International Fraud & Asset Tracing 2021

Last Updated April 30, 2021

England & Wales

Law and Practice

Authors



Seladore Legal Limited is a disputes-only law firm specialising in major and complex litigation and arbitration, with a particular emphasis on multi-party, multi-jurisdictional disputes. By specialising solely in litigation, the firm minimises the prospect of commercial and legal conflicts of interest. Seladore Legal Limited is made up of experienced litigators who have previously worked at other top-tier UK, USA and international law firms and who regularly act in significant commercial disputes across a range of different sectors.

While the law of England and Wales does not provide a specific, single cause of action of civil or commercial fraud, it has developed a flexible and creative approach to assisting victims of fraudulent behaviour. The typical claims utilised by a victim of fraud are deceit/fraudulent misrepresentation and breach of trust/breach of fiduciary duty.

Deceit/Fraudulent Misrepresentation

The tort of deceit or fraudulent misrepresentation is a cause of action available where Party A makes a false representation to Party B either by words or conduct, knowing it to be untrue (or being reckless as to whether or not it is true) and intending Party B to rely on that representation. If Party B does so, and suffers a loss as a consequence, then Party A will be liable to Party B. 

Importantly, there is also a statutory action for misrepresentation under the Misrepresentation Act 1967. A claim under the Act is often preferable to bringing an action in fraud because:

  • it reverses the burden of proof by requiring Party A to show they had an honest belief in the truth of the representation at the time it was made;
  • it does not require Party B to prove fraudulent conduct (which is a high hurdle in English law); and
  • it still allows for a measure of damages commensurate with a claim in fraud, (ie, Party B is allowed to recover all losses flowing from the affected transaction, as opposed to, eg, a claim in negligent misstatement, where Party B is only allowed to recover losses that are the direct consequence of the misstatement). 

Breach of Trust/Breach of Fiduciary Duty

A "trustee" or "fiduciary" relationship often plays an important part in fraud claims. It exists where one person (the "trustee" or "fiduciary") has undertaken to act for or on behalf of another person (the "beneficiary" or "principal") in circumstances that give rise to a special relationship of trust and confidence.  Common examples may be the relationship between a trustee and beneficiary, a solicitor and their client, a company director and the company, a financial adviser and the investors they are advising, an agent and their principal, or a business partner and their co-partner(s). 

Where such a relationship exists, the trustee or fiduciary must act with outright loyalty towards their beneficiary or principal. In broad terms, this means that they must act in good faith, must not make a profit out of the relationship of trust, and must not put themselves in a position where their duty may conflict with their own interests.   

Unsurprisingly, fraudulent behaviour (such as misappropriation of assets) in the context of one of these relationships will amount to a breach of trust/breach of fiduciary duty. 

There are a number of remedies available for a claim of breach of trust or breach of fiduciary duty. Most commonly, the trustee or fiduciary will be required to compensate the beneficiary or principal for losses suffered, or to "account" for any losses and (potentially) profits made as a result of the breach. The beneficiary or principal may also be able to "follow" or "trace" specific trust property or proceeds and assert an equitable interest over them (see 1.5 Proprietary Claims against Property). 

Other Causes of Action

Third-party involvement

English law also provides separate causes of action against third parties who assist or facilitate fraudulent acts (eg, unlawful means conspiracy and dishonest assistance). These are discussed in detail in 1.3 Claims against Parties Who Assist or Facilitate Fraudulent Acts.

Specific insolvency claims – "wrongful trading" and “transaction at undervalue”

Additionally, there are specific claims that arise in an insolvency setting. In particular, English insolvency law provides a specific claim available to liquidators of "wrongful trading", which will occur where a company’s director(s) continues to trade in circumstances where they know (or ought to have known) that there is no reasonable prospect of the company avoiding insolvency proceedings. A director who knowingly fails to exercise due care may become personally liable to the company/its creditors for the losses they cause.   

Steps may also be taken where a company enters into a "transaction at undervalue" whereby assets are gifted or sold to third parties at a price that is significantly below their actual value. If the company subsequently becomes insolvent, a court may order the reversal of any such transactions that took place in the two years prior to the insolvency. 

Civil Claim

A civil law claim may be brought by a person who discovers that their agent or employee has been bribed or has received a secret commission. In bringing such a claim, the claimant must show:

  • a payment was made to the agent/employee of the briber’s counterparty;
  • the briber knew that the recipient was the agent/employee of the counterparty; and
  • the payment was not properly disclosed to the counterparty. 

Where that occurs, English law makes an irrebuttable presumption that the party making the payment did so to cause the agent/employee to prioritise their interests over those of the counterparty, and that the agent/employee was actually influenced by the bribe. 

It should be noted that the agent/employee cannot avoid liability by arguing that the payment is governed by (and has no adverse consequences under) foreign law. This is because the English courts will not apply a foreign law where doing so conflicts with the principles of domestic public policy.

Damages and/or Equitable Remedies

If a claim of bribery is successful, the claimant can seek damages and/or equitable remedies (such as requiring the defendant(s) to account for, or return, any profits made). The amount recovered will generally be at least the value of the bribe (even if there is no other identifiable loss) on the basis that English law deems that the agent/employee holds the bribe on a "constructive trust" for the benefit of their principal/employer. This is significant as it provides the principal/employer with a proprietary interest (see 1.5 Proprietary Claims against Property) over those funds (and therefore the asset is not available to creditors of the agent).

Dishonest Assistance

The wronged party may also claim for dishonest assistance (see 1.3 Claims against Parties Who Assist or Facilitate Fraudulent Acts) against the person who paid the bribe (assuming the party receiving the bribe is a trustee or fiduciary) or for procuring a breach of contract (on the basis that an agent/employee will typically breach the terms of any contract if they receive a bribe). In doing so, the wronged party may be able to rescind all transactions between them and the party paying the bribe (or the company they are associated with).

Injury by Unlawful Means

In some circumstances, it may be possible for a wronged party to bring a claim for conspiracy to injure by unlawful means (see 1.3 Claims against Parties Who Assist or Facilitate Fraudulent Acts) against a third-party competitor that it suspects of bribery (ie, in circumstances where Party A suspects that its competitor, Party B, has paid bribes to a potential customer, Party C, such that Party C agrees to do business with Party B and not with Party A). Such claims are difficult to substantiate, as it is insufficient to show that the bribe was merely likely to injure Party A – rather it must be shown that Party B had an intention to injure Party A.

Separate Criminal Offences

Note there are also separate criminal offences for bribery, which arise under the Bribery Act 2010.

In some circumstances, English law allows a wronged party to claim against third parties who do not owe any pre-existing duties. These claims will be particularly important where the primary wrongdoer (ie, the one who owes specific, pre-existing duties to the victim) is out of the jurisdiction or does not have assets with which to satisfy a claim. Three causes of action are most relevant in such circumstances.

Three Most Relevant Causes of Action

Dishonest assistance 

A claim in dishonest assistance will exist where:

  • a breach of trust and/or fiduciary duty has occurred, causing loss (see 1.1 General Characteristics of Fraud Claims);
  • the third-party defendant assisted in that breach of trust or breach of fiduciary duty; and
  • the third-party defendant acted dishonestly in doing so. 

In these circumstances, the third party will be deemed to have acted dishonestly where they have not acted in the way an honest person would have done in the circumstances. This is largely an objective question, which asks whether the third party’s actions fell below the standard expected of ordinary honest people, regardless of whether or not they knew it fell below that standard. Importantly, it is not necessary for the wronged party to show that the trustee/fiduciary was also dishonest in breaching their duty.   

Where a claim of dishonest assistance is successful, the third party is liable to the wronged party as though they were a trustee or a fiduciary. This means they can be ordered to account for any profits, as well as be required to pay damages. 

Knowing receipt

Unlike dishonest assistance, a claim for knowing receipt focuses on a third party who actually receives misappropriated property or proceeds, knowing that they were provided in breach of trust or breach of a fiduciary duty.  The third party’s state of mind must make it unconscionable for them to retain the benefit of the property or proceeds (even if they have not acted dishonestly). 

As with dishonest assistance, the third party is liable to the wronged party as though they were a trustee or a fiduciary. 

Conspiracy

A wronged party may also have a claim in the tort of conspiracy where a number of parties conspired to injure them. This is a helpful tool to a potential claimant as it allows potential defendants to be grouped together, even where they may not have a direct cause of action against all of them.

There are two forms of conspiracy. First, "lawful means conspiracy", whereby the claimant must show that notwithstanding the fact that lawful means were used, the defendants’ predominant intention was to injure them. This form of conspiracy is rarely seen in practice. The second, more common, form is "unlawful means conspiracy". The fact that the defendants may have utilised unlawful means lowers the evidential burden for the claimant. In particular, they need only show that the defendants intended to injure them, even if that was not the predominant intention. For this second form of conspiracy, "unlawful means" exist where the wronged party has an actionable claim against one or more of the defendants, or where criminal conduct is involved.   

Misappropriation

In addition, as noted below, in certain circumstances it may be possible to argue that an asset in the hands of a third party is held on constructive trust for the victim of fraud (eg, where an asset has been misappropriated in breach of fiduciary duty).

The limitation period for the wronged party in a fraud claim is typically six years, starting from when they either discovered the fraud or when they could have done so using reasonable diligence. 

Importantly, in the context of fraud (whether in relation to trust property or otherwise), where the defendant has deliberately concealed any fact that is relevant to the victim’s ability to bring a claim, the limitation period will not begin to run until that concealment has been discovered, or could reasonably have been discovered. 

An exception to the general six-year rule also exists in relation to trust property. Specifically, there is no set limitation period in respect of (i) any fraudulent breach of trust, or (ii) any action to recover trust property that the trustee has taken for themselves. This allowance relates only to trustees who have assumed responsibility for trust property (and therefore does not apply to trusts that arise solely at the discretion of the courts). Furthermore, dependent on the remedy that is being sought, the court may still have discretion to say that there has been unreasonable delay and that it would be unfair to the trustee to allow the claim to proceed. 

Where property has been fraudulently obtained and transferred to a third party, the victim may have a proprietary claim in respect of that property (or its proceeds), unless it has been obtained by a third party in good faith, for value, and without notice of the relevant fraudulent activity.

A proprietary claim will be particularly significant where the third party or the wrongdoer is insolvent as it enables the wronged party to rank ahead of general creditors.   

A proprietary interest also becomes particularly relevant (and particularly helpful to a victim of fraud) where a fiduciary or trustee has made a financial gain through a wrongful act, as this will enable the victim to obtain that gain for themselves. By way of example, where a financial adviser invests in an opportunity alongside their client, but fails (in breach of their fiduciary duty) to disclose a conflict of interest, the client may be able to claim the financial adviser’s share of the profits from the investment (in addition to retaining their own profit). In this regard, a proprietary interest can dramatically increase the value of any claim.

"Following" and "Tracing" Transferred Property

The proprietary remedies available are assisted by the complicated evidential rules of "following" and "tracing" transferred property. These are processes by which a claimant can identify the relevant property or proceeds that will form the focus of the claim. In broad terms, the claimant generally has a choice to either "follow" the relevant property and recover it from the third party (assuming they are not a good faith purchaser, for value, without prior notice), or they can instead "trace" and recover any proceeds or new assets the fraudster obtained from the third party. 

In the event that the proceeds of fraudulent activity become mixed with other funds, there are complicated rules for identifying what the wronged party is entitled to (either in terms of a share of the fund or any asset purchased with it). Generally, however, these rules favour the wronged party.

Claims in England and Wales are governed by certain "pre-action protocols" that set out the steps that the courts will expect parties to take prior to commencing proceedings. These steps include setting out the claim in full, providing the other side with an opportunity to respond, considering whether the dispute is suitable for alternative forms of dispute resolution such as mediation, and so on. While there is no specific protocol for instances of fraud, an allegation of fraud is serious and has far-reaching consequences even if it is not proved. Given this, any allegation of fraud must be clearly and accurately pleaded (as discussed in 2.7 Rules for Pleading Fraud).   

Note that the pre-action protocols do not apply in respect of "without notice" applications, although there are other steps that must be taken in such circumstances (see 2.4 Procedural Orders).

A wronged party may seek an interim "freezing injunction" that prevents a defendant from disposing of, or otherwise dealing with, their assets. This is intended to prevent the defendant from hiding, moving or dissipating their assets in a way that makes them "judgment-proof". Such orders typically also require the defendant to promptly disclose a list of their assets (which they are subsequently required to verify by way of affidavit). Failure to comply with the order may result in the defendant being in contempt of court, which can result in the defendant being fined or (in serious cases) imprisoned. Failure to comply is also likely to affect the defendant’s credibility and may have other consequences for their substantive defence of the claim. 

Freezing orders are "in personam" orders, meaning they operate over individuals, rather than over specific assets. This is significant as it means they do not only limit dealings with assets that are located within England and Wales (a "domestic freezing order"), but also dealings with assets that are located overseas (a "worldwide freezing order" – discussed in greater detail below). Furthermore, a freezing order can extend over various types of assets (normally bank accounts, shares, physical property, but also things like goodwill) provided that the defendant has a legal or beneficial interest in them. Exceptions to the freezing order (eg, reasonable living costs, legal fees, ordinary business transactions, etc) are typically defined. 

In certain cases, it may be possible to obtain a proprietary injunction where a party claims a proprietary interest in a specific asset. There will generally be very limited exceptions to such an order. 

An application for a freezing order is made as a standard application to the court but is a complex application requiring a party to discharge its duty of full and frank disclosure (discussed below). The court fees associated with this are reasonably modest (at the time of writing, the fee for a without-notice application was £100). However, in making such an application the claimant will typically need to provide (i) an undertaking to commence a claim shortly after the injunction hearing is determined, and (ii) a "cross-undertaking in damages", meaning they must compensate the defendant for any loss suffered if it is later shown that the injunction should not have been granted.

Remedies Assisting with International Claims

In relation to preventing the dissipation of overseas assets, the English courts have developed two remedies that assist with international claims.

Worldwide freezing injunctions

The English courts have shown a willingness to be dynamic in respect of freezing injunctions with an international aspect. Examples of this include orders being granted in circumstances where the defendant has no significant presence in England and Wales, and orders preventing a defendant from dealing with their overseas assets unless they transferred a specified value of assets to England and left them there for the duration of the order. 

The requirements associated with a worldwide freezing order are similar to those associated with a general, domestic freezing order. The notable exceptions however, are that the claimant must show that (i) any assets the defendant has in England and Wales are insufficient to satisfy the claim, and (ii) there are suitable assets in other jurisdictions. The relevant court will also give consideration to issues such as the interests of other parties or creditors, either in England or overseas. 

When making an order, the defendant is entitled to additional protections, given the risk that they may face proceedings in each jurisdiction where their assets are located. Accordingly, orders typically contain a provision that they will not be enforced outside England and Wales without the permission of the English court. Even if permission is granted by the English court, the process of actually enforcing a worldwide order abroad can be problematic depending on the location of the parties, the relevant international agreements and so on. 

Interim relief in support of foreign proceedings

The English court may grant interim relief (including freezing injunctions) in an effort to support proceedings that have been brought in a different jurisdiction. 

In the case of a freezing injunction, the claimant must show that it is expedient for the order to be granted. This will depend on matters such as the domicile of the defendant, whether granting the order will interfere with the case-management powers of the foreign court, and/or whether the order will create the possibility of conflicting/overlapping restrictions in different jurisdictions. 

A freezing injunction (discussed in detail in 1.7 Prevention of Defendants Dissipating or Secreting Assets) will typically require the defendant to swear an affidavit giving details of assets they have a legal or beneficial interest in. This includes details as to the value and location of any such assets (including overseas locations in the case of a worldwide order). Such disclosure may also be ordered by the court prior to any application for a freezing order (although this is uncommon given that one of the main purposes for seeking disclosure is to guard against the dissipation of assets, and that purpose would be undermined if a freezing order has not been put in place).

The defendant may be required to submit to cross-examination if there are any concerns regarding the disclosure they have given. Failure to comply with the requirement to give disclosure, or providing inadequate/false information, may lead to a finding of contempt of court (and therefore a fine or, in serious cases, imprisonment). 

In an effort to ensure compliance with the disclosure requirements (as well as a freezing and/or search and seizure order), in appropriate cases it is possible to obtain an order requiring the defendant to hand over their passport to the claimant’s solicitor. Such an order ensures that the defendant cannot leave the jurisdiction until the court orders otherwise.   

Search and Seizure Order

A claimant may obtain a search and seizure order giving the claimant (or their solicitors/agents) access to relevant premises and allowing them to take possession of specified evidence such as documents, computers, electronic data, etc. The purpose of such an order is to preserve (rather than obtain) evidence in circumstances where there is a real risk that it might otherwise be destroyed. These orders are only available in very limited circumstances. Where they are granted, an independent supervising solicitor will oversee the process to ensure it is conducted in a manner that is consistent with the terms of the order.

Terms and conditions

In applying for a search and seizure order, it is necessary to specify which premises will be searched. Those premises must normally be in the United Kingdom and under the defendant’s control. No material may be removed from the premises unless it is specifically identified in the order (and accordingly, orders cannot include any "catch-all" wording), nor can legally privileged material be obtained. The claimant will typically need to provide a "cross-undertaking in damages", which means they must compensate the defendant for any loss unduly suffered as a consequence of the search and seizure order. They must also undertake to commence a claim shortly after any such order is made.     

Note that a search and seizure order does not allow a claimant to force their way into the defendant’s premises. Rather, if the defendant refuses entry, the claimant’s remedy is through contempt of court proceedings.

There are three main ways in which a wronged party may seek to obtain information from third parties.

Third-Party Disclosure Pursuant to the Civil Procedure Rules (the “CPRs”)

Rule 31.17 of the CPRs allows for disclosure from a non-party when the disclosure sought is (i) likely to support the claimant’s case, or adversely affect the case of the other party(ies), and (ii) necessary to deal with the claim fairly and/or save costs. In considering whether to grant such an order, the court will consider the burden imposed on the third party by having to provide disclosure.

Importantly, Rule 31.17 only applies where proceedings have been commenced. It is possible to obtain disclosure before proceedings have begun under Rule 31.16, but such an order can only be sought against someone who is likely to become a party to any subsequent proceedings (which will be difficult where the third party has not committed any wrong).   

Norwich Pharmacal Orders

Where the CPRs do not assist, a Norwich Pharmacal order (so-called because of the case from which it derives) enables a wronged party to obtain disclosure from a third party who is involved in wrongdoing (innocently or not), but who is unlikely to be a party to any subsequent proceedings. 

Norwich Pharmacal orders are flexible and have been developed to respond to a range of circumstances. In fraud cases, they are commonly sought against banks, and are used to identify the proper defendant to a claim, to trace assets, to assist in pleading a case, and/or to enforce a judgment. They are often sought "without notice" and are accompanied by a "gagging order" preventing the third party from informing anyone, including its customer(s), that the order has been obtained. 

Bankers Trust Orders

Bankers Trust orders (again, so-called because of the case from which they derive) are typically made against banks or other institutions that hold misappropriated funds or through which misappropriated funds have passed. They require the bank or institution to disclose information relating to customer accounts and can accordingly be very useful in tracing funds. They operate in a similar manner to Norwich Pharmacal orders, but are generally easier to obtain.

Restricted Use

Where an order allows for material to be obtained from a third party, that material can normally only be used in respect of the specific proceedings in which the order was made – it cannot be used for other collateral purposes without the permission of the court. 

Procedural orders in fraud cases are often sought "without notice" to the defendant in order to avoid "tipping them off". If the order is granted, the defendant is then subsequently given an opportunity (through the “return date”) to vary or discharge the order. 

In an effort to ensure the defendant is not unduly disadvantaged by not being present when the order is first sought, the claimant must give "full and frank" disclosure of all relevant facts, including any points that are disputed or which might have otherwise been advanced by the defendant. The English courts are becoming increasingly vigilant in ensuring that the duty of full and frank disclosure is properly complied with by claimants. This issue is taken seriously and is often a point on which the defendant may subsequently challenge what has taken place. Such challenges may have serious repercussions in that they may not only damage the claimant’s credibility, but may also result in the order being discharged at the return date (or earlier) and an adverse costs order being made against the claimant. Furthermore, in seeking an order without notice, the claimant will typically need to provide a "cross-undertaking in damages" which means they must compensate the defendant for any loss suffered if it is later shown that the injunction should not have been granted.   

Criminal proceedings for complex and high-value instances of fraud in the United Kingdom are typically investigated and prosecuted by the Government’s Serious Fraud Office. While uncommon, it is possible for a private party or individual to bring their own criminal prosecution against the wrongdoer.

In some instances a criminal conviction for fraud will result in an order requiring the wrongdoer to repay the victim, although this is not always the case. 

Fraud victims seeking redress will usually pursue a civil claim against the wrongdoer on the basis that:

  • civil proceedings are controlled by the victim (rather than a prosecutor);
  • civil proceedings have a lower standard of proof (in that the claim must be proven on the balance of probabilities rather than beyond a reasonable doubt); and
  • civil proceedings (generally) take less time than a criminal investigation and any subsequent trial. 

There is nothing to prevent a civil claim following criminal proceedings, or vice versa. Similarly, civil and criminal proceedings may take place simultaneously, provided there is no risk of serious prejudice to the defendant(s). Having noted this, it is uncommon for proceedings to take place simultaneously. 

As with other proceedings, it may be possible for a claimant in a fraud claim to obtain "default judgment" where the defendant does not take steps in the proceedings. Similarly (although only in extreme cases), a defendant who fails to comply with orders and instructions issued by the court may be "de-barred" from taking steps to defend the claim. 

It should be noted that the enforcement of any judgment is a separate process (see 5.1 Methods of Enforcement) and will be particularly difficult where a dispute has an international element and/or where the defendant is refusing to engage. It is difficult (although not impossible) to obtain "summary judgment" (whereby a judgment is obtained without a full trial) in fraud claims because it will generally be necessary for the defendant to be cross-examined and to have the opportunity to respond to the allegations that are being made. 

There are special rules (set out in Rule 16 of the CPRs and the associated Practice Directions) that apply to pleadings of fraud and/or dishonesty. In particular, allegations must be clear and should set out the specific facts that the claimant intends to rely on in showing that the other party acted fraudulently or dishonestly.

Furthermore, barristers and solicitors in England are subject to specific professional rules in relation to fraud allegations. In general terms, these rules provide that a barrister or solicitor must not make an allegation of fraud unless they have clear instructions and reasonably credible supporting material. In this respect, care should be taken not to overstate the position against a defendant. Pleadings may be amended following disclosure should fraudulent or dishonest activity come to light through that process.   

The English courts have the ability to make judgments and orders against "persons unknown" where a claimant cannot identify a specific individual who has caused them harm. Where a freezing order (see 1.7 Prevention of Defendants Dissipating or Secreting Assets) is made against persons unknown, it is likely to apply to any person who assisted or participated in the fraud, as well as any person who received misappropriated funds. A freezing order will often be paired with orders against third parties like banks (see 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties) in an effort to identify people involved in the fraud.

The ability to take steps against persons unknown has become particularly significant in recent years given the rise of cyberfraud. Such orders show the English courts’ willingness to take a flexible and innovative approach when assisting victims of fraud.         

The CPRs allow a court to issue a summons requiring a witness located within the jurisdiction to attend court to give evidence or to produce documents. This power is in addition to the orders requiring third parties to provide specific information and material (see 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties), which are more likely to be utilised in a fraud claim.           

As a general rule, English law holds that a company acts through its board of directors and senior officers, and that the actions and states of mind of those individuals will be attributed to the company. Similarly, companies will normally be vicariously liable for the actions (including fraudulent actions) of employees and agents where they are acting within the scope of their employment or authority.   

Under English law it is difficult to "pierce the corporate veil" so that a beneficial owner of a company will become liable for the actions of the company. Such claims will normally only exist where the beneficial owner is effectively a "shadow director" of the company in that they exercise control and influence over its business decisions, and the actual directors act in accordance with their instructions. Where this occurs, the beneficial owner will have the same duties as an actual director (see 3.3 Shareholders' Claims against Fraudulent Directors).   

The more common approach to bringing a claim against the beneficial owner of a fraudulent company is to bring a claim of conspiracy (as discussed in 1.3 Claims against Parties Who Assist or Facilitate Fraudulent Acts).   

Individual directors must act, with good faith, within the powers set out in the company’s constitution. They must also exercise reasonable care, skill, diligence and independence, and seek to promote the success of the company. Undertaking fraudulent or dishonest activity in a way that harms the company will clearly breach these duties.

The Company as Plaintiff

Importantly, these duties are owed to the company itself, rather than to individual shareholders. This means that, under English law, where a wrong is committed against a company, the proper plaintiff in any subsequent claim is the company itself (rather than the shareholders of the company). Accordingly, under normal circumstances, any enforcement action against an individual director will generally be taken by the board or (in an insolvency situation) a liquidator. Importantly, the principle of "no reflective loss" means that a shareholder cannot bring a claim in respect of a loss suffered by the company where the company itself has a cause of action in respect of the same wrongdoing.

Derivative Actions

In some circumstances, it is possible for an individual shareholder (or a group of shareholders) to bring a "derivative action" on behalf of the company. The central question for any court considering whether or not to allow a derivative action is whether a wrong committed against the company would not be adequately redressed if the action were not allowed to proceed.     

For many years, England has been a prominent and leading venue for international disputes, and English law has developed to reflect this. It continues to be a popular environment in which to resolve international fraud claims. As a corollary to this, the English courts have developed a number of rules to join overseas parties to English proceedings, and/or to initiate proceedings in England against such parties.   

Where a party is located outside the jurisdiction, it will be necessary for the claimant to obtain the court’s permission to serve out of the jurisdiction. To do so, they will need to show (broadly) that:

  • there is a serious issue to be tried;
  • one or more of the "jurisdictional gateways" is satisfied; and
  • England is the proper and appropriate forum for the claim.  

These gateways provide the English courts with jurisdiction over foreign defendants where the subject matter of the dispute is sufficiently connected to England or Wales. The most common gateways for fraud claims are that the claim relates partly or wholly to property within the jurisdiction, the claim involves a contract governed by English law or a jurisdiction clause in favour of England, the harmful act or the harm suffered occurred in England or Wales, and/or that an international co-defendant is a "necessary and proper party" to proceedings in England against other defendants over whom there is jurisdiction (eg, due to a jurisdiction clause or due to their domicile).   

It is open to a foreign party who has been joined to challenge jurisdiction, including on the grounds of forum non conveniens (ie, that England is not the appropriate venue for a particular claim, and a more convenient forum exists elsewhere).    

In England and Wales, the court will not automatically enforce any judgment or order that is obtained against a defendant. In circumstances where the defendant fails to make payment by the timeframe set by the court, the claimant will be required to take steps to enforce the judgment (including by seeking a further order from the court).   

Common Forms of Enforcement in Fraud Proceedings

A freezing order

It is possible to obtain a post-judgment freezing order. This is more straightforward than obtaining a freezing order before a claim is commenced and it can be a useful tool in securing assets pending other enforcement mechanisms being used.  

A charging order

A charging order imposes a charge over the defendant’s interests (including beneficial interests) in specific land, securities or other assets. In doing so, it prevents the defendant from selling the land or assets without paying what is owed to the claimant (assuming there are no other prior creditors). A charging order is sometimes combined with an "order for sale", which requires the defendant to sell the property or asset in order to satisfy the judgment.    

A third-party debt order

A third-party debt order freezes assets that are owned by the defendant, but which are in the hands of a third party, such as a bank. In doing so, it restricts the defendant’s ability to access those assets and may lead to the third party being required to make payment to the claimant.   

Insolvency proceedings

If the result of the judgment is that the defendant no longer has sufficient assets to pay their debts, it may be possible to apply for them to be wound-up (in the case of a company) or made bankrupt (in the case of an individual). In such circumstances, the defendant’s assets will vest in a trustee in bankruptcy or a liquidator, who will then seek to realise the value of those assets and pay the defendant’s creditors accordingly.   

Care should be taken before initiating insolvency proceedings, as the amount received by the claimant will depend on (i) the value of any assets owned by the defendant, and (ii) the interests of any other creditors (particularly preferred creditors such as employees, or those who hold a security interest in particular assets).   

Examination of the debtor

Where the judgment debtor is within the jurisdiction of the English courts it is possible to obtain an order for their examination. This requires the judgment debtor to attend court and be cross-examined about their assets and affairs. If the judgment debtor does not attend, or does not answer truthfully, then they may be subject to proceedings for contempt of court.   

English law provides that a party may refuse to produce material or information that would otherwise be disclosable, if doing so will incriminate them in criminal proceedings or expose them to a penalty in England and Wales. This right will also be relevant in cases involving a search and seizure order (as discussed in 2.2 Preserving Evidence) in that the defendant must be informed of their privilege against self-incrimination before the premises are entered.   

In the context of fraud, there are noteworthy limits on the right to privilege against self-incrimination. First, Section 13 of the Fraud Act 2006 disapplies the privilege in relation to criminal fraud and the related offences (including bribery) under that Act. Secondly, the English courts have taken a limited reading of the privilege in respect of pre-existing evidence obtained through a search order that does not require the defendant to testify to its existence. In such cases, it has been held that the evidence obtained may be regarded as being able to "speak for itself" and so does not create the risk that the defendant will be coaxed into making a false statement.   

A party to English legal proceedings can withhold "privileged" documents. In broad terms (and specific advice should be sought in respect of each of these), the two main forms of privilege arise in relation to communications between a lawyer and their client for the purpose of giving or receiving legal advice ("legal advice privilege"), and communications between a lawyer, their client and/or a third party for the dominant purpose of conducting legal proceedings, including criminal proceedings ("litigation privilege").  

Importantly, privilege will not exist where communications are made for the purpose of allowing or assisting a party to commit a crime or fraud. This has been described as the "crime-fraud" or "iniquity" exception and requires a strong prima facie case of fraud (rather than actual proof of fraud). The exception applies to both legal advice privilege and litigation privilege. It exists whether or not the lawyer involved in the communications knows of the wrongful purpose. 

Remedies in English law are typically focused on either compensating the wronged party or disgorging any gains that have been obtained by another party in unjust circumstances. As a consequence, the courts are slow to award damages that are purely punitive/exemplary.   

However, it is now well established in English law that punitive damages are available where a wrong has been committed wilfully and/or dishonestly (such as in instances of fraud). This allows a victim of such wrongdoing to claim more than they have lost. 

It is important to note that the approach to punitive damages continues to be "proportionate and principled". Accordingly, they will only be awarded in cases where the wrongdoing is particularly egregious, and even then, they are likely to be reasonably modest in value.   

There is no specific banking secrecy regime in the United Kingdom. While English law provides that banks owe a general duty of confidentiality to their customers, there are a growing number of exceptions to this duty based on efforts to prevent money laundering, the funding of terrorism, tax evasion and so on.   

In any event, in instances of fraud, English law provides avenues by which a wronged party may seek to obtain information from third-party banks (see the discussion of third-party disclosure and Norwich Pharmacal orders set out in 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties). Where sufficient evidence of fraudulent activity exists, these avenues are unlikely to be impeded by general considerations such as a bank’s duty of confidence to its customers.    

Seladore Legal Limited

24 Greville Street
London
EC1N 8SS

+44 (0)20 3008 4432

info@seladorelegal.com www.seladorelegal.com
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Trends and Developments


Authors



Seladore Legal Limited is a disputes-only law firm specialising in major and complex litigation and arbitration, with a particular emphasis on multi-party, multi-jurisdictional disputes. By specialising solely in litigation, the firm minimises the prospect of commercial and legal conflicts of interest. Seladore Legal Limited is made up of experienced litigators who have previously worked at other top-tier UK, USA and international law firms and who regularly act in significant commercial disputes across a range of different sectors.

Introduction

Some of the trends and developments in England in relation to fraud and asset tracing over the past 12 months have been rapidly driven by the response to the significant changes which the impact of COVID-19 has necessitated, but others are developments which have been in the pipeline for some time and are now coming to fruition. However, overall, the legal landscape in England remains one which is very well suited to the pursuit and defence of claims relating to fraud.

Fraud Trends

Perhaps one of the most surprising developments is that, according to KPMG, who have been monitoring fraud claims for a number of years, 2020 saw a drop in both the value and volume of fraud cases heard in UK courts. The volume of cases heard decreased by 51% and the value of claims fell from over GBP1 billion to circa GBP720 million.

While an economic downturn usually results in an increase in fraud, and therefore fraud-related claims, it is likely that the very unusual circumstances of the COVID-19 restrictions, which had a profound impact on business activity overall, have artificially suppressed fraud claims for a period. However, in our view it is also likely that this drop will sharply reverse in the near future both as businesses return to more normal activity levels, and therefore begin to have an appetite for litigation again, but also as a result of the unfortunate but inevitable large number of corporate insolvencies which will lead to investigations by insolvency practitioners. Those investigations will, in turn, undoubtedly uncover fraud or wrongdoing in some cases and lead to claims.

Remote Hearings

The most noticeable change for practitioners has been the rapid switch to remote hearings. It is now over a year since many lawyers last set foot (physically) in a courtroom. 

While there was already provision for certain hearings to take place by telephone, in practice this rarely happened in cases of any significant size or complexity. However, when COVID-19 hit, the English courts very quickly adapted by moving to remote hearings. The Coronavirus Act of March 2020 introduced provisions which significantly expanded the availability of video links in court proceedings. There were also strong messages from senior members of the judiciary that “the show must go on” and that the profession would need to adapt and resort to virtual hearings to avoid the wheels of justice seizing up.

As a result, UK litigators very quickly saw the rise of fully remote and hybrid court hearings (where some of the participants attend court and others attend using an internet video or audio link).

There was initial concern as to how effective this would be, in particular, in relation to fraud claims in which there was a perception that in-person witness evidence, and the large number of documents often involved in fraud claims, meant that they were not well suited to remote hearings. However, it is fair to say that it has worked extremely well. A number of very large and complex cases have taken place smoothly via remote hearings. According to the Commercial Court (which hears many fraud cases), 498 hearings took place in the Commercial Court between March 2020 and September 2020, of which 493 took place remotely, 1 was hybrid and 4 were in person. Furthermore, the switch to virtual hearings has been coupled with a move from hard-copy paper bundles to electronic court bundles which has meant a significant reduction in costs, as well as being more beneficial for the environment.

In the arbitration context, there has been a similar seamless switch to virtual hearings: parties have commonly agreed to virtual-hearing protocols, and service providers (such as the IDRC) have developed facilities to run virtual hearings smoothly for the parties and the Tribunal. In circumstances where at least some members of the Tribunal are often based overseas, this way of working brings many advantages through the reduction of travel and the associated time and cost. 

In-person hearings will undoubtedly return at some point (and it is the case that criminal trials have been adversely affected due to difficulties with juries). However, we are confident that even once the pandemic is past, remote and hybrid hearings will continue to take place far more regularly than they ever did in previous years. Indeed, the Commercial Court has noted that even though in-person hearings are more available now than they were, parties still seem to be electing for remote hearings.

Claims against Banks

It is often the case in claims involving fraud that the fraudster has disappeared, or does not have sufficient assets to satisfy a judgment (or sufficient assets cannot be located). This means that the victim of fraud is left in a difficult position.

In this scenario, victims often look to the banks who were involved (even if innocently) in the fraud, for example, as the bank through which payments were processed.

Accordingly, there has recently been a trend to pursue so-called "Quincecare claims" against banks. The Quincecare duty implies  that a bank should observe reasonable skill and care when executing a customer’s instructions and should refrain from executing a payment instruction if and for as long as it was put "on enquiry" that the payment might be fraudulent. 

For example, 2019 saw the UK Supreme Court (Singularis v Daiwa (2019) UKSC 50) uphold the first-ever successful claim against a bank for breach of its Quincecare duty not to make payments out of an account where there are grounds for suspecting the payment instruction is fraudulent. This trend has continued throughout 2020 and the first part of 2021 with a number of claims involving allegations that banks and other financial institutions have breached their Quincecare duty.

An example of this is Stanford International Bank Plc (In liquidation) v HSBC ([2021] EWCA Civ 535). Stanford International Bank collapsed into insolvency in 2009 having been used as the vehicle for one of the most prolonged Ponzi schemes in history.

Stanford’s liquidators brought claims against HSBC for breach of its Quincecare duty and dishonest assistance in relation to its role in allowing payments to be made out of Stanford’s accounts in the period before they were frozen in February 2009. HSBC sought summary judgment/strike out of both claims. 

As regards the Quincecare claim, Stanford’s liquidators argued that although HSBC had frozen Stanford’s accounts in February 2009, it should have done so in August 2008. At that point, there was GBP80 million in the HSBC accounts, all of which was paid out to investors by February 2009.  HSBC’s argument was that even if it had breached its Quincecare duty, it had not caused Stanford any loss. There was no dispute between the parties that Stanford’s net asset position (viewed from a balance sheet perspective) was identical in August 2008 and February 2009 and that all the money had been paid out to legitimate, pre-existing creditors of Stanford (ie, investors), thereby reducing Stanford’s indebtedness pound for pound. 

Although HSBC’s argument was rejected by the High Court, in April 2021, the Court of Appeal overturned this and upheld HSBC’s appeal. The Court of Appeal found that HSBC owed a duty to Stanford, but not to its creditors. As a result, the Court said that the only question was whether Stanford (as a company) had suffered a loss. The key point was that Stanford had not claimed that its net worth was less overall in February 2009 (when HSBC froze the accounts) than it had been in August 2008 and, as a result, there was no loss.

However, the Court acknowledged that this finding was as a result of the way the liquidators had put their case. The result may well have been different if the liquidators had articulated a claim for consequential loss from a failure to freeze the accounts earlier (which the Court said might plausibly have been made) or if they had been able to show that, had HSBC complied with its Quincecare duty, Stanford’s winding-up would have occurred sooner and/or that its overall net asset position would have been better at that earlier time or on the eventual winding-up. 

Furthermore, and importantly for victims of fraud, HSBC also themselves acknowledged that the position would have been different if the money had been paid out to parties other than legitimate creditors of Stanford. Therefore, although the decision ultimately resulted in the claim being dismissed, it did make clear that in other circumstances the Quincecare claim is an available remedy to victims of fraud. We therefore expect there to be a number of such claims, and this firm is currently working on several Quincecare claims itself. 

Crypto-assets

Litigation concerning crypto-assets continues and is predicted to grow. There is an increasing appetite for crypto-assets as investments, and they also remain of interest to fraudsters, both as the basis for scams, such as those involving investment schemes, and as an asset class through which fraudsters seek to conceal the proceeds of their fraud. 

A significant decision of 2020 in relation to crypto-assets was Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited. The applicants claimed that they had been induced to invest a total of 64.35 bitcoin in relation to an initial coin offering (where a company issues cryptocurrency to the market to raise capital) for a new cryptocurrency. The investment was a fraud, and the applicants did not receive the expected profits. 

The victims of the fraud therefore applied to the Commercial Court for a worldwide freezing order, a proprietary injunction, and related disclosure orders against the cryptocurrency exchanges through which the bitcoin had been transferred, to reveal the identity of the alleged fraudsters. 

The orders sought were granted, and this was significant as:

  • it further confirms that under English law crypto-assets can be treated as property; and
  • it permitted disclosure orders to be made against cryptocurrency exchanges outside the jurisdiction and against whom no claim was asserted (ie, only information was sought from the exchanges).

In our view, this case signals the English courts’ willingness to adapt to assist victims of fraud, and to adapt remedies to meet new situations, such as new types of assets and difficulties in identifying the ultimate wrongdoers. 

Witness Evidence

A major development in the English courts which is of interest to fraud practitioners relates to witness evidence. In the English courts, witnesses provide their primary evidence (evidence-in-chief) in the form of a witness statement, and are then subject to cross-examination by the opposing counsel. 

However, over the years there has been a trend towards witness statements being documents carefully crafted by lawyers which, in some cases, simply provide a commentary on documents, or are a “constructed” recollection based upon documents. This led to concerns on the part of the judiciary as to how useful witness statements really are and the Witness Evidence Working Group was therefore established in spring 2018, comprising members of the judiciary and the legal profession. 

The result of the Working Group was a series of new rules as to how witness statements are to be produced. These reforms apply to all trial witness statements in the Business and Property Courts (the main English business courts). The changes had a long gestation, only coming into force on 6 April 2021, and therefore the full impact is yet to be seen. However, they are likely to result in fundamental changes in the way witness evidence is prepared in English litigation. Given that witness evidence is often key in fraud cases, this is therefore a significant development in this area. 

The following are the most significant changes.

  • Both the witness, and their legal representative, must sign a certificate of compliance that they have complied with the new rules. The legal representative’s certificate confirms that the relevant requirements have been explained to the witness and that the statement complies with the PD and has been prepared in accordance with the Statement of Best Practice contained in the Appendix. It is quite possible that this will result in satellite disputes as to whether statements have in fact been properly prepared and attempts to challenge the legal representative’s certificate.
  • The witness statement must identify which documents, if any, the witness has been referred to in order to produce the statement. The purpose of this change is to try to ensure that witnesses are only shown documents that they would have seen at the time in order to avoid “constructive memory”.
  • There is a requirement, for important disputed matters of fact, that the witness statement should, if practicable, state how well the witness recalls the matter in question and indicate whether that recollection has been refreshed by considering documents.
  • Furthermore, a trial witness statement must set out only matters of fact of which the witness has personal knowledge that are relevant to the case. The Statement of Best Practice states that a matter is regarded as having been witnessed personally by a witness only if it was experienced by one of their primary senses (sight, hearing, smell, touch or taste), or if it was a matter internal to their mind (eg, what they thought about something at some time in the past or why they took some past decision or action). Therefore, matters a witness subsequently learned about, through documents, or from other persons, should not be included in that evidence.

The Statement of Best Practice, which parties are required to follow, provides that those helping a witness to draft their statement should:

  • try to let the witness use their own words;
  • avoid any leading questions;
  • try to avoid anything that might alter or influence recollection; and
  • finalise the statement with as few drafts as possible as the process of reviewing drafts is considered to risk corrupting a witness’s recollection.

These are profound changes to the way in which trial witness statements are to be prepared. Moreover, these are likely to be changes which are enforced in practice (unlike some procedural changes), as there appears to be a real sense of discontent among the judiciary with witness statements at present.

This is illustrated by the case of PJSC Tatneft v Bogolyubov and others in which the judge was extremely critical of the witness evidence that had been provided. Tatneft was a USD300 million claim which was dismissed in its entirety at least in part due to deficiencies in the witness evidence advanced by the claimant. In her judgment, Mrs Justice Moulder observed that “this is not a case where the court has discounted the evidence of a particular witness as unreliable but a case where all four witnesses called for Tatneft on limitation have been found to be evasive, unreliable and in some instances likely not to be telling the truth”. 

One of the principal causes of this criticism appears to be the fact that the witnesses’ statements had been drafted by their lawyers and the witnesses themselves did not appear to know what was in their statements and frequently contradicted them in cross-examination as a result. This led to Mrs Justice Moulder concluding that: “I am not satisfied that [the witnesses] gave, or sought to give, a ‘full and open account’… Accordingly, I accord little or no weight to [their] evidence.” In light of the absence of contemporaneous documentary evidence and the discounting of Tatneft’s witness evidence, Mrs Justice Moulder considered that they had failed to establish their case on limitation and their claim was dismissed. 

Practitioners should therefore expect that witness evidence will be very carefully scrutinised, both as to its content and also the manner in which it is prepared. Since fraud cases can be won or lost on points of witness evidence, this is therefore an important change, which is likely to be of real significance in fraud practice.

Developments in the Disclosure Pilot Scheme

A further procedural development is the continuation until December 2021 of the so-called Disclosure Pilot Scheme. This is a series of rules introduced in 2019 (initially for a two-year period) which has changed the way in which disclosure of documents has been approached in most English High Court disputes in the Business and Property Courts. The changes were introduced in light of perceived concerns in relation to disclosure exercises in large cases, which were extremely complex exercises, often involving vast expense due to the large quantities of electronic data involved. 

The idea of the pilot was to front-load aspects of disclosure and to provide different disclosure options. The key changes introduced by the pilot were:

  • a requirement for parties to produce “initial disclosure” with their statements of case of key documents;
  • an obligation on the parties to produce a “Disclosure Review Document” which includes agreeing on a list of issues for disclosure; and
  • a menu of disclosure options, from very limited disclosure to extensive far-reaching searches which are intended to allow the court to pick a process appropriate to the case. 

In addition, wide-reaching obligations were placed on parties (and their solicitors) to ensure that documents were preserved, including documents in the hands of third parties. 

As well as the scheme being extended in April 2021, certain changes (mostly fairly technical) came into force intended to make the scheme work more effectively.

The most significant change was in relation to Disclosure Guidance Hearings, which are intended to enable disputes about disclosure to be resolved at a very early stage. These are now to be more easily available and to last for longer than previously permitted, which is likely to make them more useful to the parties.

There is now a feeling among practitioners that these changes are likely to be here to stay, and the suggestion that this is still a pilot is somewhat misplaced. There has also been clear encouragement from the judiciary that Disclosure Guidance Hearings are to be used and we should therefore expect that more of these hearings will take place. 

Brexit

A further important development arises out of Brexit. 

The departure of the United Kingdom from the European Union means that the rules on jurisdiction and service as set out in the Recast Brussels Regulation, no longer apply in the UK. 

This means that where there is no exclusive jurisdiction clause, the previous domicile rule (and its exceptions), whereby an EU-domiciled party had to be sued in the courts of the place of its domicile, has now been displaced, and the UK is back to the position under the common law. This presents an interesting situation insofar as defendants domiciled in EU member states are concerned. Jurisdiction can now be established over such defendants in the same way as other non-EU foreign defendants, which gives enormous flexibility to a claimant wanting to pursue a claim in the English courts.

In short, where a defendant cannot be served in England, permission of the court can be obtained to serve the defendant in an EU member state if one or more of the 21 “gateways” can be established under CPR6.36 and paragraph 3.1 of Practice Direction 6B. Some of the more commonly used gateways are:

  • the claim is pursuant to a contract that was made in England, and/or is governed by English law;
  • the claim is for a breach of contract that was committed in England;
  • (for tort claims) either the wrongful act was committed in England, or the damage was suffered here; and
  • the foreign defendant is a necessary or proper party to a claim against a different defendant, in respect of which the English court already has jurisdiction.

This is likely to provide greater flexibility to victims of fraud looking to bring a claim in the English courts against EU defendants.

However, there is one caveat to this. The United Kingdom has applied to accede to the Lugano Convention (which, in practice, would create a similar regime to that under the previous Recast Brussels Regime). On 13 April 2021, the European Commission indicated that it opposed the United Kingdom’s application. At the time of writing this, it is unclear whether the member states of the European Union will agree with the Commission, or whether they will agree to the UK acceding. It is therefore currently a case of “watch this space” to see what the final jurisdictional landscape will look like. 

Seladore Legal Limited

24 Greville Street
London
EC1N 8SS

+44 (0)20 3008 4432

info@seladorelegal.com www.seladorelegal.com
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Law and Practice

Authors



Seladore Legal Limited is a disputes-only law firm specialising in major and complex litigation and arbitration, with a particular emphasis on multi-party, multi-jurisdictional disputes. By specialising solely in litigation, the firm minimises the prospect of commercial and legal conflicts of interest. Seladore Legal Limited is made up of experienced litigators who have previously worked at other top-tier UK, USA and international law firms and who regularly act in significant commercial disputes across a range of different sectors.

Trends and Development

Authors



Seladore Legal Limited is a disputes-only law firm specialising in major and complex litigation and arbitration, with a particular emphasis on multi-party, multi-jurisdictional disputes. By specialising solely in litigation, the firm minimises the prospect of commercial and legal conflicts of interest. Seladore Legal Limited is made up of experienced litigators who have previously worked at other top-tier UK, USA and international law firms and who regularly act in significant commercial disputes across a range of different sectors.

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