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Weapons Available to Litigators in the Fight Against International Fraud: Part 1, Contributed by Richard Lewis, Hogan Lovells LLP

Friday, January 27, 2012

Particularly in fraud cases, the need to freeze a defendant’s assets has long been seen as essential in seeking to ensure that judgments do not go unsatisfied. The same is true of orders for the disclosure of assets: unless a claimant is informed of the nature and location of a defendant’s assets, policing a worldwide freezing order is likely to be impossible.

Worldwide freezing and disclosure orders have, however, become a familiar part of the English litigation landscape, and, where a claimant is faced with a well-funded and intransigent defendant, he will need to consider how effective they really are. What, for example, can a defendant legitimately do with his assets even though they are frozen? How effective will a freezing order be if he puts assets in the names of others? What recourse is available to a claimant if a defendant does not give full disclosure? And, what if he continues to deal with his assets in breach of a freezing order? Recent experience, in particular the ongoing litigation brought by BTA Bank, shows what the courts are willing to do to address such concerns.

In one of the largest sets of proceedings currently before the English courts, the now state-owned Kazakh bank, JSC BTA Bank, is suing its former chairman, Mukhtar Ablyazov, alleging the wrongful misappropriation of funds and assets running to over £3 billion. The litigation is made up of a number of discrete claims, many of which involve the grant of loans, on uncommercial terms and with no, or no proper, security, to offshore companies that the defendant is alleged to secretly own. Mr Ablyazov and some of his associates are currently living in London, giving rise to the English court’s jurisdiction over the claim.

As is often the case, this alleged fraud, along with a number of others currently occupying courtrooms around the world, came to light in the midst of the recent financial crisis. The last recession had a similar effect, bringing another bank previously little known in the West, BCCI, to the forefront of the legal world. At that time, Robert Walker J noted that, as the perpetrators of international fraud become more sophisticated, so must the armoury of the litigator who seeks to fight it.1 Never has that been truer than in the current age, where assets and funds can be hidden by, and dealt with between, companies in multiple jurisdictions at the push of a button. For a defendant using technology such as remote banking, anonymous e-mail addresses, and Skype, to name but a few, the weapons traditionally available to litigators are coming under strain.

New and more powerful weapons are needed and, in the appropriate case, are available to the litigator who knows what to ask for.

Part one of this article will look at the way in which the standard form freezing order can be made more effective; how a defendant can be required to attend for cross-examination to improve his asset disclosure; and the circumstances in which a court will, prior to judgment, appoint receivers to ensure that assets are not dealt with illegitimately. Next month, in the second part of this article, we will consider some more exotic weapons in a litigator’s armoury, such as search orders, orders for the disclosure of the content of an alleged fraudster’s email accounts, and one of the ultimate sanctions – orders committing a defendant to prison.

LIMITATIONS OF THE WORLDWIDE FREEZING ORDER

— The Maximum Sum

Back in the mid-1980s, the freezing order was being referred to as one of the two “nuclear weapons” in the court’s arsenal.2 But times change. As those who would be made respondents to freezing orders have become ever more adept at finding ways around them, the possibility that standard form freezing orders, even worldwide freezing orders, may sometimes be unfit for purpose needs to be recognised. In JSC BTA Bank v Ablyazov (No.2),3 it was held that, in the case of a defendant whose assets are located abroad, the standard form wording may require amendment to make a freezing order effective.

The most commonly used form of worldwide freezing order is that annexed to Part 25 of the Civil Procedure Rules(CPR) and seeks to prevent a respondent dealing with his assets, whether located in England or overseas, up to the value of the claim against him.4

The model order should serve to ensure that, to the extent that sufficient assets are initially located within England and Wales, they remain so and allow a judgment to be satisfied. However, in a case where the respondent’s assets are situated abroad, all the model freezing order actually does is ensure that those assets are not dissipated so as to reduce in value below the level of the claim. What they do not do is prevent dealings in any, or even all, of the overseas assets, so long as their objective value is maintained.

This permits mischief. For example, where a defendant to a £100 million claim has, as his only asset, a deposit of the euro equivalent of £100 million with a bank in France, the standard freezing order does not prevent him from withdrawing the cash and using it to buy £100 million worth of shares in a company incorporated in a far flung jurisdiction, such as the Marshall Islands. Yet, by doing so, he has ensured that his assets are no longer liquid or located in a jurisdiction in which enforcement should be relatively straightforward; now, they are illiquid and likely, in practice, to be very difficult to execute a judgment against. So the defendant has succeeded in putting his assets beyond the reach of the claimant, but has committed no breach of the freezing order.

Of perhaps even greater concern is that a transaction such as the one described above could be carried out without the need to inform either the court or the claimant, rendering the defendant’s asset disclosure meaningless, potentially within days of being given. The claimant would most likely remain entirely ignorant of the change to the defendant’s assets until the day when, long after proceedings having concluded, he arrives at the French bank to enforce his judgment.

In BTA v Ablyazov, Teare J was satisfied that such a mischief did indeed constitute “dissipation” as understood by the Court, and therefore held that it was appropriate in that case to amend the freezing order to prohibit all dealings in overseas assets unless assets of a sufficient value to cover the claimant’s claim were held within the jurisdiction.

— Assets Held by Nominees

One of the reasons given by Teare J for varying the freezing injunction to prevent dealings in overseas assets was the heightened risk of dissipation where a defendant’s assets are held through nominees. A subtle but important distinction between the model freezing order contained at the annex to CPR Part 25 and that in the Admiralty & Commercial Courts Guide has a significant impact on the ability of a claimant to identify and freeze the assets of such a defendant.

In JSC BTA Bank v Solodchenko,5 the respondent, a provider of nominee services in Cyprus, sought to resist disclosing the assets he held for others under the disclosure provisions of a worldwide freezing order. The claimant pointed to the wording of the disclosure provision in the freezing order (based on the model Commercial Court order), which required disclosure of assets “whether the Respondent is interested in them legally, beneficially or otherwise” to argue that disclosure of trust assets was indeed required. Those words do not appear in the form of order annexed to CPR Part 25.

On appeal from a decision of Proudman J in the Chancery Division, the Court of Appeal held that the wording of the order meant that the respondent would have to disclose any assets he held on behalf of others, including, importantly, those held on behalf of other defendants to the proceedings. In complex fraud cases, where nominee and trustee arrangements can be commonplace, this makes the Commercial Court form of order potentially a significantly more powerful weapon than that contained in the White Book. The Court of Appeal, however, stressed that, in future, it would be incumbent upon an advocate seeking an injunction without notice to draw to the court’s attention the fact that it was the Commercial Court form of order being sought and the effect the wording in question would have on trust assets.

CROSS-EXAMINATION

It has long been accepted that a freezing order cannot be effective without disclosure of a defendant’s assets. However, especially where assets are held in complex offshore corporate structures using trust and nominee holding arrangements, the written disclosure given by an unscrupulous defendant may often be insufficiently detailed to allow proper measures to be taken to ensure that assets are not dealt with illegitimately. In cases where disclosure is obviously insufficient, the court has the power to order a defendant to attend court for cross-examination.

The test as to whether the court will make an order requiring a defendant to be cross-examined on his asset disclosure is simply whether it is “just and convenient,” although the process has been accepted to be burdensome and will therefore only be ordered in exceptional circumstances. In practice, however, it would appear that where the disclosure given by a defendant is insufficient to allow a freezing injunction to be properly policed and no less burdensome alternative is readily available, the court will be prepared to make such an order. In another of the BTA decisions,6 Teare J held that the disclosure given by the defendant was “extraordinarily inadequate” and it was therefore appropriate that he be ordered to attend for cross-examination.7

PRE-JUDGMENT RECEIVERSHIP

So, what if even the unusual measures described above, such as the unlimited freezing order and orders for cross-examination, are neutered by a defendant who is willing to evade and mislead as to his assets, even under oath? What, then, does the litigator have left in his arsenal? One answer is to ask the court to appoint receivers over the assets of an unco-operative defendant.

While courts have historically been comfortable in appointing receivers over the assets of a defendant against whom judgment has already been entered, there are no more than a handful of reported cases in which the court has appointed receivers prior to judgment. That said, recent experience shows that courts are willing to consider what is accepted to be an extremely intrusive remedy if a claimant can show that there is a real risk that the defendant will not abide by a freezing order. In JSC BTA Bank v Ablyazov8 Teare J ordered what is believed to be the largest pre-judgment receivership ever granted by the English courts.

The circumstances in which the appointment of receivers in support of a freezing order would be justified had previously been considered in three reported cases: ICIC v Adham,9 Derby v Weldon (Nos. 3 and 4),10 and Don King Productions v Warren.11 Between them, these cases suggest that a receiver should be appointed where the “proper preservation” of assets requires it and that courts would not hesitate to “take drastic action” on appropriate occasions. Potential damage to the defendant’s assets is, however, a factor to be borne in mind.

In BTA v Ablyazov, Teare J referred to each of the above decisions in rejecting the defendant’s submission that the appointment of receivers would only be justified where there is strong evidence that the freezing order is being breached. Instead, the Judge held that the question that the court must ask is whether the freezing order provides adequate protection against the risk that the defendant’s assets may be dissipated prior to judgment. In the circumstances of BTA, the Judge held that because: (1) there were substantial grounds to believe that the defendant had initially given inadequate disclosure so as to make effective enforcement of the freezing order difficult; and (2) the structure by which the defendant held his assets, which included trust and nominee arrangements, as well as companies incorporated in offshore jurisdictions, would enable assets to be dealt with illegitimately, there was good reason for making a receivership order.

The defendant also submitted that, regardless of whether there was good reason to make a receivership order, the court should only do so where the risk of damage to the defendant’s business was very small. The defendant claimed that the imposition of a receivership over his majority stakes in banks could be mistaken for some form of insolvency procedure and therefore risked causing a “run” on those banks when the general public found out – causing a loss that would be far from very small.

Teare J rejected the notion that the appointment of receivers would only be countenanced where the risk of damage was very small but did accept that a risk to operating businesses was a highly material factor to bear in mind. The Judge observed that the role of the receivers is to preserve assets and that they could be expected to strive to limit the damage that their appointment might cause. He also noted with approval the stated intention of the receivers to obtain control of the defendant’s assets by taking in the shares of the companies at the top of each chain and not to seek to become involved with the running of the operating companies without the permission of the court. Given that losses were conceivable, the Judge ordered the claimant to fortify its undertaking in damages with a significant payment into court.

Teare J’s decision was later upheld by the Court of Appeal, which endorsed his imposition of a receivership.12These decisions, and the rationale for them, should serve to emphasise to defendants the importance of giving proper asset disclosure when first ordered to do so.

EXTENDING A RECEIVERSHIP WITHOUT NOTICE

Unlike a freezing order, which purports to freeze all of a defendant’s assets, both disclosed and undisclosed, a receivership will usually be limited to those assets that a defendant has disclosed and that are therefore capable of express identification in the order (if for no other reason than, in practice, receivers will usually be unwilling to take more uncertain an appointment). Where, as in the BTA case, a receivership is imposed partly on the basis that the defendant’s asset disclosure has been deficient, this is an obvious shortcoming in the order.

Undisclosed assets are only therefore likely to fall under the receivers’ control where the claimant is able to identify them and have them added to the receivership. If such further assets are identified, however, applying on notice to the defendant to have them added to the receivership may well be to no avail: by this point, the claimant can assume that the defendant will have no compunction in moving assets away from the further companies, or cash out of their bank accounts, before the receivers can take control of them. Albeit an extreme course, it may well be necessary to apply to extend the receivership without notice to the defendant.

Three such applications were made in JSC BTA Bank v Ablyazov,13 resulting in the shares in a total of 636 additional, undisclosed, companies being added to the receivership granted against the defendant. The test for the addition of assets to a receivership in circumstances where the defendant had not admitted to owning them, which was held by Teare J to be whether there was good reason to believe that the defendant was in fact the beneficial owner of the assets in question, was satisfied in that case. The Judge also held that it had been appropriate for the claimant to proceed without notice to the defendant.

Of course, such an extension of a receivership is only possible where the claimant has been successful in identifying assets that the defendant has sought to conceal. The second part of this article will look at the way in which that can be done, as well as the possibility of imprisoning a defendant for his attempted concealment of assets.

© 2012 Hogan Lovells LLP

Richard Lewis is a senior associate in the litigation team at Hogan Lovells LLP. Richard has acted for BTA Bank in a series of major fraud cases against Mukhtar Ablyazov for a total of approximately U.S. $5 billion. Telephone: +44 (0) 20 7296 2000; E-mail: richard.i.lewis@hoganlovells.com.

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