Centerra caught in court crossfire about seizure of hotel in Kyrgyzstan

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While Toronto-based Centerra Gold Inc. has faced recent protests in Kyrgyzstan demanding the nationalization of its massive gold mine there, the company is also caught in the middle of a tangled legal battle at home.

The company, which operates the remote Kumtor gold mine about 350 kilometres southeast of the Kyrgyzstani capital of Bishkek, has been dragged into an obscure dispute between the former Soviet republic's government and a Turkish hotel operator.

The legal fight, which has found its way into Ontario's courts, involves the alleged seizure at gunpoint of a Turkish-owned, four-star hotel in Bishkek during the country's 2005 revolution.

The dispute, which was first filed in an Ontario court in 2010 and has been disclosed in Centerra's financial statements, has heated up just as the company faces increasing controversy over its mine in Kyrgyzstan.

The fight illustrates the increasingly complex hazards Canadian resource companies face as they invest in developing countries.

Last month, an Ontario Superior Court judge upheld freeze orders on four million of Centerra's shares and on millions in dividend payments owed to the company's state-owned Kyrgyzstani shareholder.

The Turkish firm, Sistem Muhendislik Insaat Sanayi Ve Ticaret Anonim Sirketi, is trying to collect on a 2009 ruling from an international arbitration panel in Geneva that concluded that Kyrgyzstan owed the firm, known as Sistem, about $8.5-million (U.S.) plus costs and interest for the alleged takeover of the hotel.

But Kyrgyzstan, which underwent another revolution in 2010, has refused to pay.

The arbitration decision says the Turks allege that during the 2005 revolution, a group of 50 armed men took over their hotel. They were allegedly led, the decision says, by the former chairman of the Kyrgyzstani company that had previously controlled the hotel in 1990s but went bankrupt.

In 2010, still seeking compensation for the lost hotel, Sistem was looking to seize Kyrgyzstani assets outside of the country. Centerra, with its Kumtor gold mine responsible for 12 per cent of the country's gross domestic product, caught its attention.

A third of Centerra's shares are held by a Kyrgyzstani state-owned company, Kyrgyzaltyn JSC. This, Kyrgyzaltyn's Ontario lawyers and lawyers for Centerra argue, is a key distinction.

Centerra has contested the demands to hand over shares and dividend payments to Sistem, arguing that the assets were not directly owned by the government, but by a corporation with its own commercial operations.

Sistem argues in court documents that Kyrgyzstan is the "beneficial" or de facto owner of the shares, and should pay up. Centerra, caught in the middle, has been denied court standing in the dispute.

Last month, an Ontario Superior Court judge reaffirmed an earlier order freezing four million of Kyrgyzaltyn's 77 million shares in Centerra and forcing Centerra to put about $8-million in owed and future dividends in trust, pending the outcome of the legal fight.

Lawyers acting for Kyrgyzaltyn in Toronto have appealed a preliminary ruling on jurisdiction to the Ontario Court of Appeal.

The outcome, says John Judge, Centerra's lawyer on the matter with Stikeman Elliott LLP, could have implications for other Canadian resource companies doing business around the world.

"It's a precedent and that's why it's very important that the courts here carefully look at issues of jurisdiction," Mr. Judge said in an interview.

Frank Herbert, Centerra's general counsel, does not believe a ruling forcing the company to hand over shares would adversely effect its relationship with Kyrgyzstan: "I don't see that there's any scope here for this issue to be a trigger for something larger in respect of the status of the mine in the Kyrgyz Republic."