Victims of large-scale cross border fraud now have a new weapon in their armoury thanks to Mr Justice Teare’s recent decision in JSC BTA Bank v Mukhtar Ablyazov and Ilyas Khrapunov[1].

The English courts have long been prepared to make imaginative use of company law and equity to afford a remedy to the victim of a fraud. If a fraudster is the controlling mind of a company which engineers a fraud, the courts will usually be ready to pierce the corporate veil to enable a claim to proceed against that sole director, rather than against his company with no assets.

Equally, if the victim’s funds can be located, then the English courts will usually identify a fiduciary duty owed by the fraudster to the victim. That finding enables the victim to trace his money in equity and to reclaim it under a constructive trust, even if the fraudster has since substituted the misappropriated funds[2].

But the fraudster might have fled the jurisdiction of the English courts, and our victim might not be in a position to identify any funds. It is in those circumstances that Mr Justice Teare has now invoked the law of tort to give our victim at least the possibility of a remedy. Where a claimant has secured the benefit of a freezing order; and

can identify an accomplice who assisted the fraudster to breach that freezing order, then

the victim now has a claim in damages against the accomplice for the tort of unlawful means conspiracy.

That is because the accomplice’s assistance to the fraudster in breaching the freezing order places the accomplice personally in contempt of court. It is that contempt which constitutes the unlawful means ingredient of the claim in tort for damages for unlawful means conspiracy.

Mr Justice Teare also found that if the accomplice is domiciled in a Lugano Convention State and the conspiracy was implemented by instructions provided from England and Wales, then the High Court will have jurisdiction to order damages against the accomplice. On that basis the fraudster’s flight from the jurisdiction will no longer prevent the claimant obtaining its remedy. That finding will also prove useful to those advising the victims of cross-border fraud. 

Background to the Decision.

Practitioners will be familiar with the long-running Ablyazov litigation which is considered to be the largest ever fraud case to come before the English courts. Back in 2009 the Claimant, JSC BTA Bank (“the Bank”) obtained from Teare J a worldwide freezing order against its former chairman Mr Mukhtar Ablyazov. During his tenure as the Bank’s chairman from 2005 to 2009 he misappropriated some $10 billion of the Bank’s assets for his own benefit. The Bank obtained judgment for $ 4.6 billion against Mr Ablyazov. He then fled the jurisdiction to avoid facing contempt proceedings for breaches of the worldwide freezing order. 

The Bank’s various actions to enforce its worldwide freezing order against Mr Ablyazov have already produced two case authorities which assist claimants. The first is the ruling of Popplewell J on identifying the point at which a client’s communications with his solicitor lose the protection of legal professional privilege where the advice is sought to further a fraud[3]

The second is the opinion of the Supreme Court which confirms that loan proceeds which can be directed by the defendant to third parties do constitute assets which can be made subject to the court’s standard form freezing order[4]

In this case the Bank issued proceedings against Mr Ablyazov’s son in law, Mr Khrapunov in order to enhance its prospects of obtaining at least something of a recovery,. It pleaded that he had conspired with Mr Ablyazov to breach the worldwide freezing order by producing false and misleading documents in response to the disclosure provisions of the freezing order, He took that step to prevent the Bank from recovering its judgment debts from Mr Ablyazov. 

On the Bank’s pleading that conduct constituted contempt of court which qualified as the unlawful means for a claim for damages against Mr Khrapunov for unlawful means conspiracy. 

Mr Khrapunov applied to Teare J set aside the Bank’s claim form on two grounds. The first ground was that it disclosed no cause of action. The second was that the court did not have jurisdiction over him.

The Nature of Contempt. 

Teare J quoted Lord Neuberger’s dictum setting out the requisite elements for the tort of conspiracy to injure by unlawful means in Revenue and Customs Commissioners v Total Network[5]

“ … an arrangement between two or more parties, whereby they effectively agree that at least one of them will use “unlawful means” against the claimant, and, although damage to the claimant need not be the predominant intention of any of the parties, the claimant must have suffered loss or damage as a result”. 

Mr Khrapunov’s leading counsel submitted that the claim should be struck out because one party to litigation has no right to damages for another party’s contempt. Penalties such as committal are available to the court in the face of a party’s contempt but there is no power to award damages. 

Teare J considered the authorities on contempt which underscored its public nature rather than its being a private law remedy: 

“[T]he law of contempt is not focused on upon compensating litigants who have suffered loss as a result of failures to obey orders of the court. That is the concern of the private law of obligations, typically contract and tort. The law of contempt is focused upon publishing those who fail to obey orders of the court with the aim of thereby maintaining the authority of the court in the public interest. Principle would therefore suggest that the court, when exercising its contempt jurisdiction, does not have power to compensate individuals by an order for damages”. 

That conclusion was supported by CPR 81.2 on the power of the court where a party is in contempt. The White Book permits committal, sequestration and fines. But there is no wider power. 

For those reasons he ruled that the court does not have power to order damages for contempt. However he then cited the decision of the House of Lords (the Supreme Court) in Total Network[6] to the effect that the crime of conspiring to cheat Her Majesty’s Revenue and Customs constituted unlawful means for the purpose of the tort of unlawful means conspiracy. Teare J declared that it was an incremental step justified by the House of Lords’ reasoning in Total Networks to include within the scope of “unlawful means” the serious contempts of court alleged against Mr Khrapunov. The application to strike out on that ground failed. 

The Jurisdiction Question. 

Mr Khrapunov was domiciled in Switzerland, which is party to the Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007 (“the Lugano Convention”). The Bank first attempted to assert jurisdiction under its Article 6 which provides that a person domiciled in one Convention State can be sued in another State if he is one of a number of defendants and one of those other defendants is domiciled in that other State. In this case the Bank would have to establish that the other defendant, Mr Ablyazov, was domiciled in England and Wales. 

That attempt to establish the Commercial Court’s jurisdiction failed. It failed because Mr Ablyazov could not be said to domiciled in the United Kingdom. He had fled to France to avoid facing proceedings for contempt of court.

However the Bank’s second attempt to invoke jurisdiction based on the Lugano Convention did succeed. It relied on Article 5 paragraph 3 which permits a tort claim against a person “ in the courts for the place where the harmful event occurred or may occur”. Teare J referred to a 1978 decision of the European Court of Justice to the effect that this wording encompassed both:  

  1. the jurisdiction where the event giving rise to the damage occurred and also
  2. the jurisdiction where the damage in fact occurred.[7]

On the first limb, all the assets which were subject to the worldwide freezing order against Mr Ablyazov were located in Switzerland, Belize and Russia. Teare J held that the damage was sustained in those jurisdictions because that is where they were wrongly dealt with in breach of the worldwide freezing orders. For that reason the damage could not have occurred in England and Wales.

For the second limb, Teare J considered that the place where the event giving rise to the damage had taken place was where the conspiracy was implemented. That was in this jurisdiction. Mr Ablyazov had lived in England from early 2009 and 2012. That is where he would have received Mr Khrapunov’s assent to the conspiracy either receiving his communications here or his visits here. On that basis dealings in any of the foreign assets which took place whilst Mr Ablyazov was in this jurisdiction were subject to the jurisdiction of the Commercial Court. 

Teare J’s fascinating decision invoking the law of tort is the latest in a line of case authorities in which the English courts have adopted imaginative solutions in order to apply the common law to assist victims of fraud.