Credit Committee minutes for Bolzhal alone, the complaint to the financial police and material relating to the unenforceability of the pledges, to which I have largely referred. At the end of February Alliance disclosed loan and Credit Committee minutes in relation to the Replacement Loans, the internal valuation of the GeoTEK companies effected by Ms Kabidoldanova and the internal audit reports which had been provided to the financial police, together with the Internal Investigation Report No. 33.

Although the complaints on disclosure covered other areas as well, the three critical areas, in my judgment, where Alliance fell short in its duties, relate to the due diligence and credit approval processes applied by Alliance when deciding to take security over the GeoTEK companies’ shares, (the Credit Committee Minutes for the Replacement Borrowers), the Internal Audit Reports and the Internal Investigation Report No. 33 in relation to the Replacement Borrowers’ wrongdoings, and documents relating to the financial police investigation in 2010, both in the context of the complaint made and the police report.

As I have already said, the essential nature of the case made by Alliance is that Mr Arip committed unlawful acts violating the rights of Alliance which caused it harm inasmuch as his companies obtained monies from Alliance when he had no intention of repaying nor of providing effective security. The case is not predicated on the failure of the Replacement Borrowers to provide security, nor on Mr Arip’s deceit of Alliance when persuading it to accept the GeoTEK security instead of the KNG-D/DinyelNeft security. Documents which militated against any intention on the part of Mr Arip and the Replacement Borrowers not to repay the Replacement Loans were therefore material to be disclosed. Furthermore, documents which militated against Alliance’s argument as to causation of harm fell to be considered. If Alliance had sought and obtained security in the form of pledges over the GeoTEK shares, which it had valued as sufficient to cover the Replacement Borrowers’ obligations, this not only impacted on the question of Mr Arip’s intent when taking the Replacement Loans but also on the question whether harm was caused and loss was caused by Mr Arip’s acts, as alleged in the POC, or by a failure to enforce valuable security over the GeoTEK shares, or a subsequent inability to enforce that security by reasons of problems in notarisation or registration of the pledge agreements, both those pre-dating and post-dating 1st July 2009. The internal audit reports and the Internal Investigation Report No. 33 were highly material to Alliance’s state of knowledge of the wrongs allegedly done and the limitation defence which was available to Mr Arip.

I have already referred to the Credit Committee minutes in the context of the Internal Audit Reports but it is necessary to note their contents inasmuch as they reveal the decision making processes of Alliance to accept the GeoTEK shares as security, as opposed to the KNG-D/DinyelNeft shares. If, in accordance with Alliance’s case, the decisions of the Credit Committee prior to March 2009 are all suspect as being subject to the influence of the Seisembayev brothers and in particular Ms Abylkasyova who was first deputy chairman of the board at that stage, the unusual nature of the loan agreements and the advancement of money without security against a promise to provide it within, initially one month, extended to nine months, is readily explicable. These were “shareholder-related loans on preferential terms” and the amendments made in January/early February fit with Alliance’s case.

Following the meeting in March 2009 between Mr Arip and Mr Balgarin to which Mr Bolgauov refers in his evidence, when Alliance was under new management, valuation reports on the market value of the shares in the three GeoTEK companies were obtained from AppraisConsult. Despite aspersions now cast on these reports by Mr Bolgauov, the reports referred to the valuation exercise as being carried out in accordance with the requirements of International Valuation Standards on the discounted cash flow method “for the purpose of financial planning and development of future business strategies … as well as with the intention to facilitate a transaction with the chosen financial institution”. It is not suggested that any other type of valuation than an income-based approach on a discounted cash flow method would be appropriate. The valuation sought to determine the price at which a 100% shareholding equity interest in the relevant company could be sold, assuming the existence of a market with a willing buyer and a willing seller in an arms-length transaction with the proper market research. The value implied that the hypothetical buyer was a financial buyer who would invest in it with the expectation of obtaining a return on the investment corresponding to the commercial risk. Because the GeoTEK companies held licences for the development and extraction of oil where there were proven global oil reserves but no oil had as yet been extracted, significant investment was required and a “high number of assumptions” had to be made in using the discounted cash flow method which did “not guarantee accurate reflection of the situation due to the limited nature of the sources of information used in the valuation”.

As appears from the Internal Investigation Report No. 33, from which I have already quoted extensively, Ms Kabidoldanova of Alliance made her own assessment of the value of the GeoTEK shares by reference to the AppraisConsult valuations. She assessed the value of the shares for security purposes at 50% of the AppraisConsult valuations for SibGeoTEK and SibirGeoTEK, disagreed with the AppraisConsult valuation of OmskGeoTEK, reducing it by 39% and then assessing the security value as 50% of that lesser figure.

On 8th May, the Credit Committee considered the position relating to Bolzhal, Caspian and Holding Invest and essentially followed the credit manager’s proposals to accept the 60% shareholdings in the various GeoTEK companies as security for the indebtedness of the Replacement Borrowers whilst stating that there should be reconsideration in two months time of what other collateral might be sought. The amounts determined by Ms Kabidoldanova were to be used as the basis of the Pledge Agreements. The necessary agreements were to be drawn up and the terms of the resolution brought to the attention of the borrowers.

Share pledge agreements were drawn up with printed dates, in the case of the SibGeoTEK shares and the SibirGeoTEK shares of June 15th 2009 whilst the pledge of the OmskGeoTEK shares was dated 7th July 2009. Tredall Ltd, in the person of Ms Dikhanbayeva executed the pledge agreements as pledgor and each of the Replacement Borrowers was also a party. Reference was made to the outstanding loans to each of the Replacement Borrowers and a value on the subject of the pledge specified, as mutually agreed between the parties, at $324 million approximately for the SibGeoTEK shares and $278 million approximately for the SibirGeoTEK shares, whilst the OmskGeoTEK shares were assessed at $58 million approximately. These reflected Ms Kabidoldanova’s assessments. The Pledges, as valued, were more than sufficient to cover the obligations of the borrowers under the amended form of article 3.6 of the October loan agreements.

On 24th June 2009 the risk management department submitted a memorandum to the Credit Committee which was to meet on 26th June. The document referred to the income of Tredall Ltd as coming from its related companies KNG-D and DinyelNeft (97.6%) and then referred to the GeoTEK companies and the eleven licences held for production and extraction of oil, of which ten were due to expire in 2011-2012, when it was envisaged that extension would occur. Whilst DinyelNeft and KNG-D are referred to as being “problematic”, it was considered that the 60% shareholdings in the GeoTEK companies covered all the Replacement Borrowers’ obligations with something to spare. The report suggested nonetheless obtaining additional collateral from KNG-D.

On 26th June 2009, the Credit Committee met again and considered the position of Simons Holding and the Replacement Borrowers. The 60% shareholdings in the GeoTEK companies were accepted as sufficient security in respect of the indebtedness with action to be taken to engage a law firm to register the pledge agreements and to request a guarantee from DinyelNeft. There is no evidence that any such request was ever made. The series of internal audit reports then emerged during the course of the rest of the year whilst attempts were made to notarise/register the three pledge agreements.

It is thus clear that the Credit Committee took a deliberate decision to accept the GeoTEK shares as security on the basis of Alliance’s assessment of their value. Whether or not there was any deception as to the value of the KNG-D/DinyelNeft shares (and there are documents which could be said to support Alliance’s position in this regard) the Credit Committee accepted the GeoTEK shares as security in place of earlier promises in 2008 to provide the KNG-D/DinyelNeft shares as security, albeit that the obligation to provide the latter had apparently been superseded by the amendment to article 3.1.6 in January/February 2009.

The offer of the GeoTEK shares as security and the circumstances in which it was accepted with Alliance’s valuations of the assets as sufficient to cover the indebtedness, strongly militates against the allegation that Mr Arip intended to injure Alliance by accepting loans without any intent to pay or to give effective security. Alliance fought shy, in argument, of saying that Mr Arip must have appreciated at the time of offering this security that Russian law would be changed to require notarisation which he could stymie. It was suggested in argument that Mr Arip was opportunistic in taking advantage of the change in Russian law in failing to do what was required to achieve notarisation/registration in the second half of 2009. The materiality of the circumstances in which the pledges over the GeoTEK shares were accepted and the valuations put upon them is self-evident in the context of liability for the alleged wrongdoing.

It is also highly material to the question of causation of harm. If the GeoTEK shares had the value accepted by Alliance, the recoverability of the loans could be said not to have resulted from the obtaining of the loans without security but from the failure of the security offered and accepted, whether by reason of lack of registration/notarisation or otherwise. It was Mr Arip’s case at the hearing that the pledges of the SibGeoTEK shares and the SibirGeoTEK shares could certainly have been enforced and that no attempt had been made to do so. Reference was also made to the offer of the SibGeoTEK shares in satisfaction of the loans in 2010. These matters which were not disclosed were material to the question of causation of harm and loss.

Alliance’s complaint to the financial police and the internal audit reports and Internal Investigation Report attached to it were, for the reasons I have given already in relation to limitation, highly material to that issue. So also was the response of the Financial Police to Alliance’s complaint. On 1st September 2010 the Financial Police gave notice of their refusal to institute criminal proceedings on the application of Alliance with respect to the Holding Invest group of companies in connection with a “malicious failure to repay credit debit on banking loans” (in translation). The police report of that date set out the history of loans made to Holding Invest, Bolzhal, CBC and Caspian and specifically referred to the loan agreements of 24th October 2008 and the CBC agreement of 3rd December 2008 in which there had been agreement to provide security over the KNG-D and DinyelNeft shares. Reference was made to the Credit Committee decisions of 8th May and the substituted collateral in the GeoTEK companies which was accepted, and the history of valuation of those companies. Investigations had also been made with Serco Solutions Ltd which now owned the Replacement Borrowers and the offer of the SibGeoTEK shares in satisfaction of the indebtedness. The report included the following paragraphs in translation:

“Thus an analysis of the banking documents and the pre-investigation examination shows thatadopting a procedural decision to institute criminal proceedings doesn’t seem to be possible. In particular documents submitted by Alliance Bank JSC show existence of the contractual relationship between the Bank and the entities. At the time of the issuance of the credit facilities the entities provided collateral that was accepted by the Bank. At the time of issuance of the bank loans the value of the provided collateral exceeded the value of the loans received. As the repayment period in respect of the bank loans begins from the year of 2013, and given that the Bank had set the deadline for the completion of the repayment at 2018, any discussion of the financial damage is premature. It should also be mentioned that the management of Bolzhal LTD LLP, Holding Invest LLP, Caspian Minerals LLP and Commerce Business Centre LLP are taking steps towards the resolution of the issue of the repayment of the bank loans, however, the Bank is not taking any steps towards selling the collateral assets. That is, the behavior of the workers of the Bank’s does not point to any facts of illegal use of the Bank’s funds.

Given the fact that at the time of obtaining the loans, the management of Bolzhal LTD LLP, Holding Investment LLP, Caspian Minerals LLP and Commerce Business Centre LLP provided collateral that was examined by the Bank’s staff, as well as the fact that there were valuation reports in respect of the collateral assets estimating their market value available at the time of the issuance of the bank loans showing the their value exceeded the value of the loans granted, the fact of presence of an element of fraud in their actions is also ruled out.

…

Given that the bank filed an application alleging a malicious failure to pay credit debt this issue has to be considered by a court in a civil procedure.”

The materiality of the absence of any finding of fraud on the part of the police in relation to the taking out of the new loans is self-evident.

No explanation for the failure to disclose this material has been advanced save that some of it was considered irrelevant because of the view that the pledges were unenforceable. That is not an adequate reason for failing to disclose the valuations, the Credit Committee minutes, the audit reports and the Investigation Report, nor the complaint to the Financial Police and the Police response, which were material to Mr Arip’s intent, the causation of harm and the loss suffered. These failures were in my judgment significant, however they may have come about. The information contained in these documents was highly material to the judge’s decision making process on the without notice hearing when determining the applications made.

In these circumstances, both because Alliance has no realistic prospect of success on the limitation issue and because of the non-disclosure on the without notice hearing before Flaux J, the order for service out of the jurisdiction upon Mr Arip and the Freezing Order must both be discharged. Any new application would fall foul of the limitation defence and there is therefore no basis for it, quite apart from the seriousness of the non-disclosures relating both to the merits of the claim and the limitation defence.

It appears to me that costs must follow the event and, subject to any submissions I would be minded to make an order for an interim payment on account of costs. If the form of the order can be agreed between the parties so much the better. If not I will hear any argument on the form of the orders I should make.