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June 10, 2019

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Recovering Misappropriated Assets – The English Route To Asset Recovery


- Ros Prince, Partner and Co-head [ Stephenson Harwood ]
- Harriet Campbell, Professional Support Lawyer [ ]

Ros-Prince-&-Harriet-Campbell

The English Courts are taking a proactive approach that assists Claimants dealing with fraudsters taking advantage of changing technologies

We live in an era where money can be transferred electronically through multiple accounts and jurisdictions at the push of a button. Consequently, victims of fraud and misappropriations need to consider international asset recovery strategies.

London has long proven a popular venue for litigation, both in support of foreign disputes and as a primary seat of litigation. It is an international city, and Defendants often own assets here: from real estate (owned for personal use or investment) to bank accounts or trading companies. This means there are often assets available for enforcement.

In addition, the English Courts have a proven track record in helping foreign claimants fight the battle against fraudsters. They offer robust interim injunctions, and the prospects of a swift resolution of disputes: it can take just two years to get to Judgment, and very rarely takes more than five years (even in complex heavyweight fraud claims with multiple parties). Finally, English orders and judgments are easily enforced in a number of other jurisdictions, with England therefore providing a good ‘spring board’ for international asset recovery actions.

Many of the remedies available in England are also available in other jurisdictions, particularly the common law ones. However, this article explains how the English Courts are taking a proactive approach in applying the law in a manner that assists Claimants dealing with fraudsters who cleverly seek to take advantage of changing technologies and an ever more global financial system./p>

Worldwide Freezing Orders “WFOs”

WFOs are a well known and well established remedy, available in many common law jurisdictions. Their effect is to freeze assets in the hands of the Defendant pending judgment.

However, fraudsters are often creative, and seek to set up their assets so as to avoid the effect of injunctions or other asset recovery steps. The English Courts have shown themselves to be quick to adapt to the changing strategies adopted by fraudsters:

1. Fraudsters often do not hold assets themselves directly. Assets are often placed into companies, trusts, and nominee structures, so as to avoid enforcement. The English Courts have adapted to this. For example, the standard English WFO does not just freeze assets which a Defendant ‘owns’. It goes so far as to freeze any asset which the Respondent “has the power, directly or indirectly, to dispose of or deal with as if it were its, her or his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with its, her or his direct or indirect instructions”. The effect of this is essentially to allow Claimants to freeze assets first, and argue about ownership later.

2. These indirect ownership structures are also often used to avoid having to give disclosure about assets, as is usually required under a standard WFO. For example, assets may be held in a discretionary trust and therefore the Respondent will say that they have no interest in those assets (and so they fall outside the scope of the WFO). Again, the English Court has reacted to this robustly. In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev & Ors [2016] 1 WLR 160, the Court granted an order for disclosure in relation to assets held in a discretionary trust, despite the fact that there was no evidence that the trust was a ‘sham’.

Finally, the English Court will not tolerate breaches of WFOs. There have been a number of decisions over recent years where the Courts have committed Respondents to WFO to prison for contempt of Court for breaching the orders. The sentences imposed have been close to the maximum permissible term of two years.

Interestingly, in a recent decision (Vik v Deutsche Bank AG [2018] EWCA Civ 2011), the English Courts have confirmed that an application for committal can be made extraterritorially.

Where freezing orders alone are not enough to protect a Claimant, the English Court can go further.

Receivership

Where a WFO alone does not provide sufficient protection, the English Courts have the power to appoint a Receiver to preserve assets. Whilst this may not be surprising in enforcement post-judgment, the English Courts can also appoint receivers pre-judgment.

The English Courts have exercised this power in a number of cases, the most well known of which in recent times was JSC BTA Bank v Ablyazov [2010] EWHC 1779 (Comm). This was a hard-fought fraud litigation, where the Court appointed receivers over Mr Ablyazov’s assets because the judge did not trust Mr Ablyazov to properly disclose, and not deal with, his assets despite the WFO against him.

Orders can be extraterritorial: they apply not just to assets in England but can apply to the Defendant’s assets anywhere in the world (although of course they will require recognition by the local Courts).

These orders have wide ranging commercial and strategic impact. A WFO only has effect if (a) the Respondent decides to comply or (b) it is served on third parties (such as banks) who will comply with the order regardless of the Respondent’s instructions. Appointing a third party to control the assets is a draconian step which can have dramatic consequences both in terms of the likelihood of the Claimant recovering assets, and indeed early settlement.

Dealing with fraudsters who use technology

A key development in fraud litigation is the increasingly sophisticated use of technology by fraudsters. The English Courts have not shied away from addressing this, and have shown themselves willing to take innovative steps, for example:

1. We had been granted permission to serve notice of a claim via the Facebook platform a number of years ago, where a Defendant had absconded but was known to use social media. Since then, the Court has granted permission to serve documents via other social media platforms in other cases.

2. The English Court has long used ‘Norwich Pharmacal’ orders to compel third parties mixed up in wrongdoing to give disclosure of documents or information, to assist a Claimant to identify a fraudster. Traditionally these orders were usually obtained against banks, accountants, and parties who held financial information. However, we are aware of at least one case where the Courts have made such an order against an email platform provider, such that the provider was disclosing the Respondent’s emails to the Claimant over a period of time (without the Respondent knowing about this).

3. Search orders are another long-standing remedy, allowing a Claimant’s solicitors to search premises and seize documents. It is now standard practice for such orders to include a provision allowing the Claimant’s solicitors to be accompanied by forensic technicians who have the power to image all electronic devices at the Respondent’s premises.

4. In an era where email fraud is common, it may be possible to identify where a victim’s money has gone, but not who the perpetrator of the fraud is. The English Courts are willing to grant injunctions against ‘persons unknown’ such that WFOs can be served on banks that receive misappropriated funds, even if the identity of the Defendant(s) is not known at that time.

Conclusion

Where a Defendant has connections to England, it should always be considered as a potential venue for asset recovery litigation. Where contracts involve English jurisdiction clauses, it will be the primary seat of litigation, but it should be considered in any other cases where a Defendant has assets in England and particularly if one of the Defendants resides in England.

The English Courts are very willing to grant injunctions in support of foreign proceedings, and will allow Claimants to police them as effectively as they would if the injunction were in support of English litigation. Some of the recent leading judgments in this area (such as the Pugachev decision) in fact relate to proceedings that were brought in support of foreign litigation.

The key point to take from this is that the English Courts usually seek to help Claimants whose assets have been misappropriated. They will deal with appropriate flexibility with new practical difficulties, such as those posed by changing technologies, asset holding structures, or banking systems.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.

 

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