Legal Briefing

The chronicles of the JSC BTA Bank litigation

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Dispute resolution | 01 December 2012

Barry Donnelly and Zoë Fuller discuss the extraordinary battle between JSC BTA Bank and Ablyazov. In numerous courts and with nearly 50 interim applications, the proceedings have created a substantial volume of new case law.

The litigation at the heart of the cases discussed in this article concerns the claim of JSC BTA Bank (the Bank) against its former chairman, Mr Ablyazov (A) and his associates, which commenced in August 2009 (the Proceedings). The Bank is one of the largest banks in Kazakhstan and was effectively nationalised on 2 February 2009 in the wake of the global financial crisis. Until its nationalisation, as well as chairman, A was the beneficial owner of the majority of the Bank’s shares. In January 2009, A (and some of his associates) fled to the UK. Various criminal prosecutions are pending against him (and his associates) in Kazakhstan, and at least nine sets of UK civil proceedings have been issued.

The Proceedings revolve around the Bank’s claim that A orchestrated a ‘scheme of misappropriation’, through which several billion US dollars were extracted from the Bank in 2008. The Bank’s case is that the whole scheme was a sham carried out by and for the benefit of A and his associates, who channelled the money through a number of companies. A denies these claims and considers them to be an attempt by the president of Kazakhstan to take control of his assets in support of a politically motivated claim against him, as he is a leading figure in Kazakhstan’s democratic opposition. A claims to have been subjected to torture while imprisoned in Kazakhstan and two unsuccessful attempts to assassinate him.

The core litigation is under the control of Teare J, who has described it as an ‘extraordinary case’ ‘being fought by means of the forensic equivalent of trench warfare’. Before even reaching trial on the substantive issues, the litigation has produced in the region of 50 interim applications and a substantial volume of new case law. While the facts of the Proceedings are extraordinary, many of the decisions relating to the enforcement of freezing orders are essential reading for practitioners of fraud litigation. This article summarises some of the more high-profile decisions and focuses, in particular, on the Bank’s attempts to enforce freezing orders (and ancillary disclosure orders) obtained against A and his associates.

FREEZING ORDER REQUIRES DISCLOSURE DESPITE RISK OF SELF-INCRIMINATION

JSC BTA Bank v A & ors [2009] EWCA Civ 1125

At an early stage in the Proceedings, a freezing injunction (the freezing order) was granted in favour of the Bank, which included an order for disclosure as to the extent and location of certain of A’s (and his associates’) assets

A appealed against the ancillary disclosure order on the basis that, among other things, such disclosure should not be ordered because the information to be disclosed could be used against him in criminal proceedings in Kazakhstan.

A’s appeal was dismissed and the order for disclosure upheld. Sedley LJ noted that, A’s attempt to use a long-standing shield as a sword illustrated the potentially stultifying effect of the privilege against self-incrimination on the administration of justice. Had A succeeded in his application to discharge the order, the strength of the Bank’s case would have been significantly limited.

SUCCESSFUL CHALLENGE TO A RESTRICTIVE DISCLOSURE ORDER

JSC BTA Bank v Mukhtar A 
& ors [2010] EWHC 90 (Comm)

A filed a witness statement in connection with his disclosure obligations under the freezing order. The material contained in his witness statement was subject to a ‘lawyers’ eyes only’ restriction and could not be viewed directly by the Bank (the LEO restriction).

The Bank applied to have the LEO restriction lifted so that it could ascertain the accuracy of allegations made by A, which affected the quantum of the Bank’s claim (and recovery). A was concerned that without the LEO restriction, previously redacted information would reach the prosecuting authorities in Kazakhstan, thereby putting his associates at risk of torture or imprisonment.

Teare J was not convinced that A had established that the risk of ‘unjust and unlawful harm to third parties’ was such as to prevent the disclosure of the redacted information to the Bank and considered, on balance, that a failure to disclose this information would impair the Bank’s ability to trace and preserve the funds alleged to have been misappropriated. The LEO restriction was relaxed so far as it applied 
to A’s witness statement.

OBTAINING A RECEIVERSHIP ORDER PURSUANT TO S37 OF THE SENIOR 
COURTS ACT

JSC BTA Bank v Ablyazov 
[2010] EWHC 1779 (Comm)

A’s assets are held through an elaborate scheme involving nominees. He claims that this is necessary to protect him from unlawful depredations by the president of Kazakhstan. Concerned about the accuracy of A’s disclosure of his assets and the risk of A dissipating his assets, the Bank applied for the appointment of a receiver over his assets, in support of the freezing order. The Court has power to order the appointment of a receiver under s37 of the Senior Courts Act 1981 ‘in all cases in which it appears to the court to be just and convenient to do so’.

Teare J considered that it was necessary for the Bank to prove that the freezing order did not provide adequate protection against the risk of dissipation. He held that a mere risk of dissipation of assets was insufficient justification, but that evidence of an actual breach of the freezing order was unnecessary.

Teare J granted the receivership order on the basis that:

  • A’s conduct in the Proceedings had left Teare J unable to trust A not to deal with his assets in breach of the freezing order;
  • the undertakings offered by A did not provide the Bank with adequate protection; and
  • any risk to A could be minimised by 
the terms of the receivership order (A could still operate the affected businesses and make bona fide decisions relating to the management of his investment portfolio).

This decision was appealed in JSC BTA Bank v Ablyazov [2010] EWCA Civ 1141. Teare J’s decision to impose a receivership was upheld. However, certain declarations he made in relation to the meaning and effect of the freezing order were set aside.

VARIATION OF THE RECEIVERSHIP ORDER

JSC BTA v Ablyazov [2012] EWHC 648

In 2012, the Bank applied for a variation of the receivership order to provide the receivers with greater control over the disputed assets. This was to be achieved by appointing them as ‘receivers and managers’ and bringing further assets within the scope of the receivership order. Hamblen J granted the variation (with minor amendments). He considered the amendments were just and convenient since, by this time, A had disappeared and was very unlikely to 
co-operate with the receivers and no longer appeared to be subject to the jurisdiction and control of the courts of England and Wales.

CHECKLIST WHEN SENTENCING 
FOR CONTEMPT OF COURT

JSC BTA Bank v Solodchenko 
& ors [2010] EWHC 2843 (Ch)

One of A’s associates, K, was convicted for contempt as a result of his failure to disclose details of the identity and whereabouts of certain assets. This case concerns the sentencing decision. Proudman J’s judgment is particularly useful because she clearly sets out the factors the court must take into account when determining a sentence for contempt of court. In doing so, she relied heavily on the considerations of Lawrence Collins J in Crystal Mews v Metterick [2006]. The court should consider:

  • whether the claimant is prejudiced by virtue of the contempt and whether the prejudice is capable of remedy;
  • the extent to which the contemnor has acted under pressure;
  • whether breach of the order was deliberate or unintentional;
  • the degree of culpability;
  • whether the contemnor was placed 
in breach by reason of the conduct 
of others;
  • whether the contemnor appreciates the seriousness of the breach;
  • whether the contemnor has co-operated;
  • a genuine offer following judgment but before sentence to co-operate in the provision of information (this is capable of being a ‘serious mitigating factor’);
  • whether the contemnor has admitted their contempt and entered the equivalent of a guilty plea (the earlier the admission, the more credit the contemnor is entitled to be given);
  • whether the contemnor has made a sincere apology for their contempt;
  • the contemnor’s previous good character and antecedents; and
  • any personal mitigation advanced on the contemnor’s behalf.

It is for those who allege the contempt to prove it (to the criminal standard). Proudman J confirmed the same approach should be applied to contested issues of fact relevant to sentencing, particularly in relation to the considerations listed above. However, the burden is on the contemnor to demonstrate that they have purged their contempt (on the balance of probabilities).

In this instance, Proudman J held that K, who had since provided additional documents and information, had purged his contempt. She held that the costs K incurred in making his disclosure, together with his liability for the costs of the committal proceedings were ‘punishment enough’ and imposed no further sentence.

The Civil Procedure Rules now contain a new Part 81 and supplemental practice direction on ‘Applications and proceedings in relation to contempt of court’, which came into force on 1 October 2012. This does not conflict with the guidelines discussed above.

APPEAL

JSC BTA Bank v Solodchenko 
& ors [2011] EWCA Civ 1241

JSC obtained leave to adduce fresh evidence on appeal, which showed K had presented false evidence at first instance and had not purged his contempt. The Court of Appeal subsequently held the proper sentence in this case was 21 months imprisonment. However, the Court indicated that the punitive portion of this sentence (to be served in any event) should be nine months and if K fully complied with the disclosure obligations to which he was subject, he could apply to the Court to vary the remainder of the 21 months sentence.

The Court of Appeal highlighted that breaching a freezing order was a serious contempt, for which a prison sentence would usually be the appropriate punishment. However, it acknowledged there may be circumstances in which a substantial fine is sufficient (for example if the contempt has been purged and the relevant assets recovered).

MEANING OF ‘HIS ASSETS’ IN THE STANDARD FORM FREEZING ORDER

JSC BTA Bank v Kythreotis 
& ors [2010] EWCA Civ 1436

Paragraph 5 of the standard freezing order, as set out in Appendix 5 to the current edition of the Commercial Court Guide, contains reference to ‘his assets’. Paragraph 6 goes on to say:

‘Paragraph 5 applies to all the respondent’s assets whether or not they are in his own name, whether they are solely or jointly owned and whether the respondent is interested in them legally or beneficially or otherwise. For the purpose of this order the respondent’s assets include any asset which he has the power, directly or indirectly, to dispose or deal with as if it were his own. The respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions’.

This wording differs from that in previous editions of the Commercial Court Guide and it was settled law that the previous wording did not include assets held by the respondent for the benefit of a third party. The question before the Court was whether the revised wording had the effect of including assets that a respondent holds as trustee or nominee for a third party.

The Court considered the new wording had considerably enlarged the scope of the standard form freezing order. In particular, Proudman J considered the words ‘legally, beneficially or otherwise’ drew a distinction between assets held legally and those held beneficially and would include assets held by the respondent as trustee or nominee for a third party. However:

  • inclusion of trust assets in the order is only justifiable if there are proper grounds for believing that assets ostensibly held by the respondent on trust or as nominee in fact belong to the respondent;
  • judges should be minded to minimise the impact of the order on third-party beneficiaries under genuine trusts;
  • issues of title should be resolved quickly; and
  • if the application is made ex parte, it will be necessary for the cross-undertaking to be extended to cover any beneficiary that is truly a third party in respect of any assets held in trust.

APPLICATION TO STAY PROCEEDINGS

JSC BTA Bank v Mukhtar Ablyazov 
& ors [2011] EWHC 202 (Comm)

A and his associates applied to stay the Proceedings (and ancillary proceedings) on grounds that:

  • they were an abuse of process, brought for the collateral purpose of political oppression;
  • if allowed to proceed, they would give effect to a flagrant breach of international law;
  • they involved indirect enforcement of a foreign law; and
  • it would not be possible to have a fair trial (due to the Kazakhstan authorities’ power to prevent witnesses attending and to withhold documents and information which would assist A).

Ultimately, A’s application failed.

Teare J did not consider it appropriate to determine all of the issues raised by A at this early stage in the Proceedings. However, relying on the authority of Mbasogo v Logo Ltd [2006], he held that the Bank’s interest was to bring claims to recover compensation for losses it claimed to have suffered as a result of the unlawful actions of A. This was a private law claim existing independently of the Bank’s effective nationalisation and which the Bank was obliged to bring on behalf of its creditors; it would not require the English court to enforce foreign law. Teare J agreed (with the Bank) that the English courts do not have jurisdiction to rule on the legality of the nationalisation of the Bank.

Teare J’s decision was upheld on appeal (see Ablyazov & ors v JSC BTA Bank [2011] EWCA Civ 1588).

STAY ON GROUNDS OF ABUSE OF 
PROCESS IN MIXED PURPOSE CASES

JSC BTA Bank v Ablyazov & 
ors [2011] EWHC 1136 (Comm)

Notwithstanding Teare J’s ruling in JSC BTA Bank v Mukhtar Ablyazov & ors [2011] EWHC 202 (Comm) (see above), A and his associates pursued a further application for a stay of the Proceedings. This time on grounds that the Proceedings were pursued by the Bank for a collateral purpose and were therefore an abuse of process.

After reviewing a number of authorities on the matter Teare J highlighted the two recognised categories of abuse of process based on collateral purpose (identified by Simon Brown LJ in Broxton v McCellan [1995]):

  1. attempts to achieve a collateral purpose beyond the scope of the action – for example, to obtain information to which the claimant is not entitled; and
  2. to conduct proceedings not so as to vindicate a right but rather in a manner designed to cause the defendant problems of expense, harassment, commercial prejudice or the like beyond those ordinarily encountered in the course of properly conducted litigation.

He also highlighted that:

‘The circumstances in which the court will regard conduct as amounting to an abuse of process are not narrowly defined, nor should they be’.

No object which a claimant seeks to obtain can be condemned as a collateral advantage if it is reasonably related to the provision of some form of redress for that grievance.

‘A plaintiff is entitled to seek the defendant’s financial ruin if that will be the consequence of properly prosecuting a legitimate claim’.

Teare J held that, where there are mixed purposes, if one of the purposes is legitimate, the claimant should (in principle) be entitled to proceed with their claim. He also considered that the absence of a ‘good arguable case’ may indicate that proceedings were not brought for a legitimate purpose. On the facts of the case, Teare J held that the Bank had a legitimate reason for taking proceedings against A and his associates (to recover the assets which it claims A appropriated). Further, the Bank was contractually obliged to pursue the case. The application to stay the proceedings was dismissed.

This decision was upheld on appeal (see Ablyazov & ors v JSC BTA Bank [2011] EWCA Civ 1588).

COURT ORDERS SOLICITORS TO 
DISCLOSE CLIENT’S CONTACT DETAILS

JSC BTA Bank v Solodchenko 
& ors [2011] EWHC 2163

One of A’s associates, S, was found guilty of serious and continuing contempt of court in relation to his disclosure obligations pursuant to the freezing order. Committal proceedings were held in his absence and he was sentenced to 18 months imprisonment for contempt. S had not paid any part of the interim costs order made against him and was still in hiding when this application was heard.

The Bank applied for an order requiring his solicitors to disclose:

  1. all contact details they held for S;
  2. all information in their knowledge or reasonable belief, relating to S’s assets, which S was required to provide under the terms of the freezing order; and
  3. information about how their fees were being paid (to enable the Bank to seek a non-party costs order).

The Bank argued that the Court had jurisdiction to order disclosure of S’s contact details either (i) under s37(1) of the Senior Courts Act 1981; or (ii) pursuant to its inherent power to make orders ancillary to a freezing order to give effect to that order.

Henderson J granted an order requiring disclosure of one above but not two or three. He held that, despite S’s ‘deplorable conduct and unpurged contempt’, he remained entitled to unfettered access to legal advice. Henderson J highlighted the clear distinction in English law between (i) a client’s absolute right to claim legal professional privilege; and (ii) the right to protection of confidential information (which may be overridden by other considerations). Henderson J considered any information S had given to his solicitors relating to his assets was very likely to be subject to legal advice privilege.

The primary purpose of the disclosure was to aid enforcement of the committal order and Henderson J, made it clear he ‘would probably not have’ made the order in the absence of the committal order.

SECURITY FOR COSTS

JSC BTA Bank v Ablyazov & 
ors [2011] EWHC 2500 (Comm)

Both A and S applied for security for costs against the Bank on grounds that it is resident out of the jurisdiction and is not resident in an EU or European Free Trade Association state (Civil Procedure Rules (CPR) 25.13(2)(a)).

By this stage, the Bank had paid £57.5m into court as fortification for the undertakings it gave to obtain the freezing order and the receivership order (see above). The Bank had also secured various costs orders in its favour (exceeding £4m) during the course of the Proceedings.

A and S claimed there were (i) real concerns about the Bank’s creditworthiness (as revealed by credit rating agencies); (ii) it would be impossible to enforce any costs award in Kazakhstan; and (iii) the litigation was being fought aggressively, motivated by personal and political undercurrents. The Bank argued security was unnecessary because the applicants had ‘de facto’ security in various forms, including the Bank’s payment into court and the costs orders in the Bank’s favour. The Bank also contended that the Court should refuse the application on account of A’s conduct (a hearing of contempt charges against A was outstanding).

Teare J granted S’s application for security. However, he declined to make an order in favour of A on the basis that it was not right, in principle, to order security in favour of A before the contempt hearing was resolved.

ORDER TO DISCLOSE THE IDENTITY 
OF ANY THIRD-PARTY FUNDERS

JSC BTA v Ablyazov & ors 
[2011] EWHC 2664 (Comm)

The terms of the freezing order required A to notify the Bank’s lawyers of the source of funds used to pay A’s legal fees. A’s lawyers informed the Bank’s lawyers that A’s legal expenses were being paid by a Belize registered company, Green Life, the ultimate beneficial owner of which was a businessman from the former Soviet Union, who wanted to remain anonymous.

The Bank considered there was good reason to believe the funding purportedly provided by Green Life in fact came from A’s own assets. It consequently claimed there was a real risk the freezing order would be circumvented and sought an order requiring A to disclose the identity of the ultimate beneficial owner of Green Life and the source of that entity’s funds.

Christopher Clarke J granted the order on the basis there was ‘good evidence’ to support the Bank’s claim, and that failure to grant the order might allow the freezing order to be frustrated. He considered the possibility that the disclosure ordered in this case might enable the Bank and the Kazakh authorities to harass the ultimate beneficial owner of Green Life (with the risk that A might subsequently lose his funder), but concluded this was insufficient reason to refuse to make the order for disclosure.

JSC BTA Bank v Shalabayev & anor [2011] EWHC 2915 (Ch): it is difficult to envisage any circumstances where privilege could properly be overridden by the courts’ case management powers

During a search executed pursuant to a search order, the Bank obtained boxes containing files belonging to A and his associates’ (the defendants) solicitors. The solicitors supervising the search were obliged (under the terms of the search order) to send the defendants electronic copies of documents in the boxes which might be privileged. The defendants were then required to identify the documents over which they asserted legal professional privilege.

The defendants failed to comply with the terms of the order despite two extensions of time, the second of which was combined with an unless order. The unless order required the defendants to comply by 20 September 2011, failing which they would be debarred from claiming privilege over documents against which no claim for privilege had been made.

The defendants served a schedule on 20 September 2011 which the Court subsequently deemed defective. Two, more detailed, schedules were subsequently served (the first of which was served just 16 days after the defective schedule). The defendants claimed their original schedule complied with the unless order, but if it did not, relief from sanctions should be granted because the delay in providing a compliant schedule could not have caused the Bank any significant prejudice.

The Court held the original schedule did not comply with the original order, and so the unless order automatically took effect. Directions were given for the issue of an application for relief from sanctions (under CPR 3.9(1)). On application for relief, the Court held:

  • the final schedule contained (just) enough detail to satisfy the order;
  • the list of circumstances to be considered under CPR3.9(1) is not intended to be exhaustive;
  • it would be ‘hard, if not impossible’ to envisage circumstances where privilege could properly be overridden by a court’s case management powers; and
  • although the delay in compliance was regrettable, it was not seriously prejudicial to the Bank in the context of the proceedings as a whole.

However, the defendants bore the costs 
of the application because it was necessitated by their failure to comply 
with the unless order.

UNLESS ORDERS AND 
SURRENDER TO THE TIPSTAFF

JSC BTA Bank v Ablyazov & 
ors [2012] EWHC 455 (Comm)

A was (eventually) convicted for contempt of court (in relation to his continued 
non-compliance with his disclosure obligations under the freezing order) and sentenced (in his absence) to 22 months in custody. Despite confirming to the Court that he would attend for his sentencing, A went into hiding and it remains unclear whether or not he remains in the jurisdiction. Consequently, the Bank issued various applications, including applications for: (i) an order requiring A to surrender to the Tipstaff; (ii) an order for full and proper disclosure of assets; and (iii) an order that unless A complied with (i) and (ii), his case be struck out.

A’s lawyers claimed that such an unless order was akin to a ‘deferred’ application to strike out A’s defence and, therefore, the overarching principal was whether A’s 
non-compliance gave rise to a substantial risk of injustice. Teare J disagreed; he considered it was within the Court’s power to grant an unless order to bring pressure on a party to comply with a court order. Teare J relied on the Court’s jurisdiction under s37 of the Senior Courts Act 1981 (independent of any legal or equitable rights of the Bank) and the Court’s inherent jurisdiction to issue ancillary orders to ensure previous orders are effective. He granted the order but specified that it should not take effect until seven days after the determination of any appeal.

APPEAL (SUCCESSFUL)

JSC BTA Bank v Mukhtar 
Ablyazov [2012] EWCA Civ 639

Moore-Bick LJ refused to make the order sought by the Bank. Overall, the Court of Appeal considered it would not be right to impose the above conditions on A because the consequence of failure to comply with them would be disproportionately severe. He noted Potter LJ’s observation in Motorola v Uzan (No 2) [2003] that the circumstances would be rare indeed when it would be right to shut out a contemnor from arguing an appeal against an order of committal.

INTERIM PAYMENT ORDERED AGAINST DEFENDANT WHOSE DEFENCE WAS STRUCK OUT

JSC BTA Bank v Ablyazov & 
ors [2012] EWHC 783 (Comm)

The Bank applied for an interim payment of its costs relating to its claim that a loan of $120m to A (and others) was invalid. While A contested the Bank’s position as to the validity of the loan he admitted that he had failed to pay the Bank interest in breach of the terms of the loan (which amounted to over $78m).

The Bank applied for an interim payment of $65m on grounds that either:

  • A had admitted liability to pay such sum to the bank (CPR25.7(1)(a)); or
  • if the action went to trial the Bank would obtain judgment for a substantial amount of money against A (CPR25.7(1)(c)).

A failed to respond to the application and, by the time of the hearing, had been debarred from defending the proceedings due to his non-compliance with an order for standard disclosure and a Part 18 request for information. Hamblen J ordered the interim payment.

LOANS ARE NOT ‘ASSETS’ FOR THE PURPOSES OF A FREEZING ORDER

JSC BTA Bank v Ablyazov 
& ors [2012] All ER (D) 85

A entered into four loan agreements subsequent to the granting of the freezing order. The Bank sought a declaration that A’s rights under these loan agreements were assets for the purposes of the freezing order and therefore any drawings under the loan agreements could only lawfully be made in accordance with the terms of the freezing order.

Christopher Clarke J declined to make the declaration sought or to grant any consequential relief. He held A’s rights under the loan agreements were not assets within the meaning of the freezing order; nor was his exercise of his rights a disposal of or dealing therewith. A freezing order should be construed in a way in which it would be understood by a businessman to whom it was addressed, bearing in mind the purpose it was designed to serve. In this case, the purpose was to prevent A from disposing of his assets, otherwise than in the ordinary course of business, so as to prevent the Bank from securing payment of any future judgment. A right to borrow on the terms of the loan agreements was not the sort of asset the freezing order contemplated. Those rights were of no value to the Bank. In addition, if the loans were not shams they were personal loans made by trusted friends or associates of A and, as such, were incapable of assignment.