Civil Fraud Quarterly Round-Up: Q4 2021

10 January 2022

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

 

Constructive and Resulting Trusts

The Supreme Court considered the interaction of proprietary claims and confiscation orders in Crown Prosecution Service v Aquila Advisory Ltd which is discussed in more detail here. The Supreme Court found that the dishonest acts of a company’s directors were not to be attributed to the company thereby giving the director a defence of illegality to a claim for breach of fiduciary duty against him by the company.  Further, where a company had a proprietary claim against its directors to recover sums received as a result of breaches of fiduciary duty, which were also subject to confiscation orders as the proceeds of crime, the proprietary claim could be asserted in priority to the confiscation order because the funds held by the directors were held on constructive trust for the company.  This was the case even where the company would therefore profit from the criminal acts of its directors as the proceeds of crime regime was not intended to interfere with third-party property rights other than tainted gifts. 

In Ravendark Holdings Ltd v Rotenberg the Court of Appeal considered whether the first instance decision that a loan provided to purchase a property was genuine and not a sham was inconsistent with the finding that the property which was purchased was held on resulting trust.  The Court of Appeal found that the presumption supporting the existence of a resulting trust (a voluntary or gratuitous payment used to buy a property in a third party’s name) was inconsistent with the use of a genuine loan to purchase that property.  If the loan was genuine and not a sham, the property it was used to purchase could not be held on resulting trust.  The Court of Appeal remitted the case for a full hearing on whether a constructive trust had been established.

 

Contempt of Court

The Court in Dattani v Rasheed found the Defendant to be in contempt of court for breaches of a Court Order preventing the dissipation of half of the proceeds of sale of a property and requiring the Defendant to provide information about the other half of the proceeds of sale including their location.  The Defendant admitted contempt in an email to the Court as well as offering an apology but did not attend the hearing. The Court considered that as the Defendant had not attended the hearing and was unrepresented it would not treat his email as a formal admission of contempt, but that the email could be taken into account in so far as it indicated that he did not intend to contest the application. As the Defendant was not in attendance, the Court adjourned the hearing and issued a bench warrant to ensure the Defendant would attend the sentencing hearing.

An accountant was committed to prison for five months for contempt of court in Eim v Lewis (also known as DRFG Invest II sro v Shire Warwick Lewis Capital Ltd) for transferring assets which were subject to a freezing injunction and making false statements in an affidavit about his assets.  The Court determined that the breach had been deliberate, involved prolonged conduct and the aggravating factors were that the Respondent had tried to conceal his offending, produced a false statement and had tried to put them beyond the reach of creditors.  The mitigating factor was that most of the money (but not all) had been recovered.  Had there been no mitigation, a sentence of nine months’ imprisonment would have been appropriate – the Court considered the mitigation and the impact on the Respondent’s career and his dependants and reduced the sentence to five months.

In GUH v KYT the Court declined to impose a sanction on a Defendant who had admitted contempt of court.  The Defendant had contacted the Claimant in breach of Court Orders and made threats to disclose private information.  The Court took into account the fact that the threats had not been carried out, that no irretrievable damage had been done and that some of the actions had taken place before the Defendant had received legal advice, so it was not clear that she understood the gravity of the position.  The Defendant had since apologised to the Court and had complied with the Orders since receiving legal advice.  The Court determined that the finding of contempt was sufficient and imposed no sanction but confirmed that if there was any future breach the Defendant would face an immediate sentence.

The Court of Appeal in Navigator Equities Ltd v Deripaska which was included in my civil fraud case update Q2 2020 reviewed the role and duties of applicants bringing contempt proceedings, as well as their instructed solicitors.  The Appellants were appealing the striking out of their application to commit the Respondent for contempt of court following breaches of undertakings.  The first instance decision was based on what the Judge ruled to be an abuse of process because the committal application was motivated by animosity and a desire for revenge.  The Judge also concluded that the applicants/Appellants and their lawyers had a duty to pursue a committal application dispassionately as quasi-prosecutors serving the public interest.  The Appeal was allowed: the Judge had misunderstood certain positions, failed to take into account the merits of the contempt application, improperly treated the applicants/Appellants’ subjective motive as a ground for strike out, and was wrong in approaching the application as one which should have been treated by the applicants/Appellants and their lawyers as if it was brought solely in the public interest.  Solicitors acting for applicants in contempt proceedings must comply with their obligation to uphold the rule of law and the proper administration of justice as well as acting with integrity and independence.  It is not, however, necessary for them to act impartially or as wholly disinterested parties.

The Supreme Court considered the issue of contempt in Her Majesty’s Attorney General (Respondent) v Crosland (Appellant) which related to the disclosure of a judgment which was embargoed.  The Appellant, an unregistered barrister disclosed the outcome of the appeal to the Supreme Court to the press before the judgment had been delivered, despite it being clear that the draft judgment which had been circulated was strictly confidential.  The President of the Supreme Court referred the matter to the Attorney General who applied to have the Appellant committed for contempt of court.  The Supreme Court found that the Appellant’s conduct constituted a criminal contempt of court, imposed a fine and ordered the Appellant to pay the Attorney General’s costs.

 

Cross Examination

The Court ordered that the Defendant in Ashraf v Sattar (which I also mentioned in my civil fraud case update Q3 2021 be cross-examined on his assets after he failed to comply with an unless order to provide information pursuant to a worldwide freezing injunction.  Whilst the Defendant had requested an adjournment and denied that he had failed to comply, the Court confirmed that the sanction of an unless order took effect automatically and therefore there was no need for a further hearing or order.  As such if a defaulting party wished to seek relief, an application was required.  No such application had been made by the Defendant and the evidence he had provided, purportedly in compliance with the unless order, was incomprehensible without further information or explanation.  As such the Defendant was required to attend for cross examination.

 

Crypto-Assets and Civil Recovery Orders

In DPP v Briedis criminal restraint orders were discharged by the High Court: the criminal investigation had ended, and a civil recovery investigation had begun.  Property freezing orders were granted on the basis that various listed items were recoverable property, being property obtained through unlawful conduct.  In its judgment the Court explained that property freezing orders were a type of civil order which could be made under the Proceeds of Crime Act 2002 and which could be made by the High Court.  Whilst the discharge of criminal restraint orders was made by way of an application made to the Crown Court, the jurisdiction of the Crown Court could be exercised by a judge of the High Court under the Senior Courts Act 1981.  Since the property freezing orders could only be made once the criminal restraint orders had been discharged, it made sense for the two applications to be heard together by a judge sitting in a dual capacity.  The Court also confirmed that as crypto assets fell within the definition of “property” they therefore fell within the statutory scheme enabling recovery of property obtained through unlawful conduct.

 

Freezing Injunctions

The Defendant in Wang v Darby applied to vary a freezing injunction to increase the amount he was permitted to use to fund legal costs.  The Court considered whether the Defendant had proved that there were no funds available to him other than the funds which were frozen.  Part of that consideration involved the Defendant’s explanation that he was unable to access certain crypto-assets because he had forgotten the password to the wallets due to a medical condition which affected his memory.  The Claimant referred to a transaction by the Defendant which contradicted that explanation.  The Court refused the Defendant’s application because he had failed to discharge the burden of proof.

The Court refused an application to make a further freezing injunction in Astrum Technology Ltd v Jablonksa.  An injunction had been made in 2018 which was continued in 2019, and the first Defendant had been imprisoned for four months following his breach of that injunction (as mentioned in my civil fraud case update Q3 2019.  It was argued by the Claimant that the first Defendant had used dissipated assets to fund a property development company and the Claimant applied to freeze the assets of that company, along with property in Poland and Spain belonging to the first and second Defendants.  The Court refused the application: there was no claim pleaded against the company and if the Claimant wished to injunct the company’s assets, it had time to plead its claim.  In terms of the Spanish and Polish properties, the Court found that not only was the evidence of ownership sparse, but there was no evidence of a risk of dissipation.  The Court also explained that in so far as assets had been purchased using assets which were subject to the initial freezing injunction, those assets were caught by that injunction. 

The Court considered the weight of undertakings in Hutchcroft v Barrett when being asked to continue a freezing injunction.  The Defendant offered undertakings to replace the freezing injunction but the Claimants argued that in other jurisdictions the undertakings being proposed would be seen as different from an injunction and was unlikely to be afforded as much weight as an injunction.  The Court agreed.  Further the proposal to provide undertakings had been made at the last minute so the Claimants had not had the time to research their effect in other jurisdictions.  The freezing injunction was therefore continued.
 
The earlier decision in Broad Idea International Ltd v Convoy Collateral Ltd, Convoy Collateral Ltd v Cho has been discussed widely, and I mention it here and in my civil fraud case update Q2 2020.  The Privy Council considered the appeal against the refusal to grant a freezing injunction against the first Respondent on the basis that the BVI Court could not authorise service outside the jurisdiction of a claim form in which a freezing injunction was the only relief sought.  The appeal was dismissed and the Privy Council declined to depart from previous decisions on service on a defendant outside the jurisdiction where a freezing injunction was the only relief sought, finding that no compelling reason to depart had been provided.  The Privy Council also considered the Court’s power to grant a freezing injunction and confirmed that a court with jurisdiction to grant injunctions had the power to grant a freezing injunction against a respondent over whom the court had personal jurisdiction if there was: a good argument that judgment would be granted for a sum which would be enforceable; assets against which a judgment could be enforced; and a real risk of dissipation which would leave any judgment unsatisfied.  That judgment did not have to be made by a domestic court, it could equally be a foreign judgment.  

 

Knowing Receipt

The Court considered whether a claim for equitable damages against directors of a company precluded a claimant from seeking an account of profits for knowing receipt in Kenneth Davies v Stephen Ford, Richard Monks, Green Box Recycling Kent Limited.  The Claimant, as an assignee of a company sued the two directors company who had breached their fiduciary duties by diverting business to the Third Defendant, thereby failing to promote the success of the company and failing to avoid conflicts of interest.  The Court considered how to calculate the value of compensation due, which involved considering issues of funding available to the companies from and to whom business had been diverted, what an honest director would have done, and whether any deductions should be made.  Simple interest was ordered at a sum of 2% above Bank of England base rate.  As the Claimant had elected for equitable compensation against the directors, it was not possible to also claim equitable compensation from the Third Defendant to whom the business has been diverted.  However, the Claimant was not prevented from claiming an account of profits.  Any claim against the Third Defendant was a claim in knowing receipt and such a claim did not contradict the claims made against the directors.  However, the elements for a claim in knowing receipt were not made out and as such no account of profits was ordered.  The equitable compensation awarded against the directors had taken into account the value of the Third Defendant, so any further award would have involved double recovery in any event.

 

Limitation

In Libyan Investment Authority v Credit Suisse International the Court entered summary judgment in favour of the Defendants in respect of fraud claims brought by the Claimant because they were statute-barred.  The Claimant had no realistic prospect of showing that it could not, with reasonable diligence, have discovered the alleged fraud at a time which would have allowed it to bring the claims within the limitation period.

The Court considered a similar application for summary judgment on limitation grounds in Allianz Global Investors GmbH v RSA Insurance Group Ltd (formerly RSA Insurance Group Plc), reiterating the approach to determining whether facts could have been discovered with reasonable diligence such as to allow a claimant to plead a claim in fraud.  The Court suggested that the fact that the Claimants comprised a number of institutional investors meant that their differing characteristics would affect their ability to discover the fraud and this should be taken into account when applying the reasonable diligence test.  The test was an objective one, so that personal traits such as slothfulness, naivety or incuriousness were not relevant, but that was not to say that the Claimant had to be treated as someone or something they were not.  The Court would have to undertake a careful factual investigation, taking into account the Claimant’s actual knowledge and usual practices and processes rather than making assumptions about what institutional investors might do.  The Court found that it would be preferable to make such findings based on the facts found at trial and therefore refused the application for summary judgment.

 

Norwich Pharmacal

The Court of Appeal upheld a decision not to grant a Norwich Pharmacal order against a mobile phone service provider in EUI Ltd v UK Vodaphone Ltd. The Appellant insurer’s potential claim turned in part on the location of an individual against whom the Appellant considered it might have a claim in deceit and conspiracy, and the purpose of the Norwich Pharmacal application was to collect evidence about the location of that individual via her phone records and cell-site data for a designated period.  The appeal was dismissed: Norwich Pharmacal relief did not extend to mere witnesses or bystanders and there was nothing to suggest that the Respondent was engaged in any way in any of the suspected wrongdoing.  

 

Quia Timet Injunctions

In Lim v Chee Kong Ong the Court considered an application by the Claimants to vary a quia timet injunction preventing the dissipation of assets by the first Defendant to correct a lacuna in the original order which might have allowed a share sale of a company to take place.  The Claimants were seeking relief which was more modest than the Defendants were willing to give, and the Court considered that there was evidence that there were good prospects of the sale progressing to vary the order as requested.

 

Setting Aside Judgments

The Court of Appeal considered an appeal against a refusal to set aside default judgment in Park v CNH Industrial Capital Europe Ltd (t/a CNH Capital) on the basis that the judgment had been obtained by fraud. The judge at first instance had refused the application, finding that it was an abuse of process because the fraud claim was based on facts known to the Appellant at the time.  The appeal was allowed: there was clear evidence which demonstrated that the Respondent had deceived the Court into granting default judgment and had made false statements in its particulars of claim.  Whilst the judge at first instance found that the operative cause of the entry of default judgment was the Appellant’s procedural default, it was only necessary to show that the deceit needed to be an operative cause.  The finding of abuse of process was also wrong: there was no principle that a party could not set aside a judgment for fraud on the basis of evidence which he knew about prior to the trial.

 

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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