Discharge of worldwide freezing order: test of “materiality” of non-disclosure

Sarah Speller

In Alliance Bank JSC v Zhunus, Mr Justice Cooke discharged a worldwide freezing order and an order giving permission to serve out of the jurisdiction where (1) the underlying claim was time-barred as a matter of Kazakh law; and (2) the claimant had made material non-disclosures at the without notice hearing of the injunction application. In reaching his decision, the judge considered the test of “materiality” in relation to the duty of full and frank disclosure.

Facts

The claimant bank loaned $222 million to two companies (the “original borrowers”) for the purpose of investing in various oil companies. Part of the security for the original loans was made up of pledges in the shares in two Russian oil companies. In October 2008, the defendants persuaded the claimant that the original loans should be replaced by new loans (the “replacement loans”). None of the sums lent under the replacement loans were repaid to the claimant.

In July 2014 the claimant issued proceedings in the English Commercial Court, alleging that in early 2008 the defendants had devised and executed a scheme to acquire for their own benefit the shares and assets of the two Russian companies and, in so doing, to deprive the claimant of the benefit of those assets as security for borrowing facilities and lending to the original borrowers.

It was common ground that the governing law of the torts alleged was that of Kazakhstan. The claim was made under article 917 of the Kazakh Civil Code. In essence, the claimant alleged that the defendants’ actions had caused it to suffer harm, in that it made the replacement loans without obtaining enforceable valuable security and was unable to recover any of the sums lent. Claims under article 917 are subject to a limitation period of three years.

In November 2014, Mr Justice Flaux granted the claimant (1) permission to serve a claim form and particulars of claim out of the jurisdiction on the second defendant; and (2) a worldwide freezing order against the second defendant in respect of assets up to the value of £206 million.

The second defendant applied to applied to discharge the freezing order and order for service out on the grounds that (1) the claimant did not have a good arguable case against him; and (2) there were material non-disclosures at the without notice hearing before Flaux J.

Decision

Cooke J had two issues to consider: (1) whether the claim was time-barred as a matter of Kazakh law; and (2) whether the claimant’s alleged non-disclosures were “material” such that they warranted discharge of the orders.

The limitation issue

Cooke J found that the three year limitation period under article 917 of the Kazakh Civil Code represented an “insuperable barrier” for the claimant. That period began to run from the date when the claimant learnt or should have learned that it had suffered harm as a result of an unlawful violation of its acts. On the claimant’s own case, it was apparent that its managing direction had known back in March 2009 that replacement loans had been made without taking any security and that they had not been entered into with due regard to the claimant’s own interests. The claimant had no prospect in succeeding in its claims because they were time-barred as a matter of Kazakh law.

Material non-disclosure

Having reviewed the authorities on material non-disclosure on without notice applications, Cooke J confirmed that the test of “materiality” was whether the matter not disclosed would be relevant to the exercise of the court’s discretion. A fact was material if it would have influenced the judge when deciding whether to make an order or the terms on which such order should be made. The question of materiality was a matter for the court and not the subjective judgment of the applicant or his lawyers.

The authorities (in particular Brinks Mat v Elcombe [1988] 1 WLR 1350) demonstrated that the interests of justice had to be paramount and a due sense of proportion was required in relation to the assessment of the seriousness of the breach. Cooke J also noted that the court had to be cautious where the non-disclosure in question depended on proof of facts which were in issue in the action. The court had to avoid a mini-trial.

There had clearly been material non-disclosure by the claimant on its without notice application before Flaux J. The matters it should have disclosed (which included the claimant’s complaint to the financial police and the police’s response, and the claimant’s internal audit and investigation reports) were relevant both to the merits of the claim and the issue of limitation. They were material to the judge’s consideration of the application and would have influenced his decision, particularly in relation to limitation, on which it was now clear the claimant’s case did not “cross the threshold of a serious issue to be tried, let alone a good arguable case”.

The claimant had also failed to disclose matters which were “highly material” to the question of causation. In particular, “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 [was] self-evident”.

In the light of Cooke J’s findings on both limitation and non-disclosure, he discharged the freezing order and the order for service out.

Comment

Although the judge could have discharged the freezing order solely on the basis that the claimant did not have a good arguable case because its claim was time-barred, his ruling on material non-disclosure was part of the ratio of the decision, and it appears that this issue alone would have been sufficient to persuade the court to discharge the order.

Alliance Bank JSC v Zhunus and others [2015] EWHC 714 (Comm)

Post By Sarah Speller (10 Posts)

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