Civil Fraud Quarterly Round-Up: Q3 2018

11 October 2018

Unlawful Means Conspiracy

In my civil fraud quarterly round up Q1-2018 I mentioned the freezing injunction against ‘persons unknown’ made in the ground-breaking litigation of CMOC Sales and Marketing Ltd v Persons Unknown & 30 Ors.  Judgment has now been entered against the unknown cyber criminals and the known recipients of funds under a range of different causes of action.  The most interesting issue considered in the judgment was confirmation that a Defendant to a claim of unlawful means conspiracy need only know that there was a victim targeted by the conspiracy and need not know the precise identity of that victim.

Dishonest Assistance

In the case of Autogas (Europe) Ltd (in liquidation) v (1) Thomas Tadeus Ochocki (2) Timothy Alan Saunders (3) Christina Jean Craig the Claimant claimed compensation from the Defendants for dishonest assistance in a VAT fraud.  However, there was no evidence that the Defendants were dishonest or that they had been corresponding about any form of conspiracy. The claim was therefore dismissed.

Duty of Full and Frank Disclosure

The Court set aside a worldwide freezing injunction in Fundo Soberano de Angola v Jose Filomeno dos Santos on the grounds that there had been material breaches of the duty of full and frank disclosure by the Claimant.  The Court focussed on three key points:

  • The duty of full and frank disclosure enabled the Court to ensure a fair hearing, even where that hearing was held without notice to a Defendant;
  • The presentation of the information had to be fair and balanced, particularly in a complex case; and
  • The legal teams had an obligation to ensure their clients understood the duty of full and frank disclosure.

Likewise in Galagaev v Ananyev the Court discharged a freezing injunction on the basis that the Claimant had failed to provide information about who had instructed a transaction which it had relied on to demonstrate a real risk of dissipation. Whilst mention had been made of the transaction and the party directing the same, it was not possible to determine that the Court’s attention had specifically been drawn to the fact that it was not the Defendant who had instructed the transaction.  Whilst the Court did not find that the Claimant had deliberately withheld the information, it did find that the Claimant had not gone far enough to draw it to the Court’s attention and the injunction was therefore discharged.

Transactions defrauding creditors

The Court of Appeal confirmed in Orexim Trading Limited v Mahavir Port and Terminal Private Limited that it had the power to permit service of a claim under section 423 Insolvency Act 1986 on foreign parties in circumstances in which there was a sufficient connection with England and where England was the appropriate forum for the claim.  In this particular case, however, the Court of Appeal upheld the first instance decision refusing permission as there was an insufficient connection to England and Wales.

Fraudulent Misrepresentation

In BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc (a decision which is subject to appeal) the Court considered whether a misrepresentation by the Claimant had induced the Defendant to enter into a contract. The Court confirmed that the relevant test was whether, but for the Claimant’s misrepresentation, the Defendant would have entered into a contract.  Whilst there was evidence that the Defendant might have entered into the contract even without the misrepresentation, that evidence was insufficient to persuade the Court.

In Bennett Gould & Partners Ltd v Charles O’Sullivan the Court found that representations made by an insurance and reinsurance broking Defendant were that his income from broking in previous years was valid and legitimate and that his practices were legitimate.  In fact he had concealed commissions he had received and given clients incorrect information.  He was therefore liable for all the damages suffered by the Claimant flowing from his deceit.

In Imad Al-Nesnas v (1) Mahmood Al-Najar (2) Faphdev Ltd (formerly Prestige Homes (Developments) Ltd) (3) Prestige Homes Improvements Ltd the Court of Appeal considered whether the first instance Judge was right to grant summary judgment on claims of fraudulent misrepresentation and found that whilst the defence was thin the evidence provided did not justify summary judgment on the issue of fraudulent misrepresentation.

Inter Export LLC v (1) Jonathan Townley (2) Yaroslavna Lasytsya  also involved an appeal from a decision relating to misrepresentations.  A company director had induced a company to provide goods by representing that her company could afford to pay, and by providing forged SWIFT confirmations.  In this case the director was found to be using the appeal process for incorrect purposes as she was trying to use the process to determine the meaning of the judgment including questioning the reasoning of the first instance Judge.  The appeal was dismissed: the reasoning was sound and sufficiently clear and the measure of damages had been correctly concluded.

Freezing Injunctions

As my colleague Fiona Simpson wrote about in her blog the Court refused an amendment to a worldwide freezing injunction which would have allowed a Defendant to avoid disclosing all of its assets.  PJSC Tatneft v Gennady Bogolyubov & Others involved an application by one of the Defendants asking the Court to use its discretion to vary the terms of the disclosure aspect of the freezing injunction on the basis that it was unnecessary for him to disclose his assets above the value of the claim and to do so would cause him prejudice.  The Court’s concern about granting such an application was that allowing a Defendant to choose which assets to disclose would enable that Defendant to provide details of only the hardest assets against which to enforce, which contradicted the purpose of disclosure in such circumstances.  Likewise, where the value of assets could fluctuate the monitoring of value would be unwieldy and could lead to circumstances in which a Claimant had no comfort that there remained assets sufficient to satisfy a judgment debt.

I mentioned the case of Phoenix Group Foundation & Another v Cochrane & others in my civil fraud round up Q4 2016 and in particular whether a freezing injunction made without notice should have been continued (it was).  In the latest reported part of this on-going claim six of the Defendants applied to increase the fortification of the cross undertaking in damages given by the Claimant.  The Defendants alleged that they had suffered losses as a result of the freezing injunction and cited various aborted sales and the increased costs of funding as examples.  The Court was not satisfied however, that the Defendants had established an arguable case that but for the freezing orders these events would not have happened.  Further the Court disagreed with the Defendants’ calculation of losses.  The application was therefore refused.

Two cases in which the names of the Claimants and Defendants have not yet been released also hold some interest in respect of decisions relating to freezing injunctions:

Mr Justice Bryan considered the efforts of a Claimant to serve Defendants with freezing injunctions in A v B and concluded that he was satisfied that the Defendant companies and their directors were aware of the freezing injunction and agreed that personal service should be deemed to have occurred.  However, he gave the Defendants a further chance to comply with the disclosure requirements of the orders before determining whether the freezing injunctions should be continued; and

Mr Justice Garnham refused to hear an application for a freezing injunction and a search order in private on the basis that Courts should always sit in public where possible.  In A v B the Judge imposed restrictions on the journalists present, but commented that he believed they could be trusted to act responsibly.

Contempt of Court

A Defendant in breach of various aspects of a freezing injunction was fined rather than imprisoned in Absolute Living Developments Ltd (in liquidation acting by its liquidator Louise Mary Brittain) v DS7 Ltd & 12 Ors.  The Court struck out some of the grounds on which contempt was being alleged on the basis that they constituted an abuse of process and found that the remaining grounds while serious, did not justify a custodial sentence.

The Court of Appeal considered the issue of committal for contempt of Court where a Respondent is out of the jurisdiction.  The case of Vik v Deutsche Bank AG involved committal proceedings brought against a Respondent resident in Monaco under CPR r.81.4 which has extraterritorial reach. The Court of Appeal agreed that the Court did have jurisdiction to hear the committal proceedings against the Respondent and commented that its power to hear committal proceedings derived in the first instance from its inherent jurisdiction.  The Court of Appeal also commented that there should be a specific jurisdictional ‘gateway’ for service out of the jurisdiction of an application to commit an officer of a company.

Norwich Pharmacal

In Popov v Deloitte LLP & Anor the Court considered the costs regime in respect of Norwich Pharmacal applications.  The general rule is that Norwich Pharmacal applications are not adversarial and that the Respondent’s costs should be paid by the Applicant who would then seek to recover them from the wrong-doer.  However, there were possible exceptions and the Court had a discretion in respect of costs orders.  Whilst the relevant Respondent had not acted in bad faith, some of its actions deviated from best practice and involved cryptic answers and unexplained delays.  As such the Respondent did not recover its costs in full, and in particular could not recover its costs for the time during which it should have responded to the Claimant.

The Norwich Pharmacal jurisdiction was found to be the most suitable route to the relief sought in Benhurst Finance Ltd & Ors v Colliac.  This was in response to an allegation made by the Respondent that the Applicants could have obtained the disclosure they sought via arbitral proceedings in Switzerland.  However, the Evidence (Proceedings in other Jurisdictions) Act 1975, which permits a foreign Court to request assistance from an English Court does not extend to requests from private arbitrators and the Arbitration Act 1996 does not permit orders against non-parties.  As such the Norwich Pharmacal jurisdiction was the most suitable and the case satisfied the tests.

Illegality

Stoffel & Co v Ms Maria Grondona is a Court of Appeal case in which a firm of solicitors who had admitted breach of the duty of care it owed to its client, argued that no damages should be recoverable as its client had been involved in mortgage fraud.  The Court of Appeal dismissed the solicitors’ appeal: it is not in the public interest that solicitors who are negligent should be able to avoid liability as a result of there being some aspect of illegality in the underlying transaction.  It was the solicitors’ negligence which caused the loss.

Costs

In PJSC Aeroflot – Russian Airlines v Leeds & Anor the Court found that the Defendants were entitled to costs on an indemnity basis because the Claimant had made serious allegations of fraud which had been entirely abandoned and the claim discontinued with no explanation.  The discontinuation of the claim deprived the Defendant of the opportunity to clear his name.  The claim was discontinued after the trial had started which was conduct outside the norm.

Privilege

Much has been written about the Court of Appeal decision in Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd & Law Society (Intervener) including by my colleague Will Hayes so I will mention only very briefly that the appeal was allowed in part.  The Court found that whilst a party anticipating a possible prosecution might not know how likely that prosecution was without further investigations, that did not prevent proceedings from being in reasonable contemplation.  The fact that a document would ultimately be shown to the opposing party did not mean that preparatory versions did not attract litigation privilege, including documents relating to internal investigations.  Communications between an employee and the company’s lawyers would only attract privilege if that employee was tasked with obtaining legal advice on behalf of the company.  The Court of Appeal commented that the question of whether interviews with ex-employees would be covered by legal advice privilege was a matter for the Supreme Court.

Evidence

In Autonomy Corp Ltd & Ors v Lynch & Anor the Court gave directions on the form a witness statement in complex fraud proceedings should take.  In particular the Court confirmed that a witness statement should not simply affirm a defence, although it could use sections of the defence, verbatim if desired.  The Court also confirmed that any evidence in reply to the other side could only be evidence in reply and could not contain evidence which could and should have been given at the outset.

Bribery

The Defendant in Nua Interiors Ltd & Ors v Terry Brady (t/a Terry Brady Development) applied to amend his defence to include an allegation of bribery between a contractor and the Claimant’s agent.  The Court refused the application on the basis that the information was known a year earlier and should have been included then.  The allegations included individuals, including the main contractor’s wife, rather than the Claimant (which would require evidence to be obtained) and the issue of bribes was not central to the dispute.  It was therefore not necessary for the Court to have the allegations of bribery before it in order to decide upon the claim.

Arbitral Award Obtained by Fraud

 I discussed the first instance decision of Anatolie Stati (2) Gabrial Stati (3) Ascom Group SA (4) Terra RAF Trans Traiding Ltd v Republic of Kazakhstan in my civil fraud round up for Q2 2018.  The case has now been heard by the Court of Appeal who allowed an appeal against the setting aside of the notice of discontinuance.  The fraud allegations relating to the arbitral award were insufficient to invalidate the award and were therefore incapable of establishing that an enforcement application was a fraud on the English Courts.  Further, foreign Courts could have no legitimate interest in the continuation of the proceedings.

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