Transactions defrauding creditors

In my civil fraud quarterly round up for Q4 2016 I mentioned the first instance decision in JSC BTA Bank v (1) Mukhtar Ablyazov(2) Madiyar Ablyazov. That decision has been considered and upheld by the Court of Appeal. The Court of Appeal confirmed that, on the facts of this case, even though a debtor knew that there may be claims made against him, although he may have been conscious that a by-product of the transfer of assets by him to a third party would be that those assets would be put beyond the reach of his creditors, this was not a substantial purpose of the transfer and so was not made for the prohibited purpose and so not caught by s.423 Insolvency Act 1986. The Judge at first instance was entitled to reach the conclusion he reached and there was no requirement that he draw adverse inferences from the first defendant’s conduct.

Freezing Injunctions

In the case of Eastern European Engineering Ltd v Vijay Constructions (Proprietary) Ltd the Court was asked to decide whether to exercise its discretion to grant a worldwide freezing injunction following the grant of an arbitration award in favour of the claimant from an arbitral tribunal seated in France where both parties were companies registered in the Seychelles. The Court considered the circumstances in which it was being asked to act and decided that the limited link to the jurisdiction of England and Wales and the fact that the Seychelles Court had discharged the interim measures and was likely empowered to grant injunctive relief over assets located in that jurisdiction, weighed against granting a worldwide freezing injunction. In addition there would be a risk of conflicting orders and, as the case did not involve issues of international fraud, there were insufficient grounds to grant a worldwide freezing injunction. The Court did, however, grant a domestic freezing injunction as there was a real risk that the judgment would go unsatisfied, particularly as the defendant had indicated it would rather be wound up than satisfy the judgment.

Akcine Bendrove Bankas Snoras v Antonov the Commercial Court considered the standard undertaking included in a freezing injunction not to enforce the order outside England and Wales “or seek an order of a similar nature including orders conferring a charge or other security on the Respondent or the Respondent’s assets”. In this case the proceedings commenced by the claimant, in respect of which the freezing injunction had been granted, had been stayed by consent in 2013, and in 2017 the claimant issued proceedings in Lithuania and obtained orders seizing certain assets of the defendant including funds held in bank accounts. The Court was asked to determine whether the issue of those proceedings and the obtaining of those orders was in breach of the undertaking contained in the freezing injunction. The Court adopted a narrow interpretation of the undertaking and held that it should not be concerned with circumstances in which a foreign court exercised its own independent jurisdiction. In this case the orders made were in support of foreign proceedings which did not constitute enforcement of the freezing injunction. The Court also found that, had permission been required to issue the proceedings in Lithuania, it could have been granted on a retrospective basis as the foreign order was not of an oppressive nature.

The Court revisited the question of how a risk of dissipation of assets could be demonstrated in the case of Gulf Air BSC (C) v One Inflight Ltd & 6 Others and confirmed that as yet unproved allegations of fraud could be taken into account as could past conduct. Further, the fact that much of the relevant property was immovable did not mean that there was no risk of dissipation as ownership of assets could easily be transferred.

The importance of full and frank disclosure when applying for an injunction on a without notice basis was confirmed by the Court in Banca Turco Romana SA (in liquidation) (acting through its liquidator Fondul de Garantare a Depozitelor Bancare) v (1)Kamuran Cortuk (2) Serkan Cortuk (3) Yesim Sakarya (4) Hasim Bora Ozerman (5) Fusun Gonen. The claimant was found to have deliberately breached its duty of full and frank disclosure and those breaches were substantial and serious. Such a deliberate and serious breach would almost always result in the injunction being set aside unless the merits of the application were overwhelming and the interests of justice required the continuation of the freezing relief. This was not one of those instances and the injunction was set aside.

In the case of VB Football Assets v (1) Blackpool Football Club (Properties) Ltd (formerly Segesta Ltd) (2) Owen Oyston (3) Karl Oyston (4) Blackpool Football Club Ltd the Court considered whether a freezing injunction should be discharged or varied. The respondent argued that the petitioner had charging orders in place over the respondent’s assets and as such was adequately protected and did not require a post-judgment freezing injunction. The Court dismissed this argument on the basis that the real property which was the subject of charging orders was of insufficient value to satisfy the judgment and confirmed that the charging orders in place over shares held by the respondent only extended as far as the respondent’s beneficial interest in those shares. Only a freezing injunction could prevent the shares from being sold and there was, therefore, a continuing need for the freezing injunction.

The Court considered similar issues in the case of State Bank of India & Others v Dr Vijay Mallya & Others and in particular looked at whether various aspects of a case might impact on the risk of dissipation for the purpose of continuing a freezing injunction. The Court found that offers to settle did not constitute evidence that a defendant intended to satisfy judgment, particularly where there was an on-going challenge to the claim or the judgment. The Court also determined that findings of contempt against a defendant would impact on an assessment of risk of dissipation, in particular where that contempt involved prior breach of court orders not to dissipate assets. Where allegations against a defendant involve issues of dishonesty, those allegations can be taken into account event if they have not been proven. The Court also considered issues of disposal of low valued (de minimis) assets, delay, material non-disclosure and the existence of complex corporate structures as part of its determination of whether to continue the injunction.

The requirement for compliance with an asset disclosure order contained in a worldwide freezing injunction was considered by the Court in PSJC Commercial Bank Privatbank v Kolomoisky with the Court confirming that the purpose of the asset disclosure order is to give effect to the freezing injunction and not to help a claimant investigate the substance of its claim.

Cross-examination on asset disclosure obligations was the subject of the most recent decision in Ilyas Khrapunov v JSC BTA Bank (see civil fraud quarterly round ups Q1 2017 and Q2 2016) with the Court considering Mr Khrapunov’s appeal against an earlier refusal to allow him to be cross-examined by video link from Switzerland. The Court considered new evidence which had come to light that there was an increased risk of extradition proceedings being brought if Mr Khrapunov attended the UK for a hearing, and determined that cross examination by video link was unlikely to be an effective means of obtaining the necessary information. The earlier decision was upheld and Mr Khrapunov is required to attend the High Court of England and Wales for cross examination.

The Court refused to vary an injunction to allow an individual to use money to refurbish his home in the case of Revenue & Customs Commissioners v Malde, as there was no evidence that he had no other assets which could be used. The Court also considered whether the injunction should be discharged due to non-disclosure and found that although there had been non-disclosure of certain information, had it been raised at the initial hearing it would have made no difference and the injunction would still have been granted.

Jurisdiction

The defendants in (1) Republic of Angola (acting by & through the Ministry of Finance of Angola) (2) Banco Nacional de Angola v Perfectbit Ltd & 7 Others sought to challenge jurisdiction on the basis that one of the agreements which formed the subject matter of the claim contained an exclusive jurisdiction clause requiring disputes to be resolved in Angola. The Court found that whilst this might have been decisive in a single defendant case, where there were other defendants against whom continuing claims would rightly be brought in England, and those claims were interlinked, there would be a risk of inconsistent judgments if proceedings were to take place in two countries. The jurisdictional challenge therefore failed.

Contempt of Court

In Henderson & Jones Ltd v Tsimboykas & Others the Court considered how to deal with two respondents who were in contempt of Court for (1) failing to comply with the obligation to disclose assets as imposed by a freezing injunction and (2) dissipation of assets in breach of the injunction. The respondents admitted they were in contempt of Court and, having been served with the injunction whilst in Greece, they returned to the UK to deal with the outstanding matters of the claim. The Court found that the breaches were sufficiently serious to justify a custodial sentence but took into account the respondents’ guilty pleas, apparently genuine remorse and honesty in returning to the jurisdiction in deciding to suspend the sentence for 18 months provided that no further breach took place.

In the case of Maidstone Borough Council v Catherine Small the Court considered what sanction would be appropriate and proportionate in circumstances in which the defendant had breached an injunction (preventing her from entering onto land to undertake work) without having taken legal advice about whether her intended actions would constitute a breach of the injunction. The Court found that the proportionate sanction was a fine, rather than a custodial sentence or suspended sentence.

Bribery

The Court found in Motortrak Ltd v FCA Australia Pty Ltd that as bribery was a separate tort, the defendant was entitled to damages as a result of bribes paid to its managing director by the claimant even where it had affirmed the agreement pursuant to which the payments had been made. The defendant was entitled to claim for loss suffered after the affirmation of the agreement, so the date of affirmation was not something the Court needed to consider or determine.

Arbitral award obtained by fraud

In the case of (1) Anatolie Stati (2) Gabriel Stati (3) Ascom Group SA (4) Terra RAF Trans Traiding Ltd v Republic of Kazakhstan the claimants applied to enforce an arbitral award obtained in Sweden against the defendant state. Kazakhstan applied to set aside the award on the basis that it had been obtained by fraud and directions were given that Kazakhstan’s claim should proceed to trial. The claimants served a notice of discontinuance shortly before disclosure stating that their funders were not funding the proceedings and they, therefore, did not have the ability to continue to trial. Kazakhstan challenged the notice of discontinuance and asked the Court to set it aside on the basis that it had outstanding claims for declaratory remedies which should be decided. The Court agreed: whilst there was no need to provide reasons for discontinuing a claim, the reasons given were not credible; there were benefits to the English Court determining the question of whether the award had been obtained through fraud; and progression to trial was not disproportionate.

In RBRG Trading (UK) Ltd v Sinocore International Co Ltd the Court of Appeal considered the decision of the first instance Court that a claimant could enforce an arbitral award in England despite the fact that in the course of its dealings with the defendant, the claimant had attempted to defraud the defendant through the submission of forged documents. These documents had been produced after the breach of contract which became the subject of the arbitration and the submission of those documents did not cause the claimant’s loss as they were not acted on by the defendant. The decision of the lower Court was upheld: the fraud attempt had failed and therefore did not taint the arbitral award and there was no public policy reason to refuse to enforce the award.

Alternative Service

In the case of Societe General v Goldas Kuyumculuk the Court of Appeal confirmed that exceptional circumstances are needed where service by an alternative method is sought in respect of countries to which the Hague Convention applies.

Breach of Trust and Breach of Warranty of Authority

I refer to my colleague’s article, 'Property Fraud after Dreamvar' which discusses in some detail the combined appeals of P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited and Dreamvar (UK) Limited v (1) Mishcon de Reya (2) Mary Monson Solicitors Limited. For the purpose of this summary the key decisions of the Court of Appeal were:

(1) Despite finding that both Mishcon de Reya and Mary Monson, being the solicitors on each side of the transaction, were liable for breach of trust, the Court did not award Mishcon de Reya relief under s.61 Trustee Act even though it was found to have acted honestly and reasonably. The Court considered the third limb of s.61: whether a trustee ought fairly to be excused for the breach of trust and decided that as Mishcon de Reya was insured it was better able to absorb the loss than the claimant. The Court concluded, based on this reasoning that it would not be fair to the claimant to award relief to Mishcon de Reya. Contribution proceedings were the appropriate way for liability to be determined between the two firms; and

(2) That a solicitor acting for a seller of the property warrants that she acts for the genuine owner where her client is identified in the contract as the real owner. However, for a breach of warranty of authority to be actionable, there must have been reliance on the warranty. All parties accepted there had been no reliance on the warranty in this case.

In the most recent instalment of JSC BTA Bank v Mukhtar Ablyazov the Court established a new weapon against fraudsters in respect of unlawful means conspiracy. Such a claim requires some form of understanding between two or more people, an intention to injure, a form of concerted action using unlawful means which results in damage being caused to the person or entity targeted. Mr Justice Teare’s decision of 11 February 2016, that contempt of court could constitute ‘unlawful means’ for the purpose of the tort of conspiracy to injure by unlawful means, provides a claimant with the ability to claim damages arising from that contempt by way of a claim in unlawful means conspiracy. This decision is currently the subject of an appeal.

In the case of Navig8 Chemicals Pool Inc v (1) Nu Tek (HK) PVT Ltd (2) Inder Sharma (3) Murugaiyan Karthukeyan the Court held that the purported resignation of the defendant company’s sole director was an attempt to evade an obligation on the part of the company to comply with the disclosure requirements of a worldwide freezing injunction. The Court found that the two individuals who were registered as directors of the company, one at the time the injunction was made and the other appointed shortly after the injunction was made, must have known that they had a duty to comply with the order, including the disclosure requirements. They were found to be in contempt of Court for failing to do so. They were committed to custodial sentences despite being absent, on the basis that they had been notified of the hearing and failed to attend, suggesting that an adjournment would not be likely to secure their attendance.

The Court of Appeal decision of Interactive Technology Corp Ltd v Jonathan Ferster & 13 Ors deals with the issue of material non-disclosure in the context of an application for a freezing injunction and the duty of full and frank disclosure such an application requires. The Court looked at issues of non-disclosure and considered whether what was being complained of was sufficiently serious to warrant the setting aside of the freezing injunction. The Court took into account the fact that the appellants had chosen not to apply for cross examination to test the evidence relied upon, and considered whether the documents which the respondent complained had not been included in the application for the freezing injunction were material to the fraud alleged. The Court mentioned the fact that a letter which had not been disclosed was just one in a stream of correspondence and concluded that the non-disclosure was not sufficiently material as to set aside the freezing injunction.

Another recent case relating to freezing injunctions is Stewart v Franey & Ors in which the Court had granted a proprietary freezing injunction over various properties in which the defendants were said to have an interest. The defendants were allowed by the Court to raise funds against the properties to mount their defence as the Court was concerned that otherwise they would be prevented from properly defending themselves.

There have been two early 2016 BVI decisions confirming the BVI Court’s ability to grant stand-alone freezing injunctions (or ‘Black Swan’ orders) in support of foreign proceedings where no other relief is sought in the BVI. Where there are assets in the BVI which might be used to satisfy a prospective foreign judgment, it may be possible to persuade the BVI Court to use its territorial jurisdiction to freeze those assets pending the outcome of proceedings elsewhere.

In Kazakhstan Kagazy plc & ors v Bagland Abdullayevich Zhunus & ors the Court considered whether two defendants could obtain a freezing injunction over the assets of a third co-defendant to support a contribution claim against him. In this particular instance the defendants had not filed contribution notices at the same time as filing their defences and therefore required permission to do so. The case was complicated by the fact that the co-defendant from whom a contribution was sought had reached a full and final settlement with the claimant. The Court refused the application for permission to bring a contribution claim because the defendants were not willing to advance the case against the co-defendant themselves; they wished instead to rely on the case pleaded against the co-defendant in the (amended) particulars of claim.

The Court found that a contribution notice which did not advance its own claim but instead sought to rely on the claimant’s case which was no longer being pursued could not succeed. The Court therefore also refused the application for a freezing injunction on the basis that there was no accrued cause of action.

In Eng King Ltd & Ors v Vincent Petrillo the Court considered the argument that proceedings brought in England and Wales should be set aside on the grounds that as the defendant was not resident here it was not the appropriate forum. The Court’s decision to allow the English proceedings to continue took into account the fact that a person could be resident and domiciled in more than one country, and looked at whether the Defendant’s links to England had the necessary permanence to allow proceedings to be brought here. The deciding factors were that throughout the course of the business entered into between the Claimant and the Defendant, the Defendant was contactable on an English mobile phone and landline, that he remained on the electoral role at a property in England and used that address for formal documents, that his Russian bank account was for a non-resident and showed regular transfers to UK accounts. Also the case was about fraud and would require cross-examination of the parties. Neither the directors of the Claimant nor the Defendant were native Russian speakers so it made more sense for cross-examination to be undertaken in English.

The importance of a carefully worded jurisdiction clause was highlighted in Perella Weinberg Partners UK LLP & Anor v Codere SA . In this case the Court decided that a clause stating that ‘for the benefit of’ one of the parties to a contract, the English Courts would have non-exclusive jurisdiction, was not an exclusive jurisdiction clause.

In Vincent Aziz Tchenguiz & Ors v Grant Thornton & Ors the Court considered the wording of a settlement agreement and whether it might also compromise proceedings against a third party. The Court found that whilst claims in misconduct or deliberate wrongdoing were not listed in the settlement agreement, that was because it was drafted to refer to subject areas rather than specific causes of action. The misconduct and wrongdoing related to the subject area of the matters compromised and as such was caught by the settlement. The Court commented on the fact that the parties had taken legal advice in drafting and entering into the settlement agreement and that the claims they now sought to pursue must have been within their contemplation. This case highlights the need to consider any associated claims you might wish to preserve when entering into a settlement agreement, even if they relate to people or entities who are not party to the agreement.

In Andrew Ian McTear & Anor v Michael Conrad Engelhard & 6 Ors the Court of Appeal revisited issues of relief from sanction in respect of the late service of witness statements and failures in relation to disclosure. The Court of Appeal’s decision focussed on the gravity of the allegations of breach of fiduciary duty against the former administrators of a company and found that where allegations involved such an attack on the integrity of the defendants, their explanations, in witness statement format, would be necessary for a fair trial and that it would not, therefore, be proportionate to exclude them from giving evidence.

In Pioneer Co for Pharmaceuticals Industries v Al-Qerat the Court held that a Norwich Pharmacal Order could be made against a third party bank on the basis that the Claimant had an arguable case that it was the victim of fraud and that the bank had received funds linked to the fraud.

Finally, there have been two recent developments in claims relating to solicitors caught up in mortgage fraud. The first, Purrunsing v A’Court & Co (discussed more here) was a claim for relief under s.61 Trustee Act. There have been numerous cases considering breach of trust in fraudulent transactions, but this was the first decision in which both the vendor’s and the purchaser’s solicitors were found liable for breach of trust for the release of purchase monies in circumstances in which the transaction itself was a sham.

In that respect the equitable duties owed by the vendor’s solicitor as trustee were extended beyond the contractual duties established by the retainer which did not establish a duty to the innocent purchaser. The second case of Chief Land Registrar v Caffrey & Co involved a firm of solicitors duped by their clients into providing false information to the Land Registry. Master Matthews found that solicitors owed a duty of care to the Land Registry in respect of representations made in relation to documents submitted which were in fact forgeries.