I have written about Kazakhstan Kagazy Plc & 5 Others v Baglan Abdullayevich Zhunus & Others on a number of previous occasions, most recently in my civil fraud case update Q2 2018. In this new iteration of the long running litigation, charging and freezing orders were varied to permit the owners of properties to grant tenancies. The use of rental income to fund legal costs was strictly prohibited on the basis that no evidence had been provided that the Applicants had no other source of income or funds which could be used to fund their defence to the charging order application.
The Court refused to make a freezing order in Khan & Anor v Five Rivers Haulage Ltd on the basis that the agreement which formed the subject of the dispute was entered into by the Applicants and the shareholder of the Defendant company, rather than the Defendant company itself. As such the Applicants were not able to show a good arguable case against the Defendant company.
In Paul Charles Markham v Moira O’Hara (formerly Moira Karsten) the Court of Appeal considered whether the lower Court had been wrong to order only a partial and conditional discharge of a freezing order first made in 2009. The Court of Appeal paid regard to the consideration that an injunction which had no further use should not be maintained, but nonetheless found that the requirements for the freezing order remained, including a real risk of dissipation of assets by a debtor who had previously ignored Court orders.
In my civil fraud case update Q2 2018 I discussed the case of Revenue & Customs Commissioners v Malde in relation to an unsuccessful application by the Defendant to discharge a freezing order made in 2015. The most recent decision in this case involves the variation of the freezing order to allow the Defendant to spend up to £1.26 million on the refurbishment of his family home which had fallen into disrepair.
In an interesting decision for those representing victims of mandate fraud, the Court in Nigeria v JP Morgan Chase Bank NA considered the circumstances in which a bank owed a Quincecare duty of care to refrain from withdrawing funds from a customer’s account where there were reasonable grounds to believe that the payment was part of a scheme to defraud the customer. The Court found that there was no duty to make enquiries prior to having reasonable grounds for believing that fraud was at play. However, the duty of care owed by the bank to its customer was to decline payment until any reasonable grounds for suspecting fraud had been satisfied. This applied regardless of whether the account was a depository or current account.
The Court of Appeal looked at the nature of a bank/customer relationship in First City Monument Bank plc v Zumax Nigeria and declined to uphold the imposition of an express or Quistclose trust in favour of the intended recipient of transferred funds. The fact that a bank transfer had been carried out for a reason did not mean it was intended to create a trust.
In Elite Property Holdings Ltd & Anor v Barclays Bank plc the Court of Appeal upheld the dismissal of applications to amend particulars of claim to include pleadings in unlawful means conspiracy as a fresh cause of action against the Defendant bank. The Claimant companies had already entered into a settlement agreement with the Defendant bank relating to missold interest rate hedging products. The settlement agreement included a definition of “claim” wide enough to cover the claim in unlawful means conspiracy that the Claimants sought to bring. Further, the Claimants had not made out the essential elements of a claim for unlawful means conspiracy. The Claimants therefore had no real prospect of success in respect of that claim.
Judgments, decisions and allegations of fraud
I first discussed the case of Takhar v Gracefield Developments Ltd & Others in my civil fraud case update Q1 2017. This case was referred to the Supreme Court to consider whether a judgment could be set aside on the basis that it was obtained through fraud and whether there was a requirement for a degree of due diligence to be undertaken at the time of the initial trial in respect of the veracity of documents. The Supreme Court found that: on a public policy basis, people should not have to arrange their affairs on the assumption that others would commit fraud. It was not in the public interest for a fraudster to benefit from a lack of reasonable diligence. To allow a judgment to survive in circumstances in which it had been obtained through fraud would allow a fraudster to get away with deceiving both the Court and the rule of law. However, where fraud had been raised at the original trial and an application to set aside judgment was made on the grounds of new evidence, a Court considering that new evidence would have discretion to decide how to proceed.
The Court in Brearley & Others v Higgs & Sons (a firm) looked at whether a defence referring to (rather than making) allegations of fraud made against the Claimant in separate proceedings needed to state whether the Defendant made a positive assertion of the truth of those allegations. It was held that the truth of the allegations was something which could be determined by the trial judge based on the evidence available.
In Simer Kaur Dhillon v (1) Barclays Bank plc (2) Chief Land Registrar the Claimant was seeking to rectify title to a property by removing a charge registered against the title. Her request was based on an allegation that the charge had only been registered following a transfer of the property which was completed on the basis of transfer documents which were forged. The Court considered whether the charge should be removed or whether there were exceptional circumstances to refuse such an application. The Claimant’s application to remove the charge could only succeed if she adopted and relied on a document which was a forgery and which she stated she had never seen before. Further, she would be put in a better position than she would have been in had the fraud not taken place. By leaving the charge in place, the Claimant was left in approximately the same position she would have been in had there been no fraud. The Court found that whilst the Claimant had the locus to apply to alter the register, there were exceptional circumstances to justify a decision not to remove the charge.
In (1) Atlantica Holdings Inc (2) Baltica Investment Holding Inc (3) Blu Funds Inc v (1) Sovereign Wealth Fund Samruk-Kazyna JSC (2) BTA Bank JSC (Defendants) & (1) Pavel Prosyankin (2) John Howell (Applicants/Third Parties) the Court refused an application to set aside an order that UK-resident third parties to US fraud proceedings be orally examined under oath. There was no oppression and there were good reasons for international cooperation on cases of international fraud.
Transactions defrauding creditors
The Court of Appeal gave a decision in the case of Sequana –v- (1) BAT Industries plc & Others dismissing the appeal that payment of a dividend by a company can be challenged under s.423 Insolvency Act 1986. In particular, there is nothing in the wording of s.423 which prevents it being applied to dividends.
In Newmafruit Farms Ltd & Others v Magnolia Park Ltd & Another the Court continued a freezing injunction against two Respondent companies until judgment or further order. It was argued that one of the Defendants in the substantive claim was the de facto director of the Respondents and that money had been received by the Respondents. The Respondents argued that the freezing injunction had impacted the business of the Respondents, they had not been able to use their bank accounts and a contract with a third party had been terminated as a result.
The Court found that there were good reasons to continue the injunction: that there were assets held by the Respondents in the jurisdiction with a real risk that those assets would be dissipated if not protected: the Claimant had acted swiftly to minimise any impact the injunction would have on the Respondents’ business and the Respondents had failed to comply with previous Court orders.
The Court also continued the freezing injunction made against the Defendant in the case of Application by Touton Far East PTE for the Committal to Prison of Gard & Others. The Claimant obtained judgment against the Defendant in 2010 but failed to enforce the judgment. A freezing injunction was granted in 2016 when the Claimant renewed its attempts to enforce judgment. The Defendant applied to set aside the injunction on the basis that it had been improperly obtained for the purpose of bringing pressure on the Defendant to pay the judgment debt in circumstances in which enforcement had not been attempted. The Claimant argued that as the Defendant had failed to comply with the disclosure aspects of the freezing order it was in contempt of Court and should not be heard. The Court found that the injunction had enabled the Claimant to take the decision of where to seek to enforce its judgment and that the freezing injunction should continue.
I discussed the case of Kevin Taylor v (1) Van Dutch Marine Holding Ltd (2) Van Dutch Marine Ltd (3) Henrik R Erenstein (4) Rudd Koekkoek & TCA Global Credit Master Fund LP (Third Party) in my Quarter 3 2016 civil fraud case update. In the most recent decision made in this case the Court found that the exercise of disposal rights by a secured creditor was not an act prohibited by a freezing injunction. The application by the third party creditor to vary the injunction was not, therefore, necessary.
The Court makes it clear that a normal security enforcement situation which did not involve a disposal by the party subject to the freezing injunction, which was not collusive and which did not amount to aiding and abetting a breach of the injunction could be pursued without the need to vary the injunction. However, the Court did comment that it should be sympathetic to creditors wanting comfort from the Court that they would not be breaching an injunction.
I mentioned in my Quarter 2 2016 civil fraud case update that Mr Justice Teare had determined, in the case of JSC BTA Bank v Ablyazov and Khrapunov, that contempt of Court could constitute unlawful means and be the basis for a claim in the tort of conspiracy to injure by unlawful means, and that the decision was the subject of an appeal. The appeal was heard in February 2017 and was dismissed; the Court of Appeal upheld the first instance decision and also considered issues of jurisdiction based on where the harmful effect occurred.
In the second report relating to the case of Application by Touton Far East PTE for the Committal to Prison of Gard & Others relates to the Defendant’s failure to comply with ancillary orders requiring the Defendant to disclose details of its assets and that the Claimant alleged the Defendant had made disposals of assets worth more than $20,000 on three occasions since the freezing order had been made. The Court found that there had been breaches of the freezing injunction and therefore made a writ of sequestration against the Defendant company and committed five of the Defendant company’s directors to prison for contempt of Court for sentences of between 18 and 6 months.
A company director was also sentenced to 18 months in prison for contempt of Court in the case of Bunge S.A. v Huaya Maritime Corporation of the Marshall Islands and Mr Zhu Gho Hua. Anecdotally Mr Hua had stated that by staying away from the UK he hoped to avoid the consequences of both an arbitration award and the freezing injunction obtained after the Defendant had failed to satisfy that arbitration award. The Court made a committal order in his absence and if Mr Hua returns to the UK he will be arrested and imprisoned for 18 months.
The Court of Appeal dismissed an appeal against a sentence of 21 days’ imprisonment for comtempt of Court in Julian John Watson v (1) Tariq Mahmood Sadiq (2) Khalid Mahmood Sadiq. The Court did, however, agree to suspend the sentence for 28 days to give the appellant the opportunity to comply with previous orders. If previous orders were complied with, there would be the possibility of a reduction to the sentence.
In the case of JSC Alfa-Bank v Reznik the imposition of an 18 month prison sentence was remitted in circumstances in which the Defendant complied with the disclosure requirements (albeit belatedly), apologised to the Court and applied to purge his contempt. The Court agreed that the compliance and clearly sincere apology were sufficient to remit the sentence, finding that there was no need for the Defendant to spend time in prison in order to be punished.
Another sympathetic approach was taken by the Court in Lum v Chan & Another in which the Court declined to make a committal order or impose a fine, despite breaches of Court order. The Court found that the breaches had been minor and there had been no deliberate attempt to frustrate the order.
Orders against Third Parties
The Court considered the grounds for making a Bankers Trust Order in the case of Kyriarkou v Christie Manson & Woods Ltd & Others. The application was linked to a divorce and the removal from Greece of jewellery and antiques. The Applicant husband was attempting, by the application, to discover what had been taken by his wife and where it was being held. The Respondents included an auction house, a jeweller and a safe deposit company. The Court was careful to ensure that the draft order was not too wide and did not represent an unjustified interference with the duty of confidentiality owed to the customers of the Respondents.
In the case of Abela & Others v Baadarani (Third Party: Fakih) the Court granted the first ever search order against a third party. The substantive case had been commenced in 2009, involved a leading decision relating to alternative service out of the jurisdiction and culminated in judgment being entered against the Defendant in June 2015 following breaches of unless orders. A post-judgment freezing injunction was granted in 2016 along with a number of disclosure orders against third parties. Documents provided in response to these disclosure orders suggested that an asset schedule produced by the Defendant in the proceedings had been backdated, possibly with the assistance of a third party.
The Claimant applied, on a without notice basis, for a search order against that third party Respondent for relevant documents relating to the Defendant’s assets. The claimant relied on s.7 Civil Procedure Act and argued that a search order did not have to be limited to parties against whom a claim was being pursued. The Court’s decision involved findings that there was nothing in any legislation to prevent the granting of a search order after judgment, and that there was no reason to refuse to make a search order simply because the Claimant was not also seeking a third party disclosure order.
In what is likely to be a useful decision the Court in Singularis Holdings Limited (in Official Liquidation) v Daiwa Capital Markets Europe Limited found a bank liable in negligence to its customer as the bank was on notice that the customer was at risk of being defrauded by its director but failed to prevent payments being made which constituted the misappropriation of company funds. The Judge found that any reasonable banker would have realised that there were signs that the director of the company was perpetrating a fraud on the company by using funds for his own purpose. The duty established in Barclays Bank Plc v Quincecare Limited and Another  required a bank to do something more than accept strange documents or implausible explanations at face value. By allowing the payments to be made, the Defendant bank was found to have been negligent and was liable to repay the money to the Claimant company.
The fraud in Clydesdale Bank plc v (1) Stoke Place Hotel Ltd (In administration) (2) Novtej Singh Dhillon (3) Sarina Thiara Dhillon (4) Andrew Paul Seavers was described as audacious, detailed and sustained and involved the Claimant bank being led to believe that the second and third Defendants were selling a majority of their shareholding in the first Defendant company. The solicitor acting for the second Defendant consistently led the bank to believe that this was the nature of the transaction. In fact the first Defendant was suffering serious cash-flow problems and the second Defendant decided to try to raise money against the first Defendant company. Facilities were made available by the fourth Defendant although they were not authorised by the Claimant bank. There was evidence to suggest that the fourth Defendant had informed the second Defendant that the lending was unauthorised. The second Defendant was therefore found to have conspired to injure the Claimant by unlawful means and was found liable for sums due.
Breach of Trust & Property Fraud
In First Subsea Ltd (foermerly BSW Ltd) v (1) Balltec Ltd (2) Robert Emmett (3) [Discontinued] (4) Russell Benson (5) Roger Bacon the Court considered claims for breach of fiduciary duty and breach of trust and how the Limitation Act 1980 would apply to such claims. The Court considered the two classes of constructive trust established by Paragon Finance plc v DB Thakerar & Co : Class One arose where both parties intended to create a trust and the trustee was in lawful possession of trust property; Class Two arose where a party is implicated in a fraud and is obliged to account for his fraud as if he was a trustee. The Court found that a company director could not be a Class One trustee and that in circumstances in which breaches of trust/fiduciary duty were found to be fraudulent then s.21(1)(a) Limitation Act 1980 disapplied any limitation period.
I have addressed the recent cases of Purrunsing v A’Court and Another and P&P Property Ltd v Owen White & Catlin and Another in the article ‘Who is on the hook’ and my Quarter 4 2016 civil fraud case update. Another case dealing with the same sort of issues has recently been decided. In Dreamvar v Mishcon De Reya & Another the Claimant had handed over funds in order to purchase a property only to discover, too late, that the purported vendor was not the genuine owner of the property and was instead a fraudster. The Claimant therefore sued its solicitors, Mishcon De Reya, in (1)professional negligence alleging that Mishcons should have alerted it to the risk of fraud and that they should have obtained an undertaking from the purported vendor’s solicitors that they had established the identity of the vendor, and (2) in breach of trust for paying away the completion monies in circumstances in which no genuine completion had occurred.
The claim in negligence failed, the Court finding that there was nothing usual about the transaction which would have put Mishcons on enquiry of the risk of fraud. Relying on case law the Judge found that Mishcons were in breach of trust for releasing completion monies without a genuine completion occurring. Mishcons therefore sought s.61 Trustee Act relief from liability. This required Mishcons to prove that they had acted honestly and reasonably and to show that they ought fairly to be excused for the breach. There was no question about Mishcons’ honesty, so the issue for the Court to decide was whether they had acted reasonably and what would be fair.
The Court assessed the parties’ positions and found that as the Claimant had no other source of recovery and because Mishcons had professional indemnity insurance, it was only fair that Mishcons be held liable to reconstitute the trust.
Interestingly, unlike the decision in Purrunsing, the purported vendor’s solicitors were not also found to have been in breach of trust by releasing the completion monies, although it is worth noting that the solicitors in Purrunsing admitted breach of trust.
This case has been appealed on a number of issues and it will be interesting to see what approach the Court of Appeal takes.
In my article ‘Notification Injunctions: Forewarned is Forearmed’ I discussed the notification injunction made by Nugee J in the case of Holyoake & Another v Candy & Others. This decision has been the subject of a successful appeal. The Court of Appeal found in (1) Nicholas Anthony Christopher Candy (2) Christian Peter Candy (3) CPC Group Lrd v (1) Mark Alan Holyoake (2) Hotblack Holdings Ltd that the Judge at first instance had not applied the correct test in relation to the risk of dissipation of assets: the notification injunction granted was akin to a freezing injunction in effect, as such the same test should have been applied in respect of risk of dissipation.
Judgment Obtained through Fraud
The Claimant in Celtic Bioenergy Limited v Knowles Limited applied to set aside an arbitrator’s award on the grounds that that it had been obtained through the Defendant’s failure to disclose correspondence which was so misleading it amounted to fraud.
The Court found that the Defendant’s failure to disclose correspondence to the arbitrator was deliberate and that the Defendant had failed to provide a credible explanation for this failure. The arbitrator’s decision was therefore obtained by fraud. Those parts of the award were therefore remitted back to the arbitrator for reconsideration.
Another case relating to the setting aside of an arbitral award is Sinocore International Co Ltd v RBRG Trading (UK) Ltd. In this case the argument was that the award gave effect to a claim which was based on forged bills of lading. The Claimant brought a claim to enforce the arbitral award in England and obtained, on a without notice basis, an enforcement order. The Defendant objected to that order on the basis that the Claimant had presented forged bills of lading and that the Court should not assist a party who has presented forged documents.
The Court rejected the Defendant’s arguments. Even if the transaction had been tainted by fraud, it did not prevent the Claimant bringing other lawful claims. Whilst a bank may be able to rely on the principle that fraud unravels all and refuse to pay out on letters of credit based on forged documents, that principle does not necessarily apply to all situations: it is necessary to determine whether the fraud goes to an essential part of the claim.
In the case of Joseph Akerman v (1) Andrew Robert Thornhill (2) Naomi Ackerman (3) Barry Ackerman (4) Bana One Ltd the Court was asked to consider whether a Judgment and a Settlement Agreement could be set aside on the basis that they had resulted from bribery, fraud and collusion. A Judgment could only be set aside on the basis that it was obtained by fraud or collusion if the evidence of fraud or collusion was not available, and could not have been discovered with reasonable diligence, at the time the judgment was given.
The Court found that there was a substantial public interest in finality in litigation. Likewise settlement agreements should not be undermined except on the clearest grounds.
As all the documents on which the Claimant sought to rely to evidence the fraud and collusion had been disclosed in the earlier litigation, he was barred by the principle of res judicata. The evidence had been available at the time the judgment was given and the judgment would not, therefore, be set aside.
The issue of evidence being available at trial was also considered in the case of Roshan v Singh in which the Court held that someone who was not party to original proceedings could set aside judgment in those proceedings on the grounds that it was fraudulently obtained.
There was no need for the Claimant to prove that there had been a conspiracy to damage his interests but again it was necessary to demonstrate that the evidence of fraud was evidence which was not available, and could not have been discovered with reasonable diligence, at the time the judgment was given.
In Balber Kaur Takhar v (1) Gracefield Developments Ltd (2) Kewal Singh Krishan (3) Parkash Krishan the Court of Appeal considered whether a Claimant had to demonstrate that evidence of forgery of documents was not available to her at the time of trial and could not have been discovered with reasonable diligence. The Claimant submitted that it would be wrong to impose a requirement of reasonable diligence in the case of a fraud.
The Court found that there was no distinction between an application to set aside judgment for fraud and an application to re-litigate an issue on the basis of new evidence. The appeal was allowed and the matter was remitted for consideration of whether the Claimant had satisfied the condition of reasonable diligence in respect of the evidence relied upon.