Kazakhstan Kagazy Plc & Ors v Zhunus & Ors

On this application by the claimants to re-amend the particulars of claim the focus of dispute lies, unusually, not in amendments which the claimants wish to make but in amendments which the claimants do not wish to make to their statement of case. The defendants contend that the claimants’ decision to leave certain claims in the particulars of claim and not to delete those claims comes too late, because the claims have already been discontinued. The claimants deny that they have discontinued the claims. If it is found that the claims have not been discontinued, the defendants renew an application issued much earlier in the proceedings, but which has never been decided, and seek a declaration that the court has no jurisdiction to determine the claims in question because those claims do not raise a serious issue to be tried.

The relevant procedural history and background is quite complicated but I will try to summarise it shortly.

The first claimant (C1), a company registered in the Isle of Man, is the ultimate parent company of the second claimant (C2), a company incorporated in Kazakhstan. C2 in turn directly or indirectly owns the other claimants, which are also Kazakh corporations. The defendants are former officers of the claimants who are alleged in this action to have defrauded the claimants of substantial sums of money. Earlier this year, the claimants concluded a settlement with the first defendant, Mr Zhunus, and the proceedings against him have been stayed. When I refer in this judgment to “the defendants”, I am referring only to the second and third defendants, Mr Arip and Ms Dikhanbayeva, against whom claims are still being pursued, with the trial listed to take place after Easter next year.

Some of the claims pleaded in the original particulars of claim were claims for losses allegedly caused by breaches of fiduciary duties said to have been owed by the second defendant (D2) to C1 under the laws of the Isle of Man. It was also pleaded that the third defendant (D3) is liable for dishonestly assisting in these alleged breaches of fiduciary duty. I will refer to this group of claims as the “Manx law claims”.

From the start of the proceedings, the defendants have objected to the Manx law claims on the ground that C1 is precluded from pursuing them by the so called “rule against the recovery of reflective loss”. The precise scope of that rule is a matter in dispute but, broadly speaking, where loss suffered by a shareholder of a company merely reflects loss suffered by the company which the company itself is entitled to recover from the defendant, then the shareholder is not permitted to pursue a claim to recover its loss from the defendant.

This action was begun in August 2013. When the proceedings were launched, the claimants applied without notice for and obtained a freezing injunction against D2. An application by D2 to set aside the freezing injunction was largely unsuccessful but did succeed in relation to the Manx law claims. HHJ Mackie QC decided that, because of the rule against the recovery of reflective loss, C1 had failed to show a good arguable case in relation to those claims. That decision was upheld by the Court of Appeal. In consequence, the freezing injunction against D2 was varied so as to remove the Manx law claims from its scope.

At the end of last year the claimants notified the defendants that they no longer intended to pursue the Manx law claims (and certain other claims which I leave aside for present purposes). The claimants took the view – which was not at that stage disputed by the defendants – that they needed the court’s permission in order to discontinue the claims.

In January 2016 the claimants provided draft re-amended particulars of claim to the defendants in which the Manx law claims were deleted. The defendants gave their consent to the proposed amendments. There was disagreement, however, about the terms of an order which the court would be asked to make granting the claimants permission to discontinue the Manx law claims (and certain other claims) and to amend the particulars of claim. In particular, although it was common ground that the claimants should pay the defendants’ costs of the discontinued claims, there was disagreement about aspects of the costs order including whether there should be an immediate detailed assessment and what should be ordered by way of a payment on account of the relevant costs.

On 15 April 2016 the claimants’ solicitors sent to the defendants’ solicitors a draft order accompanied by a notice of discontinuance and a copy of the re-amended particulars of claim in the agreed form which showed the Manx law claims as deleted. The notice of discontinuance was also filed with the court. However, the draft order was not agreed by the defendants.

The draft order had still not been agreed when on 24 June 2016 the claimants’ solicitors wrote to say that they were reconsidering their position with regard to the Manx law claims. Shortly afterwards they informed the defendants that they no longer wished to discontinue those claims because of recent developments in Kazakhstan. Those developments, in outline, are as follows.

In January 2016 a holding of bonds issued by C2 was acquired by an entity called Trust Mediation Warranty LLP. I will refer to this entity, for short, as “TMW”. Those are also the initials of Mr Thomas Mateos Werner, the CEO of C1, which the claimants suggest is not a coincidence. The bonds acquired by TMW amounted to only 1.3% of the total bonds issued by C2. But on the basis of its standing as a creditor, TMW applied to the Kazakh court to place C2 into “rehabilitation”. Rehabilitation is a procedure under Kazakh law which bears some similarities to administration in English law and is aimed at restoring a company’s capacity to pay its creditors and avoid liquidation.

TMW’s application was opposed by a substantial majority of the bondholders who between them owned 87% of the company’s bonds. Despite that, the application was granted by the Kazakh court in March 2016. There was an appeal, but that was dismissed by the appeal court on 8 June 2016. As a result, a Temporary Administrator of C2 was appointed on 28 June 2016.

No sooner was he appointed than the Temporary Administrator wrote a series of letters to the solicitors acting for the claimants in these proceedings and to an entity which is funding the litigation on a commercial basis. This correspondence included a letter dated 7 July 2016 to the litigation funder purporting to invalidate its agreement with C2 and a letter of the same date sent to C2’s solicitors telling them that they were prohibited from representing the interests of C2 and that they were acting without authority and thereby committing a “serious offence”. Copies of these letters also found their way to the defendants’ solicitors and were relied on by the defendants at a hearing in this court on 15 July 2016.

On 18 July 2016 the Temporary Administrator applied to the Kazakh court for various interim measures, which included orders which would prohibit C2 from taking any actions, including actions in relation to these proceedings, without his approval. That application, however, was dismissed by the Kazakh court in a judgment dated 29 July 2016. A further application by the Temporary Administrator made on 25 July 2016, seeking to establish that C2’s conduct of these proceedings required his approval, was also unsuccessful.

At meetings of C2’s creditors which took place at the end of August a plan for rehabilitation of the company was discussed and approved by its creditors. That plan contemplates that C2 will continue to pursue the present proceedings and indeed counts on C2 making a recovery in these proceedings in order to achieve a projected partial recovery for its creditors. The Temporary Administrator submitted an opinion to the court criticising this plan. Nevertheless, following a hearing on 16 September 2016 the Kazakh court approved the rehabilitation plan and removed the Temporary Administrator from office. Subject to any appeal against that decision, it therefore appears that the attempts made by the Temporary Administrator to interfere with C2’s pursuit of its claims in this litigation have failed.

The claimants say that it is to be inferred – or that there is at least a real prospect of showing – that TMW and the Temporary Administrator have been procured or instructed by the defendants to try to make it impossible for C2 to be able to pursue its claims in these proceedings. The matters on which they rely to support this inference include the following:

This is not a situation where an existing creditor has become dissatisfied with the way the company is being run and sought to get an administrator appointed. Rather, the claimants say, it is plain from the history that TMW was set up and acquired bonds in C2 specifically with the aim of controlling or influencing the conduct of C2’s affairs by getting a Temporary Administrator appointed.

The bonds were acquired from a Kazakh company in which D2 formerly held a senior position.

The role of a Temporary Administrator under the relevant Kazakh law is to identify creditors, form a creditors’ committee to prepare a plan aimed at restoring solvency and to consider any transaction outside the ordinary course of the company’s business. The claimants maintain that the actions of the individual appointed went well beyond this and concentrated on attempting to stop the company from pursuing the present proceedings.

Not only, it is said, was this course of action contrary to the wishes of the great majority of C2’s creditors but there is no apparent commercial reason why someone who is genuinely interested in seeing that creditors get paid should attempt to destroy the company’s most valuable asset – namely, its claims in this litigation. The only people who would benefit from this, the claimants suggest, are the defendants.

The claimants also rely on the fact that copies of letters written by the Temporary Administrator were provided via an intermediary to the solicitors who are acting for the defendants in these proceedings.

The claimants further argue that it can be inferred from these events that the defendants threaten or intend to take further actions between now and the date of the trial to try to disable C2 from being able to pursue its claims against them.

The claimants then submit that, if C2 were to be prevented from pursuing its claims by actions taken by the defendants, the rule against the recovery of reflective loss would not apply – or at least there is a serious argument that it would not apply – to bar C1’s Manx law claims. In support of this argument, the claimants rely on Giles v Rhind [2003] Ch 618, a decision of the Court of Appeal. In that case a company went into administrative receivership as a result of the wrongdoing of a former director in diverting the company’s most lucrative contract to another company in which he had an interest. The company began an action against its former director but was forced to discontinue the action when it was unable to put up security for the defendant’s costs. A shareholder of the company then brought a claim against the defendant alleging that his conduct was a breach of duties owed to the shareholder under a contract between them. The shareholder obtained a judgment on liability but it was subsequently held that no damages were recoverable because of the rule against the recovery of reflective loss. The Court of Appeal allowed an appeal from that decision holding that the rule did not apply in circumstances were the defendant’s wrong had made it impossible for the company to pursue its claim against the defendant.

Although on the facts of Giles v Rhind it was the very wrong giving rise to the company’s claim which also prevented the company (through lack of funds) from pursuing its claims against the defendant, the claimants argue that the exception to the rule illustrated by this case is not limited to such a situation. Counsel for the claimants, Mr Howe QC, submits that on a correct analysis of the law the rule against the recovery of reflective loss does not apply where actions of the defendants, whether wrongful or not, have made it impossible for the company to recover its losses from the defendant. Alternatively, if wrongful conduct of the defendant is a requirement, the claimants wish to contend that the alleged actions of the defendants in this case in trying to prevent C2 from continuing to sue them were wrongful under Manx law as a conspiracy to injure C1 by unlawful means and/or under Kazakh law as a deliberate causing of harm to C1’s rights or economic interests.

In response to an objection that the case which they now seek to make needs to be pleaded, counsel for the claimants have prepared draft amendments to the particulars of claim and ask for permission to make those amendments.

The defendants have made witness statements denying that they are responsible in any way for the actions of TMW or the Temporary Administrator; and, on their behalf, Mr Twigger QC submits that there is no evidence which justifies the allegation that TMW and the Temporary Administrator have been acting on the instructions or under the influence of the defendants. He further submits that the exception to the rule against the recovery of reflective loss illustrated by Giles v Rhind only applies where the inability of the company to pursue its claims is the result of a wrong done by the defendant to the shareholder – whether it be the original wrong or a separate wrong which gives rise to an independent cause of action. He argues that, even if the actions of TMW and the Temporary Administrator had been procured by the defendants (which they deny), and even if the result of those actions had been to make it impossible for C2 to pursue its claims against the defendants, the cause of that situation would have been rulings of the Kazakh courts and/or actions taken by the Temporary Administrator on behalf of the company itself pursuant to such rulings – which actions would ex hypothesi have been lawful. In any event, Mr Twigger emphasises that C2 has not been prevented from pursuing its claims in these proceedings and submits that there is no reasonable basis for anticipating that it will be prevented from doing so before this case comes to trial. In these circumstances he contends that there is no justification for allowing C1 to maintain the Manx law claims, if those claims have not been discontinued as the defendants assert; still less, if the claims have been discontinued, would it be justifiable to allow the claimants to reinstate the claims.

It is logical to start by considering whether the Manx law claims are currently live claims or whether the claims were discontinued when a notice of discontinuance was served on the defendants on 15 April 2016. This depends principally on whether or not the permission of the court was needed in order to discontinue the claims. This in turn depends on the interpretation of CPR 38.2. That rule provides:

The first question which arises in relation to the meaning of this rule is what is meant by the word “claim”. That word is sometimes used to refer to the entire action begun by issuing a claim form. At other times the word is used in a much narrower sense to refer to a cause of action. There is also an intermediate sense in which the word may refer to all the causes of action asserted by a particular claimant against a particular defendant. As Mr Howe QC observed, the CPR are not consistent in their use of the term and examples of all three uses can be found in the rules.

In the context of Part 38 I do not think that the word “claim” can mean a cause of action because of the repeated references (including in r.38.2) to “all or part of a claim”. It does not make sense to provide for the discontinuance of part of a cause of action. Causes of action are not susceptible to partition or not in a way that would make discontinuance an appropriate procedure. If, for example, a claimant no longer wishes to maintain a case that an alleged breach of duty by the defendant gave rise certain pleaded losses while continuing to seek damages for other alleged losses, the appropriate procedure is simply to amend the statement of case. Thus, it seems to me that the word “claim” in r.38.2 must refer either to the entire action or, at its narrowest, to all causes of action asserted by a particular claimant against a particular defendant. It is not necessary for present purposes to decide which of these is the correct meaning. That is because on either interpretation C1 was only seeking to discontinue part of the claim. In addition to the Manx law claims, C1 has asserted claims (in the sense of causes of action) under Kazakh law which it has never sought to discontinue.

The key question is whether in r.38.2(2)(a) the words “in relation to which … the court has granted an interim injunction” refer to the whole claim or only, in a case where the claimant wishes to discontinue part, to such part of the claim as the claimant wishes to discontinue. This matters because the freezing injunction which the court has granted against D2 applies to C1’s Kazakh law claims but, as mentioned earlier, does not apply to the Manx law claims because of the finding that, as regards those claims, C1 has not shown a good arguable case. For the claimants, Mr Howe submitted that the permission of the court was needed to discontinue the Manx law claims because the court has granted an interim injunction in relation to part of C1’s “claim”, even though it is not the part which C1 wishes to discontinue. He suggested that this is the more natural meaning of the language used and that the existence of an interim injunction makes it sensible to require the court’s involvement, as discontinuing part of the claim may have implications for the injunction even if the injunction does not relate to that part of the claim.

I find that suggestion far-fetched. The simpler and better explanation, in my view, is that the permission of the court is required only when the subject matter of the injunction includes whatever claim or part of a claim it is that the claimant wishes to discontinue. In such circumstances it may be necessary to consider whether the injunction should be discharged or varied, so the claimant cannot simply be allowed to discontinue without having such issues sorted out. Such issues do not arise where the claimant wishes only to discontinue a part of its claim which falls outside the scope of the injunction.

Reading the language of the rule without regard to its purpose, both of the suggested meanings are in my view equally possible. However, when regard is had – as it must be – to the rule’s purpose and rationale, the defendants’ interpretation is to be preferred.

Mr Howe made a further submission that the words “has granted an interim injunction” are purely historical and cover a case where in the past the court has granted an interim injunction even if that injunction is no longer in force – or is no longer in force in relation to the relevant part of the claim. If this interpretation were right, it would follow that the court’s permission was needed to discontinue the Manx law claims because the freezing injunction originally granted on the claimants’ without notice application covered those claims, albeit that the injunction was later varied to exclude those claims from its scope. This suggested interpretation, in my view, makes no sense at all. It would be absurd if the court’s permission to discontinue was required merely because the court had once granted an interim injunction which was subsequently set aside. I think it plainly implicit in the rule that the injunction is still in force.

Although it was no doubt sensible for the claimants’ solicitors to seek the permission of the court out of caution so as to make sure that the discontinuance was effective, I conclude that the defendants are correct in their contention that on the proper interpretation of r.38.2(2)(a) the court’s permission was not required.

Rule 38.3(1) provides that:

Rule 38.5 deals with “when discontinuance takes effect where permission of the court is not needed” and provides that “[d]iscontinuance against any defendant takes effect on the date when notice of discontinuance is served on him under rule 38.3(1).”

Mr Howe submitted that, notwithstanding the apparently plain terms of this rule, even if – as I have held – the court’s permission was not needed, the Manx law claims were not discontinued when the claimants served a notice of discontinuance on the defendants because, in the context of the correspondence, it was plain that the claimants’ solicitors did not intend to bring about an immediate discontinuance. I do not regard this contention as tenable. The notice of discontinuance filed and served on behalf of C1 conveyed an unequivocal intention to discontinue the Manx law claims. I cannot accept that on a proper interpretation of Part 38 the effectiveness or otherwise of the notice depended upon when the claimants believed that it would be effective. It is evidently true that the claimants’ solicitors thought that the court’s permission to discontinue was needed with the result that the notice would not take effect until such permission was obtained. I have held that this belief was mistaken, however, as the court’s permission was unnecessary. The inescapable consequence is that, as a matter of law under under Part 38, the discontinuance took effect when the notice was served on 15 April 2016.

The discontinuance of a claim does not necessarily prevent the same claim from being made again at a later stage. However, CPR 38.7 provides that:

If there had been a material change of circumstances since the Manx law claims were discontinued and the claims were shown now to have a real prospect of success, then there would in principle be a basis for seeking the permission of the court to amend the particulars of claim again in order to put the Manx law claims back in. I think it plain, however, that there has not been a material change of circumstances and that at the present time there are no reasonable grounds for making the Manx law claims; nor do those claims have a real prospect of success.

In reaching that conclusion, I do not think it necessary to decide whether the matters relied on by the claimants provide reasonable grounds for alleging that TMW and the Temporary Administrator have acted on the instructions or at the behest of the defendants. Nor is it necessary to decide whether, if actions of the defendants had made it impossible for C2 to pursue its claims against them, C1 would have a real prospect of establishing that the rule against the recovery of reflective loss did not preclude C1 from recovering damages from the defendants. I am inclined to think that, if those questions arose for decision, the claimants have probably done enough to surmount the fairly low threshold of showing a serious issue to be tried. However, it is unnecessary to reach a firm view because nothing has happened which has in fact prevented C2 from pursuing its claims against the defendants. Nor are there any facts or alleged facts capable of supporting an inference that it will become impossible for C2 to pursue its claims against the defendants before the trial takes place.

As I have described, the present situation is that the Kazakh court has approved a rehabilitation plan for C2 which involves the company continuing this litigation and has removed the Temporary Administrator from office. It is suggested that there could be an appeal; but no reason has been given to think that an appeal, even if brought, would have any significant likelihood of success. Moreover, even there were to be a successful appeal, with the result that the rehabilitation plan is disapproved and the Temporary Administrator reappointed, that would not prevent C2 from pursuing its claims in these proceedings. The Kazakh court previously decided in July that C2 did not require the approval of the Temporary Administrator for any steps taken in these proceedings, and there was no appeal from that decision.

As matters now stand, therefore, C1 has no right to advance the Manx law claims because the rule against the recovery of reflective loss precludes it from doing so, and there is no reason to infer that this will change before the trial. It cannot in these circumstances be said that the Manx law claims have any real prospect of success.

That would be sufficient reason in itself to refuse permission to re-instate the Manx law claims, but there are also case management considerations. If the matters raised by the claimants’ draft amendments to the particulars of claim were to be included in the issues for the trial, further evidence from factual witnesses dealing with those matters would be required as well as expert evidence on Manx law. There is no warrant for allowing such evidence to be introduced, and it would be a waste of time and money to do so, when nothing has yet happened and there is no reason to assume that anything will happen which will make the evidence relevant. It would be wrong to increase the scope of this already very heavy and expensive litigation just in case something were to occur before the trial which would give rise to an additional triable issue.

For the same reasons, if I had concluded that the Manx law claims had not been discontinued, I would have granted the declaration sought by the defendants that the court has no jurisdiction to determine the claims because they do not raise a serious issue to be tried. I would also have considered that, even if the court had jurisdiction, it should not exercise it in circumstances where the issues which the claimants seek to raise in connection with the Manx law claims are purely hypothetical on the present facts.