Civil Fraud Quarterly Round-Up: Q4 2023

This quarterly civil fraud update provides a summary of reported decisions handed down in the courts of England and Wales in the period of October - December 2023. 
 

Breach of Fiduciary Duty

In Akkurate Ltd v Richmond the Court considered the continuing nature of the fiduciary duties owed by directors, in particular where the former director remained involved in management of the company. The decision related to an unsuccessful application for reverse summary judgment and also considered whether an earlier settlement between the parties had compromised the claim in breach of fiduciary duty, and whether that settlement had been induced by fraud.

Committal for Contempt

The Court of Appeal in Ahmed v Rahman considered an appeal against a custodial sentence made against a barrister, who was a member of an LLP, and who had not been included as a defendant, for contempt. The Court of Appeal allowed the appeal on the basis that there were serious deficiencies in the application: whilst the Court had the power (under CPR Part 81) to commit a director/officer of a corporate entity for contempt and whilst that power extended to a member of an LLP (as was the situation in this case), the Defendant had to be named as a defendant. A defendant to contempt proceedings also needed to be informed by the Applicant of various things including his rights, and the potential consequences of a finding of contempt.

Equitable Compensation

The Court of Appeal overturned an order that a party found to have dishonestly assisted in a breach of fiduciary duty should pay equitable compensation. The fiduciary Defendant in Hotel Portfolio II UK Ltd (in liquidation) v Ruhan had been ordered to account for his profits and the dishonest assistant had been ordered to pay equitable compensation in the same amount. The Court of Appeal confirmed that equitable compensation was concerned with loss and in this case the Claimant (Respondent to the appeal) had suffered no loss as a result of the breach of fiduciary duty in respect of which the Appellant had assisted. As such an award of equitable compensation was not appropriate and instead an account of any profit made was the proper award.

Freezing Injunctions

In AB v CD the Defendant applied to vary a proprietary freezing order to allow him to use frozen assets to pay his legal fees for representation. The Court noted the unusual wording in the proprietary order which included an exception for the payment of reasonable legal fees (in terms similar to a non-proprietary freezing order) and decided that, given the nature of the case, it was necessary for the Court to exercise its discretion and take a more interventionist approach. The Court considered what it would be reasonable to release to the Defendant, taking into account the potential prejudice to the Claimant if it succeeded at trial, the complexity of the matter, and the Court’s interest in having parties represented. It concluded that, on the assumption that the principles set out in Marino v FM Capital Partners Ltd were satisfied, the sum of £1.2m should be released to the Defendant for the payment of legal fees.

In two hearings in the case of Magomedov v TPG & Others the Court considered applications for freezing and notification orders and the meaning of “good arguable case” in that context. The Court confirmed that the correct formulation was one “which is more than barely capable of serious argument but not necessarily one which the judge considers would have a better than 50 per cent chance of success”. This differs from the test used in jurisdiction challenges which requires an applicant to have “the better of the argument”. However, the Court noted that the test as applied to a jurisdiction challenge related to whether a jurisdictional gateway had been met, rather than being directed to the merits of the claim. The Court rejected all but one of the applications: even where the Claimants had shown good arguable cases, they failed to show any risk of dissipation. The one successful application was heard separately and in that case the Claimant was granted a notification injunction against the twentieth Defendant.

I discussed the Court of Appeal decision about s.423 Insolvency Act proceedings in Invest Bank PSC v El Husseini in my Civil Fraud Case Update Q2 2023. In the latest reported decision within that claim, the Claimant’s application for a declaration that the sixth Defendant should be restrained from using frozen funds for her living and legal expenses was rejected. The Court considered that the undertakings given by the sixth Defendant that she would only use frozen funds in the event that she had no other means to pay provided sufficient protection. It was for the sixth Defendant to determine whether circumstances had arisen which allowed her to use frozen funds, and she would be liable for contempt if she got that decision wrong. It was not necessary or appropriate for the Court to be asked to determine the sixth Defendant’s access to alternative funds each time she wished to use the frozen funds.

Knowing Receipt

In Byers v Saudi National Bank the Supreme Court considered whether a claim in knowing receipt required a continuing equitable proprietary interest in the property in dispute in order to succeed.  The Supreme Court held that a proprietary interest in an asset would be extinguished or overridden by a transfer of that asset to a bona fide purchaser for value without notice. A claim in knowing receipt is closely linked to a proprietary claim for return of that asset. The overriding of that proprietary claim by the time the asset was received would therefore be fatal to any claim in knowing receipt.

Limitation and Concealment

The Supreme Court considered the operation of s.32(1)(b) Limitation Act 1980 in respect of concealed commissions in Canada Square Operations Ltd v Potter. The Supreme Court found that what was necessary to engage s.32(1)(b) was that (1) a fact relevant to the Claimant’s right of action; (2) was concealed by the Defendant either by a positive concealment, or the withholding of relevant information; and (3) that the concealment or withholding of information was intended by the Defendant. There was no need for the concealment itself to be a breach of duty.

The above decision was referred to by the Privy Council in Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Ltd (an earlier decision in this was discussed in my Civil Fraud Case Update Q3 2021) which confirmed that concealment had to be deliberate: recklessness was not sufficient to engage the Cayman version of s.32(1)(b).

Revenue Rule

The Supreme Court upheld the Court of Appeal decision in Skatteforvaltningen v Solo Capital Partners LLP & Others that whilst the Danish tax system provided the basis for the Claimant’s claim, the claims themselves were for recovery of sums taken from the Claimant by fraud. The “Revenue Rule” did not apply as the claim was not for direct or indirect enforcement of foreign tax laws. I mentioned the first instance decision on this point in my Civil Fraud Case Update Q2 2021.

Set Aside 

In The Federal Republic of Nigeria v Process & Industrial Developments Ltd the Court found that an arbitral award had been obtained by fraud, on the basis that the underlying contract and the conduct of the arbitration itself were both tainted by bribery. Further, the Defendant’s evidence was untruthful and, as a result of the bribery of the Claimant’s legal team, the Defendant had received legal documents which were subject to privilege and confidential to the Claimant, which it should not have received, and should not have retained. As such the award and/or the way it had been procured was contrary to public policy. At a later hearing, the Court determined that the arbitral award be set aside, rather than remitted for reconsideration by the tribunal.

Wasted Costs

The latest development in the long-running and quite extraordinary case involving ENRC, Dechert and the SFO involved a wasted costs order being made against the SFO. In Eurasian Natural Resources Corp Ltd v Dechert LLP and Eurasian Natural Resources Corp Ltd v Director of the Serious Fraud Office the Court found that by inducing breaches of duty by ENRC’s solicitor, the SFO effectively caused ENRC’s losses in respect of unnecessary work, costs and management time. The Court had found that the solicitor acting for ENRC had acted negligently and in breach of contractual and fiduciary duties by disclosing information to the SFO. Dechert and its former partner sought a contribution from the SFO. The Court apportioned the SFO’s liability at 25% of ENRC’s costs relating to unnecessary costs and management time, noting that Dechert and its former partner were liable for 100% of the unnecessary work.