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Burden of proof in commercial fraud claim

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Alice Englehart



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03 May 2013

JSC BTA Bank v Mukhtar Ablyazov, Zhaksylyk Zharimbetov & ors (Granton action); JSC BTA Bank v Mukhtar Ablyazov, Zhaksylyk Zharimbetov & ors (Drey action); JSC BTA Bank v Mukhtar Ablyazov, Ildar Gayarevich Khazhaev, Usarel Investments Ltd & ors (Chrysopa action) [2013] EWHC 510 (Comm) 19 March 2013

In this latest ruling in the long-running Kazakh bank litigation, Teare J upheld the Bank’s civil claims based on fraud and dishonest assistance in fraud against, respectively, a former Chairman of the Bank and two ex-employees. The case is a useful reminder that the standard of proof where fraud is alleged remains the usual civil standard but that the cogency of evidence relied upon by a claimant must be commensurate with the seriousness of the conduct alleged if the claim is to succeed.

In February 2009, JSC BTA Bank, once one of Kazakhstan’s largest banks (the Bank), was effectively nationalised after concerns arose over its ability to continue as a going concern. The Bank later underwent an insolvency process and several Western banks were forced to write off billions in debt.

Criminal proceedings were brought against the Bank’s former Chairman, Mukhtar Ablyazov (A), in Kazakhstan and Russia. The Bank also commenced 11 civil actions in England against A and his associates, including Z (a Kazakh citizen who had held a senior position at the Bank) and K (a Russian citizen who had worked for the Bank in Moscow). In essence, the Bank claimed that: (a) A had defrauded the Bank out of up to USD 6 billion by procuring the payment of the Bank’s money to offshore companies owned or controlled by him; and (b) Z and K had knowingly assisted A in his frauds.
The litigation was brought in England because A (and some of his associates) fled to London shortly before the authorities took control of the Bank. They have consistently maintained that the allegations against them are politically motivated and that they are not safe in Kazakhstan. They have therefore never suggested that Kazakhstan was the forum conveniens.
The claims were vigorously pursued and defended for three years, leading Teare J to describe the dispute as an "extraordinary case being brought by means of the forensic equivalent of trench warfare" and involving allegations of fraud "on an epic scale". However, following contempt proceedings brought by the Bank against A, A failed to comply with an order to give full disclosure of his assets. His defence was struck out and he was sentenced to 22 months in prison for "brazen" and "deliberate" contempts. By this time, A had already left the country, allegedly on a coach bound for Europe.

The latest ruling, after a 44 day trial, follows more than 100 hearings on the matter and two judgments entered in default against A last year, one of which was for more than GBP 1 billion, with interest accruing at an eyewatering sum of over GBP 225,000 per day.

The key questions before Teare J were:
(a) Did A commit a fraud on the Bank?
(b) If so, did Z and/or K knowingly assist in the fraud?
(c) If so, were those individuals liable under Kazakh and Russian law, respectively?

When considering the first question, Teare J was mindful of the fact that A’s defence had been struck out and that he had therefore not adduced any evidence with regard to the frauds alleged against him. However, it was necessary to consider whether the Bank had made good its case against A because the alleged frauds were an essential part of the cases against Z and K.

Teare J noted that the Bank needed to persuade him, on the balance of probabilities, that A had committed the frauds and that Z and K had knowingly assisted him. However, as the case involved very serious allegations (and indeed exposed Z to a personal liability of over USD 1 billion), the cogency of the evidence relied upon by the Bank needed to be commensurate with the seriousness of the conduct alleged.
Teare J concluded that the Bank had proved its case against each of A, Z and K to the relevant standard:
(d) It was "clear" and "much more probable than not" that A had orchestrated, or at least authorised, the frauds in question.
(e) Although the Bank’s case was based on inference from circumstantial evidence, that evidence, considered as a whole, led to a "necessary and inevitable inference" and "the only reasonable inference" that Z had knowingly assisted A in committing certain frauds. He was liable under Kazakh law.
(f) The Bank had also adduced cogent evidence commensurate with the seriousness of the allegations made against him. K had knowingly assisted A to defraud the Bank and was liable under Russian law.

Comment: There are various legal avenues available to a victim of fraud. The victim may try to persuade the authorities to commence a criminal investigation against the alleged perpetrator. It may bring a civil action against the perpetrator to recover compensation. Or it may, as the Bank did, pursue both avenues in parallel, either in the same or different jurisdictions.

In English civil actions, the standard of proof is the balance of probabilities. That is, a claimant must establish that, on the evidence, the occurrence of the event was more likely than not (ie 50% +1).
An allegation of fraud does not affect the standard to which a claimant must prove its case. However, the JSC BTA case is a useful reminder that where very serious misconduct is alleged, particularly where it requires proof of a dishonest state of mind, the balance of probabilities test has some flexibility.

The courts will consider, to whatever extent is appropriate, that the more serious the allegation, the less likely it is that the event occurred and hence the stronger the evidence that is needed before it can be concluded that the allegation has been established on the balance of probabilities. So, fraud is generally a more improbable explanation for an event than negligence and therefore a claimant will usually need to adduce more compelling evidence to prove its case.

Or, as Lord Hoffmann noted in a colourful passage in Secretary of State for the Home Department v Rehman [2001] UKHL 47¸ "it would need more cogent evidence to satisfy [a judge] that the creature seen walking in Regent’s Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian."
Pleading fraud has various advantages over a claim in negligence or breach of contract. For example, it is generally easier to pierce the corporate veil, the limitation period may be extended, liability for fraud cannot be excluded or limited and the courts may be more willing to infer significant losses.

However, allegations of fraud should never be made lightly. They must be pleaded with particularity or face being struck out. They tend to raise the temperature of a case considerably and they can sometimes backfire, with attention shifting at trial to the party making the allegations and its motive for doing so. And, as this latest judgment in the JSC BTA litigation confirms, although a claimant in theory only needs to prove its case to the standard applicable to other civil claims, in reality the court will require it to satisfy a more rigorous standard where fraud is alleged.