Civil Fraud Quarterly Round-Up: Q1 2021
The Court revisited the legal principles for granting permission to bring proceedings for contempt in Mohamed v Khalil, confirming that it was necessary to show a strong case that the respondent knew that the statements made were false, and considering the significance of those statements in the proceedings. There would also be issues of the public interest to consider, including avoiding circumstances in which contempt proceedings were used to harass a respondent.
The applicant in Re Lueshing was a bankrupt who applied to discharge the 10 month sentence he was serving for contempt. The Bankruptcy Court found that it did not have the power to discharge the order, and that the apology given by the applicant, although seemingly sincere, was not sufficient to obtain a discharge. The order was varied to reduce the sentence and the requirement that the bankrupt cooperate with his trustees in bankruptcy was repeated.
In XL Insurance Company SE v IPORS Underwriting Ltd, Paul Alan Corcoran & Others a maximum custodial sentence of two years was handed down in respect of multiple and persistent breaches of a freezing and proprietary injunction. The sentence was given despite the contemnor not attending the hearing after the judge concluded that he had committed over 800 acts of contempt and following a consideration of the sentencing principles which apply (and are unaffected by the changes to CPR Part 81).
Shelley v Norman also related to breaches of a freezing injunction. In this case a litigant in person was found to be in contempt of court because of multiple breaches of a freezing and proprietary injunction. The Court found that the respondent, despite being a litigant in person, was a sophisticated investment manager who was more than capable of understanding the terms of the injunction and had deliberately breached it.
In Taylor v Robinson the Court confirmed that although the new CPR 81 did not set out the power, the Court did retain the ability to strike out committal proceedings as part of its inherent power to control proceedings and avoid abuse of process.
The Commercial Court refused to discharge an ex parte worldwide freezing injunction in Private Joint Stock Co Pharmaceutical Firm Darnitsa v Metabay Import/Export Ltd. The claimant alleged that the defendant company had been used to commit a large fraud on the claimant and that there was a risk of dissipation evidenced by, amongst other things, the concealed charging of extremely high commissions, and the use of the defendant as a vehicle for such charges. The Court agreed that there was a risk of dissipation and that there had been no failure of full and frank disclosure by the claimant when making the application.
However, the Court went the other way in Roman v Zorino Properties Limited, discharging a worldwide freezing injunction which had been made in 2016 as there had been significant delays and a failure by the claimant to progress the claim as well as no evidence of a risk of dissipation. This was despite the fact that the freezing injunction had been continued on a number of occasions by agreement between the parties. The Court concluded from the claimant’s failure to obtain summary or default judgment that it was not concerned that there was a risk of dissipation. The delay was down to the claimant and mitigated against continuing the freezing injunction.
In Gould v Kay the Court considered whether a third party applicant should be joined to a claim involving a defendant against whom the third party applicant had already obtained a judgment. That judgment was secured over a property owned by the defendant. The claimant in this action had obtained a freezing injunction preventing the defendant from selling the same property. The freezing injunction was later varied to allow a sale of the property provided the claimant was given 14 days’ notice before exchange of contracts and provided the proceeds of sale were held by the defendant’s solicitors. The third party applicant wanted the same level of notice as the claimant in the event of the sale of the property and asked the Court to joint it as a party to the claim. The Court refused: it was not necessary to add the third party applicant to allow all matters in dispute to be resolved, and there was no connection between the claim and the third party applicant. That left only the overriding objective and the policy objective of allowing parties to be heard if a decision in a matter might impact on their rights. The third party applicant had already obtained a judgment in an unrelated action and the protections requested relating to the freezing injunction and notice of sale of the property should have been sought in that action.
The need to show a risk of dissipation of assets was considered once again in Les Ambassadeurs Club Ltd v Yu. The Court considered an application for a post-judgment freezing injunction and found that the non-payment of a debt and lack of engagement was not sufficient to establish a risk of dissipation. There had been no findings of dishonesty and whilst unmeritorious conduct and the use of off-shore structures could be relevant factors in the decision-making process they did not constitute the solid evidence of risk of dissipation which was required. The Court therefore refused to grant the application for a post judgment freezing injunction.
The Court refused to make an order for further disclosure in Abu Dhabi Commercial Bank PJSC v Shetty. The claimant applied for further disclosure under a freezing injunction on the basis that the disclosure provided had been deficient and argued that there were discrepancies in the evidence which needed to be explained. However, the Court confirmed that an order for further affidavit evidence was designed to deal with disclosure of assets to allow the policing of the freezing injunction, not to explore issues of credibility or collect evidence to be deployed later.
In Cardium Law Ltd v Kew Holdings Ltd the Court continued a freezing injunction which prevented the respondent from dealing with its interest in a long leasehold property. However, the injunction was varied to allow the respondent some flexibility over use of the property, provided the value of its interest be above a certain sum, and provided that it gave written notice to the applicant prior to entering into any legal commitment to dispose of or deal with the interest in the property.
The Court considered the question of costs in respect of freezing injunctions in Re Microcredit Ltd. In this case the freezing injunction was obtained by the liquidator of a company pending an application relating to ownership and removal of company property. The company had resisted the continuation of the freezing injunction at the return date and had failed. Costs following an injunction application are not treated in the usual way (i.e. that the unsuccessful party pays) as injunctions are granted on the balance of convenience rather than in terms of there being a winner and a loser. However, the Court confirmed that there was no strict rule that costs should always be reserved, instead the Court considered whether any of the issues heard would be revisited at the substantive hearing and made a costs order against the company accordingly.
In Skatteforvaltningen (Danish Customs and Tax Adminstration) v Solo Capital Partners LLP (In Special Administration) the Court refused the claimant’s application for permission to appeal and therefore did not have jurisdiction to continue a freezing injunction. However, the Court was able to make a freezing injunction for a short period to protect the claimant’s position pending its application to the Court of Appeal. The Court of Appeal had the ability to grant interim relief. The Court set a date on which the freezing injunction would expire.
The second interesting decision in Skatteforvaltningen (Danish Customs and Tax Adminstration) v Skatteforvaltningen this quarter is the dismissal by the Court of the £1.5billion claim in misrepresentation by the Danish tax authority on the basis that the claims were for the enforcement of Danish tax legislation which was the exercise of Danish sovereign authority, which was therefore inadmissible in the UK Court under Dicey Rule 3 (being that the English Courts do not have jurisdiction to entertain an action for the direct or indirect enforcement of a penal, revenue or other public law of a foreign State). Unsurprisingly this decision is being appealed.
In Forbes v Mason the Court discharged an interim injunction preventing receivers from selling a property at auction. The litigant in person applicant had not issued a claim and had not provided full and frank disclosure in his application, in particular he had failed to tell the Court about efforts which had been made to market the property for sale.
The Court of Appeal considered a similar issue in Valbonne Estates Ltd v Cityvalue Estates Ltd, concluding that there was no reason to overturn a judge’s decision not to continue an injunction preventing dealing with a property where there had been failure to comply with the dutyof full and frank disclosure at the initial without notice hearing. The Court of Appeal confirmed that where there had been breaches of the duty of full andfrank disclosure on a without notice application, the general rule was that the order should be discharged and not re-granted. There were further reasons not to re-grant the order which turned on the facts of the case.
The Court struck out a claim in unlawful means conspiracy in King v Stiefel. The Court considered the possibility of summarily determining a fraud claim and confirmed that it could do so in suitable circumstances, where there was a point of law or cases turning entirely on their facts. Whilst the Court was not barred from evaluating evidence, but had to bear in mind the clarify of the evidence as well as what further evidence might be available at trial. A distinction was drawn between summary judgment (where evidence was admissible to show that a pleaded case was fanciful) and strike-out (where the pleaded facts were assumed to be true and evidence was inadmissible). The Court also confirmed that where a defendant had applied for summary judgment before filing a defence, the failure to file a defence was not a breach of the rules and default judgment was not available. The Court also reminded lawyers of the expectation that they try to cooperate with their opponents.
In Ward v Savill (the first instance decision in this case is discussed by my colleagues here) the Court of Appeal considered the circumstances in which a judgment could be considered a judgment in rem, capable of binding the whole world. The Court of Appeal held that declarations in a separate earlier case to which the respondent was not a party did not take effect in rem as: the judgment did not describe them as such and they were only made against the defendants to that action; the judge in the earlier action had granted permission to join additional defendants, which would not have been necessary if the judgment had been in rem; and the judgment taking effect in rem would be inconsistent with undertakings given by the claimants at the time. The appellants could not rely on the declarations made in the earlier action and would need to plead and prove their case against the respondent.
The Court of Appeal considered a bank’s Quincecare duty in Stanford International Bank Ltd (in liquidation) v HSBC Bank Plc (I discussed the first instance decision in my Civil Fraud Case Update Q3 2020). The claimant alleged that the defendant should have invoked its Quincecare duty and frozen its accounts to prevent fraudulent payments being made. The defendant bank appealed against a decision not to strike out the claim. The Court of Appeal concluded that where a payment had been made by a company which then entered insolvency there was no loss suffered by the company by virtue of that payment. Any loss was suffered by the company’s creditors who had less cash available. The appeal was therefore allowed.
In 889 Trading Ltd v Clydesdale Bank plc the Court considered whether it would be an abuse of process for a claimant whose initial claim was struck out for failure to comply with an unless order to commence a second claim on much the same grounds. The claimant argued that the new claim was not an abuse of process because of fraud and forgery on the part of the defendant bank and the principle that fraud unravels all. The Court commented that it was not necessarily an abuse of process for a claimant to try to have a second bite of the cherry where a first action was struck out for failure to comply with an unless order, unless there had been a deliberate decision taken not to comply. The Court also commented that it would be important to consider the circumstances in which the unless order was breached. The Court concluded that an unsubstantiated allegation of fraud was not enough to avoid a finding that an action was abusive. The fraud needed to be applied within the context of another recognised claim, it was not sufficient for fraud to be alleged and relied on to circumvent a finding of abuse of process.
The Court of Appeal considered the status of statements made at mediation in Berkeley Square Holdings Ltd v Lancer Property Asset Management Ltd and, in particular, considered the exceptions to the without prejudice rule. I discussed the first instance decision in my Civil Fraud Case Update Q2 2020. The Court of Appeal confirmed that evidence of negotiations was admissible not only where there was an argument that an agreement should be set aside on grounds of misrepresentation but also where there was an argument to uphold the agreement. The Court of Appeal reminded us that the purpose of without prejudice communications is to reach a compromise which was recorded in a (settlement) contract. If there were questions about that contract: its terms, meaning or validity, then there was no reason to exclude evidence of the negotiations merely because they were without prejudice.
In Tugushev v Orlov (which I discuss in my Civil Fraud Quarterly Update Q3 2019) the Court grappled with issues of disclosure of documents and whether disclosure should be deferred to avoid the defendant being exposed to criminal liability as a result of disclosing documents which had been seized by an investigator in Russian criminal proceedings. Whilst it was accepted by the Court that the risk of prosecution was real, it had not been shown to be significant or substantial and there was no strong evidence that any harm had been suffered or that disclosure would lead to a prosecution. The Court mitigated the risk of prosecution by ordering disclosure of all the documents held by the defendant’s solicitors without revealing which of those had been seized by the prosecutor but ultimately found that the balance was in favour of disclosure.
In Stokoe Partnership Solicitors v Grayson the Court of Appeal considered the circumstances in which an individual could be cross-examined on the content of an affidavit sworn pursuant to an order made under the Norwich Pharmacal jurisdiction. The appellant firm was not entitled to an order that the respondent attend for cross examination and face proceedings for contempt if he failed to do so as the Court found that it was not possible to put adequate protections in place that the evidence given by the party being cross examined would not be used against him at trial.
The Court refused to make a pre-action disclosure order in Domestic and General Insurance Plc v HomeShield Direct Ltd on the basis that the categories of documents sought were too broad and where the applicant had not provided enough evidence to persuade the Court that such an order would materially advance the pleadings or be necessary to save costs or fairly dispose of the case. Withheld evidence of covert human intelligence should have been dealt with in the application as it was material the applicant would use to plead its case, and the applicant had not proposed how to preserve the confidentiality of commercially sensitive material.
The Court considered issues of third party documents and information preserved and inspected following a search order in Vneshprombank LLC v Bedzhamov (which I also discuss in my Civil Fraud Case Update Q4 2019). The Court halted the review process because it became clear that the documents under review did not belong to the defendant but belonged to third parties and contained confidential information about/belonging to their clients. The Court did not discharge the search order but reminded the parties that the purpose of a search order is to preserve documents and in this case any further review of the documents would be possible only where an application to review had been made and granted.
In London Partners Capital Management LLP v Utkan the Court confirmed that there was no requirement that a supervising solicitor must be a person who had never previously been instructed in that capacity by the applicant or his solicitors. The Court also considered the substitution of one trainee for another who had been named in the order: whilst it was irregular, it would not cause any prejudice.
In Lemos v Church Bay Trust Co Ltd the Court granted an application to join a defendant’s trustees in bankruptcy to proceedings as co-claimants. The claimant had brought a claim under s.423 of the Insolvency Act 1986 (that a transfer of property was a transaction to defraud creditors) and the defendant filed for bankruptcy. The Court confirmed that in such circumstances, the trustees in bankruptcy were the most appropriate persons to bring the action as any recovery would be for the benefit of the creditors as a whole rather than just the claimant. Further, because the claimant could otherwise settle with the defendant and bind the trustees, which would not be in the interests of the creditors as a whole, it was preferable that the trustees deal with the claim.
The Family Court also considered s.423 in Akhmedova v Akhmedov (discussed in my Civil Fraud Case Update Q4 2020 and by my colleague here): the claimant had financial orders in her favour following a divorce from the first defendant, who had, both before and after those orders, made significant transfers of assets within trust and corporate structures. The claimant applied to set aside the transfers on the basis that they were transactions defrauding creditors. The Court considered that it was not necessary for s.423 to be engaged and for relief to be granted to show that the transaction left the debtor with insufficient funds to pay his debts. The Court was also willing to make orders binding: Lichtenstein trustees on the basis that there was a sufficient connection between the transfers and the English jurisdiction and it would not have exorbitant extra territorial effect; the claimant’s son on the basis that his receipt of assets was at a massive undervalue; and against a Cypriot company on the basis that a transfer of assets to the company was designed to put assets beyond the claimant’s reach and otherwise to prejudice her interests.
In Biscoe v Milner the Court considered allegations of fraudulent and wrongful trading, breaches of directors’ duties and transactions at undervalues. The Court found that there was a causative link between the continuation of the company’s trading and the increase of the deficit to creditors and that the third respondent, who was alleged to be a de-facto director, was therefore liable for wrongful trading. His knowledge that the scheme his company was running was dishonest and fraudulent from the outset meant he was also liable for fraudulent trading. Since the third respondent was a director of the company he was also in breach of his director’s duties, and payments received by him from the companies were transactions at an undervalue and he held the funds received as a constructive trustee. Claims that payments made to an insurance broker as part of the fraudulent scheme were transactions at undervalues failed as those transactions took place at freely negotiated market prices. The Court also considered the effect of a settlement agreement with the first two respondents: where there was a joint cause of action against more than one person a discharge of one operated as a discharge of all, but a covenant not to sue a joint tortfeasor did not have that effect. The settlement agreement did not distinguish between claims which gave rise to joint liability and those which gave rise to joint and several liability. The Court implied a term into the agreement in order to allow the applicants to pursue the remaining respondents.
In the combined appeals of Wood v Commercial First Business ltd and Business Mortgage Finance 5 Plc v Pengelly the Court of Appeal considered whether a fiduciary relationship was a necessary precondition for relief against the payer of a bribe or undisclosed commission and whether the commissions paid were half-secret or secret. The cases involved the question of whether borrowers could set aside mortgage contracts where brokers had received undisclosed commissions from their mortgage lenders. The Court of Appeal concluded that a fiduciary relationship was not necessary: the nature of the relationship was what mattered, rather than the label applied to it, and the question was whether there was a duty to provide advice, recommendations or information in an impartial manner. If such a duty existed, then any bribe or secret commission would expose the paying and receiving party to civil remedies. Whilst the brokers’ terms of business stated that they received commissions paid by lenders, there was an obligation to inform the borrower if that commission exceeded £250. By failing to disclose the exact sum, the commissions were rendered secret rather than half-secret.
The Court considered the fiduciary duties owed by directors in Re TMG Brokers Ltd (In Liquidation) (discussed in more detail by my colleague here). The second defendant had withdrawn cash from the company’s bank account and authorised payments to be made to both directors which were ultra vires disguised distributions of capital. The first defendant admitted to allowing the second defendant to make payments and was therefore found to have authorised the same. An agreement that one director would primarily be responsible for a company’s financial affairs did not absolve the other directors from financial responsibility.
In Koza Ltd v Koza Altin Isletmeleri AS (discussed in more detail by my colleague here) the Court was asked to consider whether a company should pay for the costs of legal proceedings brought against one shareholder where the dispute was properly between the shareholders themselves. The Court concluded that the company’s money should not be spent on disputes between shareholders. The questions to be answered were whether the legal costs principle was, or might be, engaged and whether it was just and convenient to grant an injunction. In this case the dispute was properly characterised as a dispute between shareholders. It was therefore right that the shareholders themselves should fund any action and, even if a shareholder was unable to fund a claim, there was no reason for the company to pay the legal costs. It was therefore just and convenient to grant injunctive relief restraining the sole director of the claimant company from causing or procuring the claimant from using its funds to pay legal costs.
The Court of Appeal considered the issue of jurisdiction in Manek v IFL Wealth (UK) Ltd (another aspect of which I discussed in my Civil Fraud Case Update Q1 2021). The claim related to deceit arising out of misrepresentations made in England to minority shareholders but involved the sale of shares in an Indian company to a Mauritian company. A critical point was the finding of the lower Court that the tort took place in England. The Court of Appeal concluded that the natural forum for the claim to be heard was England and Wales, and that as the first and fourth defendants had acknowledged the jurisdiction of the English Court any contrary decision would lead to a duplication of proceedings and the risk of conflicting judgments.
In Glossop Cartons and Print Ltd v Contact (Print and Packaging) Ltd the Court of Appeal considered the way in which damages for fraudulent misrepresentation should be assessed. The correct assessment of value was reached by deducting the actual value of the assets purchased at the relevant date from the price paid. Issues which a purchaser may have ‘factored in’ to the calculation of value were irrelevant for the purpose of calculating loss and in this context a claimant could be compensated for a bad bargain.
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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