AML: HMRC flexes enforcement muscle to the tune of £7.8 million
This quarterly civil fraud update provides a summary of reported decisions handed down in the courts of England and Wales in the period April – June 2019.
I started my civil fraud case update for the first quarter of 2019 with a reference to Kazakhstan Kagazy Plc & 5 Others v Baglan Abdullayevich Zhunus & Others and thought I should continue in the same vein. In the most recent reported decision on that case from June 2019 the Claimants successfully applied for the cross examination of the Fourth Defendant, arguing that she had failed to provide adequate disclosure to comply with the obligations imposed by the disclosure orders made ancillary to a freezing injunction. Specific examples of transactions which would be the subject of cross examination were given. Cross examination of the Fourth Defendant was therefore ordered, despite the Court confirming that it was the exception rather than the rule.
In World Proteins KFT v Persons Unknown the Court considered the judgment in CMOC (see the discussion at Q1 2018 civil fraud case update) and continued a freezing injunction made against persons unknown following a cyber fraud. The disclosure of bank statements as part of the initial application meant that the Claimant could show that there were assets which were caught by the injunction and on which a freezing injunction could take effect.
The standard form freezing injunction contains an exception which allows the use of funds within the ‘ordinary and proper course of business’. The Court of Appeal considered the test in the case of Koza Ltd v Koza Altin. The case itself did not involve a freezing injunction per se, but related to control of the Claimant company and involved an undertaking that the claimant would not dispose of, deal with or diminish the value of any of its funds other than in the ordinary and proper course of its business. The Court of Appeal was asked to consider proposed expenditures and whether they were permitted under that exception. One of the proposals was to fund arbitration proceedings relating to the establishment of ownership of the group of companies to which the Claimant belonged. The second proposal was to fund the defence of extradition proceedings relating to one of the Claimant’s directors. At first instance the requests were refused. The Court of Appeal considered what ‘ordinary’ and ‘proper’ meant in these circumstances and confirmed that the question was answered by considering a mixture of fact and law, that the test is objective and that the question should be considered against commercial standards in the company’s specific context. Interestingly the Court of Appeal found that the expenditure relating to arbitration would be made at the Claimant’s risk and declined to permit the spending, whereas it found that funding the defence of the extradition proceedings relating to its director would be in the ordinary and proper course of its business as he was a vital asset of the Claimant company.
The Privy Council considered in Emmerson International Corp v Renova Holding Ltd whether the disclosure provisions of a freezing injunction were severable from the rest of the injunction. This was considered in relation to s.30(4)(ii) of the Eastern Caribbean Supreme Court (Virgin Islands) Act which provides that permission to appeal is required except where an injunction is granted or refused. The Court found that the restraining and disclosure provisions were integral and necessary parts of a freezing injunction and that they could not be regarded as severable or discrete. As such, an appeal relating to the imposition of a confidentiality club in respect of the disclosure aspect of a freezing injunction would fall within s.30(4)(ii) and permission was not required.
In Arcelor Mittal USA LLC v Essar Steel Ltd the Commercial Court upheld a worldwide freezing injunction granted following an arbitration award despite there being no real links with the jurisdiction. The Court found that the attempted dissipation of a US$1.5 billion asset in the fact of arbitration proceedings brought the case within the international fraud exception which would allow the English Court to intervene even where there were no strong links to England.
Allergy Therapeutics (UK) Ltd v (1) Inflamax Research Inc (2) Piyush Patel (3) George Markus (4) Annemarie Salapatek involved a claim in breach of contract and deceit in respect of which the Claimant obtained a freezing injunction against the Second Defendant. The Second Defendant swore three affidavits relating to his assets, but the third disclosed that the position set out in the first two had changed, with the most valuable asset having been transferred into a trust. The Claimant applied for further disclosure as it would be necessary for the Court to determine the extent of the Second Defendant’s interests in and control over the trust. The Claimant also sought an order limiting the Second Defendant’s living expenses permitted under the freezing injunction to $2,500 per week. The Court ordered further disclosure determining that it was necessary to test whether the Second Defendant was in fact the controller of the trust. The test in respect of living expenses was to identify the standard of living to which the Second Defendant was reasonably accustomed.
The Court refused to grant a freezing injunction in Garry William Jack v (1) Ian Riches (2) Lorraine Riches on the basis that the Claimant had not shown a real risk that assets would be dissipated without an injunction.
The Court granted a post-judgment freezing injunction in Iranian Offshore Engineering & Construction Co v Dean Investment Holdings SA & Others and refused the Sixth Defendant’s request for an adjournment to allow him to provide further information about his position in Iran. The hearing took place five weeks after the request for a post-judgment freezing injunction had first been made and the Sixth Defendant had provided no further information about his position or assets. The Sixth Defendant’s failure to provide any more information about his assets supported the decision to grant the freezing injunction.
The Claimants’ double derivative action in (1) John Anthony Popely (2) Andrew Popely v (1) Ronald Anthony Popely (2) Cosmos Trust Ltd (3) Casterbidge Properties Ltd failed because the allegations that the First Defendant had been the de facto director of the Third Defendant and had fraudulently and in breach of fiduciary duty, transferred the Third Defendant’s assets for his own benefit had not been proved. The evidence pointed to the First Defendant acting as shadow, but not necessarily a de facto, director. As such any payments made pursuant to his instructions as a shadow director were not made in breach of duty.
In the case of Group Seven Ltd and another v Notable Services LLP and others the Court of Appeal considered carefully the test for dishonest assistance of a breach of trust. The point of argument related to whether the assistance provided in this case was in fact dishonest and whether turning a blind eye could equate to actual knowledge. The Court found that it was impossible to separate the receipt of funds from the assistance provided in facilitating payments out of an account particularly where the recipient had negotiated his own bribe and attempted to hide its receipt from his colleagues.
The Court found that the Defendant in In the matter of Pantiles Investments ltd (in liquidation) sub nom (1) Pantiles Investments Ltd (In Liquidation (2) James Ashley Dowers v Sabine Christel Karina Winckler who had been the sole director and sole shareholder of a company had carried on the company in such a way as to defraud its creditors. The Court was satisfied that although the Defendant lacked commercial experience, she was intelligent and appreciated the nature and effect of the documents she signed on behalf of the company as well as the lack of commercial reality behind them. She also appreciated that the company was being operated to keep assets out of the hands of the creditors of a third party who was bankrupt.
In (1) Vallabh Haribhai Bakrania (2) Hansaben Haribhai Pragji Bakrania v Rajesh Shah & Others the Court struck out a claim against two solicitors who had acted on the transfer of a property on the basis that the first Claimant who was a beneficial owner of the property was unable to show that the transfer from three trustees to two trustees had caused him to suffer a loss: as the underlying trust was unaltered by the change in legal ownership.
The Claimants in (1) Abdul Rahman Alokozay (2) Alokozay FZE (A company registered in Dubai) v (1) Salman Alokozay (2) Najebullah Alakozai (3) Gulalay Alokozay alleged that sums obtained by the Defendants had been obtained by deceit or wrongly retained. The First Claimant and the First Defendant were father and son, who had fallen out badly. The Court found that they both gave unreliable evidence and as such would only be relied on if it was supported by contemporaneous documents.
The Court of Appeal confirmed, in Jofa v Benherst Finance Ltd that the starting point was that an applicant for a Norwich Pharmacal Order should pay the costs of the respondent as the respondent was an innocent party with no recourse to recover its costs of the process. It was also reasonable for a company to require a Court Order before disclosing confidential information and documents.
In Avonwick Holdings Ltd v (1) Azitio Holdings Ltd (2) Dargamo Holdings Ltd (3) Oleg Mkrtchan (4) Sergiy Taruta (Defendants) & Vitali Gaiduk & 19 Others (Third Parties) the Court upheld an Order for alternative service where service under the Hague Convention would case a delay likely to prejudice progress of the litigation. The Court found that the Defendants had knowledge of the claims and found that there was a need for service not to be delayed, given the on-going litigation.
The importance of full and frank disclosure in respect of a without notice application for service out of the jurisdiction was considered by the Court in Libyan Investment Authority v JP Morgan Markets Ltd & Others. The Claimant obtained orders permitting service out but failed to mention a limited defence which was available to the Defendants. Not only was limitation a point taken by way of defence, it was also a matter which the Court should weigh up when considering an application for service out of the jurisdiction as it went to the issue of whether the Claimant had prospects of success. Based on the fact that the Claimant had been involved in prior litigation in which the same issues of limitation had been raised, the Court concluded that it was a conscious decision not to mention the limitation position in the application. The Court therefore set aside the Order permitting service out of the jurisdiction.
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