The big freeze: English courts are meeting fraud claims head on


Author: Sophia Purkis


This article was previously published in New Law Journal on 27 March 2015.

The English Courts have never shied away from addressing fraud claims head-on. The courts have responded to the trend claimants to seek increasingly wide forms of freezing orders by taking a flexible approach to compel disclosure (thus assist the preservation of assets) while simultaneously seeking to protect the respondent’s position appropriately.

To reflect corporate ownership of assets, the court recently proposed modifying the standard form freezing order. In Lakatamia Shipping Co Ltd v Nobu Su & Ors [2014] EWHC 275 (Comm), [2014] All ER (D) 132 (Feb), the Court of Appeal held that the standard form order does not bring within an individual defendant’s assets those of a company which he owns and controls. While disposing of such assets might constitute a breach of the freezing order, as it would diminish the value of the individual’s shareholding in the company, the Court endorsed the suggestion in Group Seven v Allied Investments Corp [2013] EWHC 1509 (Ch), [2013] All ER (D) 64 (Jun) that, in appropriate circumstances, additional wording should be added to the standard order “to restrain dealings in assets of bodies corporate that have no or no substantial trading activities and which are wholly owned and controlled by the respondent”.

In FHR European Ventures LLP & Ors v Cedar Capital Partners LLC [2014] UKSC 45, [2014] 4 All ER 79 the Supreme Court considered the perennial question of whether a bribe or secret commission received by an agent is held by that agent on trust for its principal or whether the principal only has a claim for equitable compensation equal to the value of the bribe or commission. The issue is important as, if the bribe is held on trust, the principal has a proprietary claim to it and therefore would have priority over the agent’s unsecured creditors in the event of his insolvency and is further allowed to trace the monies into the hands of third parties as trust property.

The Supreme Court held that where an agent acquires a benefit as a result of his fiduciary position, the general equitable rule is that he will be treated as having acquired the benefit on behalf of his principal and therefore the benefit belongs to the principal. While it was not possible as a matter of pure legal authority to identify the extent of the rule “considerations of practicality and principle support the case that a bribe or secret commission accepted by an agent is held on trust for his principal”. The decision has far reaching applications as the relationship of principal and agent extends to all sorts of fiduciary relationships including company and director, employer and employee and, of course, trustee and beneficiary.

Trustee & beneficiary

On the topic of trustee and beneficiary, in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2014] EWHC 4336 (Ch), [2015] All ER (D) 16 (Jan), the Court of Appeal considered the grounds upon which it has jurisdiction to order a member of a class of beneficiaries under a discretionary trust to disclose details of the trust and trust assets pursuant to disclosure orders contained in a freezing order. It held that the respondent’s interest under the discretionary trust was caught by the prohibition on dealing in the specific order, thus by the disclosure obligation designed to facilitate its enforcement. Case law has extended the interpretation of assets to include those held legally, beneficially or otherwise by the respondent. A freezing order (suitably worded) thus may operate to prohibit dealing with assets in which the respondent is beneficially interested but which are held for him by a third party trustee. The court reasserted its jurisdiction, as a matter of judicial precedent, to make any ancillary order necessary to give effect to a freezing order.

The judgment in Pugachev is also notable for its approval of the lower court’s decision to require an unlimited cross-undertaking in damages from a liquidator of an insolvent company and to reject the claimant’s submissions that the respondent should demonstrate that the freezing order was likely to cause him loss before such order was made.

Fortification

Fortification of the cross-undertaking was also considered and permission to appeal granted. This leads to Energy Venture Partners v Malabu Oil & Gas [2014] EWCA Civ 1295, [2014] All ER (D) 119 (Oct) in which the Court of Appeal for the first time considered the test applicable for fortification of the crossundertaking. It held that a defendant may be entitled to fortification if it can demonstrate that as a result of the injunction (not the proceedings) it has a good arguable case that it will suffer loss, provide an “intelligent estimate” of the same and demonstrate that the risk of the loss is sufficient for the court to require fortification.

While the courts are ever willing to make orders to preserve and facilitate the preservation of assets, they are equally concerned to ensure that a respondent’s position is protected by his being the subject of a clear unambiguous order with suitable, and if necessary fortified protection should it later be held that the order should not have been granted.

Sophia Purkis, Partner, Fladgate LLP (spurkis@fladgate.com)

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