SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-11-9419-00CL
DATE: 20120904

RE: SISTEM MÜHENDISLIK İNŞAAT SANAYI VE TICARET ANONIM SIRKETI

Applicant

and

KYRGYZ REPUBLIC and KYRGYZALTYN JSC

Respondents

BEFORE: Justice Newbould

COUNSEL:
Steven G. Frankel, for the Applicant
J. Brian Casey and Christina Doria, for the Respondents
John A.M. Judge, for Centerra Gold Inc.

DATE HEARD: August 27, 2012

E N D O R S E M E N T

[ 1 ] This is a motion by Sistem Mühendislik İnşaat Sanayi Ve Ticaret Anonim Sirketi ("Sistem") to extend the order of Justice Strathy dated August 17, 2012, which granted relief in the nature of a Mareva injunction. In essence, Sistem seeks to freeze 4,000,000 common shares in Centerra Gold Inc. ("Centerra") nominally held by Kyrgyzaltyn JSC ("Kyrgyzaltyn"), and to prevent Kyrgyzaltyn from removing from Ontario share certificates evidencing those shares. Sistem also seeks an order requiring Centerra to hold $3,080,000 in trust to the credit of this proceeding, being an amount equal to a dividend payment that Centerra will otherwise make to Kyrgyzaltyn on August 30, 2012. [1]

[ 2 ] On September 9, 2009, an arbitration panel constituted pursuant to the International Center for Settlement of Investment Disputes ("ICSID") Additional Facility Rules ordered the Kyrgyz Republic (the “Republic”) pay to Sistem US $8.5 million, plus certain costs and interest (the "Award"). The arbitration concerned the illegal expropriation of the Hotel Pinara, a hotel in Bishkek, the capital of Kyrgyzstan, owned by Sistem. The arbitration panel found that the Republic was responsible for the expropriation.

[ 3 ] Despite retaining counsel and actively participating in the arbitration, the Republic has refused to pay the Award. It has also rejected the validity of judgments recognizing the Award in France and Switzerland.

[ 4 ] On October 8, 2010, Sistem commenced an application in this Court for an order recognizing and enforcing the Award. Despite being given notice of the application, the Republic did not file material or appear. On January 5, 2011, Echlin J. made an order recognizing the Award as an award of this Court.

[ 5 ] Centerra is a publicly-traded Canadian mining company that has extensive operations in Asia and, though subsidiaries, operates the Kumtor gold mine in the Republic, one of the largest gold mines in the world. Centerra’s head office is in Toronto, it is a reporting issuer under the Securities Act, R.S.O. 1990, c. S.5 and its shares are traded over the Toronto Stock Exchange.

[ 6 ] Kyrgyzaltyn, a state-owned enterprise wholly-owned by the Republic, nominally holds 77,401,766 Centerra shares. Sistem maintains that the true owner of the shares is the Republic. Sistem is seeking to enforce the award against those shares, and has therefore sought declaratory relief from this Court that, if granted, would permit the seizure of enough of those shares to satisfy the award.

[ 7 ] Having obtained the order from Echlin J., Sistem sought to enforce the Award. On February 11, 2011, the Registrar of this Court issued a Writ of Seizure and Sale directing the Sheriff of the City of Toronto to seize and sell the real and personal property of the Republic sufficient to satisfy the Republic's judgment debt to Sistem. Sistem asked the sheriff to enforce the Writ by seizing the Republic's beneficial interest in the Centerra shares. Ultimately, however, the sheriff was unwilling to do so.

[ 8 ] Sistem also caused the Registrar to issue a Notice of Garnishment against Centerra in respect of existing or future debts owed by Centerra to the Republic. Centerra has denied that any such debt exists, and has not paid any money to the Sheriff pursuant to the Notice of Garnishment.

[ 9 ] On May 3, 2011, Sistem brought a motion for a declaration that (i) the Republic beneficially owns the Centerra shares and (ii) the Sheriff may seize those shares pursuant to the Writ. Neither the Republic nor Kyrgyzaltyn responded to the motion. Centerra, however, did oppose the motion, which was adjourned sine die on June 8, 2011.

[ 10 ] On August 22, 2011, Sistem brought a motion to add Kyrgyzaltyn as a party to the Application. The Republic and Kyrgyzaltyn were provided with notice of the motion, but again did not appear. As before, Centerra opposed the motion.

[ 11 ] The motion was heard by Cumming J. on September 29, 2011, after the matter was transferred to the Commercial List. On September 30, 2011, Justice Cumming delivered reasons allowing Sistem's motion. Among other things, Justice Cumming found that Centerra had no standing.

[ 12 ] After the Amended Notice of Application was issued and served, Kyrgyzaltyn filed an appearance and then brought two motions. The first was to set aside the order of Echlin J. on the basis that the Court had no jurisdiction. The second was to stay any determination of the share ownership issue in favour of the Courts of the Republic on the basis of forum non conveniens. Centerra supported Kyrgyzaltyn’s jurisdiction motion.

[ 13 ] On July 25, 2012, Mr. Brown J. dismissed Kyrgyzaltyn‘s motions. He directed the parties to attend at a 9:30 a.m. chambers appointment before him in order to present a timetable and plan for the adjudication of the remainder of the Application, that is, the share ownership issue. Further, he directed the Republic to file an appearance by September 1, 2012 and be present at the chambers appointment, if it wanted to participate in the proceedings at all.

[ 14 ] On August 14, 2012, Sistem became aware through news reports from the Republic that Kyrgyzaltyn either has received or will shortly receive certificates in respect of 74,551,766 of the 77,401,766 shares. The reports further indicate that the certificates have been or will soon be moved out of Ontario and to the Republic. One report quotes the Prime Minister of the Republic as calling this event "historical". The remaining 2,850,000 shares nominally held by Kyrgyzaltyn are pledged to Centerra.

[ 15 ] On August 17, 2012, Sistem brought an ex parte motion for relief in the nature of a Mareva injunction. Strathy J. granted the motion. See Sistem v. Krygyz Republic , 2012 ONSC 4751 . His order provided that it would expire in 10 days unless Sistem applied to extend it. Sistem now applies to extend his order for a further 90 days.

[ 16 ] Sistem’s evidence is that the shares of Centerra had a market price on August 15, 2012 of $6.67 per share. At this price, the Award could be satisfied by the seizure and sale of less than 2,000,000 shares. There has, however, been considerable volatility in Centerra’s share price, which has had a 52 week high of $23.69. There could be further volatility in the share price. In the circumstances, Sistem asked for an order freezing 4,000,000 shares, which Strathy J. granted.

[ 17 ] Centerra announced that in August 30, 2012 it will pay a dividend of $0.04 per share to shareholders of record as of August 17, 2012. This will entitle Kyrgyzaltyn to a payment of $3,080,000. Sistem asked for an order that such amount and any further dividends to be paid to Kyrgyzaltyn be held in trust by Centerra to the credit of this proceeding, which Strathy J. ordered.

[ 18 ] The Republic has not appeared to defend this motion by Sistem to extend the Mareva injunction ordered by Strathy J. Kyrgyzaltyn has appeared and opposes the motion. It has not filed any evidence. Thus the evidence on this motion is the evidence that was before Strathy J.

[ 19 ] Centerra has appeared only for the limited purpose of seeking consent amendments to the order of Strathy J. to deal with what are said to be ambiguities in the order.

[ 20 ] The tests for granting a Mareva injunction are well known and need not be repeated here. See Chitel v. Rothbart (1983), 39 O.R. S2d) 513. One requirement is that the moving party must establish a strong prima facie case.

[ 21 ] Kyrgyzaltyn primary contention is that Sistem has not established any case, let alone a strong prima facie case, as there is no evidence that Kyrgyzaltyn holds the Centerra shares for the Republic. I do not agree, and essentially agree with the reasons of Strathy J. in granting the Mareva injunction in the first place.

[ 22 ] Kyrgyzaltyn asserts, and I agree, that the fact that shares are held by a subsidiary does not in itself mean that they are the asset of the parent. Kyrgyzaltyn asserts that there is no evidence that the shares of Centerra held by Kyrgyzaltyn are held on any basis on behalf of the Republic that wholly owns the shares of Kyrgyzaltyn. I do not accept that assertion.

[ 23 ] Kyrgyzaltyn relies on an agreement amongst the Republic, Kyrgyzaltyn, Cameco, Centerra and Kumtor under which Cameco, which was a large shareholder of Centerra, agreed to exit Centerra and transfer its shares to Kyrgyzaltyn. The agreement provided that approximately 25.3 million shares of Centerra owned by Cameco would be transferred to Kyrgyzaltyn and that an additional approximately 18.2 million shares would issued by Centerra from treasury to Kyrgyzaltyn. The agreement provided expressly in section 2.2 that the treasury shares would be issued to Kyrgyzaltyn so that “Kyrgyzaltyn will beneficially own” such shares and be “entitled to all the benefits arising from such shares”. Kyrgyzaltyn asserts that that is the end of the matter and that it is Kyrgyzaltyn and not the Republic that beneficially owns the shares of Centerra.

[ 24 ] I note that section 2.2 does not deal with the 25.3 million shares of Centerra to be transferred under the agreement by Cameco. It may be that section 2.2 was intended to mean that so far as Centerra was concerned, it was Kyrgyzaltyn that was entitled to act as beneficial owner of those treasury shares issued to Kyrgyzaltyn. But there are other provisions in the agreement that indicate that Kyrgyzaltyn holds the shares of Centerra for the benefit of the Republic.

[ 25 ] The preamble to the agreement provided-

Whereas Cameco… and Kyrgyzaltyn, which holds shares in Centerra on behalf of the Government (Kyrgyzaltyn, together with the Government, the “Kyrgyz Side”) are the largest shareholder of Centerra;

[ 26 ] This is a clear statement that Kyrgyzaltyn holds its shares of Centerra on behalf of the Republic. Moreover, section 2.5(c) provided that the “Kyrgyz Side [meaning the Republic and Kyrgyzaltyn] shall have no restrictions on the transfer or encumbrance of any common shares it holds…” (Underlining added) and section 2.5 (d) provided that “Any common shares held by the Kyrgyz Side shall be subject to the provision of section 3.8 of the 2004 Shareholders Agreement…” These provisions indicate a clear intention that the Republic is a shareholder in Centerra.

[ 27 ] There are other indications that the shares of Centerra held by Kyrgyzaltyn are held for the Republic. In a press release of April 22, 2011, the Prime Minister of the Republic was quoted as saying that “we have a 33% stake in Centerra”. In a central Asia newswire of May 2, 2011 there is reference to a Bishkek (the capital of Kyrgyzstan) news agency 24.kg reporting that the Deputy Prime Minister made the statement that the Kyrgyz government is looking to expand its stake in Centerra.

[ 28 ] There are statements from Centerra that indicate that so far as Centerra is concerned, the holding of its shares by Kyrgyzaltyn is a holding by the Republic. While these statements are not directly by Kyrgyzaltyn or the Republic, they are statements of Centerra management about a very important shareholder. In the Management’s Discussion and Analysis (MD&A) section of the 2009 annual report of Centerra, it refers to the transfer by Cameco of 25.3 million common shares “to Kyrgyzaltyn”, “to the Government” and “to the Kyrgyz Government”. In the MD&A in the 2010 annual statement of Centerra, there is reference to “the issuance of common shares to the Government”. In an April 24, 2009 press release of Centerra, there is reference to an agreement to issue 18,232,615 common shares of Centerra to the Government and to the agreement of Cameco to transfer 23.5 million shares to the Government.

[ 29 ] Sistem has filed expert evidence of Ms. Mirgul Smanalieva, an expert in Kyrgyz law, to the effect that under the law of the Republic, the Republic is the owner of the Centerra shares and that Kyrgyzaltyn holds the Centerra shares on behalf of the Republic. She further opines that the shares and any dividends are the property of the Republic and may be seized in satisfaction of the arbitration Award. This report was known to Kyrgyzaltyn at the time of the hearing before Brown J., although not relevant then as the issue was forum non conveniens, but to date no opposing expert opinion has been produced.

[ 30 ] Kyrgyzaltyn points to the affidavit of Mr. Frank Hebert, the general counsel and corporate counsel of Centerra. He states in his affidavit that it is made in support of Centerra’s interest in the motion. I fail to see any interest Centerra has in the motion, as it involves a question which should be irrelevant to Centerra. Whatever the court decides will be binding on Centerra, which should have no interest in who between Sistem or Kyrgyzaltyn is right. The fact that Centerra has in prior motions sought to intervene to support the position of Kyrgyzaltyn and the Republic is an indication that Centerra is not being entirely neutral in this matter.

[ 31 ] Mr. Hebert states in his affidavit that he is “aware that Kyrgyzaltyn was intended to be, and is, the beneficial owner and not merely the nominal owner of the shares of Centerra”. He says this is set out in section 2.2 of the agreement I have referred to. He says that Centerra has always observed this provision and has paid dividends directly to Kyrgyzaltyn. I can understand that as between Centerra and Kyrgyzaltyn, Centerra deals with Kyrgyzaltyn as the holder of the shares. But that does not deal directly with the question of who between the Republic and Kyrgyzaltyn is the beneficial owner of the Centerra shares. His statements are contradictory to the position of Centerra in its MD&A statements and press releases. I see the statement of Mr. Hebert as mainly argument.

[ 32 ] In my view, Sistem has established a strong prima facie case that the shares of Centerra held by Kyrgyzaltyn are held for the benefit of the Republic. This of course does not mean that Sistem will necessarily succeed on this point at the trial of the action, if it proceeds that far, but I am satisfied, as was Strathy J., that the case of Sistem is sufficiently strong to say that a strong prima facie case has been established.

[ 33 ] Kyrgyzaltyn also contends that there is no evidence of a risk that there will be a dissipation of assets. In answer to a question from the bench, Mr. Casey said that Kyrgyzaltyn would make no undertaking to retain the dividends it will receive from Centerra, and no undertaking regarding the shares except in the alternative. That is a clear indication that any dividends it obtains will be given to the Republic, which is consistent with the evidence that the Republic intends to cause the dividends to be transferred to the Republic.

[ 34 ] A judgment creditor need not invariably provide direct evidence that there is a risk of removal or dissipation of assets. Rather, such a risk can, in an appropriate case, be inferred from the circumstances. See Sibley & Associates LP v. Ross , 2011 ONSC 2951 at para. 63.

[ 35 ] Sistem is concerned that if the share certificates for the shares are physically transferred to the Republic they will not be capable of being seized by the sheriff to satisfy the Award and Sistem's efforts to enforce the Award will be frustrated. Sistem believes that this activity is designed to put the Shares beyond the reach of this court and to avoid the enforcement of the judgment in favour of Sistem. Under the Securities Transfer Act S.O. 2006, c. 8, an interest in a certificated security may only be seized by seizing the actual certificates (subject to limited exceptions that do not apply). Thus, if the certificates are moved to the Republic, the sheriff will be unable to seize them and the Republic will have made itself judgment-proof with respect to the shares.

[ 36 ] Mr. Casey stated in argument that the share certificates of Centerra have already been moved to the Republic. This is consistent with press reports emanating from Kyrgyzstan that the certificates have or will shortly be received by Kyrgyzaltyn and that the Prime Minister of Kyrgyzstan had described this event as historical. Mr. Casey asserts that where the certificates are located is not important as the share register of Centerra is in Canada and the court can make whatever order regarding the shares that it deems appropriate. Sistem points out that it is by no means certain that if a Canadian court ordered the share certificates to be returned that Kyrgyzaltyn would obey the order. The Republic has made it clear that it will do everything in its power to avoid paying Sistem the amount of the Award, and there is no reason to think that it would not direct Kyrgyzaltyn to ignore an order of this court.

[ 37 ] Kyrgyzaltyn also contends that it is overkill to tie up both 4 million common shares of Centerra and the dividends of $3,080,000. It contends that the shares are more than enough. However, taken the attempts by both the Republic and Kyrgyzaltyn to prevent recognition and payment of the Award and to spirit away the share certificates, I think it appropriate that the dividends to be tied up.

[ 38 ] I agree with Strathy J. in his conclusion that while the evidence is limited concerning efforts to remove the shares from this jurisdiction, it is consistent with the course of conduct of the respondents in taking every possible measure to avoid payment of the Award and the coincidence of this action being taken within a few weeks of the order of Brown J. cannot be overlooked. In my view there is a real risk that that the share certificates will, if not already removed from Canada, be removed and a real risk that the dividends if paid to Kyrgyzaltyn will be removed.

[ 39 ] It was not argued that the balance of convenience favours Kyrgyzaltyn. However, I agree with Strathy J. for the reasons given by him that the balance of convenience favours the granting of the relief sought.

[ 40 ] Kyrgyzaltyn also contends that there is no evidence that Sistem has any assets in Canada and that a letter of credit should be posted in support of its undertaking as to damages in an amount equivalent to the number of shares frozen at today’s price. Whether an undertaking as to damages or security for it is required is a discretionary matter. In this case, I see no purpose in requiring a letter of credit for the value of the shares being tied up. The shares exist somewhere and will not be dissipated unless Kyrgyzaltyn or the Republic takes some steps to sell them. Mr. Casey says there is no intent to do that. The dividends will presumably remain in an interest bearing account.

[ 41 ] Strathy J. held that he did not propose to order security for the undertaking in light of the substantial judgment Sistem has. I am of the same view.

[ 42 ] In the circumstances the motion to extend the order of Strathy J. for 90 days is granted. With respect to the proposed changes to the order of Strathy J., Mr. Casey had not had a chance to review the proposed changes. If the parties cannot agree on the changes, the matter can be taken up with me.

Newbould J.

DATE: September 04, 2012

[1] It was agreed that no interim order was required tying up the assets pending my decision on this motion, as under the language of the order of Strathy J., Sistem was required to apply for an extension of the order within 10 days, which it did, failing which the order would terminate.