Following judgment in the case of Kazakhstan Kagazy plc & 5 Others v Baglan Abullayevich Zhunus (formerly Baglan Abdullayevich Shunussov) & Others the Claimants returned to Court to request certain orders consequential to that judgment (see my previous discussion of this case in my Civil Fraud Quarterly Round-Ups for Q2 and Q4 2016 ). The Court was asked to determine a number of issues including the currency of the judgment, whether a freezing injunction should be continued post-judgment and what should become of the exceptions to the freezing injunction allowing the Defendants to use funds in the ordinary course of business, for living expenses and for legal costs.
The Court held that the currency should be the one which best expressed the losses, rather than the currency generally used by the Claimants. In this case the misappropriated funds were drawn from USD and Euro accounts, and there was no reason for the judgment to be in any other currency.
The Court continued the freezing injunction, and held that the cross-undertaking in damages provided by the Claimants should continue until the Defendants’ application for permission to appeal had been determined. The exceptions in the freezing injunction for ordinary business and living expenses were removed, but as there were further steps in the proceedings which the Defendants were compelled to take, the exception for legal expenses was left in place.
In Gresport Finance Ltd v Carlo Battaglia the Court of Appeal considered issues of limitation and fraud. The Court of Appeal confirmed that the test was whether a Claimant could, with reasonable diligence, have discovered the fraud sooner. The concept of reasonable diligence was one which a Court would need to assess on the facts and in this particular case there was no reason to doubt the evidence given that unauthorised transactions could not have been discovered sooner.
In January 2018 reports of a decision of Judge Waksman QC made in October 2017 were released. In the decision of CMOC v Persons Unknown a freezing injunction had been made against un-named individuals relating to a claim that a cyber-attack had resulted in £8 million of the Claimant’s money being transferred out of its accounts into accounts across the world. The order made also compelled the recipient banks to disclose information to assist with tracing and allowed the Claimants to use email, Facebook and online data rooms to effect service.
Solid Property Grundstuck GMBH & Co KG & Others v Singh & Others also related to a cyber-attack. In that case the Claimants asked the Court to continue a freezing injunction in circumstances in which two of the five Defendants opposed such continuation on the basis that they had nothing to do with the fraud. The Court considered whether the Claimants were able to show that they had a good arguable case against the Defendants who were opposing the continuation and found that they were able to do so. The first Defendant admitted that he had a pension, which was an asset which could be caught by a freezing injunction. The Court confirmed that where the underlying claim was one of dishonesty and involved the transfer of assets to different jurisdictions, the risk of dissipation was established. There was nothing to suggest that the continuation of the injunction would not be just and convenient, and the injunction was therefore continued.
In Andrews v Stanway & Another the Court considered an application to vary a freezing injunction to allow the Defendant to sell his share of his family home to his wife in order to release money to fund his litigation costs. The Court considered the Defendant’s past actions and the fact that he had, immediately after being informed about the freezing injunction, completed a number of transactions on his account including the withdrawal of large amounts of cash. Likewise regular payments into his account ceased when the freezing injunction was made. The Defendant had previously divested himself of assets when it suited him, all of which suggested that the Defendant had not been frank and transparent. The application was refused and the freezing injunction was not varied.
Angel Group Ltd (in Liquidation) v Julie Anne Davey also involved an application to vary an injunction, this time a proprietary injunction to which the Defendant had consented. The Defendant applied to vary the injunction to allow payment of £1.42 million for legal and expert fees. The Court considered the fact that there had been no material change of circumstances since the Defendant consented to the injunction being made. Nor had she demonstrated that she had no other source of funds from which to pay legal costs. The Court therefore concluded that it was in the interests of justice for the injunction to continue and the funds to be protected. The application was refused.
Third Party Disclosure
A further application was granted against ‘persons unknown’ in the case of Nicholas Ho v (1) Lloyds Bank plc (2) Persons Unknown. In this case a Norwich Pharmacal application was granted against the bank into which monies were transferred as a result of an email deception. The Court found that it was in the public interest that the bank should provide the information in circumstances in which money had been paid to the wrong account as a result of fraudsters hacking an email account. In addition, declaratory relief that the bank held the money on trust for the Claimant was granted as the Claimant had provided sufficient evidence to support such a declaration.
The Court also considered the Norwich Pharmacal jurisdiction in the case of (1) Benherst Finance Ltd (2) Chestone Industry Holding v (1) Jofa Ltd (2) Joseph Fara (3) National Westminster Bank plc. The Court considered whether there was an arguable case that there had been wrongdoing, whether disclosure was necessary and then considered its discretion in respect of whether to grant an order, concluding that it was necessary, proportionate and in the interests of justice to make an order compelling disclosure.
I have previously discussed the Court of Appeal decision in JSC BTA Bank v Khrapunov in my Civil Fraud update Q1 2017 . The Supreme Court has now considered the issue of whether contempt of Court could constitute the unlawful means for the purpose of the tort of conspiracy to injure by unlawful means. The Supreme Court found that whilst damage to the Claimant bank was not the predominant purpose of the concealment of assets in breach of Court orders, that damage was more than incidental. The object of the conspiracy was to prevent enforcement by the Claimant bank of a judgment it had obtained against its former chairman. Contempt of Court is a criminal offence which can be punishable in civil proceedings. The cause of action for unlawful means conspiracy was therefore made out.
The Supreme Court also considered the issue of jurisdiction and in particular Article 5(3)(b) of the Lugano Convention which allows a claim in tort to be brought in the jurisdiction in which the harmful event occurred or may occur. In this particular case, there was a conspiratorial agreement which encouraged and procured the commission of unlawful acts. It was the agreement which constituted the harmful event and, as that was made in England, the Courts of England and Wales had jurisdiction.
In (1) Terry John Neil (2) Anthony Wright Hall v Soraya Jasmine Henderson the Court considered the deployment of forged documents in Court proceedings and whether that deployment constituted an attempt to interfere with the administration of justice and contempt of Court. The Court found that there was sufficient evidence to conclude that signatures on various documents were forgeries. However, the Court also found that the service of those forged documents did not constitute contempt of Court because it was not a step in proceedings nor a step preparatory to the issue of proceedings and was not, therefore capable of impacting on the administration of justice. Nonetheless, the Court found that deployment of forged documents in proceedings or at a hearing could impact on the administration of justice and constitute contempt of Court. The filing and service of a witness statement exhibiting false documents was not itself a contempt of Court, however, when it was then used in a Court hearing (by inclusion in the Court bundle), that use did constitute contempt of Court. In this instance the Court found that the Defendant had intended that both the Claimants and the Court would be misled into thinking that the document exhibited to her witness statement and deployed at Court was genuine and was therefore in contempt of Court.
Directors Duties and Vicarious Liability
In Singularis Holdings Ltd (In Official Liquidation) (a company incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd (which I discussed in my Civil Fraud Update Q1 2017 ) the Court of Appeal considered whether the fraud of a director could be attributed to the Claimant company, therefore providing the Defendant bank with a defence to a claim in negligence relating to payments made to third parties at the behest of that director. The Court of Appeal confirmed that where there was more than one director, and where there were innocent directors or shareholders, the fraudulent actions of one director could not be attributed to the company. The bank’s argument that the claim for recovery of the payments should fail on the grounds of illegality was rejected by the High Court and this decision was upheld by the Court of Appeal.
In Frederick & Others v Positive Solutions (Financial Services) Ltd the Court of Appeal considered the decision of the High Court to strike out various heads of claim against a company providing financial advice, but to allow a claim in vicarious liability to proceed. The claim in vicarious liability was based on the allegation that an agent had been able to submit false mortgage applications by virtue of his access to an online portal because of his role as agent of the Defendant company and that the Defendant company should therefore be found liable for his actions. The Court of Appeal was asked to consider whether the Defendant company could be vicariously liable for the actions of its agent.
The Court of Appeal found that the wrongdoing was an independent business of the agent and was not part of the agent’s role with the company: it was independent to the company’s business. Whilst the agent’s role with the company may have provided the opportunity for the agent to commit the wrongdoing, this was not enough to make the company vicariously liable for the agent’s actions.
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.