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 2019.
Rogachev v Goryainov involves a dispute about business relationships and ownership of assets. The Claimant obtained a freezing injunction to restrain, inter alia, the proceeds of sale of a Moscow market place in the event that it was sold. At the return hearing, the freezing injunction was discharged on the basis of the Claimant’s material non-disclosure. The Court found that facts which were not disclosed, or were not fairly presented, were of central importance to issues of knowledge, delay and risk of dissipation. It was not enough for documents to be merely exhibited to an affidavit, if the Court’s attention was not drawn to the relevant passages at the hearing of the application. Further, the Claimant had not investigated the facts in sufficient detail and, had full investigations been completed, the Claimant would have been unable to make some of the allegations which were included in the application.
In Tugushev v Orlov (No 2), the Court considered four complaints of material non-disclosure as part of an application to discharge a freezing injunction. The Defendant complained that the Claimant had not fairly presented the following matters: details of his own conviction for fraud; the credibility of the Defendant’s position that the Claimant had divested himself of the shareholding which was key to the subject matter of the dispute; details of previous statements made about the same subject; and details of parallel criminal proceedings being heard in Russia. Three of the complaints were dismissed by the Judge, but the failures to set out the credibility of the Defendants position in respect of the shareholding was material to the case and therefore justified the discharge of the freezing injunction.
However, in Bokhari & Others v Shah and Another, the Court refused the First Defendant’s application to discharge a freezing injunction on the grounds of material non-disclosure because the Claimant had overstated the value of the claim, and therefore the sum to be frozen. The Claimant had corrected the position, reduced the amount to be frozen and apologised for the error which was innocently made. The Court therefore refused to discharge the freezing injunction.
In my Civil Fraud Case Update Q4 2018 I discussed the now discontinued case involving the same parties as Sheikh Mohamed Bin Issa Al Jaber v Basem Bosheh. The dispute between these parties continues in a new action in which the Defendant has obtained a freezing injunction in respect of a counterclaim for repayment of loans totalling £4.5 million. The Court considered that the Defendant had a good arguable counterclaim, and that there was a real risk of dissipation. To this end, the Court took into account the fact that the Claimant had submitted misleading evidence and had backdated documents. However the Court emphasised that a freezing injunction should do the minimum necessary to achieve its purpose. In this case it was possible to limit the scope of the injunction to two properties: one in London and one in Paris, pending the provision of an undertaking by the Claimant.
In The Matter of Grosvenor Property Developers Ltd, the Court considered an application made by the First Defendant for the return of his passport. A freezing injunction had been imposed and the First Defendant had to comply with various Orders, including attending a private examination under s.236 of the Insolvency Act 1986. The First Defendant failed to comply with the Orders and failed to attend the s.236 examination. The liquidators of the company applied to commit the First Defendant for breaching Court Orders and making false statements. The committal application is yet to be heard and the Court decided that it was not appropriate to return the First Defendant’s passport: there was evidence of fraud, the First Defendant received some of the money, and there was clear evidence of asset dissipation. Returning the First Defendant’s passport would undermine the freezing injunction entirely, and the Court refused the application.
NON PARTY DISCLOSURE
I mentioned the decision of the Court in respect of risk of dissipation in the case of State Bank of India & Others v Mallya & Others in my Civil Fraud Case Update Q2 2018. In the most recent decision on this case, the Court made an Order compelling non-parties to disclose information about the ownership of certain assets to allow the Claimant to seek to enforce a £1 billion judgment debt. The Respondents to the disclosure application did not oppose the application, but the Court heard arguments from parties interested in the assets, who had concerns about confidentiality. The Court decided that absent a disclosure order, the consequences for the Claimant would be highly unsatisfactory and that the risk of irrelevant material being disclosed was not fatal to the application.
CONTEMPT OF COURT
The Court imposed a fine of £100,000 on the Defendant in the case of Aspinalls Club Ltd v Han Jeoh Lim. The Claimant had applied to commit the Defendant for contempt of Court for failing to comply with the disclosure requirements included in a freezing injunction. The Court found that the custodial threshold had not been reached and a fine was the appropriate penalty. The Court imposed a fine for each breach and specified that a proportion of the fine was for punishment and a proportion was intended to coerce the Defendant into compliance: therefore the coercive element of the fine could be lifted if the breaches were remedied.
In Astrum Technology Ltd v Jablonska & Others the Claimant applied to commit the First and Second Defendants for breaches of a freezing injunction and an unless order. The Defendants admitted that they had dissipated assets which were subject to a freezing injunction, but denied breaching an unless order that they provide an explanation of payments made. The Court found that there had been no breach of the unless order: it was not possible to establish whether the explanation provided was true, but an explanation had been given and therefore there had been at least an attempt to comply with the unless order. However, the freezing injunction had been breached and the contempt could not be purged so the Court found that there was no alternative but to pass a sentence of immediate imprisonment. The sole mitigating factor was that the Defendants had admitted the breaches and so the Court held that a four month sentence was appropriate.
In N v Royal Bank of Scotland, the Court considered whether the termination of a bank account without notice constituted a breach of contract. The Bank’s terms of business allowed it to close a customer’s account without notice in exceptional circumstances. The Court considered whether the circumstances of the case could be considered exceptional, and concluded that they could: the Bank believed that the Claimant’s clients were engaged in money laundering and that the Claimant’s accounts therefore contained the proceeds of crime. Other, less drastic measures had been tried by the bank, but did not have the necessary effect. The Court found therefore that the bank was justified in taking the steps it took.
However, in the case of Sogexia SARL v R. Raphael & Sons PLC the Court granted a mandatory injunction compelling the Defendant bank to continue to provide banking services to the Claimant. The Court was convinced that the termination of banking services would have caused immediate adverse consequences which could not have been compensated for by damages. Further, the Claimant was making alternative banking arrangements and as such the relationship would only have to be maintained for a short period of time.
BREACH OF TRUST
The claim brought in Robert Sofer v Swissindependent Trustees SA was struck out on the basis that the underlying trust deed excluded the trustee’s liability for loss, except where the loss was caused by intentional acts in fraudulent bad faith. The Claimant had applied to amend his pleadings, but the proposed amended particulars of claim did not do enough to overcome the exclusion clause and did not contain sufficient particulars of the allegations. The application to amend the particulars of claim was refused and the claim was struck out.
Colin Robert Parr v (1) Keystone Healthcare Ltd (2) Keystone Healthcare Holdings Ltd (3) Mark Reynard (4) Medipro Recruitment Ltd involved an appeal against a decision that the Appellant had made an unauthorised profit from the sale of his shares in the first Respondent. The Court held that it was not necessary for the Respondent to show that it would have made the profit. Likewise the Court rejected the Appellant’s argument that the profit had to have been caused by a breach of fiduciary duty, although the Court confirmed that there had to be a degree of connection between the breach and the profit. The Appeal was dismissed.
In (1) Vald Nielsen Holding A/S (2) Newwatch Ltd v (1) Victor Baldorino (2) Richard Bennett (3) Julian Mantell the Court found that false information given in the course of a management buy-out which caused the owner to sell at the wrong time and for the wrong price meant the managers of the company, who all knew that deliberately false statements were being made, were liable in deceit. They were also liable in conspiracy. The loss was calculated by considering the fair value, making a discount for uncertainty, and subtracting the sum actually received.
The Court of Appeal ordered a retrial of (1) Simetra Global Assets Ltd (2) Richcroft Investments Ltd v Ikon Finance Ltd & 11 Others which involved a claim for dishonest assistance, deceit and conspiracy. The retrial was necessary because the trial judge had failed to identify, in a relatively short judgment, the elements of the claim, properly consider the contemporaneous documents including documents which were contrary to the decision he had reached, deal with expert evidence or properly assess the credibility of witnesses.
I mentioned the case of World Proteins KFT v (1) Muhammad Mateen (T/A Gifts of Clay & Zindy MM) (2) Barclays Bank UK Plc in my Civil Fraud Case Update Q2 2019, but at that time the case was against ‘persons unknown’ who had committed an email fraud. In the space of just one quarter the Claimant obtained the names of the parties against whom its claim could be brought, and applied for default judgment on its claim which included declaratory orders. Whilst declarations should not be given without inter-partes argument, in the clearest of cases and where the declaration would not cause injustice to those affected, the Court could make a declaration as part of a default judgment. The claim and the application had been properly served, and the Defendant had not responded. The Claimant had the necessary interest in the funds and it would be unconscionable for the Defendant to retain them. The Court therefore granted the application.
The case of Adam Anderson & Others v Sense Network Ltd involved an appeal by 95 investors who had sought to recover losses sustained following their investment in a fraudulent Ponzi scheme. The Claim was brought against the Defendant whose appointed representative had operated the Ponzi scheme. The Court of Appeal upheld the decision of the lower Court that the appointed representative company had been carrying on its own business and had hidden the existence of the Ponzi scheme from its Respondent principal. The Respondent was not liable for the actions of its representative.