JSC BTA BANK v. MUKHTAR KABULOVICH ABLYAZOV

HCMP 341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 341 OF 2014

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A. Introduction

1. This application concerns a foreign plaintiff seeking interim relief in Hong Kong in relation to corporate entities associated with a foreign defendant in furtherance of proceedings in a foreign jurisdiction. At the conclusion of the application, I granted the orders sought by the plaintiff and said I would hand down brief reasons for my decision which I now do.

2. Thisis an ex parte application by JSC BTA Bank (“the Bank”) for interim relief in aid of English proceedings against Mukhtar Kabulovich Ablyazov (“Ablyazov”) under section 21M of the High Court Ordinance (Cap 4).  The Bank seeks:

(1) an order appointing receivers over the shares and assets of two Hong Kong companies, Kazoil-Astana Group Ltd (“Kazoil”) and Maxray Logistics Ltd (“Maxray”); and

(2) a freezing order restraining Ablyazov from dealing with the shares and assets of Kazoil and Maxray.

B. Background

3. Ablyazov is the former chairman of the Bank.  It is alleged that he has committed widespread misappropriation of the Bank's funds, involving billions of US dollars which he has secured through a web of offshore companies controlled and managed on his behalf by, or through, a network of nominees and associates.  From 2009, the Bank has commenced 11 sets of proceedings against Ablyazov and his associates in England, seeking to recover sums in excess of US$5 billion.  The first set of proceedings, called the Drey proceedings, was commenced on 13 August 2009.  Immediately prior to the commencement of the proceedings, the Bank obtained a freezing order against Ablyazov which was continued on 12 November 2009.  As a result of Ablyazov’s failure to make full and frank disclosure about his assets, the Bank obtained a court order on 6 August 2010 for the appointment of receivers over the assets that Ablyazov disclosed.  This was later extended by 7 court orders to add approximately 1,000 further companies which were believed to be beneficially owned by Ablyazov.  The court orders were made on 26 January 2011, 8 April 2011, 27 May 2011, 24 April 2012, 25 January 2013, 31 July 2013 and 23 January 2014.  The two companies, the subject of this application, Maxray and Kazoil (together with the two related offshore companies, Fine Tuner Ltd (“Fine Tuner”) and Dual Channels Ltd (“Dual Channels”)),[1] were included in the list of companies under receivership by court orders made on 13 July 2013[2] and 24 January 2014[3] respectively.

4. In light of apparent breaches of the court orders and lies on oath by Ablyazov, Teare J held contempt proceedings against him.  He found, according to the criminal standard of proof, Ablyazov in contempt of court after a three week trial.  On 16 February 2012, Ablyazov was sentenced to 22 months imprisonment in absentia, having absconded by the time committal judgment was handed down.[4]  He was eventually located and is now detained in France. 

5. On 29 February 2012, Teare J ordered Ablyazov to surrender to the authorities and make full disclosure of his asserts by 14 March 2012, failing which he would be debarred from defending in 8 sets of proceedings in the Commercial Court under an Unless Order.  The order was later upheld as was the committal judgment by the Court of Appeal.[5]  Ablyazov did not comply with the Unless Order and Teare J on 23 November 2012 made orders entering judgment against him in the Drey proceedings and two other sets of proceedings.[6] This resulted in the freezing order of 12 November 2009 being replaced on 23 November 2012 by a post-judgement freezing order.

6. On 26 November 2013, Henderson J gave summary judgment against Ablyazov on the basis of a fraud with respect to AAA-investment bonds acquired by the Bank which were misappropriated for the ultimate benefit of Ablyazov by a series of linked transactions.  In these proceedings, Ablyazov had not been debarred from defending, and as Ablyazov chose not to defend the proceedings, it is therefore less likely that any issue can be taken by him with the summary judgment.

7. The litigation action against Ablyazov has been extensive and the judgments of the English courts provide a detailed history and account of the attempts by Ablyazov to frustrate and delay locating and recovering the funds the Bank has accused him of misappropriating.[7]  Ablyazov has failed to pay any amount to the Bank in satisfaction of the judgment debts under the English judgments.

C. The application

8. Mr Jose Maurellet, who appears with Mr Jason Yu for the Bank, in his comprehensive submissions argues that this is a case where relief ought to be granted in order to render judicial assistance to the English courts.  

9. The Bank in support of its application has filed an affidavit of Mr Mark Lin, a partner of Hogan Lovells, the solicitors acting for the Bank, who has exhibited numerous relevant documents and papers in relation to the English proceedings and related action.  Mr Lin’s affidavit included the 61^st and 64^th statements of Christopher George Hardman, a partner of Hogan Lovells International LLP, who provides a comprehensive background to this case with particular reference to the link and connection between Ablyazov and the two companies in Hong Kong.  Mr Lin provides an overview of the English proceedings and the extensive efforts to trace and locate related companies and nominees of Ablyazov.   It has so far unearthed an extensive array of companies and nominees, involving nearly 1,000 companies. In relation to a large majority of the companies within the receivership, the appointed receivers are David Standish and John Milsom of KPMG.  Mr Lin points out that Maxray was one of the companies successfully included in the receivership application of 31 July 2013 and Kazoil together with its related BVI companies, Fine Tuner and Dual Channels were companies successfully included in the receivership application of 23 January 2014.

10. Mr Milsom on behalf of himself and Mr Standish has submitted a report dated 5 February 2014 confirming that they are aware of the content of this application and the terms of the draft order and provide their consent to be appointed as receivers of Kazoil and Maxray.

11. Maxray is a Hong Kong company which was incorporated on 15 March 2005.  It has issued one share to Ascent Capital Development Ltd.  Its corporate secretary is a company secretarial service and its director is Dominic Lau Tak Ming.  It appears to have a bank account with the Public Bank (Hong Kong) Ltd.  Inquiries were made by the receivers with the Public Bank in October 2013 but the bank refused to provide any information other than by court order.  The receivers believe that Maxray may have significant funds in Hong Kong.

12. Kazoil is believed to be secretly owned by Ablyazov which initially borrowed nearly US$13 million from the Bank, and invested most of it in a joint venture construction project in Mainland China.  The loan amount was later increased to US$16 million. Fine Tuner and Dual Channels have each held one of Kazoil’s issued shares since 21 June 2012.  The Bank has been unable to procure the cooperation of the apparent directors and shareholders of the Kazoil companies.  It is believed that Kazoil may hold a bank account with HSBC with funds amounting to several million US dollars. 

13. In making this application, Mr Maurellet relies on, amongst other things, the judgment against Ablyazov by Henderson J on 26 November 2013.[8]  As already noted, it is a summary judgment, unlike the default judgments of the other proceedings, which forms part of the basis of the English receivership order. He makes the point that the validity of the judgment is less likely to be subject to any successful challenge. He also makes particular reference to the judgment against Ablyazov in the Drey proceedings where Teare J gave judgment appointing receivers.[9] He points out that the terms of the Hong Kong orders sought in the present application mirror the terms of the English orders, to the extent they relate to Kazoil and Maxray, in aid of the enforcement of the English judgments and orders.

14. Mr Maurellet submits that the application should be granted given the following matters.

(1) Ablyazov’s clear propensity to disregard the English court’s order;

(2) The English judgments remain unsatisfied by Ablyazov;

(3) If the shares in Kazoil and Maxray belong to Ablyazov, the Bank will be entitled to execute judgment against such shares; if not, there will be no prejudice to Ablyazov in making the Hong Kong orders and the real beneficial owners may intervene to challenge the inclusion of Kazoil and Maxray in the receivership;

(4) The Bank is asking for complementary back-to-back relief on the basis that the English court has already seen fit to grant the English orders (the terms of which are mirrored by the Hong Kong orders, insofar as they relate to Kazoil and Maxray); and

(5) The ambit of the Hong Kong orders is narrow, in that they specifically concern the shares and underlying assets of Kazoil and Maxray.

D. Section 21M

15. In Mercedes Benz AG v Leiduck [1996] 1 AC 284, the Privy Council applying the decision of the House of Lords in Siskina (Cargo Owners) v Distos SA [1979] AC 210, decided that a plaintiff in foreign proceedings pending resolution could not obtain a Mareva injunction to restrain a defendant who has assets in Hong Kong from dealing with those assets, where the Hong Kong courts do not have jurisdiction to deal substantively with the claim.  The reasoning of the decision was that an interlocutory injunction is not a cause of action in itself and is dependent upon there being a pre-existing cause of action in Hong Kong.  In order to obtain an interlocutory injunction, it was therefore necessary to commence substantive proceedings in Hong Kong.

16. Sections 21M and 21N of the High Court Ordinance, and the related Order 29 rule 8A of the Rules of the High Court, were enacted to overcome the decision in Leiduck.  A court now has jurisdiction to grant interim relief in support of intended or actual proceedings taking place outside Hong Kong, provided that those proceedings are capable of giving rise to a judgment which may be enforced in Hong Kong.[10] 

17. Section 21M empowers the court to grant interim relief or appoint a receiver in aid of foreign proceedings as a free-standing form of relief without substantive proceedings commenced in Hong Kong.  It provides:

“(1) Without prejudice to section 21L(1), the Court of First Instance may by order appoint a receiver or grant other interim relief in relation to proceedings which—

(a) have been or are to be commenced in a place outside Hong Kong; and

(b) are capable of giving rise to a judgment which may be enforced in Hong Kong under any Ordinance or at common law. …

(3) Subsection (1) applies notwithstanding that—

(a) the subject matter of those proceedings would not, apart from this section, give rise to a cause of action over which the Court of First Instance would have jurisdiction; or

(b) the appointment of the receiver or the interim relief sought is not ancillary or incidental to any proceedings in Hong Kong. …

(7) In this section, “interim relief” (臨時濟助) includes an interlocutory injunction referred to in section 21L(3).”

18. The court may refuse the application for relief under section 21M if, in its opinion, the fact the court has no jurisdiction over the subject matter of the proceedings makes it unjust or inconvenient for the court to grant the application.[11]  The court, however, is required to have regard to the fact that the power under section 21M is ancillary to foreign proceedings and for the purpose of facilitating such proceedings.[12]

19. Under subsection (2), an order under subsection (1) may be made either unconditionally or on such terms and conditions as the court thinks just.  In exercising this jurisdiction the court must abide by the general principles governing the grant of interim injunctions.[13]

E.  Freezing injunction and receivers

(a) Applicable principles

20. The essential principles concerning the grant of an interlocutory injunction are contained in the well known authority of American Cyanamid Co v Ethicon Ltd [1975] AC 396.  The court must be satisfied that there is a serious question to be tried and consider whether the balance of convenience lies in favour of granting or refusing the injunction.[14]

21. It is well understood that the purpose of a freezing order is to prevent injustice by preserving the assets of a defendant in order to guard against the risk of the disposal or dissipation of those assets by the defendant with a view to defeating the execution of a judgment against him.[15] The court will take the course that appears to carry the lower risk of injustice if it should turn out to have made the wrong decision.[16]

22. The jurisdiction of interim relief has gone beyond the prevention of the removal or disposal of assets to defeat judgment and includes provisions for securing property over which the plaintiff asserts a proprietary or tracing claim.[17] The reach of interim relief may extend to non-parties (referred to as the Chabra jurisdiction).  The jurisdiction is exercised as ancillary relief granted by the court in aid of, and as part of, the freezing relief granted against the defendant to the substantive claim.  Exercise of the jurisdiction can occur where there is good reason to suppose that the assets of the third party are in fact the assets of the injuncted defendant.[18]  The Chabra jurisdiction also applies in cases against a co-defendant, and the fact that the asset of the co-defendant cannot be specifically identified would not prevent the court from granting an injunction against his assets generally. [19]

(b) Freezing injunction

23. In the context of this application, for the grant of a freezing injunction, it must be demonstrated to the court’s satisfaction that (a) there is a good arguable case on the merits; (b) there are assets within the jurisdiction; (c) there is a real risk of dissipation of assets or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effort; and (d) the balance of convenience is in favour of granting the injunction in that it is just and convenient to do so.[20] This is subject to the plaintiff complying with the strict duty of full and frank disclosure.

(c) Appointment of receivers

24. The American Cyanamid principles also apply when considering the appointment of receivers on an interlocutory application.  Given the invasive nature of the appointment of receivers, a court will also take into account (a) whether there is no effective protective regime available, such as an injunction, and some form of interim protection should be given to preserve the status quo – in other words, is the appointment of receivers necessary, and could or would some other less intrusive protection suffice; and (b) whether there is a risk of damage to the assets, particularly in the case of a company, if the appointment is made, and whether it can be adequately compensated by a cross-undertaking in damages.[21]

25. In the circumstances of this case, the key question in relation to the appointment of receivers is whether a freezing order would provide adequate protection to the plaintiff.  It is acknowledged that where a freezing order is breached, or there is a real risk of such a breach, the appropriate remedy is the appointment of a receiver over the assets which are the subject matter of the freezing order.  If this be the case, the existence of alternative remedies such as contempt proceedings does not justify the deviation from the appropriate remedy of receivership.[22]

F. Application of the principles

(a) Good arguable case

26. I am satisfied that the plaintiff has made out a good arguable case. The Hong Kong orders are analogous, insofar as they relate to the Hong Kong companies, to post-judgment relief. Section 21M is a standalone section in the sense that it does not require a cause of action over which the Court of First Instance would have jurisdiction.[23]

27. There is, in my view, a good arguable case that the English judgments are capable of being enforced in Hong Kong.  Mr Maurellet submits that at common law, a foreign judgment will be conclusive in Hong Kong proceedings if it is:

   (i)    Final and conclusive on the merits;

   (ii)    Made by a court of competent jurisdiction over the parties and the subject matter;

   (iii)    Between the same parties or their privies on an identical issue;[24]

   (iv)    For a monetary sum where the plaintiff seeks to enforce as well as recognize the foreign judgment; and

   (v)    Not impeachable according to the rules on conflict of laws of Hong Kong.[25]

(i) Final and conclusive

28. Except for the summary judgment, the other English judgments were default judgments obtained in circumstances where a court order was made debarring Ablyazov from defending.  From my assessment of the proceedings, this was justified and a last resort and purely a product of Ablyazov’s own making.  I am satisfied that the order was properly reasoned and justified by Teare J which was upheld by the English Court of Appeal.  I am satisfied in the circumstances that the English judgments were final and conclusive on their merits.

(ii) Competent jurisdiction

29. The English court was clearly a court of competent jurisdiction over Ablyazov. He was present and a resident in England when the proceedings were instituted and he subjected himself to the jurisdiction until he later absconded from it.

(iii) Identified parties and issues

30. The Bank and Ablyazov are the parties in the present application and the English judgments.  Ablyazov’s liability to the Bank under the English judgments is the same issue that is sought to be enforced in Hong Kong.

(iv) For a monetary sum

31. The English judgments are for monetary sums amounting to about US$4.25 billion.

(v) Not impeachable by rules on conflict of laws

32. Mr Maurellet argues that none of the rules of conflict of laws deny enforcement.  First, the English judgments were not produced by some improper conduct or practice and Ablyazov is not the subject of persecution.  To my mind, all the evidence is to the contrary. Every opportunity had been given to Ablyazov to defend the English proceedings but he chose to be obdurate and difficult.  It is necessary to bear in mind that the allegations against him involved widespread fraud of epic propositions. 

33. Secondly, the procedure on which the English judgments were obtained did not in any way offend against notions of substantive or natural justice as practice there and here.  I do note that Ablyazov may argue that he was denied a fair hearing when he was debarred from defending the English proceedings but as I have noted from my reading and understanding of what transpired, he was given every opportunity to make good any claim he wanted but he chose to continuously breached court orders and lie on oath.  In the appeal of the Unless Order, the English Court of Appeal held that the order was fair, necessary and proportionate.  It is without doubt that Teare J gave Ablyazov every chance to satisfy the orders of the court and proceed to trial if he wished. 

34. Thirdly, the English judgments do not involve, clearly in my view, the enforcement of foreign public, penal or revenue law.  As pointed out by Mr Maurellet, the summary judgment puts the issue beyond dispute as it was a decision on the merits.  As already noted, Ablyazov may argue that the Unless Order precluded him from defending the English proceedings in order to penalize him for his contemptuous disregard for the authority of the English court, and therefore, this court by enforcing the English judgments will be enforcing English penal laws.  I do not agree.  The default procedures are a feature of the civil justice system and the penalty in question must usually be exigible by the state.  In this case, there is no question of direct or indirect enforcement of foreign penal laws.  The substance of the English judgments is the enforcement of the Bank’s private law rights, which is also something a state would be entitled to enforce.

35. Lastly, in light of the foregoing, the English judgments do not in my view offend against Hong Kong’s notions of public policy.  The judgments arise from litigation founded on a civil justice system that we have modeled here in Hong Kong.

(b) A real risk of dissipation

36. There is no question in my mind on the information and material before me of a real risk of dissipation.  A stronger case could not be made out.  This is exacerbated by the defiant and contemptuous conduct of Ablyazov toward the English proceedings and court orders.  It is submitted by Mr Maurellet that Ablyazov’s conduct to date is to obfuscate and delay any attempt to enforce any judgment obtained by the Bank from the English judgments.  There is a compelling case that there is little, if any, attempt to truly defend these proceedings, other than for the purpose of frustrating and delaying the enforcement of any judgments.

(c) Appointment of receivers necessary and appropriate

37. Given the nature and history of this case, I have no doubt that Ablyazov or his nominees would defy any freezing order and in my mind the risk is too great not to be supported by the appointment of receivers.  In the circumstances of this case, I do not see any alternative protective regime.  A receiver is necessary to ensure that there is full accounting of assets and prevent any dissipation or removal of them. 

38. I have been guided by the Receivership judgment which was upheld on appeal by the English Court of Appeal. The network of companies and nominees is elaborate and widespread and I agree could be used in a way to undermine or breach a freezing order.

(d) Assets belonging to third parties

39. In Akai Holdings Ltd (in compulsory liquidation) v Ho Wing On, HCMP 1718/2009, unreported, 24 September 2009, the Court of Appeal stressed that drastic action may include extending a freezing orderover the assets of a non-party if there is good reason to suppose against the non-party that the assets of or held by the non-party would be susceptible to a procedure which would lead to satisfaction of a judgment.[26]

40. The procedure in relation to third party interests sought to be included within a freezing or receivership order was summarized by Lloyd LJ (as he then was) in SCF v Masri [1985] 1 WLR 876 at 884B-D:

“(i) Where a plaintiff invites the court to include within the scope of a Mareva injunction assets which appear on their face to belong to a third party, e.g. a bank account in the name of a third party, the court should not accede to the invitation without good reason for supposing that the assets are in truth the assets of the defendant.

(ii)Where the defendant asserts that the assets belong to a third party, the court is not obliged to accept that assertion without inquiry, but may do so depending on the circumstances. The same applies where it is the third party who makes the assertion, on an application to intervene.

(iii) In deciding whether to accept the assertion of a defendant or a third party, without further inquiry, the court will be guided by what is just and convenient, not only between the plaintiff and the defendant, but also between the plaintiff, the defendant and the third party.

(iv) Where the court decides not to accept the assertion without further inquiry, it may order an issue to be tried between the plaintiff and the third party in advance of the main action, or it may order that the issue await the outcome of the main action, again depending in each case on what is just and convenient.”

41. I am satisfied on the information presented to me at this stage that there are good reasons to suppose that Ablyazov is the ultimate beneficial owner of the shares in and assets of Kazoil and Maxray.   I have borne in mind the importance and level of this standard proof, and that it is there to protect the rights of innocent third parties.[27]

42. It is submitted on behalf of the Bank, and I accept, that the following factors provide good reason to suppose that Kazoil is beneficially owned by Ablyazov:

(1) Teare J found in the committal judgment that Kairat Sadykov, the shareholder of Fine Tuner and Dual Channels, was a nominee used by Ablyazov. This finding was made to the criminal standard of proof and for the purpose of this application; I see no reason why I cannot rely on it.  I note that Teare J in his decision of 23 January 2014, found good reason to believe that Kazoil is ultimately beneficially owned by Ablyazov.

(2) Kazoil, Fine Tuner and Dual Channels appear in records as companies belonging to entities administering Ablyazov’s assets.

(3) I am satisfied on the information submitted to me that the directors of Kazoil have clear links to Ablyazov.

43. It is also submitted on behalf of the Bank, and I accept, that the following factors provide good reason to suppose that Maxray is beneficially owned by Ablyazov:

(1) Maxray is part of a category of companies which enter into loan agreements with another Ablyazov company where there is reason to believe that the loan is not conducted at arm’s length.

(2) The loans were usually made on favourable and substantially identical terms, without security and with no obvious means of repayment by the recipient. On 20 October 2006, Maxray entered into a loan agreement with one of the Ablyazov’s Cyprus based companies in the receivership.

(3) Another company under the English receivership paid Maxray US$550,000 on 9 March 2006 for consulting services which on its face evidenced the possible movement of funds within the group of companies under Ablyazov’s control.

(4) I note that Teare J in his decision on 31 July 2013 found good reason to believe that Maxray is ultimately beneficially owned by Ablyazov and it is significant that since then no third party has sought to release Maxray from the order.

(e)Just and convenient

44. I agree with the submissions of Mr Maurellet that this is a clear case where section 21M relief would assist foreign proceedings, in the form of English judgments against Ablyazov.  My attention has been drawn to the decision of Deiulemar Shipping SpA v Transfield [2011] 1 HKLRD 75where injunctive relief under section 21M was sought but with no initial application being mounted in the English Court, or no good reason why it was not, or why there could not have been back-to-back injunctive relief with the English court.  It was held in that case that applicants under section 21M should first apply for interim relief abroad.  If such relief is rejected by the foreign court, it is unlikely that the Hong Kong court would exercise its discretion to grant relief.  If the foreign court grants such relief, the Hong Kong court would likely grant back-to-back relief in aid of such a decision. 

45. But we do not have that situation in the present case.  Injunctive relief has been obtained from the English court and this application seeks complimentary relief in aid of the primary decision.[28] I have no hesitation to exercise my discretion in the Bank’s favour.

E. Service out of jurisdiction

46. The Bank seeks leave to serve Ablyazov with the originating summons and the application documents out of the jurisdiction pursuant to Order II.  The Bank requests that personal service on Ablyazov be dispensed with and service on his solicitors in England be deemed to be effective service under the Rules of Court.[29] It seems to me that if there is a right to grant relief against a foreign defendant, there is a concomitant right to grant leave to serve out of the jurisdiction.[30] 

47. Ablyazov is currently in custody in France and his English solicitors are still on the record and conducting various proceedings in England on his behalf.  It is reasonable to suppose that documents served on Ablyazov’s solicitors will come to his attention.  In the circumstances, I grant leave to dispense with personal service on Ablyazov and serve his solicitors. I do require, however, that as Ablyazov is detained in custody in France, reasonable endeavors be made to provide him with a copy of the relevant papers but not for the purpose of satisfying the requirement of service.

F. Conclusion

48. I am satisfied on the information and material before me that there is a strong case against Ablyazov of misappropriating Bank funds through widespread fraud and subterfuge.  I am also satisfied that there is a strong case that Kazoil and Maxray are connected to, or under the control of, Ablyazov.

49. In all the circumstances, I am satisfied that this is a matter in which it is appropriate for me to exercise my discretion in favour of the plaintiff and I make the orders sought in the terms as indicated.