Civil Fraud Quarterly Round-Up: Q1 2021

16 April 2021

This quarterly civil fraud update provides a summary of reported decisions handed down in the courts of England and Wales in the period January - March 2021.

 

Freezing injunctions

In Kevin Taylor v (1) Mohammed Khodabakhsh (2) New Beginnings Technologies LLC (3) Rhino Overseas Inc  the Court considered an on-notice application for freezing and proprietary injunctions in a claim which sought to set aside an earlier judgment on the basis that it had been allegedly procured by fraud.  The Court was not persuaded by the application for a proprietary injunction which related to payments made pursuant to the earlier judgment.  The Judge commented that payment pursuant to a regular Court order is not in the same category of payment as a fraudulently induced transfer on the basis that a Court order is only ever regular or irregular rather than void or voidable.  A Court order is valid and binding until and unless it is set aside and until that occurs it is not open for a party to simply elect to treat an order as set aside.  The Court was similarly unconvinced by the application for a freezing injunction, questioning the merits of the claim and finding that not only was there no risk of dissipation, but that it was not clear that the Defendants held assets which needed protecting.

A post-judgment freezing injunction which had been made in 2007 and extended six times was discharged in Des Palliers & Anor v Van Harinxma.  The applicant submitted that the respondents had not progressed or engaged with the litigation for some time and that the existence of the injunction was causing damage to the applicant’s health and her ability to run a business.  The Court agreed and discharged the injunction with immediate effect.

The Court also considered an application to discharge an injunction in Ahmed & Anor v Ahmed.  The Defendant alleged that there had been material non-disclosure by the Claimants.  The Court considered the guidance in the White Book that it was only in exceptional circumstances that a Court would not discharge an order where there had been deliberate material non-disclosure.  However, in this case the alleged non-disclosure depended on proof of facts which were themselves in issue in the case and were matters for trial.

In Yalcinkaya v Hassan the Court considered whether a worldwide freezing injunction and an injunction preventing the Defendant from dealing with certain properties should be continued.  The Defendant submitted that the injunctions had been improperly made because of delay or should be discharged because of the Claimant’s failure to serve a proper note of the hearing or give a full and frank explanation or fair presentation of what the Defendant might have said.  The Court considered the facts, found that the injunctions had not been improperly obtained, but concluded that the freezing injunction should not be continued as it had been demonstrated that (other than the properties, which were subject to the proprietary injunction) the Defendant had no significant assets and a freezing injunction was therefore disproportionate.  The proprietary injunction preventing the Defendant dealing with properties was continued.

Another application to continue a freezing injunction was considered by the Court in In the matter of Khadzi-Murat Derev sub nom Igor Vitalievich Protasov v Khadzhi-Murat Derev.  The applicant bankruptcy manager applied for the continuation of a freezing injunction against the respondent who had been declared bankrupt in Russia on the basis that there was a continuing risk of dissipation of assets by the respondent.  The Court considered whether foreign bankruptcy proceedings were “substantive proceedings” and concluded that they were not.  Further, the Cross-Border Insolvency Regulations 2006 under which the Russian bankruptcy proceedings had been recognised, put the applicant in the same position as an officeholder appointed under domestic law and therefore brought domestic insolvency legislation into play which suspended the respondent’s rights to deal with his assets, and there was therefore no need for a freezing injunction.

In Lakatamia Shipping Co Ltd v (1)Nobu Su (2) Toshiko Morimoto & 4 Ors (first discussed in my civil fraud update Q4 2019) the Claimant applied to amend its particulars of claim and for an order for specific disclosure against the second Defendant in an action for damages for breach of a freezing injunction.  The first Defendant was a judgment debtor of the Claimant who had defaulted on disclosure and freezing injunctions and had been imprisoned for contempt on two occasions.  The second Defendant was the mother of the first Defendant and, it was alleged, had received the proceeds of sale of a property sold in breach of a freezing injunction.  The second Defendant alleged that the proposed amendments lacked merit and would cause the trial date to be lost.  The Court considered the principles relating to amendments to particulars of claim which were that the overriding objective was of the greatest important and there was a burden on a party seeking a late amendment to show the strength of the new case and why justice required them to be able to pursue it.  An amendment would be considered to have been made very late if it was made after the trial date had been fixed and permitting the amendments would cause the trial date to be lost.  The Court gave permission to amend after finding that the proposed amendments merely added to causes of action already at issue and were unlikely to increase the length of the trial, both sides had the time to deal with the amendments before trial, and the need to amend had only arisen as a result of the second Defendant’s disclosure.  However, the Court refused the Claimant’s application for specific disclosure against the second Defendant: where a party asserts they have no control over documents, even if that assertion was implausible, it was difficult to see what more the Court could do.

The Court considered the adequacy of asset disclosure pursuant to a freezing injunction in JSC Commercial Bank Privatbank v Igor Valeryevich Kolomoisky & 7 Ors (which I considered in my civil fraud updates of Q4 and Q2 2018)and whether it would be proportionate to order that a Defendant be cross examined on his assets.  The issue related to a disclosure of an investment in Bitcoin which was described as giving the first Defendant the right to receive the lesser value of 50,000 BTC or US$1bn in January 2021.  When the Claimant’s solicitors sought further information about the investment in January 2021 the information provided was, according to the Claimant’s solicitors, fundamentally different to the information originally disclosed.  The Court concluded that whilst the Claimant was entitled to understand more information about the investment, a cross examination as to assets was unlikely to be appropriate or proportionate for the purpose of discovering sufficient information to identify and preserve the assets as the Claimant could seek further information in writing.

Freezing injunctions were granted in Walker-Smith v McGuire & Ors where the Defendants were accused of being involved in a Ponzi scheme.  The Court confirmed that the burden was on the Claimant to show that there was a real risk of dissipation of assets and that this had been made out in this case.  The Claimant’s application for an affidavit from the first Defendant disclosing what had happened to the proceeds of a property was granted, but the Court found that that Claimant was not entitled to an affidavit identifying how the first Defendant’s funds had been invested.

In J&M Contractors (UK) Ltd v Till & Till the Court granted a post judgment freezing injunction in circumstances in which the judgment debtors had failed to pay the judgment debt, failed to make the negotiated instalment payments, sold a property without settling the debt and dis-instructed their solicitors without providing a new address for service.  The Court confirmed that a freezing injunction could not be used to secure security or get preferential treatment over other creditors.  However, the Court found that it was necessary to make a freezing injunction as there was a real risk that either the judgment debt would not be satisfied or that enforcement would be more difficult unless the respondents were restrained from dissipating their assets.  The Court also made an order for alternative service by email.

In the latest instalment of National Bank Trust v Ilya Yurov & 5 Ors (which I first discussed in my civil fraud update Q3 2016 and revisited in Q1 and Q2 2020) the Court was asked to vary a freezing injunction to reinstate the Second Defendant, Mr Belyaev’s legal expenses allowance and to permit the Second  Defendant to sell assets to fund his living expenses.  The Second Defendant also applied for a stay of execution to allow him to prepare a claim that the judgment had been obtained by fraud.  The Court confirmed that where a Defendant seeks to use frozen assets to fund legal or living expenses they have the burden of proving there are no other assets available for that purpose.  The second Defendant had not discharged that burden.  Further, the legal expenses which the second Defendant sought to fund were related to his defence of enforcement proceedings in other jurisdictions and the policy of law was in favour of the enforcement of judgments.  The application to stay proceedings had not been made at the appropriate time and the allegations of fraud relied on the disclosure of privileged communications which the Defendant was not permitted to use.  It was not in the interests of justice to grant a stay.

A freezing injunction was granted and continued against an unknown individual in MSP Capital Ltd v Persons Unknown.  An unidentified Defendant had stolen the identity of a borrower to whom the Claimant believed it had lent money. Other Defendants included a company who had received the proceeds of the fraud into its bank account and its director who the Claimant alleged had engaged in a premeditated fraud.  The Court found that there was a serious issue to be tried and a real risk of dissipation if the injunction was not continued.

 

Admissibility of evidence

In (1)Motorola Solutions Inc (2) Motorola Solutions Malaysia SDN BHD v (1) Hytera Communications Corp Ltd (2) Project Shortway Ltd the Court of Appeal considered the admissibility of without prejudice statements (a summary of the first instance decision can be seen in my civil fraud update Q2 2020).  A freezing injunction had been granted based on evidence which included statements made in without prejudice settlement meetings by the appellant that it would “retreat to China” to avoid enforcement in the event that a judgment was made against it.  The Court of Appeal disapproved Dora v Simper that a without prejudice statement was admissible if it fell within an unambiguous impropriety exception.  In particular the approach of asking whether one party’s disputed evidence (if true) would demonstrate an unambiguous impropriety should not be followed.  Instead the test the judge should have applied was whether the evidence established an unambiguous impropriety.

The Court of Appeal considered the admissibility of evidence obtained through the unlawful hacking of a businessman’s emails in Ras Al Khaimah Investment Authority v Farhad Azim.  It confirmed that unlawfully obtained evidence could, but did not have to, be excluded.  In this case, regardless of whether the evidence had been obtained by a hack, what had been obtained were documents which would have fallen under the Defendant’s duty of disclosure and therefore would have been available at trial.  There was therefore no reason to exclude the documents.  To strike out the claim because of the manner in which the evidence may have been obtained would have been disproportionate and would have allowed the businessman to benefit from the fraud which was demonstrated by the documents.  However, the Court of Appeal did agree that given there were inconsistent accounts of how the hacking came about, a new case on that point would have to be pleaded and remitted to a new judge for a trial on that point.

 

Bribery

The Court of Appeal in Mozambique (acting through its Attorney General) v Credit Suisse International & 11 Ors considered whether claims for bribery, conspiracy and fraud, which were related to supply contracts, fell within the scope of the arbitration clauses in those contracts.  The Court of Appeal confirmed that it was necessary to determine whether the ‘matter’ in respect of which the proceedings were brought was within the scope of the arbitration clauses and then whether the parties had agreed that those matters could only be arbitrated.  If the answer to both was yes, s.9 Arbitration Act 1996 required a stay to be granted.  The Court of Appeal considered that the allegation that the supply contracts were instruments of fraud or shams went to the question of the validity of those supply contracts which was itself an issue which it was foreseeable would be raised.  These issues were therefore found to fall within the scope of the arbitration clauses.

 

Committal and contempt

In Ocado Group Plc v McKeeve the Court of Appeal considered the approach to be taken when applying for permission to commit someone for attempting to thwart a Court order.  In this case it was a solicitor who was accused of contempt for giving an instruction to ‘burn it’ or ‘burn all’ on becoming aware that a search order had been made.  The Court at first instance had found that there was no prima facie case of contempt.  The Court of Appeal disagreed stating that no Court could countenance the deliberate destruction of documents when litigation was under way.  Such action would be an attempt to interfere with the due administration of justice which would mean a committal application would be in the public interest.

The Court of Appeal considered another committal application in Boys & Maugham (a firm) v Moore.  The appellant (a litigant in person) appealed a decision committing him for contempt on the basis that he did not receive a fair hearing: he was a litigant in person suffering from mental health issues in respect of which only some of the proposed adjustments he had asked for had been made.  The Court of Appeal considered the material and concluded that the judge at first instance had not erred in her factual conclusions.  The Court of Appeal also considered whether it was appropriate to charge the alleged acts of contempt as separate acts.  As the orders contained different obligations the Court of Appeal found that it was correct that they were charged as separate acts.

In Rizwan Hussain v (1) Gulraj Vaswani (2) Saroj Vaswani (3) Kriti Vaswani the Court of Appeal considered whether a general civil restraint order should apply to an application to purge contempt and for early release from prison and, if it did apply, what threshold should be applied to the grant of permission.  The Court of Appeal held that a general civil restraint order applied to any application including an application to purge contempt and seek release from prison and that the threshold was whether there was some merit to the application.

In another case relating to the committal of a solicitor for contempt, the Court in Money v Delaney considered whether it was appropriate to dispense with the need for personal service of evidence in support of the contempt application where the respondent was aware of the application and had requested service by email.  The respondent had failed to comply with orders compelling him to deliver up files to the applicant and the Court was asked to determine whether the application had been properly served, whether the application should be heard in the respondent’s absence and whether the respondent was in contempt of Court.  The Court found that in circumstances in which the respondent had asked to be served by email, where it was clear that he was aware of the application and where he had been personally served with some of the documents it was in the interests of justice to dispense with the need for personal service of all documents.  Where the respondent was a solicitor, was aware of the hearing, had indicated he would attend and had provided no reason for non-attendance it was appropriate to proceed in his absence.  The Court was also satisfied that the respondent was in breach of Court orders and was therefore in contempt of Court.

 

Quincecare Duty

Fiona Lorraine Phillip v Barclays Bank UK Plc is the latest of a recent slew of cases addressing the scope of a bank’s Quincecare duty: an implied obligation to refrain from executing a payment instruction where the bank is on enquiry that the payment might be an attempt to defraud the customer.  In this case it was confirmed that the Court was not willing to extend the duty to payments where a customer who is a natural person (rather than a corporate entity) makes a payment to a fraudster.  The Court agreed with the Defendant bank’s argument that it had no obligation to protect the Claimant from the consequences of her genuine instructions.

 

Crypto-Assets

In Ion Science Limited and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payment Ventures Inc the Court granted a worldwide freezing order and proprietary injunction against unidentified persons in order to preserve transferred bitcoin and assets.  The Court also made a Bankers Trust order against exchanges compelling them to disclose information about the identity of the alleged fraudsters.  These were made despite the fact that the exchanges were outside England and Wales.  The Court also considered the location of crypto assets for the purpose of determining the law applicable to a dispute relating to crypto assets and concluded that it should be the place where the owner of such assets is domiciled.

 

Cross-examination as to means

In Lakatamia Shipping Co Ltd & Ors v Iron Monger 1 Ltd & Ors the Court considered an application to discharge an order requiring a judgment debtor to report to a police station twice a week and preventing him leaving the jurisdiction before he had been cross examined as to his means for a second time.  The order had been made after it was discovered that the judgment debtor owned a property in Monaco which had not been disclosed in breach of an earlier freezing injunction.  He had also attempted to flee the jurisdiction and had been committed to prison twice for breach of disclosure orders.  As the application was not an appeal against the order, it could only be considered on the basis that there had been a material change of circumstances: no such change had been demonstrated and there was no prospect of the judgment debtor attending a cross examination hearing remotely.  The application was refused.

 

Fraudulent Misrepresentation

The Court dismissed the claim in (1) PCP Capital Partners LLP (2) PCPC International Finance Ltd v Barclays Bank Plc.  Whilst the Court found that the Defendant bank’s senior executive made representations to the Claimant which he knew to be false, and that the Claimant had relied upon those representations, the claim on causation and loss failed and therefore the Claimant was not entitled to damages.

 

Service Out

In (1)Prashant Hasmukh Manek (2) Sanjay Chandi (3)EAGM Ventrues (India) Private Ltd v (1) IIFL Wealth (UK) Ltd (2) Ramu Ramasamy (3) Palaniyapan Ramasamy (4)Amit Shah the Court of Appeal allowed an appeal against the setting aside of an order giving the Claimants permission to serve their claim outside the jurisdiction.  The Court of Appeal found that the Court at first instance had made errors of fact and principle: there had been substantial and efficacious acts committed within the jurisdiction and the Claimants were entitled to rely on the tort gateway in order to serve the claim out of the jurisdiction.

 

Summary Judgment

The Court granted summary judgment on the fraud claims brought in Foglia v The Family Officer Ltd and others, agreeing with the Claimant that there was no reasonable prospect of establishing a defence at trial and no compelling reason for a trial to be held.  The Court’s decision was based on evidence obtained through non-party disclosure applications.  In particular, information was obtained from Vodafone that certain fraudulent telephone calls had been made from a phone bought near one of the Defendants’ offices, while connected to reception masts located close to those offices.  Vodafone also disclosed details of the card used to purchase the phone and further orders were obtained against the bank with whom the account was held.  Those orders showed that the card was in the name of a junior employee of one of the Defendants and that the card had been funded by one of the other Defendants the day before.  Importantly the Court referred to the extra weight which is lent by the accumulation of evidential factors submitted by a Claimant on an application for summary judgment in a fraud case.

 

About the author

Mary Young is a Partner in the Dispute Resolution team. Her practice covers a wide range of areas but Mary’s particular interests and expertise lie in civil fraud and asset tracing as well as claims against professionals in negligence, breach of fiduciary duty and breach of trust. 

 

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