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Commercial Fraud – Law and Practice

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  1. Commercial Fraud – Law and Practice Tim Lord QC 12th October 2017 Brick Court Chambers +44 (0)20 7379 3550

  2. Disclosure Issues +44 (0)20 7379 3550 1

  3. Guiding principles • Purpose: to prove case (cfGestmin v Credit Suisse [2013] EWHC 3560 (Comm), Leggatt J) • Typically, asymmetry of information • Inference and the prima facie case of fraud: JSC Bank of Moscow v Kekhman[2015] EWHC 3073 (Comm), Flaux J. What has “tilted the balance”? • Think carefully about what documents really ought to be disclosed • Be careful what you wish for…… +44 (0)20 7379 3550 2

  4. The importance of the 1st CMC • 1st CMC is crucial stage in the disclosure tussle • Sets up the battle lines for disclosure and future skirmishes • Opportunity to stake out claims; hard to recalibrate subsequently • CPR 31.5(3): the Disclosure Schedule • CPR 31.5(4): the Electronic Documents Questionnaire (especially Part 2) • CPR PD 31B: especially paragraphs 8 and 10 • CPR 31.5(5): the pre-CMC meetings and discussions +44 (0)20 7379 3550 3

  5. Advising the Claimant [I] • Claimant will usually be the alleged victim of the fraud • Handicapped by lack of information as to what really happened • 1st CMC is the (one and only) chance to dig and delve: do not blow it • Scrutinise the defendant’s pleading to see what it does not say ie try to piece together where the bodies may be buried • Remember that defendants under the CPR do not have a right to put the claimant to proof cfNational Grid v ABB [2014] EWHC 1555 (Ch), Roth J +44 (0)20 7379 3550 4

  6. Advising the Claimant [II] • Watch out for the Dickensian novel masquerading as the defendant’s disclosure schedule • Be wary of the defendant “blizzard” tactic ie the needle in a haystack • Be careful to check that ALL appropriate sources and archives are included eg personal devices, all mobile phones, all laptops, all servers • Check that ALL appropriate custodians are included • Ensure that ALL appropriate search terms are used, across the right periods +44 (0)20 7379 3550 5

  7. Advising the Claimant [III] • Consider staged approach cfBerezovsky v Abramovich[2010] EWHC 2010 (Comm), Gloster J – especially for “train of inquiry” documents • Lay ground for follow-up applications • Put down a marker about disclosure of documents known to exist or which could be easily revealed, irrespective of the keyword searches cfNichia v Argos [2007] EWCA Civ 741, Rix LJ +44 (0)20 7379 3550 6

  8. Advising the Defendant [I] • Beware of offering up a perfunctory exercise: only inviting problems at and after the CMC • Encourage clients to do a rigorous job ie to adhere to CPR… • A thorough forensic search is: • Easier to defend, thus saving resource wasted on further searches • Reduces risk of skeletons tumbling out of cupboards later with accompanying forfeiture of credibility, judicial trust and sympathy • Allows unhelpful documents to be disclosed without undue attention and worse inferences being drawn +44 (0)20 7379 3550 7

  9. Advising the Defendant [II] • Permits a submission of “the claimant has found no documentary support” • Justifies pressure on claimant to plead case out fully, reducing scope for manoeuvre • More solid foundation for deciding whether to fight or settle • Consider offering staged approach to limit the overall scope of initial task and placing onus on claimant to justify any extension of the disclosure exercise +44 (0)20 7379 3550 8

  10. Tim Lord QC Thank you +44 (0)20 7379 3550


  12. The Circumstances • Claim/judgment against D who has few or no assets in his own name. •  His lifestyle is paid for from assets held by/through: • Group of companies ; and/or • Discretionary trusts. • Prima facie the assets are not his: • Company owns its own assets, even one-man company. • A beneficiary of DT has no vested right in the assets, but merely a right to be considered as a potential recipient of benefits: Gartside v Inland Revenue Commissioners [1968] AC 553 +44 (0)20 7379 3550 2

  13. Attitude of the English Courts • English courts have been willing to push the boundaries of principle to help claimants: • Illustrative comments of Lewison LJ in JSC MezhdunarodniyPromyshlenniy Bank v Pugachev[2015] EWCA Civ 139 • It would, I think, be a matter of concern if a person could make himself judgment-proof merely by setting up discretionary trusts. • Sophisticated and wily operators should not be able to make themselves immune to the court’s orders +44 (0)20 7379 3550 3

  14. Freezing Injunction • Standard Commercial Court order: D’s assets include • Assets which he does not own legally or beneficially, but over which he has control: para 6 and para 46 of JSC BTA Bank v Ablyazov (No 10) SC. • Interest under discretionary trusts: para 7 and Pugachev[2015] EWCA Civ 139. • So can freeze his dealing with them, but does not fully protect against actions of third parties. Eg if abroad. +44 (0)20 7379 3550 4 4

  15. Pugachev • Pugachev instructive: • D disclosed that he was a beneficiary under 4 NZ discretionary trusts. But gave no more details. • CA ordered that he give full disclosure CPR Part 25.1 (1) (g) It said need only be satisfied that there were credible grounds for making an application for a freezing injunction against the ostensible owner of assets not that likely to succeed • This order eventually led to freezing injunctions against the trustees of the trusts (different CA at [2015] EWCA Civ 906) on basis that assets held by the trusts are in reality assets of, or under the control of, Mr P. (para 30 per Bean LJ). +44 (0)20 7379 3550 5

  16. Getting at the assets • Route 1: Claims against P3: • If has received traceable proceeds of fraud: proprietary claims; possibly personal claims, eg a constructive trust claim. • Possibly claims to unwind dispositions: Eg S423 IA 1986: transactions defrauding creditors can have extra-territorial effect , although a sufficient connection with this jurisdiction must be shown Erste Group Bank AG v JSC VMZ Red October ([2015] EWCA Civ 379, Gloster LJ at [116ff]). • But if no substantive cause of action? • Need to show that the assets are beneficially the D’s. +44 (0)20 7379 3550 6

  17. Companies • Lord Sumption in Prest v Prest [2013] 2 AC 41: concealment principle and evasion principle. • Concealment: Where company structure conceals the true position. Individual the true beneficial owner. Control not sufficient or (probably) necessary. • In PrestLord S applied resulting trust. Where A buys assets in B’s name or transfers asset to B for no consideration, then usually a presumption of resulting trust, ie that intention was for A to retain the beneficial interest. Can rebut. In Prest no evidence from husband to rebut. . +44 (0)20 7379 3550 7

  18. Companies (ii) • Prestresulting trust approach applied in two fraud cases: • JSC Solodenko [2015] EWHC 3680(Phillips J) • NRC Holdings ltd v Danilitskiy [2017] EWHC 1431 (Robin Dicker QC) • In both no evidence from Ds and judges made strong inferences that Ds had provided or sourced the funds and that there was no countervailing intention. • In NRC the judge referred to a number of pre-Prestcases where RT was rebutted by showing intention to transfer beneficial ownership because of tax planning. • Special position of matrimonial home: Prest at para 52 +44 (0)20 7379 3550 8

  19. Companies (iii) • Evasion principle: • The court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement • Applied in JSC Solodenko • The timing that the purchase of the British Virgin Island companies was designed to disguise Mr Zharimbetov's ownership of the properties in circumstances where there were substantial claims against him and, indeed, a freezing order had been granted, expressly freezing his assets. +44 (0)20 7379 3550 9

  20. Discretionary Trusts • Extreme cases: Where powers are so wide that tantamount to ownership: • TasarrufMevduati v Merrill Lynch Bank [2011] UKPC 17; [2012] 1 WLR 1721. Power to revoke held by settlor. • Clayton v Clayton [2016] NZSC Supreme Court of New Zealand: power to appoint self sole beneficiary w/o considering interests of other beneficiaries. • Sham? Often tried seldom succeeds. • If a sham the assets remain beneficially owned by the settlor. +44 (0)20 7379 3550 10

  21. Snook Sham • Requirements: • Preponderant view necessary to show that settlorand trustees both intended that a proper trust was not being set up: Shalson v. Russo [2005] Ch 281 at [190]; A v A [2007] EWHC 99 (Munby J); (cf certainty of intention and Canadian CA in Antle v R 2010 FCA 280). • The intention has to be at date of foundation of trust or settlement of additional asset • The mere fact that the Trustee will invariably follow the wishes of the settlor does not mean in itself that there is a sham but may be evidence for inference: Re Esteem Settlement [2003] JCR 093 (Royal Court of Jersey) • Initially valid trust cannot become one unless all parties agree (including all the class of beneficiaries (problem with unborn ones!) Shalson and A v A. +44 (0)20 7379 3550 11

  22. A Third Way? • Is informal control over the assets enough? • In principle no. Actual or de facto control alone cannot be sufficient to extinguish the rights of the beneficiaries: A v A [2007] EWHC 99 (Munby J); Re Esteem Settlement [2003] JCR 093; Official Assignee v Wilson [2008] NZCA 122 (NZ CA). If trustee allows control it is simply a breach of trust. • However, there are suggestions in more recent authorities that it is enough: • In de facto control of the trust assets in circumstances where no genuine discretion is exercised by the trustee over the assets: JSC VTB Bank v. Skurikhin[2015] EWHC 2131 (Christopher Butcher QC) receiver appointed over the assets of a Liechtenstein foundation (akin to discretionary trust) • Lewison LJ in Pugachev: enough if in practice the trustees did whatever the settlor wanted. +44 (0)20 7379 3550 12

  23. Pugachev revisited • Trial of claim to trust assets heard by Birss J in July/August 2017 • Sham and s423 argued. • On sham it was argued that only the settlor need have the shamming intent. • Judgment expected in November. +44 (0)20 7379 3550 13

  24. Paul Wright Thank you +44 (0)20 7379 3550

  25. Interim Remedies Against Third Parties to Arbitral Proceedings Edward Ho 12 October 2017 Brick Court Chambers +44 (0)20 7379 3550

  26. The problem often arises in fraud cases, e.g. the need for freezing injunctions; preservation of property orders; other mandatory & prohibitory interim injunctions. • Arbitral Tribunal only has jurisdiction and power over the parties to the arbitration agreement. It cannot grant relief against third parties to the proceedings. The Problem: How to Obtain Interim Relief against Third Parties to an Arbitration? +44 (0)20 7379 3550

  27. The Old Solution – s.44 Arbitration Act 1996 Section 44(1)&(2) provide: (1) Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings. (2) Those matters are— (a) the taking of the evidence of witnesses; (b) the preservation of evidence; (c) making orders relating to property which is the subject of the proceedings or as to which any question arises in the proceedings— (i) for the inspection, photographing, preservation, custody or detention of the property, or (ii) ordering that samples be taken from, or any observation be made of or experiment conducted upon, the property; and for that purpose authorising any person to enter any premises in the possession or control of a party to the arbitration; (d) the sale of any goods the subject of the proceedings; (e) the granting of an interim injunction or the appointment of a receiver. +44 (0)20 7379 3550

  28. Jurisdiction • Even if the Court can grant relief under s.44 AA 96 it needs personal jurisdiction over the defendant. • A service out route provided by CPR r.62.5(1)(b) ? “(1)The court may give permission to serve an arbitration claim form out of the jurisdiction if – … (b) the claim is for an order under section 44 of the 1996 Act. +44 (0)20 7379 3550

  29. DTEK Trading S.A. v Morozov & Anor [2017] EWHC 94 (Comm) (27 January 2017) • “[12]…orders under section 44 of the Act cannot be made against non-parties to the arbitration agreement, and hence … permission to serve out cannot be given against non-parties pursuant to CPR 62.5(1)(b)”: see [12] and [56]. • “[49] …if section 44 applications cannot be made against non-parties to the arbitration agreement, this creates a lacuna whereby a non-party can take steps to seek to thwart the arbitration agreement, with there seemingly being no right to obtain injunctive relief against that non-party pursuant to section 44 “[50] It is fair to say that the absence of a remedy in Chabra type and other acute cases is of concern... However the fact that there would be a lacuna is not a reason to find a jurisdiction which is not justified on the wording of the relevant sections against the relevant background +44 (0)20 7379 3550

  30. What now? • Section 37 Senior Courts Act 1981: Inherent jurisdiction to grant injunctive relief • AES Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35 at para 48 & 60 “[48] The better view, in my opinion, is that the reference in section 44(2)(e) to the granting of an interim injunction was not intended either to exclude the Court's general power to act under section 37 of the 1981 Act in circumstances outside the scope of section 44 of the 1996 Act or to duplicate part of the general power contained in section 37 of the 1981 Act. [60] …The general power provided by section 37 of the 1981 Act must be exercised sensitively and, in particular, with due regard for the scheme and terms of the 1996 Act when any arbitration is on foot or proposed.” +44 (0)20 7379 3550

  31. And How about Jurisdiction? • No route provided by CPR r. 62.5(1)(b) • Route in CPR r.62.5(1)(c)? (c) the claimant – (i) seeks some other remedy…affecting an arbitration…; and (ii) the seat of the arbitration is or will be within the jurisdiction or the conditions in section 2(4) of the 1996 Act are satisfied. No, see: Cruz City 1 Mauritius Holdings v Unitech Ltd[2015] 1 Lloyd's Rep. 191 • Gateway in CPR PD 6B Para 3.1(3)? See: DTEK at [57] (3) A claim is made against a person (‘the defendant’) on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and – (a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and (b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim. +44 (0)20 7379 3550

  32. Thank you +44 (0)20 7379 3550

  33. WITNESS EVIDENCE AT TRIAL Harry Matovu QC 12 October 2017 Brick Court Chambers +44 (0)20 7379 3550

  34. Judicial Scepticism • Onassis v Vergottis[1968] 2 Ll. Rep. 403, per Lord Pearce at 431 • Lord Justice Browne, Judicial Reflections (1982) • The Ocean Frost [1985] 1 Lloyd’s Rep 1, per Robert Goff LJ at 57 • Gestmin v Credit Suisse (UK) Ltd. [2013] EWHC 3560 (Comm), per Leggatt J at [15]-[22] +44 (0)20 7379 3550

  35. The Utility of Witness Evidence • To provide a narrative • To provide context for and explanation of the contemporaneous documents • To determine issues of fact where there are no contemporaneous documents • To provide an opportunity for cross-examination • Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638, [2006] FSR 17, per Lewison J at [25] +44 (0)20 7379 3550

  36. Preparation of Witness Statements • The Procedural Requirements • CPR Part 32 and Practice Direction 32 • Chancery Guide, paras. 19.1 – 19.6 • Commercial Court Guide 2014, para. H1.1 – H1.3 +44 (0)20 7379 3550

  37. Witness Statements: Content and Language • Chancery Guide, para. 19.3 • It is not, for example, the function of a witness statement to provide a commentary on the documents in the trial bundle, nor to set out quotations from such documents, nor to engage in matters of argument, expressions of opinion or submissions about the issues, nor to make observations about the evidence of other witnesses. • Commercial Court Guide, para. H1.1 • It is seldom necessary to exhibit documents to a witness statement • A witness statement should not engage in (legal or other) argument • Unless the court directs otherwise, witness statements should be no more than 30 pages in length +44 (0)20 7379 3550

  38. Witness Statements: Content and Language • The Delphine [2001] 2 Ll. Rep. 542, per Toulson J at [43]-[50] • JD Wetherspoon v Harris [2013] 1 WLR 3296, per Sir Terence Etherton C at [32]-[42] • Assi v Dina Foods Ltd. [2005] EWHC 1099 (QB) +44 (0)20 7379 3550

  39. Witness Familiarisation or Witness Coaching? • R v Momodou[2005] EWCA Crim 177; [2005] 1 WLR 3342 at [61]-[67] • Ultraframe (UK) Ltd. v Fielding [2005] EWHC 1638, per Lewison J at [22]-[31] +44 (0)20 7379 3550

  40. Witness Preparation in International Arbitration • The problem: • Need for a level playing field in matters of evidence preparation between parties and legal teams from different traditions • Double deontology – which standards apply? • The standards of the lawyer’s home jurisdiction? • The standards of the arbitral seat? +44 (0)20 7379 3550

  41. Witness Preparation in International Arbitration • IBA Guidelines on Party Representation in International Arbitration 2013 • Guidelines 18-25 on witnesses and experts • The Guidelines are not intended to displace otherwise applicable mandatory laws, professional or disciplinary rules, or agreed arbitration rules (Guideline 3). • Do the Guidelines solve the problems? +44 (0)20 7379 3550

  42. Some Judicial Attitudes to Witness Evidence • “Where there is a conflict of evidence between witnesses, some judges believe that they can tell whether a witness is telling the truth by looking at him and listening to him. I seldom believed that...” Browne LJ, Judicial Reflections (1982) • “... The ability to tell a coherent, plausible and assured story, embellished with snippets of circumstantial detail and laced with occasional shots of life-like forgetfulness, is very likely to impress any tribunal of fact. But it is also the hallmark of the confidence trickster down the ages.” Lord Bingham, The Judge as Juror (1985) +44 (0)20 7379 3550

  43. Contemporary Judicial Attitudes • Berezovsky v Abramovich [2012] EWHC 2463 (Comm), Gloster J • GestminSGPS SA v Credit Suisse (UK) Ltd. [2013] EWHC 3560 (Comm), Leggatt J • Republic of Djibouti v Boreh [2016] EWHC 405 (Comm), Flaux J +44 (0)20 7379 3550

  44. MEDIATING FRAUD CLAIMS Tony Willis and Stephen RuttleQC 12th October 2017 Brick Court Chambers +44 (0)20 7379 3550

  45. Mediation and Litigation Carl von Clausewitz (1 June 1780 – 17 November 1831) from his final work “VomKriege” (On War) “War is the continuation of diplomacy by other means or “All Diplomacy is war by other means” for War read Litigation for Diplomacy read Mediation +44 (0)20 7379 3550 2

  46. Lawyers Role in Mediation Lawyers role is critical. Played well it can produce remarkable results. • Advisor – chances of success/failure/the consequences • Strategist – teasing out the client’s real circumstances and aims • Tactician • Moral Philosopher • Advocate • Guiding Client’s advocacy +44 (0)20 7379 3550 3 4

  47. Advocacy in Mediation 1 Written advocacy • ‘Tone’ is really important • Preliminary Correspondence • Mediation Summary or Brief • Address the right audience • Brevity +44 (0)20 7379 3550 5 4

  48. Advocacy in Mediation 2 Oral Advocacy in Plenary • You are not addressing a Judge • Your real audience is not primarily the opposing Lawyers, it is the individual decision makers on the opposing side • If you insult or offend them gratuitously, they will not listen to the substance of what you say • They will instead concentrate on your unpleasant character and worse • In other words, you will not persuade them. +44 (0)20 7379 3550 5

  49. Advocacy in Mediation 3 • Your Client should speak (with your guidance) • Possibly instead of the Lawyers in suitable cases • Remember, this is a business discussion between business people • Beware letting the Experts out of their room • Beware those who don’t want a Plenary discussion. It is an essential and very powerful part of the process. Beware the Southern California problem. +44 (0)20 7379 3550 6

  50. Without Prejudice • A bona fide negotiation conducted in an attempt to compromise should be protected • The rule is not absolute – at least 10 exceptions. See EMW Law LLP v. Halborg[2017] EWHC 1014 for most recent authority and history (being appealed expected to be heard 18th January 2018). • ‘Off the record’ is not the same thing and probably has no meaning • Different Jurisdictions take a different view of the privilege, e.g. Scotland, Civil Law Countries +44 (0)20 7379 3550 7