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OBTAINING A FREEZING ORDER

obtaining a freezing orderOur portal editor, Jonathan Fisher QC, discusses the willingness of the English civil courts to make a freezing order in a fraud case, as demonstrated in the recent Kazakhstan Kagazy PLC case in the Court of Appeal.

SPEED READ

In Kazakhstan Kagazy PLC & 6 ors v Maksat Askaruly Arip [2014] EWCA Civ 381, the Court of Appeal upheld a freezing order despite a finding of non-disclosure and the presence of a strong argument that the action was time barred under foreign law The decision demonstrates a clear willingness by the English courts to assist claimants in their attempts to recover losses sustained through fraud, by setting the bar for obtaining a freezing order lower than might otherwise be expected.

COMMENTARY

Kazakhstan Kagazy PLC & 6 ors v Maksat Askaruly Arip [2014] EWCA Civ 381 concerned a substantial fraud claim arising out of events in Kazakhstan. The claimants alleged that there were two large frauds, causing them to lose approximately $135 million. The claimant companies had contracted with a purportedly independent construction company to build on a number of sites in Kazakhstan, paying the construction company approximately $167.5 million to complete this work. However, according to the claimants, only one site ever saw any development. It later transpired from a forensic accounting report prepared in 2013 that 99% of the income of the construction company had come from the defendants, and that $167.1 million had flowed from the construction company to the defendants, or entities controlled by them. The claimants allege that a similar fraud was perpetrated on them by the defendants which caused a loss of approximately $39.3 million.

As a result of the fraud claim, the claimants sought and obtained a freezing injunction against the second defendant, Mr Arip, without notice. Mr Arip failed in his application to have the freezing order discharged. He appealed this decision to the Court of Appeal, arguing that the fraud action was time barred under Kazakh law and that the claimants had misled the court in their application for the injunction by failing to make material disclosures. (He also argued that the first defendant had no claim because any claim would only be a reflection of loss suffered by the second to seventh defendants, who are ultimately owned by the first defendant).

In order for a freezing injunction to be granted, the claimants must show that that they have a “good arguable case”. The Court of Appeal began by stating that if a Commercial Court judge decided that a claimant has a good arguable case the appellate court would not interfere with this finding “unless (which is unlikely) he makes an error of law in coming to that conclusion”. The Court also stated in clear terms that a case that was time barred “cannot constitute a good arguable case, however strong the facts of the case may be in the claimants favour”.

The question to be answered on appeal was therefore whether the claimants could show they had a good arguable case that was not time barred. Mr Arip contended that if there was a fraud the claimants ought to have been aware of it as early as 2010. The Kazakh Civil Code imposes a 3 year time limit on fraud claims running from the moment when the claimant became, or should have become aware that their rights had been violated.

The Court rejected these submissions. Citing the decision in Barnstaple Boat Co Ltd v Jones [2008] 1 AER 1124, where the Court found that it would be unsuitable to decide on English fraud time limits in a summary hearing, the Court of Appeal concluded that it would not be appropriate to determine a Kazakh time limit in an interlocutory application. The Court also noted, looking at the arguments put forward by Mr Arip, that it was difficult to see how the claimants should have done more than “suspect” there was a fraud as early as 2010, which was different from what Mr Arip needed to show at trial, namely that they “ought to have known”. According to Elias LJ, the Court “should not readily conclude that fraud ought to have been apparent unless it is satisfied that the evidence would plainly justify the allegation”.

Mr Arip also asserted that the claimants had not made full disclosure in accordance with their duty of good faith when applying for the freezing order at the outset. Mr Arip argued that the claimants had failed to disclose their earlier suspicious that a fraud had been committed, the reasons behind commissioning an accounting report by PriceWaterhouse Coopers in 2010, information regarding a derivate action in New York concerning Mr Arip, and emails related to those proceedings. The Court of Appeal concluded that the information regarding earlier suspicions was irrelevant, as suspicions were not a matter for disclosure. It was also found that the accounting report commissioned was not forensic in nature and fraud had not been suspected at the time. The Court did find that relevant proceedings in foreign jurisdictions should be disclosed, but that pre-trial emails relating to those proceeds did noit need to be disclosed even though they would be relevant to the action to be decided in due course. Ultimately, the Court declined to interfere with the lower courts determination that although some documents relating to the New York proceeding should have been disclosed, they related to matters that could not and should not be resolved before trial and would not disrupt the finding of a good arguable case.

What is particularly interesting about the judgment is the difference in emphasis between the judges on the relevant of suspicions for the purposes of disclosure when a freezing order is obtained at an hearing without notice. Longmore LJ drew a sharp distinction between a ‘suspicion’ and an ‘awareness’ when dealing with the non-disclosure argument, finding that only the later was relevant. However, for Elias LJ, matters which raise suspicions which should put persons on inquiry may well need to be disclosed in order to enable the court to have some understanding of the strength and limitations of the defence.

Overall, the bar set by the court in order to satisfy the “good arguable case” test is quite low. The court here was willing to uphold a freezing order even after it had found there had been relevant non-disclosure and where there was a strong argument that the claim may be time barred under Kazakh law. This judgement is also a good illustration of the willingness of the appellate courts to take a strict stance in the fight against fraud by allowing such a low threshold for preliminary orders to freeze assets in such cases.

BREACHING A RESTRAINT ORDER IS A CIVIL AFFAIR
RESCUING THE CONFISCATION REGIME
The views expressed in this article represent those of the author and not Bright Line Law.

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