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 2019.
The Court of Appeal in Lakatamia Shipping Co Ltd v Toshiko Morimoto considered the tests to be applied when considering whether a freezing injunction should be granted or continued. The Court of Appeal found that where there was a good arguable case that a Respondent had engaged in wrongdoing which was relevant to the issue of dissipation it might not be necessary to consider whether there was further evidence of a risk of dissipation. The fact that the Respondent had received sums in breach of an initial freezing injunction demonstrated a risk of dissipation which needed to be managed by way of a further injunction.
In The World LLC v Shokat Mohammed Dalal the Court heard from the Claimant UAE company which was constructing the man-made islands off the coast of Dubai and a Defendant who had contracted to buy various of the plots. The Claimant company had obtained a judgment in Dubai which it was seeking to enforce in the UK and obtained a freezing injunction to assist with that enforcement. The Defendant alleged various material non-disclosures relating to a fraud defence raised in Dubai, the risk of the judgment going unsatisfied and argued that there was no evidence of risk of dissipation. The Court found that, although there had been mistakes in the Claimant’s presentation of the situation, they did not constitute material non-disclosure and therefore did not merit the discharge of the freezing injunction.
The issue of the level of living expenses permitted to be used under a freezing injunction was considered by the Court of Appeal in Vneshprombank LLC v (1) Georgy Ivanovich Bedzhamov (2) Unifleet Technology Ltd (3) Persons Unknown (4)Basel Properties Ltd. The Court of Appeal confirmed that the exception allowing a Respondent to a freezing injunction to spend money on living expenses was intended to maintain their pre-injunction standard of living. The correct approach was to allow a sum for ordinary living expenses which would allow the party subject to the injunction to maintain their previous standard of living, although the Court should treat assertions about the level of expenditure with a healthy degree of scepticism. In the particular case, the initial level of authorised spending did not enable the Respondent to the freezing injunction to pay the rent on the two properties he and his family occupied in Monaco and London. The Court of Appeal therefore varied the freezing injunction to enable that rent to be paid.
The Court granted a post-judgment freezing injunction in New York Laser Clinic Ltd v Naturastudios Ltd in circumstances in which there was evidence that the director of the Defendant had set up other companies in order to dissipate the Defendant’s assets. Those companies were therefore added as parties to the action and were included in the freezing injunction. In the circumstances the Court also found that it was appropriate to disapply the usual exception allowing a party to a freezing injunction to make payments in the ordinary course of business.
As discussed in my summary of developments in crypto-assets in 2019, Elena Vorotyntseva v (1) Money-4 Ltd (T/A Nebeus.com) (2) Sergey Romanovskiy (3) Konstantin Zaripov is interesting because the freezing injunction which was granted was granted over crypto-assets held in an account with an exchange. The Court was satisfied that there was risk of dissipation and that crypto-assets constituted property over which a freezing injunction could be made.
The Defendant in Astron Bond Law Ltd v Al Sharif applied to vary a freezing injunction which had initially been made by consent. The Defendant wished to access funds for living expenses and to pay for legal representation. The Court refused the application and focussed on the fact that the injunction was made by consent and that the Defendant had not previously asked for an exception for living expenses.
Breach of Quincecare Duty
Much has been written about the Supreme Court decision in Singularis Holdings Ltd (In Official Liquidation)(A company incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd not least my summaries in the Civil Fraud Updates for Q1 2018 and 2017. A Quincecare duty (an implied duty to use reasonable skill and care in executing a customer’s orders) was established at first instance and was not appealed. The Supreme Court was asked to determine whether the fraudulent state of mind of an authorised signatory could be attributed to the company, and whether that would provide the bank with an illegality defence to a claim for breach of the Quincecare duty.
The company had a board of reputable people and a substantial business and as such the shareholder/signatory’s fraudulent state of mind could not be attributed to the company. The purpose of the Quincecare duty was to protect a company from precisely this sort of misappropriation of funds. The Supreme Court also concluded that even if the shareholder’s state of mind could be attributed to the company, the test for an illegality defence had not been met and the bank’s defence would not succeed.
Contempt of Court
The Court in Michael Wilson & Partners Ltd v Sokol Holdings Inc & Others considered an application for committal for contempt of Court for alleged breaches of an injunction relating to the source of funds used for legal representation. The Court considered that the most important question was whose money had been used to pay for the legal representation. Insufficient evidence had been filed and the Court adjourned the committal hearing to allow the parties to provide further evidence.
In Lakatamia Shipping Co Ltd & Ors v Iron Monger 1 Ltd & Ors the Court was asked to consider an application for release by a contemnor who had already been committed to prison for 21 months following multiple breaches of Court Orders. The basis of the application was that release would allow him to purge his contempt. However, the Court considered it to be significant that the contemnor had made no attempts to obtain repayment of EUR 27 million which he had apparently transferred to his mother in breach of a freezing injunction. Not only was his application refused, it was also found to have been totally without merit in circumstances in which he had been told that if he wanted to alter the sentence he would need to apologise and take some positive action: no such positive action had been taken.
The Court of Appeal considered issues of jurisdiction in ED & F Man Capital Markets Ltd v Straits (Singapore) PTE Ltd following a first instance decision that the Courts of England and Wales were the correct forum to hear the claim. This decision was reached in circumstances in which the majority of Defendants had submitted to the jurisdiction and were subject to English exclusive jurisdiction clauses and despite the issue of pre-action disclosure proceedings against the Tenth Defendant in Singapore. The Tenth Defendant appealed against the first instance decision, arguing that the risk of irreconcilable judgments was not something a Claimant could rely on where it had brought that risk on itself (in this case by way of the pre-action disclosure application). The Court of Appeal considered the fact that because there had been no indication that any of the other Defendants were willing to waive their exclusive jurisdiction clauses some part of the action would therefore have to continue in the Courts of England and Wales, and that no substantive proceedings had been brought in Singapore. The claim against the Tenth Defendant was a claim in conspiracy which needed to be considered alongside all the claims against all the Defendants. It was therefore desirable to have the claims heard in one forum and the Courts of England and Wales were the proper place for the claim to be heard.
Misappropriation of company funds
In Auden McKenzie (Pharma Division) Ltd v Amit Patel the Court of Appeal considered whether an argument that misappropriated funds would have been dissipated in any event was a valid defence to a claim for equitable compensation for misappropriation of company funds by a director. The argument put forward was that had funds not been misappropriated they would have been paid in dividends and the company would not therefore have had the benefit of those funds. The Court of Appeal determined that this was a matter which needed to be heard by a Court at trial. The Court of Appeal therefore set aside a summary judgment order which had previously been made against the Defendant.
Use of confidential information
In the case of (1)DSM SFG Group Holdings Ltd (2) St Francis Group 1 Ltd (3) St Francis Group 2 Ltd v John Thomas Kelly the Court of Appeal looked at use of confidential information obtained through the placement of sound recording devices at the Claimants’ offices.
The Respondent to the appeal had successfully applied to release him from various undertakings he had given to the Court about the use of recordings before trial. The Court of Appeal found that the lower Court had conflated issues of a Respondent/Defendant using recordings to defend himself and of a Respondent/Defendant using those recordings to bring separate claims and in so doing had enabled the Respondent to use the recordings before the Court was satisfied that he could do so. The Court of Appeal reversed that decision.
I discussed the setting aside of the freezing injunction in Re Bin Issa Al-Jaber Salfiti & Anor in my Civil Fraud Update Q4 2018. In the most recent hearing of this case the Court was asked to consider the issue of wasted costs. A freezing injunction was made against and subsequently discharged by the Second Defendant. Indemnity costs were awarded in his favour against the Claimant and the Judge criticised the Claimant’s solicitors for breaches of their duties to the Court to present the case fairly and their failure to give full and frank disclosure. The Second Defendant therefore sought a wasted costs order against the Claimant’s solicitors. The Court refused the application: the Second Defendant had not provided sufficient details of the Claimant’s solicitor’s misconduct or its consequences and as such the application could not proceed.
I have written about the case ofKazakhstan Kagazy Plc & 5 Ors (Claimants)v (1) Baglan Abdullayevich Zhunus (formerly Baglan Abdullayevich Zhunussov) (2) Maksat Askaruly Arip (3) Shynar Dikhanbayeva (4) Sholpan Arip (5) Larissa Asilbekova (Defendants) & Harbour Fund III LP (Additional Party) in my Civil Fraud Updates for Q1 2019 and Q1 2018. In the most recent reported case relating to this claim the Claimants sought non-party costs orders against the wife and mother-in-law of one of the Defendants.
The allegations made by the Claimants were raised following the disclosure of information pursuant to an order compelling the Defendants to disclose the identity of the people who had paid the Second Defendant’s legal fees. Payments had been made by the Fourth and Fifth Defendants using funds which had been transferred from a settlement in favour of the Second Defendant. Not only did the Fourth Defendant receive funds from the Second Defendant but also transferred considerable amounts of those funds to the Fifth Defendant, seemingly with the intention of putting them out of the reach of enforcement action. It was, therefore, just that costs orders should be made against both the Fourth and Fifth Defendants.
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.