Unlawful Means Conspiracy
In my civil fraud quarterly round up Q1-2018 I mentioned the freezing injunction against ‘persons unknown’ made in the ground-breaking litigation of CMOC Sales and Marketing Ltd v Persons Unknown & 30 Ors. Judgment has now been entered against the unknown cyber criminals and the known recipients of funds under a range of different causes of action. The most interesting issue considered in the judgment was confirmation that a Defendant to a claim of unlawful means conspiracy need only know that there was a victim targeted by the conspiracy and need not know the precise identity of that victim.
In the case of Autogas (Europe) Ltd (in liquidation) v (1) Thomas Tadeus Ochocki (2) Timothy Alan Saunders (3) Christina Jean Craig the Claimant claimed compensation from the Defendants for dishonest assistance in a VAT fraud. However, there was no evidence that the Defendants were dishonest or that they had been corresponding about any form of conspiracy. The claim was therefore dismissed.
Duty of Full and Frank Disclosure
The Court set aside a worldwide freezing injunction in Fundo Soberano de Angola v Jose Filomeno dos Santos on the grounds that there had been material breaches of the duty of full and frank disclosure by the Claimant. The Court focussed on three key points:
- The duty of full and frank disclosure enabled the Court to ensure a fair hearing, even where that hearing was held without notice to a Defendant;
- The presentation of the information had to be fair and balanced, particularly in a complex case; and
- The legal teams had an obligation to ensure their clients understood the duty of full and frank disclosure.
Likewise in Galagaev v Ananyev the Court discharged a freezing injunction on the basis that the Claimant had failed to provide information about who had instructed a transaction which it had relied on to demonstrate a real risk of dissipation. Whilst mention had been made of the transaction and the party directing the same, it was not possible to determine that the Court’s attention had specifically been drawn to the fact that it was not the Defendant who had instructed the transaction. Whilst the Court did not find that the Claimant had deliberately withheld the information, it did find that the Claimant had not gone far enough to draw it to the Court’s attention and the injunction was therefore discharged.
Transactions defrauding creditors
The Court of Appeal confirmed in Orexim Trading Limited v Mahavir Port and Terminal Private Limited that it had the power to permit service of a claim under section 423 Insolvency Act 1986 on foreign parties in circumstances in which there was a sufficient connection with England and where England was the appropriate forum for the claim. In this particular case, however, the Court of Appeal upheld the first instance decision refusing permission as there was an insufficient connection to England and Wales.
In BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc (a decision which is subject to appeal) the Court considered whether a misrepresentation by the Claimant had induced the Defendant to enter into a contract. The Court confirmed that the relevant test was whether, but for the Claimant’s misrepresentation, the Defendant would have entered into a contract. Whilst there was evidence that the Defendant might have entered into the contract even without the misrepresentation, that evidence was insufficient to persuade the Court.
In Bennett Gould & Partners Ltd v Charles O’Sullivan the Court found that representations made by an insurance and reinsurance broking Defendant were that his income from broking in previous years was valid and legitimate and that his practices were legitimate. In fact he had concealed commissions he had received and given clients incorrect information. He was therefore liable for all the damages suffered by the Claimant flowing from his deceit.
In Imad Al-Nesnas v (1) Mahmood Al-Najar (2) Faphdev Ltd (formerly Prestige Homes (Developments) Ltd) (3) Prestige Homes Improvements Ltd the Court of Appeal considered whether the first instance Judge was right to grant summary judgment on claims of fraudulent misrepresentation and found that whilst the defence was thin the evidence provided did not justify summary judgment on the issue of fraudulent misrepresentation.
Inter Export LLC v (1) Jonathan Townley (2) Yaroslavna Lasytsya also involved an appeal from a decision relating to misrepresentations. A company director had induced a company to provide goods by representing that her company could afford to pay, and by providing forged SWIFT confirmations. In this case the director was found to be using the appeal process for incorrect purposes as she was trying to use the process to determine the meaning of the judgment including questioning the reasoning of the first instance Judge. The appeal was dismissed: the reasoning was sound and sufficiently clear and the measure of damages had been correctly concluded.
As my colleague Fiona Simpson wrote about in her blog the Court refused an amendment to a worldwide freezing injunction which would have allowed a Defendant to avoid disclosing all of its assets. PJSC Tatneft v Gennady Bogolyubov & Others involved an application by one of the Defendants asking the Court to use its discretion to vary the terms of the disclosure aspect of the freezing injunction on the basis that it was unnecessary for him to disclose his assets above the value of the claim and to do so would cause him prejudice. The Court’s concern about granting such an application was that allowing a Defendant to choose which assets to disclose would enable that Defendant to provide details of only the hardest assets against which to enforce, which contradicted the purpose of disclosure in such circumstances. Likewise, where the value of assets could fluctuate the monitoring of value would be unwieldy and could lead to circumstances in which a Claimant had no comfort that there remained assets sufficient to satisfy a judgment debt.
I mentioned the case of Phoenix Group Foundation & Another v Cochrane & others in my civil fraud round up Q4 2016 and in particular whether a freezing injunction made without notice should have been continued (it was). In the latest reported part of this on-going claim six of the Defendants applied to increase the fortification of the cross undertaking in damages given by the Claimant. The Defendants alleged that they had suffered losses as a result of the freezing injunction and cited various aborted sales and the increased costs of funding as examples. The Court was not satisfied however, that the Defendants had established an arguable case that but for the freezing orders these events would not have happened. Further the Court disagreed with the Defendants’ calculation of losses. The application was therefore refused.
Mr Justice Bryan considered the efforts of a Claimant to serve Defendants with freezing injunctions in A v B and concluded that he was satisfied that the Defendant companies and their directors were aware of the freezing injunction and agreed that personal service should be deemed to have occurred. However, he gave the Defendants a further chance to comply with the disclosure requirements of the orders before determining whether the freezing injunctions should be continued; and
Mr Justice Garnham refused to hear an application for a freezing injunction and a search order in private on the basis that Courts should always sit in public where possible. In A v B the Judge imposed restrictions on the journalists present, but commented that he believed they could be trusted to act responsibly.
Contempt of Court
A Defendant in breach of various aspects of a freezing injunction was fined rather than imprisoned in Absolute Living Developments Ltd (in liquidation acting by its liquidator Louise Mary Brittain) v DS7 Ltd & 12 Ors. The Court struck out some of the grounds on which contempt was being alleged on the basis that they constituted an abuse of process and found that the remaining grounds while serious, did not justify a custodial sentence.
The Court of Appeal considered the issue of committal for contempt of Court where a Respondent is out of the jurisdiction. The case of Vik v Deutsche Bank AG involved committal proceedings brought against a Respondent resident in Monaco under CPR r.81.4 which has extraterritorial reach. The Court of Appeal agreed that the Court did have jurisdiction to hear the committal proceedings against the Respondent and commented that its power to hear committal proceedings derived in the first instance from its inherent jurisdiction. The Court of Appeal also commented that there should be a specific jurisdictional ‘gateway’ for service out of the jurisdiction of an application to commit an officer of a company.
In Popov v Deloitte LLP & Anor the Court considered the costs regime in respect of Norwich Pharmacal applications. The general rule is that Norwich Pharmacal applications are not adversarial and that the Respondent’s costs should be paid by the Applicant who would then seek to recover them from the wrong-doer. However, there were possible exceptions and the Court had a discretion in respect of costs orders. Whilst the relevant Respondent had not acted in bad faith, some of its actions deviated from best practice and involved cryptic answers and unexplained delays. As such the Respondent did not recover its costs in full, and in particular could not recover its costs for the time during which it should have responded to the Claimant.
The Norwich Pharmacal jurisdiction was found to be the most suitable route to the relief sought in Benhurst Finance Ltd & Ors v Colliac. This was in response to an allegation made by the Respondent that the Applicants could have obtained the disclosure they sought via arbitral proceedings in Switzerland. However, the Evidence (Proceedings in other Jurisdictions) Act 1975, which permits a foreign Court to request assistance from an English Court does not extend to requests from private arbitrators and the Arbitration Act 1996 does not permit orders against non-parties. As such the Norwich Pharmacal jurisdiction was the most suitable and the case satisfied the tests.
Stoffel & Co v Ms Maria Grondona is a Court of Appeal case in which a firm of solicitors who had admitted breach of the duty of care it owed to its client, argued that no damages should be recoverable as its client had been involved in mortgage fraud. The Court of Appeal dismissed the solicitors’ appeal: it is not in the public interest that solicitors who are negligent should be able to avoid liability as a result of there being some aspect of illegality in the underlying transaction. It was the solicitors’ negligence which caused the loss.
In PJSC Aeroflot – Russian Airlines v Leeds & Anor the Court found that the Defendants were entitled to costs on an indemnity basis because the Claimant had made serious allegations of fraud which had been entirely abandoned and the claim discontinued with no explanation. The discontinuation of the claim deprived the Defendant of the opportunity to clear his name. The claim was discontinued after the trial had started which was conduct outside the norm.
Much has been written about the Court of Appeal decision in Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd & Law Society (Intervener) including by my colleague Will Hayes so I will mention only very briefly that the appeal was allowed in part. The Court found that whilst a party anticipating a possible prosecution might not know how likely that prosecution was without further investigations, that did not prevent proceedings from being in reasonable contemplation. The fact that a document would ultimately be shown to the opposing party did not mean that preparatory versions did not attract litigation privilege, including documents relating to internal investigations. Communications between an employee and the company’s lawyers would only attract privilege if that employee was tasked with obtaining legal advice on behalf of the company. The Court of Appeal commented that the question of whether interviews with ex-employees would be covered by legal advice privilege was a matter for the Supreme Court.
In Autonomy Corp Ltd & Ors v Lynch & Anor the Court gave directions on the form a witness statement in complex fraud proceedings should take. In particular the Court confirmed that a witness statement should not simply affirm a defence, although it could use sections of the defence, verbatim if desired. The Court also confirmed that any evidence in reply to the other side could only be evidence in reply and could not contain evidence which could and should have been given at the outset.
The Defendant in Nua Interiors Ltd & Ors v Terry Brady (t/a Terry Brady Development) applied to amend his defence to include an allegation of bribery between a contractor and the Claimant’s agent. The Court refused the application on the basis that the information was known a year earlier and should have been included then. The allegations included individuals, including the main contractor’s wife, rather than the Claimant (which would require evidence to be obtained) and the issue of bribes was not central to the dispute. It was therefore not necessary for the Court to have the allegations of bribery before it in order to decide upon the claim.
Arbitral Award Obtained by Fraud
I discussed the first instance decision of Anatolie Stati (2) Gabrial Stati (3) Ascom Group SA (4) Terra RAF Trans Traiding Ltd v Republic of Kazakhstan in my civil fraud round up for Q2 2018. The case has now been heard by the Court of Appeal who allowed an appeal against the setting aside of the notice of discontinuance. The fraud allegations relating to the arbitral award were insufficient to invalidate the award and were therefore incapable of establishing that an enforcement application was a fraud on the English Courts. Further, foreign Courts could have no legitimate interest in the continuation of the proceedings.
Contempt of Court
Kevin Taylor v (1) Van Dutch Marine Holding Ltd (2) Van Dutch Marine Ltd (3) Hendrik R Erenstein (4) Ruud Koekkoek involved a claim for repayment of a loan. A freezing order was made over three vessels owned by the defendants and a disclosure order was made compelling the defendants to disclose assets. The disclosure order was not complied with.
The third and fourth defendants, who were the directors of the first and second defendants, were sentenced to six months’ imprisonment for contempt of Court. This decision was taken despite the defendants’ failure to attend at Court or submit themselves to the jurisdiction.
The third and fourth defendants had deliberately failed to comply with a disclosure order which was endorsed with a penal notice and had failed to provide the claimant with notice of the sale of two major assets.
A Court will only consider an application for contempt in the absence of the alleged contemnor in exceptional circumstances. In this case the third and fourth defendants were ordinarily resident in Monaco and had not submitted to the jurisdiction for the contempt proceedings. However, the defendants had been served with the application and had been given proper notice of the hearing, which gave them an opportunity to purge their contempt. There was no evidence before the Court that an adjournment would result in the defendants’ attendance and the claimant suffered a continued prejudice as a result of the defendants’ failure to provide disclosure as ordered.
The six month sentence was therefore granted, but suspended for one month to allow a final opportunity for the defendants to comply with the order. It is not clear whether the defendants have complied with the order.
Two defendants in Aquarius Holdings Ltd v Barber & Ors applied to discharge or vary a freezing order made against them. The application was based on allegations of material non-disclosure when the freezing injunction was obtained.
The claims were in fraudulent misrepresentation, conspiracy, breach of duty and breach of fiduciary duty. The Court found that the claims were fully arguable, there had been no material non-disclosure, and, given the defendants’ behaviour including the concealment of business relationships from which the defendants obtained profit, a risk of dissipation could be inferred. The freezing order was to remain in place.
A similar application was made in National Bank Trust v Yurov in which the defendant applied to discharge a freezing injunction on the basis that there had been a failure by the claimant to provide full and frank disclosure.
The Court considered three issues in respect of each instance of material non-disclosure:
- The importance of the non-disclosed information;
- Whether the non-disclosure was innocent, whether it justified a form of punishment and, if the latter, whether a costs order would be more appropriate than the discharge of the injunction; and
- Whether the claimant would suffer any injustice if the freezing injunction was discharged.
It was decided by the Court that the undisclosed facts were not critical to the claim or the application; that the non-disclosure was innocent; and that the claimant might suffer injustice if the injunction was discharged as there was a genuine risk of dissipation of assets.
In Financial Conduct Authority v Capital Alternatives Ltd & Ors the FCA was awarded its costs of cross examining a respondent whose assets had been made subject to a freezing injunction on the basis that:
- given the disclosure previously provided by the respondent the cross examination had been necessary;
- the respondent had only been selectively cooperative; and
- as a whole, the cross examination had proved to be a useful exercise which had determined matters which could and should have been revealed much earlier by the respondent.
In Windrush Intercontinental SA v Bitumen Invest A/S the Court found that the continuation of a freezing injunction by agreement should have been recorded in a consent order.
The freezing order contained details of a circumstance in which it would cease to have effect over the whole sum claimed. The sum frozen was expressed in US dollars ($561,000), but the costs award forming the basis of the sum frozen was in £ GBP (£412,000). The Order stated that, if leave to appeal was refused, the injunction would cease to have effect over $412,000 but it appears that the currency should have been listed as GBP.
If the injunction no longer applied to £412,000 then, given the exchange rates at the time, it no longer froze anything, as £412,000 was greater than $561,000.
The proposed consent order corrected the error in currency in the original order and would, therefore have resulted in the freezing injunction having no effect.
The injunction was therefore released and it was found that there was not a sufficient risk of dissipation to justify making a new order.
The claim of Jonathan Edward Marsden v Barclays Bank Plc related to the alleged mis-selling of an interest rate hedging product.
The claim was brought after a settlement agreement had been entered into which purported to be “in full and final settlement of all complaints, claims and causes of action which arise directly or indirectly or may arise out of or are in any way connected with the Swaps”. The claimant argued that no consideration was provided by the bank in exchange for him entering into the settlement agreement, that the agreement was procured by economic duress and that the settlement did not include claims in relation to fraud committed by the bank.
The defendant bank was granted summary judgment. The Court found that there had been consideration and that no illegitimate threats had been made which would constitute economic duress. On the issue of fraud the Court found that as an allegation of deceit had been raised prior to the settlement agreement, the settlement had to be viewed in that context and was interpreted as covering claims in fraud.
The case of Wave Lending Ltd (Claimant) v Ghanshyam Sarup Batra (Defendant) & SFM Legal Services Ltd (Third Party) involved an application to restore a claim following a delay of almost six years.
The claim between the claimant (a mortgage lender) and the defendant (a mortgage broker) was settled in October 2009 after the trial of the claim had begun. In the course of proceedings the defendant issued a Part 20 claim against the firm of solicitors who had acted for him in the transactions. The solicitors defended the claim but went into voluntary liquidation just prior to the trial. The solicitors did not appear at trial and indicated, via their liquidator that this was because of a lack of financial resources. On the date of settlement between the claimant and the defendant, the claim against the solicitors was adjourned with permission to restore.
Almost six years later, the defendant applied to restore the Part 20 claim and list it for hearing. No reasons were given for the delay. The liquidator of the firm of solicitors applied to strike out the claim on the grounds that, inter alia, no good reason had been provided for the claim to be restored, there was overwhelming evidence of fraud by the defendant in relation to the transactions in question, that indemnity insurance was not available because of the allegations of dishonesty involved and that there was no money in the liquidation to satisfy a judgment.
An order was made requiring the defendant to produce a witness statement setting out the history to date and explaining the delay. He did not comply with that order and an unless order was made that unless he produced such a statement, his claim would be struck out.
The Court determined that the defendant had not produced an adequate explanation and was therefore in breach of the unless order. The application to reinstate the Part 20 claim was dismissed and the Part 20 claim was struck out as an abuse of process.
In Eurasia Sports Ltd v Lan-Chun Tsai (aka Martin Tsai) & 10 Ors the Court looked at issues of jurisdiction in circumstances in which the claimant company was incorporated in Alderney and the defendants all resided in Peru at the relevant time.
The claimant’s claim was that the eleven defendants had defrauded the claimant by opening gambling accounts with the claimant, running up debts and neither repaying the debts nor providing the promised security. The claimant established that the High Court in London had jurisdiction to hear the claim on the basis that:
- there was a serious issue to be heard
- London was where the act of allowing the betting had taken place.
- some of the defendants had served defences (rather than challenging jurisdiction) and as the claims were interlinked, involving claims in conspiracy, there was a strong argument in favour of the claims being determined in the same set of proceedings, to avoid irreconcilable judgments.
In the case of AB Bank Ltd v Abu Dhabi Commercial Bank PJSC the Court decided that it did not have jurisdiction to permit service out of the jurisdiction of an application for a Norwich Pharmacal Order.
The claimant bank sought to rely on PD6B to obtain permission to serve an application for a Norwich Pharmacal Order on a bank based in Dubai in order to obtain more information about an alleged fraud. No allegations were being made against that bank, and it was not intended that the bank would ever be a defendant in the proceedings.
Teare J noted that the gateways under PD6B were intended to aid foreign proceedings and did not apply to proceedings within the jurisdiction. Further a Norwich Pharmacal application did not amount to an interim application: the respondent would not be a defendant to substantive proceedings and the relief sought would be the final relief obtained against that respondent.
The Judge also noted that there was a concern that a Norwich Pharmacal Order in the form sought by the applicant might have involved a breach of the laws in the UAE as there were mechanisms in place in the UAE by which the applicant could have obtained the same information.
The Supreme Court considered the issue of whether a defendant will be able to rely on the defence of Illegality in Patel v Mirza.
Mr Patel’s claim was for repayment of the sum of £620,000 which he had lent to Mr Mirza. Mr Mirza’s intention was to use the money to bet on the movement of RBS shares because he believed that he was going to receive insider information about the Government’s investment in RBS. The information was never received and Mr Mirza did not use the money.
Mr Patel sought to recover the money lent and Mr Mirza defended the claim on the grounds that it should fail due to the illegality of the use to which the loaned monies were to be put.
The Supreme Court upheld the Court of Appeal’s decision that Mr Patel was entitled to restitution of the £620,000. In the leading judgment Lord Toulson said that the rationale of the illegality doctrine was to avoid circumstances in which a claim was enforced which was contrary to the public interest or harmful to the integrity of the legal system. He concluded that it was necessary to consider:
- The reason why the underlying illegal act was prohibited and whether that reason would be enhanced by allowing or denying the claim;
- Any relevant public policy; and
- Whether denying the claim was a proportionate response to the illegality.
Lord Toulson said that a claimant who would otherwise have a claim in unjust enrichment should not be prevented from pursuing the claim because the money was initially provided for an illegal or prohibited purpose. The other judgments given agreed with the outcome but for the reason that in so far as restitution was possible a party should be entitled to recover any sum paid, even if that sum was paid to further an illegal arrangement. Lord Mance stated that whilst no one should be entitled to profit from an illegal arrangement, reliance on an illegal arrangement in order to restore the status quo is unobjectionable.
The Court of Appeal has considered the effect of blackmail on without prejudice correspondence in Jonathan Ferster v (1) Stuart Ferster (2) Warren Ferster (3) Interactive Technology Co Ltd.
A claim had been issued for breach of fiduciary duty against the respondent director of the third appellant company. The respondent issued a separate claim in unfair prejudice stating that the first claim had been brought for improper purposes – to compel him to buy the first and second appellants’ shares in the company at price above market value.
An offer had been made, in an email sent shortly after a failed mediation, that the respondent buy the first and second appellants’ shares for a certain price on the basis that there had been wrongdoing, as the respondent had failed to disclose a bank account, and that a swift settlement would avoid the need for committal proceedings. The Judge at first instance considered this to be an attempt at blackmail therefore falling within the unambiguous impropriety exception to privilege. The respondent was entitled to amend his unfair prejudice petition to refer to the contents of that email.
The Court of Appeal held that the critical issue was whether the privileged occasion (of mediation) had been abused. There might have been good reason to seek to commit the respondent, but the threat of committal proceedings should not have been used to seek to increase the value of the appellants’ shares. The email was worded to suggest that the appellants wanted more for their shares because of their ability to start committal proceedings not because of any genuine increase in the value of those shares. The price offered was not linked to the impropriety and the price sought for the shares could easily be redacted in the exhibited email, therefore maintaining the without prejudice aspect of the email relating to the mediation negotiations.