Civil Fraud Quarterly Round-Up: Q4 2018

7 January 2019

Freezing Injunctions

I previously wrote about the fact that, at the end of 2016 the Court refused to vary a proprietary freezing injunction in the case of FM Capital Partners Ltd v (1) Frederic Marino (2) Aurelien Bessot (3) Yoshiki Ohmura (4) Marit Sjovaag in my civil fraud round up Q4 2016.  The Court revisited this case twice in the last quarter, first to refuse to discharge a worldwide freezing injunction made against the third Defendant on the basis that there was a real risk of dissipation of assets, and secondly to vary the freezing injunction.  The freezing injunction was varied to remove references to companies and bodies corporate in which the third Defendant had an interest.  Instead the Court required the third Defendant to give notice of the disposal of or dealings with assets held by three companies if the value of those dealings or disposals exceeded £10,000.

In Ambey Capital Private Ltd & Ors v Mascarenhas & Ors the Court discharged a freezing injunction over a deceased Defendant’s home, following an application by the late Defendant’s trustees in bankruptcy.  The Court found that there was no risk of dissipation and that the Defendant’s trustees in bankruptcy had standing to make the application.

The Court confirmed, in Recydia Atik Yonetimi v Collins-Thomas & Ors, that the undertaking that the Claimant “will affirm and file an affidavit” could be satisfied by the filing of an affidavit affirmed by the Claimant’s solicitor.

The Court held that the disappearance of and failure to engage by the Defendant should not be rewarded in Scott v Giles and therefore continued a post-judgment worldwide freezing injunction for a further eighteen months.  The Claimant had made efforts to enforce judgment and the Court found that it would be premature to allow the relief provided by the injunction to lapse.

In the case of McGarahan & Anor v Dickens Developments UK LLP & Ors the Court refused to grant a freezing injunction because there was insufficient evidence of a risk of dissipation of assets to justify a freezing injunction, and the order sought was unduly draconian, suggesting that the Claimants were trying to seek an unfair advantage in the litigation by obtaining a freezing injunction. However, the Court did grant a proprietary injunction as the Claimant investors could show a good arguable case that they had a proprietary interest in a development owned by the Defendants.

The Court found that the inclusion of English companies as Defendants in the case of PJSC Commercial Bank Privatbank v Igor Valeryevich Kolomoisky & Ors (a case I considered in my civil fraud round up Q2 2018) was solely in order to establish jurisdiction in England and Wales, with the procedural advantages that provides, including the ability to apply for a worldwide freezing injunction.  The Court therefore declined jurisdiction and as a consequence discharged the freezing injunction previously granted.

In (1) Sheikh Mohamed Bin Issa Al Jaber (2) MBI & Partners UK Ltd (3) JJW Hotels & Resorts Ltd v (1) Amjad Alias Salfiti (2) Basem Bosheh the Court set aside a worldwide freezing injunction on the basis that the Claimants had failed to comply with the duty of full and frank disclosure in respect of the first Claimant’s ownership of the other Claimant companies, and the business practices of those companies (in particular in respect of incurred debts and interest rates of loans).  The failure was so serious that the Court held that the injunctions should not be re-granted.

Third Party Disclosure

In the case of FCFM Group Ltd v Hargreaves Lansdown Asset Management Ltd the Court refused to grant a Norwich Pharmacal order to support a possible private prosecution in circumstances in which there was already a civil action underway in respect of which disclosure would be provided.  It was clear to the Court that the first port of call for the Claimant was civil proceedings, and the third party disclosure order was not necessary to allow the Claimant to obtain justice in those proceedings.

Mortgage Fraud

In Santander UK plc v (1) Ashley Shaun Fletcher (2) Paula Denise Fletcher the Court of Appeal considered whether an order for possession should have been made in circumstances in which the first Defendant had fraudulently induced the second Defendant (his mother) into granting a mortgage over a property held in their joint names.  The Court at first instance had found that the mortgage should be set aside for undue influence but also that the Claimant bank had an equitable charge over the first Defendant’s interest in the property. The second Defendant appealed the decision and argued that the first Defendant had no interest in the property because the transfer document which the Claimant relied on to demonstrate such an interest had been mistakenly completed.  The appeal was dismissed: the Claimant bank was on notice of undue influence for the mortgage, but not the transfer, which had happened earlier.  The Claimant bank relied on the title to the property in order to lend the money and even if the second Defendant was able to show that a mistake had been made, it would render the transfer document voidable rather than void.

Dishonesty

In the case of Carr & Ors v Formation Group Plc & Ors the Court refused to allow parties to a claim to call expert evidence of market practice regarding the disclosure of shared commissions in respect of claims of dishonesty.  The Court held that, as the civil and criminal tests of dishonesty were objective, it could determine the appropriate standard assessed by the standards of reasonable honest people.  Evidence about market practice had no place in an objective test.  Permission was granted, however it was only granted in respect of that part of the claim which related to unlawful means conspiracy as the test for that claim would turn on the state of mind of the Defendants.

Stay Pending Criminal Investigation

In the case of FM Conway Ltd v Peter Suggett & Ors the Court considered a Defendant’s application to stay civil proceedings pending the outcome of a criminal investigation or proceedings.  The application relied on the privilege against self-incrimination.  The Court refused the Defendant’s application on the basis that: (1) the Defendant had not pointed to a real risk of injustice and (2) the balance of competing considerations and likely prejudice between the Claimant and Defendant came down against a stay as it would delay the Claimant’s claim (which was for a significant sum) for an uncertain length of time.  The Court also confirmed that the Defendant could apply for safeguards such as reporting restrictions if it appeared that there would be a real risk of injustice.

Vicarious Liability for Fraud

The Court of Appeal considered the test for the vicarious liability of a principal for losses caused by the fraudulent misrepresentations of its agent in the case of James Scott Winter v Hockley Mint Ltd. The test is whether the principal held out the agent as having actual or ostensible authority and whether that holding out was relied on.  The judge at first instance had applied the wrong test and the case was remitted for re-hearing on that point.

The issue of a principal’s liability for its representative’s actions was considered by the Court in Adam Anderson & Ors v Sense Network Ltd.  This case involved a fraudulent Ponzi scheme operated by a financial advice company (Midas) which was an appointed representative of the Defendant, an FCA authorised company.  Midas hid the existence of the scheme from the Defendant for some time.  When the Defendant discovered the scheme it terminated its relationship with Midas, however, by that time the Claimants had lost significant sums of money.  The Claimants sought to recover their losses from the Defendant on the basis that (1) the scheme was a collective investment scheme and was business for which the Defendant had accepted responsibility under s.39 FSMA; (2) Midas had authority to advise on the scheme; (3) a whistleblower’s knowledge of the scheme could be attributed to the Defendant; (4) the Defendant was vicariously liable for Midas’s actions; and (5) the Defendant had breached its supervisory duties to monitor Midas.

The Court found in favour of the Defendant.  (1) The scope of a principal’s responsibility under s.39 FSMA could not be determined by identifying generic types of business, the terms of the representative agreement also needed to be considered.  In this case the scheme did not fall within the scope of the agreement between the Defendant and Midas. (2) As the Defendant had not accepted responsibility for the scheme no authority, whether actual or apparent was conferred on Midas.  (3) The whistleblower was based within Midas and his role was to assist Midas with its compliance obligations.  There was no reason or basis to impose his knowledge on the Defendant. (4) Midas was carrying out its own recognisably different business and as such there could be no vicarious liability on the Defendant’s part. (5) The Defendant had operated reasonable supervisory systems which were defeated by Midas’s deliberate concealment of the scheme, not by a failure in the system.

Judgment obtained by fraud

The Court of Appeal decision of Daniel Terry v (1) BCS Corporate Acceptances Ltd (2) BCS Offshore Funding Ltd (3) John Taylor looked at the correct procedure to be adopted when a judgment is alleged to have been obtained by fraud.

Prior cases have established that a fresh action should be brought to set aside the judgment or, in appropriate circumstances, an appeal seeking to rely on new evidence in order to seek a retrial.

In this case after default judgment had been obtained against him, the Defendant applied to strike out the Claimants’ claims under CPR 3.4 and for a stay of proceedings for abuse of process on the basis that the claim itself was fraudulent.  The lower Court refused that application.

The Court of Appeal found that CPR 3.4 was a case management power and could not be used once judgment had been entered and there was no case left to manage.  Likewise an application to set aside judgment under CPR 3.1(7) would require a material change of circumstances and could only be used to set aside a final order in extremely exceptional circumstances.  The Court of Appeal therefore upheld the lower Court’s decision.

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