This quarterly civil fraud update provides a summary of reported decisions handed down in the courts of England and Wales in the period July - September 2021.
BREACH OF TRUST
The Court of Appeal in Dixon Coles & Gill v Baines considered the defence provided by s.21 Limitation Act 1980 in respect of fraudulent breaches of trust. The Appellant law firm appealed against a finding that two partners were party or privy to fraudulent breaches of trust committed by a third partner and were, therefore, unable to rely on a limitation defence. The appeal was allowed: it had been accepted that the two partners were innocent and the Court of Appeal drew a distinction between partners being liable for each other’s wrongs and being party or privy to those wrongs. In circumstances in which the Court at first instance had accepted the innocence of the two partners, it was not open to also treat them as being party or privy to fraudulent breaches of trust: that would require facts to be proved showing them to be implicated in the fraud. As such, the two partners were entitled to rely on the six year limitation period as a defence to the claim.
CONTEMPT OF COURT
In Truell v Zalinska the Court refused to grant a committal order. Various amounts had been debited from the Defendant’s bank account while she was subject to a freezing injunction. The Defendant apologised for those payments for which she was responsible, and the Court determined that this was a sufficient purge of her contempt. The Defendant’s drug and alcohol dependency and her mental health problems were taken into account, as was her evidence that use of her debit card was by third parties who had pressured her and threatened her with violence.
The Court refused to set aside the dismissal of an application to commence committal proceedings for contempt of court in Banfield v Mann. The Applicant argued that a practice direction in respect of contempt of court which enabled the Court to strike out a committal application had been revoked so that this was no longer available. The Court disagreed: the power in CPR 3.3 provided the power to terminate proceedings at any time under the Court’s inherent jurisdiction.
The Defendant in Bonnier Books UK Group Holdings Ltd v Johnson was found to have been in contempt of court. The Defendant had failed to comply with an order (which included a penal notice) requiring him to deliver up certain items or provide a sworn witness statement that he did not have those items. This failure to comply continued until he eventually filed a witness statement. The application was heard in the Defendant’s absence: he had been properly served with notice of the hearing and had given no explanation for his non-attendance, but as he had admitted the breaches in correspondence the Court concluded that the Defendant would not be disadvantaged by not being able to present his account of events. The Court was satisfied beyond reasonable doubt that the Defendant had deliberately breached the order until his belated compliance.
The Court likewise found in Farrer & Co LLP v Meyer that by failing to attend Court to provide information about her assets a judgment debtor was in contempt of court. However, rather than imposing a suspended order for committal, the Court ordered the judgment debtor to attend a further hearing for questioning on her assets, stating that if she failed to attend a second time the Applicant could apply for a custodial sentence to be imposed.
In Pharmagona Ltd v Taheri the Court refused to set aside an order striking out the Claimant’s unissued application for contempt. The breaches complained of were the obtaining by the Defendants of loans arranged for the purpose of helping family members in Iran. The Claimant argued that this was a breach of the freezing injunction it had obtained against the Defendants. The Court said that it was arguable that the loan arrangement was a breach of the freezing injunction, there was evidence which suggested that the Defendants never had any beneficial interest in the loan monies and therefore that breach was at most technical.
The Court of Appeal considered the sentence handed down in Su v Lakatamia Shipping Co Ltd which I discussed in my civil fraud updates of Q4 2019 and Q1 2021 for numerous contempts of Court committed over a nine year period. The Court of Appeal considered a custodial sentence of two years appropriate for 20 breaches of court orders.
In the same case the contemnor’s appeal against the lower Court’s refusal to discharge a passport order on the grounds that it compelled him to commit an offence under the Immigration Act 1971 by remaining in the UK was dismissed by the Court of Appeal. The Court of Appeal considered that the personal consequences of the continuation of the Order were overstated and the need for the contemnor to be cross-examined on his means outweighed those consequences.
ABUSE OF PROCESS
In WWRT Ltd v Tyshchenko the Defendant applied for a stay of proceedings on the basis that there were related proceedings in Ukraine. The Court refused the application: the argument should have been raised at an earlier stage if it was to be raised at all. There was a public interest in the finality of litigation including interlocutory hearings. Further, the English Court had been seized first. The application was an abuse of process.
The Court again considered the nature of crypto assets in Fetch.AI Ltd v Persons Unknown, this time looking at the issue of where crypto assets could be regarded as being located. The first applicant was a company registered in England and Wales and the Court was willing to treat the crypto assets as being located here. The Court also considered the types of claims which were to be brought and was satisfied that they were justiciable in England. The Court also concurred with various prior decisions, concluding that crypto assets are a type of property, but in this instance, by concluding that they were chose in action.
The case of Ashraf v Sattar also involved a dispute about crypto-assets. In this instance the Court heard requests to increase the weekly living allowance under a freezing injunction and considered submissions by the Claimant that the Defendants had given inadequate disclosure of their crypto asset holdings. The Court agreed to an increase in the weekly allowance and ordered that further disclosure be given within 48 hours, but was not satisfied that it was necessary to make an order for cross examination.
The Court continued a freezing injunction in the case of Barefoot Farms Ltd v Revuckas despite the existence of a restraining order which, the first Respondent argued, meant there was no risk of dissipation. The Court took into account the fact that the restraining order was dealt with by the police and the CPS and did not specifically protect the Claimant. There was no good reason to decline to continue the freezing injunction. The Court also ordered that the Land Registry undertake a search of the index of proprietors’ names in respect of the Respondents.
In Integral Petroleum S.A. v Petrogat FZE (which I discussed for the first time in my civil fraud update of Q1 2020) the Court similarly agreed to continue a freezing injunction obtained by the Claimant. The Claimant had obtained an arbitral award which had not been paid, the corporate defendant had transferred its funds to another company and had refused to disclose the name of the recipient company. Even though the corporate defendant was asset-less the Court considered there remained a risk of dissipation and continued the injunction.
There was also a continuation of a freezing injunction in Medico Services Ltd v Kaur in circumstances in which it was not clear that the Defendant had been personally served. However, the Court only continued the injunction until a further return date to give the Claimant time to effect service or explain what attempts had been made.
The Court made a similar order in Refinaria de Petroleo Riograndense SA v Eclipso Ltd, continuing a proprietary freezing injunction to enable the Claimant to effect personal service on three of the Defendants.
The Court varied a freezing injunction in Data Housewards Ltd v Sharma where it had become clear as the case progressed that the value of the claim against the Second Defendant was more than was initially calculated. It was no longer disproportionate to take the step of freezing the Second Defendant’s assets.
In Tonstate Group Ltd v Wojakovski the Court refused to order two legal firms to pay the Applicant’s costs of an application for disclosure of their client’s source of funding. The Court had found that there had been no breach of a freezing injunction and no misconduct on the part of the firms. Instead the Court ordered the Applicant to pay the firms’ costs on an indemnity basis as a result of the highly contentious manner in which the application had been brought.
The Court granted part of an application requiring a Defendant to provide financial information which was required under a freezing injunction, but refused an application to require the Defendant to pay money into Court failing which his Defence would be struck out. The conduct of the Defendant in Circumference Investments (Europe) Ltd v Martin was serious and required sanction, it did not justify an order for payment into Court.
In PJSC Commercial Bank Privatbank v Kolomoisky (discussed in my civil fraud case updates of Q2 2018 and Q4 2018) the Court set aside a confidentiality club which applied to the disclosure of assets given under a freezing injunction. The confidentiality club had been imposed to offer protection to the Defendants pending the outcome of their application to discharge the freezing injunction. That application had been rejected and, following the decision of the Supreme Court, had been finally determined with no prospect of further appeal. The Defendants had given no evidence of a risk of harm if the confidentiality provisions were lifted such that would justify the continuation of the order.
The Court confirmed in XX & Ors v YY & Ors that the purpose of the standard exception in freezing and proprietary injunctions which permitted reasonable expenditure on legal fees was to ensure such expenditure did not constitute contempt of Court. It did not protect lawyers who received fees from a possible claim in constructive trust and there was no jurisdiction to provide such protection as it would extinguish a Claimant’s rights.
In Phoenix Group Foundation v Cochrane (first mentioned way back in my case update of Q4 2016) the Court ordered a Claimant to pay a third party’s costs on the basis that they were covered by an undertaking contained in a freezing injunction to pay the reasonable costs of any non-parties incurred as a result of the injunction. The non-party was not entitled to the costs of the investigations into what assets he had an interest in, merely the consideration of whether that asset was caught by the freezing injunction. Whilst both activities were necessary because of the existence of the injunction, the former would have been necessary at some point in any event.
The Court in J&M Contractors v Till allowed the alternative service of a freezing injunction on the condition that the Order was also served on the Respondents’ conveyancing solicitors. The Court considered this was the best way to increase the visibility of the proceedings.
The Court of Appeal in AA v BB considered whether a decision by a lower Court to continue freezing injunctions despite the existence of criminal restraint orders was an error and determined that it was not. Whilst the existence of criminal restraint orders was a factor to take into account, a criminal restraint order was not a protection against dissipation in respect of a civil claim.
In PJSC Bank Finance and Credit v Zhevago the Court stayed proceedings on the basis that the most appropriate forum for the claim was the Ukraine. All of the witnesses bar one were likely to come from the Ukraine, the dispute was subject to Ukrainian law, and the costs would be higher if the claim was run in the UK as there would be a requirement for translation of most of the relevant documents. The Court considered whether an application to strike out part of the claim made at the same time as the request for a stay meant the Defendant had submitted to the jurisdiction and concluded that by making both applications at the same time the Defendant’s conduct was at best equivocal, rather than the wholly unequivocal conduct which was required to waive the right to challenge jurisdiction.
The Court refused an application to withdraw an acknowledgement of service in Abu Dhabi Commercial Bank PJSC v Shetty (first mentioned in my case update of Q2 2021). Five of the six Defendants had challenged jurisdiction, and the sixth wished to do the same. Whilst there were case management reasons for all Defendants to be placed on the same footing, that was not a good enough reason to permit withdrawal of an acknowledgement of service where a Defendant had a change of heart.
BREACH OF DIRECTORS' DUTY
In Ceredigion Recycling and Furniture Team v Pope the Court found that two directors who had transferred a company’s freehold property to providers of self-invested personal pensions for their own benefit had acted in breach of their duties as directors. The actions could not be attributed to the company.
In Victus Estates (2) Ltd v Munroe, Shawbrook Bank Ltd v Victus Estates (2) Ltd, OneSavings Bank Plc v Benjamin, Benjamin v Victus Estates (1) Ltd the Court of Appeal considered the effect of forged transfer documents on a mortgage lender’s interest. Where two properties had been transferred by TR1 forms which featured signatures which had been forged by one of the owners those TR1s were not valid and did not entitle the purchasers to be registered as proprietors. The Court of Appeal found that the effect of those documents was that the interest of the co-owner who had genuinely signed the TR1 was conveyed to the purchasers. Any charge granted over the properties by the purchasers took effect over those purchasers’ equitable interests in the properties, even if they could not be registered. Whilst the Court of Appeal considered the fact that this conferred a benefit on the purchasers (who were involved in the fraud) but determined that the integrity of the legal system and public morality were not offended by this effect, as the alternative would mean a greater benefit would have been conferred on the transferor who had forged the signatures.
The Privy Council considered the reflective loss rule in Primeo v Bank of Bermuda and helped to clarify two points which had not been determined by Marex. The first point of clarification was the date on which the status of a party was considered, with the Privy Council determining that the status of a party (as a shareholder or former shareholder) should be assessed at the time the loss was suffered (rather than at the time the claim was made). This is important because the rule against reflective loss only applies to claims by shareholders for losses suffered qua their position as shareholders. The Privy Council also affirmed the decision in Marex that the rule against reflective loss will only apply where the shareholder and the company have the same claim against the same wrongdoer.
In Maranello Rosso Ltd v Lohomij BV the Court was asked to review the doctrine of ‘sharp practice’ in the context of interpreting a settlement agreement. The Court considered that: normal principles of construction applied to the interpretation of settlement agreements; there should be an enquiry into whether a party intended to give up rights of which it was unaware; the private knowledge held by one party but not the other was irrelevant to the interpretation of a settlement agreement; and it was arguable that there was an equitable ‘sharp practice’ principle which would, in certain situations, prevent a party from relying on a settlement if they knew the other party had a claim and knew that the other party was not aware of the claim. The Court considered the wording of the settlement agreement in question and determined that the allegations which the Claimant now wished to raise fell within the scope of the settlement agreement and that there was no reason why claims based on fraud or dishonesty needed to be expressly stated to be covered if a settlement was intended to cover them. There was no reason to go beyond the usual principles of construction in order to interpret the settlement agreement and no need to consider the scope of any principle of ‘sharp practice’.
TRANSACTIONS DEFRAUDING CREDITORS
The Court considered the effect of a trustee in bankruptcy’s failure to properly serve applications alleging transactions at an undervalue and/or defrauding creditors in Rufus, Re. The Court concluded that the Respondent had waived his right to rely on the breach of the rules relating to service as he had taken significant steps in the proceedings and by so doing he had submitted to the jurisdiction.
CAUSING LOSS BY UNLAWFUL MEANS
As discussed by my colleague Anna Metadjer in Secretary of State for Health v Servier Laboratories Ltd the Supreme Court considered the ‘dealing requirement’ of the tort of causing loss by unlawful means. The dealing requirement is that the unlawful means should have affected a third party’s freedom to deal with a claimant. The Supreme Court found that the dealing requirement is a necessary ingredient of the tort and that it had not been shown anything to suggest that it was appropriate to depart from precedent on this matter.
UNLAWFUL MEANS CONSPIRACY
In the third mention of Lakatamia Shipping Co Ltd v Su in this round-up the Court ruled that the defendants were liable in unlawful means conspiracy for the deliberate breach of a freezing injunction and attempts to conceal the same in respect of the sale of an aeroplane and properties in Monaco and the paying away of the proceeds of sale. The Court also found that the use of a company controlled by one of the defendants to receive the funds was an attempt to impede enforcement of a judgment debt (a ‘Marex’ tort).
In R v Jones (Sally Ann) the Court of Appeal (Criminal Division) considered, amongst other things, whether documents obtained pursuant to a Norwich Pharmacal order could be used in a private prosecution in circumstances in which the Appellant had not been identified as a potential Defendant in such an action. The Norwich Pharmacal application had been made inter partes and the Appellant had been represented by experienced criminal solicitors. The possibility of criminal proceedings had been raised in the application. The Court of Appeal concluded that the Appellant must have known that the documents disclosed would incriminate her, and found that she had not been misled by the terms of the Norwich Pharmacal application. It was not necessary for the Respondents to have sought express permission to use the documents against the Appellant.