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Banking & financial disputes

Fraud – Freezing orders, Norwich Pharmacal orders, and Bankers Trust orders

Recent cases on aspects of typical fraud orders

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Freezing orders

A freezing order acts to restrain a respondent from dealing with or disposing of its assets and is typically sought to preserve the respondent’s assets until a judgment can be obtained by the claimant and satisfied.

Parties can usually expect that a court will only exercise its discretion to grant a Worldwide Freezing Order (“WFO”) where it is just and convenient to make the order, and where the applicant has demonstrated that there is a real risk of dissipation of the respondent’s assets. A WFO, as the name suggests, extends to assets located anywhere in the world and is a particularly draconian measure.

The court will typically consider a number of factors when deciding whether there is a real risk of dissipation. These factors include (a) whether the respondent has already taken any steps to dispose of their assets or (b) has shown an intention to do so. Other relevant considerations include the respondent’s financial standing, credit history and the ease at which their assets may be moved or disposed of. As the following recent case shows, evidence of dishonesty will also have a bearing on the court’s decision and may prove to be a significant factor.

GML International Ltd v Harfield [2020] 7 WLUK 362

In this case, the High Court, granted an application for a post judgment WFO against a respondent against whom judgment had been obtained who had fabricated his defence in the underlying proceedings.

The High Court’s decision was unusual as there was no direct evidence that the respondent had taken any steps to dissipate his assets. In granting the order, the court took into account the respondent’s dishonest conduct in the proceedings, and the decision serves as a salient reminder of the discretionary nature of WFOs.

YS GM Margin II and others v Lakhani and others [2020] EWHC 2629 (Comm)

The High Court has recently given judgment in another case which serves to re-enforce the discretionary nature of WFOs.

The court was asked to consider whether it was improper for the claimants, who had obtained a WFO against the defendants, to notify a third party outside the jurisdiction of the WFO. In this particular case, the claimants had sent a letter enclosing a copy of the WFO to a number of individuals, companies and financial jurisdictions outside the jurisdiction. The letter stated:

“Any other person who knows of this Order and does anything which helps or permits the respondent to breach the terms of this order may also be held to be in contempt of court and may be imprisoned, fined or have their assets seized.”

The court confirmed that it was not an abuse of process for the claimants to notify third parties outside the jurisdiction of the WFO as part of a legitimate aim of trying to make a WFO effective. The judge did warn, however, that it was important not to misrepresent the effect of the WFO to a third party outside the jurisdiction. In the judge’s view, the claimants’ references to proceedings for contempt of court were not appropriate since it would be unusual for contempt of court proceedings to apply directly to a third party outside the jurisdiction. While the judge acknowledged that the terms of the claimants’ original letters went too far, he did not consider it was appropriate to discharge the WFO on that basis. Accordingly, the court simply required the claimants to send ‘corrective’ letters explaining the position to all relevant parties.

Norwich Pharmacal orders

A Norwich Pharmacal Order (“NFO”) is an order for disclosure against a third party who has been identified as holding information that will enable an applicant to plead its case against the wrongdoer, trace assets or to bring proprietary claims.

There does not need to be a definite intention to commence proceedings against the wrongdoer. However, the courts will not allow the equitable doctrine to be used as a “fishing expedition”, nor will they allow the information sought to be used for an improper purpose.

The following hurdles (taken from the judgment of Saini J in Collier v Bennett [2020] EWHC 1884 (QB)) must be overcome by an applicant if their application for an NPO is to succeed:

(i)               The applicant has to demonstrate a “good arguable case” (see below) that a form of legally recognised wrong has been committed against the applicant by a person.

(ii)              The respondent must be involved in it so as to have facilitated the wrongdoing whether innocently or not.

(iii)            The respondent must be able, or likely to be able, to provide the information or documents necessary to enable the ultimate wrongdoer to be pursued.

(iv)            Requiring disclosure from the respondent is an appropriate and proportionate response in all the circumstances of the case.

Additionally, a NPO will not generally be granted against a respondent who is likely to be a party to the potential proceedings.

Hickox v Dickinson & Anor [2020] EWHC 2520 (Ch)

In this case, the judge gave welcome guidance on the requirement of a “good arguable case” of wrongdoing.

The application for an NPO arose in connection with the misappropriation of an 1896 artwork of Paul Signac. The painting belonged to the applicant, and she claimed it was stolen from her by a former art dealer, Mr Timothy Sammons. The second defendant, Simon Dickinson Limited (“SDL”), acted as agent for the purchaser of the painting, and consequently Ms Hickox believed that SDL held information including the location of the painting, details of transactions involving the painting and the identity of the purchaser. Mr Sammons had already been convicted of grand larceny and fraud, in relation to the misappropriation, in New York in July 2019.

The judge held that the existence of Mr Sammons’ wrongdoing was not sufficient for her to grant an NPO as Ms Hiscox did not need the NPO in order to obtain judgment against him as she had already obtained judgment in New York. The judge ruled that a separate wrongdoing of a third party was required in order to obtain an NPO. Ms Hiscox argued that she was able to meet this requirement because whoever obtained the painting from Mr Sammons committed a conversion or was subject to claims in bailment. She contended that without the NPO she was unable to specify or plead her claims against such person.

The defendants argued that the claimant’s application was speculative and a NPO could not be used to find out if there were wrongs other than those committed by Mr Sammons.

The judge observed that: “In all Norwich Pharmacal applications the claimant’s case is partly inchoate, that is the very point of the relief” and that: “…the fact that the claimant has not yet identified the wrong she alleges does not mean that the application is a fishing expedition as to whether she has a good arguable case.” The judge further explained that the “good arguable case” test “…goes to the existence of any wrong as well as its potential merits.”

In relation to the level at which a claimant needs to show a good arguable case, the judge stated that: “…if there is a clear defence or no good arguable basis for essential elements of a cause of action then that may well prevent the claimant establishing a good arguable case for that wrong.” The judge was satisfied that the claimant had established a good arguable case of conversion against any person who has taken possession of the painting in relation to the sale or subsequently. Based on the conviction of Mr Sammons, the judge considered there was “…strong evidence of a theft that would make subsequent purchasers taking possession liable in conversion…”

The court concluded that the allegations of bailment alone would not have justified an NPO because bailment related torts required proof of knowledge or notice which, given the absence of information, could not yet be made out. So, it remained speculative to suggest anyone came into possession with notice, whereas it was not disputed that someone had simply come into possession.

The case gives a useful overview of the requirements for an NPO. The point that an application will not be considered speculative merely on the basis that the specific wrong has yet to be identified is a welcome clarification.

Bankers Trust orders

The seminal case of Bankers Trust v Shapira [1980] 1 WLR 1274 (CA) concerned a defrauded claimant’s equitable right to trace the claimant’s original assets into either the proceeds of sale of the assets or new substituted assets. It was held that, to give effect to the right to trace, the court had jurisdiction to order a bank to disclose the state of, and documents and correspondence relating to, the account of a customer who was, on the face of it, guilty of fraud. It did not matter that the bank itself had not incurred any liability for the fraud.

Bankers Trust orders will not be granted lightly. To obtain such an order the evidence of fraud against the bank customer must be very strong; that is, there must be a good reason to believe that: (a) the property in question belongs to the claimant; (b) the claimant has been fraudulently deprived of it; and (c) delay might result in the dissipation of the funds before the action comes to trial.

There must also be a real prospect that the information sought might lead to the location or preservation of assets against which the claimant might make a proprietary claim.

In the above mentioned case relating to NPO’s, Hickox v Dickinson, the claimant submitted that the court also had jurisdiction to order the provision of information under the power recognised and described in Bankers Trust v Shapira.

However, the judge said that, in circumstances where the claimant has justified the requested order under the Norwich Pharmacal jurisdiction, it cannot be shown that an order is required under the Bankers Trust jurisdiction. Accordingly, the judge was not satisfied that a Bankers Trust order should be made.

The judge said that if she were wrong in deciding that a NPO could be made, then she was still not satisfied that relief should be given under the Bankers Trust equitable jurisdiction. That jurisdiction depended on a party showing a strong case that their property had been misappropriated. Here, the claimant’s case as to conversion was a good arguable one, but there was no evidence of any risk of dissipation, which was ordinarily an element justifying Bankers Trust type order.

In general, the Bankers Trust jurisdiction is only exercisable where, on the face of it, there is a clear case that the relevant funds held by, or that passed through, the bank belong to the claimant and the claimant has been fraudulently deprived of them.

However, in Miles Smith Broking Ltd v Barclays Bank plc [2017] EWHC 3338 (Ch) the judge saw no reason why a trustee would not be able to obtain a Bankers Trust order. In that case, a claimant reinsurance broker (“MSB”) had contracted with a second broker (“SMP”) to collect premiums from a reinsured (“ES”) for the reinsurer (the “Consortium”). SMP, who held an account at Barclays, collected the premiums from ES but had failed to remit the premiums to the Consortium.

MSB submitted that SMP had held the premiums on trust for MSB, and it in turn had held them on trust for ES to pay the Consortium. MSB applied to the court for a Bankers Trust order and a NPO because, it submitted, documents held by Barclays relating to SMP’s account would or might allow MSB to identify who within SMP (likely one of the directors) instructed the monies to be paid away. Master Clark agreed and granted the Bankers Trust order and a NPO on the basis that MSB had a good arguable case (i) that it was the beneficial owner of the premiums held in SMP’s account and (ii) a claim existed against those who procured the payment of the funds out of the account.

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