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Corporate fraud, investigations and asset recovery update November 2011

ContentsHerbert Smith’s guide to post-revolution asset recovery 4

Inexpensive remedies at any price? The issues surrounding ‘DIY freezing orders’ 6

Results of voting at Herbert Smith event “The European Account Preservation Order Regulation – what impact will it have and should the UK opt in?” 8

Security For Costs: make no promises and tell me no lies — Dubai Islamic Bank v PSI Energy Holding Company BSC and Ors [2011] EWCA Civ 761 10

Judgment debtor escaping the arms of English jurisdiction? Joujou v Masri [2011] EWCA Civ 746 12

Court of Appeal rules that identity of employees making money laundering reports can be redacted when disclosing documents in Shah and another v HSBC Private Bank (UK) Limited [2011] EWCA Civ 1154 14

A view from Hong Kong 17

Free-standing freezing injunctions in the Cayman Islands – Time for legislative change? VTB Capital PLC v Konstantin Malofeev and Others 19

Accessing Offshore Trust Assets: equitable execution over the power of revocation Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited and Others 21

The decision in Cadogan Petroleum Plc and Ors v Mark Tolly and Ors 23

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Editorial

Welcome to our latest fraud briefing. With the recent capture and fall of Libyan despot, Colonel Gaddafi, we are pleased to introduce Herbert Smith’s guide to post-revolution asset recovery, which seeks to de-mystify the multitude of over-lapping criminal and civil law remedies available to new or interim governments working to trace and recover misappropriated assets unlawfully accumulated and diverted from state coffers. In many cases, these assets will already have been frozen by sanctions regimes recently imposed by the US and the EU. Thus, recovery of real estate and bank accounts in places such as London, Paris and Zurich will be relatively straightforward. However, other cases will be less clear-cut. In recent years our widely experienced civil fraud group has seen examples of complex schemes involving state-owned companies or banks, which have been used to disguise the laundering of monies into networks of offshore companies and trusts controlled by former heads of state or senior public officials and their associates. Carrying out a thorough investigation of records and documents and other information left behind by former dictators and their close confidantes requires a disciplined and systematic approach. A further pre-requisite is an extensive knowledge of how to use available legal remedies for freezing assets, how to secure evidence from third parties such as banks, and how to ensure maximum cooperation from the relevant authorities in other sovereign states to which misappropriated assets may have been transferred. No doubt the ensuing legal processes which follow on from the fall-out of the Arab Spring will be well worth further observation and commentary in the coming months.

Also in this briefing there are updates from Robert Hunter, Emily Lew, Lucy Westwood, Susannah Cogman, Richard Norridge, Elizabeth Brogan and Ben Cameron. Many thanks to all contributors.

Simon Bushell Co-chair of fraud group

3Corporate fraud, investigations and asset recovery update – November 2011

Herbert Smith’s guide to post-revolution asset recovery

Since early 2011 parts of Africa and the Middle East have experienced extraordinary political upheaval. New or interim governments have been formed in Tunisia, Egypt and Libya, and there is ongoing unrest in Bahrain and serious political upheaval in Syria and Yemen.

In addition to the acute social and political issues associated with these developments, those with serious economic interests connected with these countries will face a challenging range of legal issues involving a variety of overlapping sanctions regimes, principles of public and private international law, as well as domestic and foreign criminal law. In particular, new or transitional governments, their officials, state-owned entities and other bodies will be considering whether and how to deal with the accumulation – and in some cases misappropriation – of wealth, property and commercial opportunities by members of the former regime, their families and associates. Indeed, in recent months the former President of Tunisia, Zine al-Abidine Ben Ali, together with members of his family, has been convicted in absentia of several offences and sentenced to imprisonment. The former President of Egypt, Hosni Mubarak, is currently on trial facing charges of corruption and complicity in the killing of protestors. Meanwhile in Libya, Muammar Gaddafi has been ousted and replaced by the National Transitional Council who are working to secure and stabilise the country as well as trace members and assets of the Gaddafi regime.

Much attention has already been given to the financial sanctions introduced by the UK, EU, US and the UN targeting members of deposed governments or former heads of state, their families and associates, and, in the case of Syria, the current head of state and various associates. To read Herbert Smith’s briefing on those sanctions, click here. However, those sanctions – while welcome – are of only limited effect. Sanctions are effective where assets are held or controlled by the parties named in the order giving effect to the sanction. But, in many cases assets will be held in elaborate structures consisting of companies, trusts and offshore vehicles, and administered by associates and advisers on behalf of the individuals targeted by the sanctions. In addition, sanctions are only designed to freeze the assets in question, and do nothing to resolve the thorny questions of who is the proper owner of the assets, and whether they were acquired legitimately.

In response to these developments, a team of Herbert Smith’s fraud and corruption experts have prepared a short Guide to post-revolution asset recovery which examines and de-mystifies the legal issues faced by new

or transitional governments, their officials and public bodies (who we refer to in this Guide as the potential claimants). The issues are considered from the perspective of English law. English law is significant in this context for a number of reasons:

• Londonisoneoftheworld’sleadingfinancialcentres,giving rise to the likelihood that assets which are the subject of claims may be directly or indirectly invested in, or transferred through, the City of London;

• Apartfromitsfinancialimportance,Londonisalsoacultural and social magnet, to which relevant individuals (such as potential defendants, their families, advisers or agents) may be drawn;

• Aswillbeseenfromthediscussionbelow,theEnglishlegal system provides a very wide range of measures, both civil and criminal, which can be brought to bear by potential claimants in the search for and recovery of misappropriated assets. Importantly, the same is true of the many English-law-based offshore jurisdictions, such as the Isle of Man, the Channel Islands, the Cayman Islands and British Virgin Islands, as well as those major Asian financial centres with English-law influenced legal systems, Singapore and Hong Kong. These remedies are backed by strong enforcement measures. In the event that certain court orders are breached a defendant can be de-barred from defending the substantive issues, fined, or even given a custodial sentence. In the event that a defendant misleads the court when giving evidence under oath, prosecution for perjury is also a real possibility;

• Aswellasbeingflexibleandefficient,theEnglishlegalsystem is transparent and highly regarded worldwide, which means that judgments obtained in English courts are readily enforceable overseas, and also carry a significant moral weight which may be of particular interest to potential claimants seeking to censure those who have improperly benefited at the expense of the state. On the opposite side of the coin is the fact that the impartiality and integrity of our judicial process means that “politically exposed persons” might consider the UK as something of a “safe haven”.

It is, of course, impossible to consider all the different factual circumstances which might give rise to claims to recover assets following revolution or change of regime. There will be many potential claimants, and many potential defendants, who may have enriched themselves or others in any number of ways. The Herbert Smith Guide to post-revolution asset recovery does not attempt to consider all such possible claims, but instead will examine the

4 Corporate fraud, investigations and asset recovery update – November 2011

http://www.herbertsmith.com/publications

procedural tools and mechanisms available under English law for each of the key steps in the process of recovering misappropriated assets: intelligence and evidence gathering; securing and preserving assets; establishing ownership of or entitlement to the assets; and enforcing court orders and repatriating assets.

In each case, English criminal and civil law is discussed, and the strengths and weaknesses of each are highlighted. The focus of the analysis of the criminal law mechanisms is directed towards the assistance which English law offers where the principal wrongdoing occurs outside England, for example fraud or theft occurring within a foreign state.

We hope that this brief introduction to the Guide to post-revolution asset recovery is of interest, and should you wish to access the guide please click here (you will be asked to formally register your interest). Should you require any further information please contact any of the co-authors of the guide below.

Simon Bushell


http://www.herbertsmith.com/info/post-revolution-asset-recovery

Suppose someone in another European Union member state – say, Bulgaria – owes a friend of yours £3,000. He says that he is going to do everything he can to avoid your friend getting his money. You could tell your friend about the worldwide freezing injunction available in the courts of this country. You could tell him that Bulgaria may assist your friend’s action by granting their own domestic injunction against the debtor pursuant to article 31 of the Brussels Regulation. Or you could just be realistic and tell him that, for the sake of £3,000, he is priced out of the international injunction market. Perhaps he should just let it go. After all, life’s not fair.

Your friend’s position may change with the draft European Account Preservation Order (EAPO) regulation. The UK government announced on 31 October 2011 that the UK is not going to opt in to this regime, but will nonetheless participate in the negotiations relating to the Regulation with a view to opting in in the future. If the UK eventually opts in to the scheme then your friend could apply for a standard form bank account freezing order in one European country that will be enforced in banks in another European country virtually automatically. If he can invoke the special jurisdiction provisions of the Brussels Regulation for his action on the merits, he may well be able to apply for the EAPO in his own courts.

There is no need for lawyers, or even – save in exceptional cases – for an oral hearing. The application is made by means of a simple form which can be completed by email and sent with supporting documents. Your friend will have to show that his case appears to be ‘well founded’ and arguably (depending on how you read the draft regulation) that there is a risk of dissipation of assets by the debtor. There are a few other things that he will need to include but, if the requirements are met, the court must grant the EAPO within seven days. Your friend is no longer priced out of the international injunction market.

In fact, the draft regulation contains many provisions intended to make your friend’s position easier. What happens if your friend doesn’t have details of his debtor’s bank account? The draft regulation institutes a procedure whereby all the debtor’s bank accounts in Bulgaria must be found. (The UK will have to set up a similar system here, if it adopts the regulation.)

Will your friend have to put up security or give a cross undertaking in damages? Only if the court says so. Will your friend have to tell the debtor that he is applying for an injunction? Not unless he wants to. The draft regulation gives him a right to a ‘without notice’

application. Will your friend owe a duty of full and frank disclosure when he applies for an EAPO? No – he need only tell the court whether he has similar actions pending in other courts or already has other injunctive relief. If the debtor doesn’t think that the case is well founded, he must apply to set the order aside.

Now imagine you have just returned from a skiing holiday in Italy. Suddenly, your cheques keep bouncing. It turns out that the owner of the skiing chalet you were in says that you stole the TV and that a replacement will cost the equivalent of £3,000. The Italian courts regard his case as well founded and have granted him an EAPO, freezing funds in your bank account up to the value of £3,000. You are outraged. The chalet owner accused everyone in the chalet of stealing the TV and eventually reported one of his employees for the theft. He hasn’t disclosed this in his EAPO application.

Without any duty of full and frank disclosure, he didn’t need to. You might well want to apply to set the order aside on the basis that the action is not ‘founded’. You can do this in your country of domicile if you are being sued as an insurer, consumer or employee (your best hope is to say you are being sued as a consumer). Otherwise, you have to apply to the courts of Italy (again, by email in a form attached to the draft regulation). But the attachment is an embarrassment. Some people might decide just to let him have the money and walk away. After all, life isn’t fair.

No legal system should be complacent about pricing litigants out of remedies. But there are no easy answers. The EAPO, a sort of DIY freezing/attachment order available throughout Europe which can be applied for by letter, fax or email, is a great idea. But the fairness of the procedure heavily depends upon the alleged debtor’s right to set the EAPO aside.

We can say goodbye to the injustice of many litigants being priced out of injunctive relief in Europe. But instead, we must say hello to the injustice of many other litigants being forced to urgently apply to overseas legal systems, with which they are unfamiliar, in order to unfreeze their assets. They may be priced out of legal representation, too.

It is also true that the English court has been prepared to grant freezing injunctions relating to assets abroad for many years. But this has been subject to safeguards for the alleged debtor that are not in the EAPO procedure. It is also true that the European Commission has concluded that there should be protection for those sued as “consumers, insureds and employees”. They

Inexpensive remedies at any price? The issues surrounding ‘DIY freezing orders’


can apply to have the EAPO set aside in their own courts. But that still leaves quite a lot of others.

It is, of course, a question of finding the right balance. A legal system cannot be perfect but, at the end of the day, it should enjoy a measure of public confidence. Do Europeans yet have sufficient confidence in the courts of other European states for the proposed EAPO procedure to be regarded as fair? This is the question we need to address.

(As published in Legal Week, 29 September 2011)

Robert Hunter


In our June 2011 Corporate Fraud, Investigations and Asset Recovery Update, we discussed the upcoming Europe-wide freezing order regulation. On 25 July 2011, the European Commission released the proposed European Account Preservation Order (EAPO) Regulation, which has been submitted for consideration by the European Parliament and the Council of the EU. The UK government announced on 31 October 2011 that it will not opt in to the Regulation, but instead will participate in the negotiations relating to the content of the Regulation with a view to opting in to the regime in the future.

The Regulation introduces a new and additional kind of bank freezing order which is intended to be available throughout the European Union. The regime, if it is eventually adopted in the UK, will impose new requirements on the infrastructure of the court system and will materially change the way banks do business in relation to requests to search and freeze accounts. Given that it is intended to be available in the courts of any EU Member State, it is reasonable to expect increased demands on banks in consequence.

In our 1 August 2011 e-bulletin, we set out a quick reference guide to the draft Regulation, looking at what it is likely to mean in practice.

On 21 September 2011, we held a seminar entitled “The European Account Preservation Order Regulation – what impact will it have and should the UK opt in?” At this event, a panel discussed the likely effects the Regulation will have in different EU Member States and the question of whether the UK should opt in to the Regulation. The discussion was introduced by Robert Hunter, who served on a panel of experts to the European Commission in relation to proposals for the EAPO, and waschaired by The Hon. Mr Justice Michael Burton. Other panelists included:

• Roger Brown, Executive Director of Euro & Statistics, British Bankers’ Association

• Steven Gee QC, Head of Stone Chambers, author of “Commercial Injunctions”, Sweet & Maxwell

• Professor Doctor Burkhard Hess, Director, IPR Institute, University of Heidelberg, and expert to the European Commission in relation to the proposed EAPO

• Eral Knight, International Directorate, Ministry of Justice

Opinion was sought from the audience, comprising lawyers and financial institution industry members, by way of interactive voting. We set out a summary of the results of the voting below.

At the beginning of the evening, Robert Hunter explained that there were essentially three options facing the UK government:

1. it could opt in to the draft Regulation and be bound by the finalised version;

2. it could opt out of the draft Regulation but participate in the negotiations with a view to opting in at a later date if the finalised version of the Regulation was satisfactory; or

3. it could opt out of the draft Regulation altogether.

The second of these options was the one selected by the UK government, but this was not announced until 31 October.

At the outset of the event, there was moderate support for the concept, with a vote on the question “Are you in favour of the draft Regulation in its current form?” garnering 59% support (with 53% agreeing and 6% strongly agreeing. 25% disagreed and 15% strongly disagreed).

By the end of the discussion however, the same question revealed a very different result, with only 1% strongly agreeing and 37% agreeing. 35% disagreed and 27% strongly disagreed. It was apparent that there was general opposition to opting into the Regulation: of the voters, only 3% strongly agreed and 5% agreed with this option. 22% disagreed and an overwhelming 70% strongly disagreed.

It was apparent that there was general opposition to opting into the Regulation: of the voters, only 3% strongly agreed and 5% agreed with this option. 22% disagreed and an overwhelming 70% strongly disagreed.

The probable reason for this was exhibited by two further questions:

1. Are you concerned that the Regulation provides sufficient protection for the interests of the creditor? and

2. Are you concerned that the Regulation provides sufficient protection for the debtor?

Results of voting at Herbert Smith event “The European Account Preservation Order Regulation – what impact will it have and should the UK opt in?”


http://www.herbertsmith.com/Publications/Corporatefraudebulletin080611.htm

http://www.herbertsmith.com/Publications/Corporatefraudebulletin080611.htm

http://ec.europa.eu/justice/newsroom/news/20110725_en.htm

http://www.herbertsmith.com/Publications/Litigationebulletin010811.htm

Of the voters on the first question, 15% strongly agreed and 14% agreed; 36% disagreed and 35% strongly disagreed. In relation to the second question, 66% strongly agreed, 22% agreed, and only 5% disagreed and 7% strongly disagreed.

It seems people felt strongly that there were insufficient protections in the Regulation for the UK to commit itself to opting in. The vote for opting out at this stage and participating in the negotiations, with a view to potentially opting in at a later date if the Regulation was felt to be satisfactory, supported this approach. 45% strongly agreed and 41% agreed with this option. Only 8% disagreed and 6% strongly disagreed.

It seems that the UK government agreed with the views expressed at the event, as the announcement that the UK would not opt in to the Regulation contained references to the lack of debtor safeguards and the likely impact on banks and on the government.

If you wish to delve deeper into this issue, please click here for the source materials (including the Ministry of Justice consultation documents) conveniently set out.

Emily Lew


http://www.herbertsmith.com/Publications/TheEuropeanAccountPreservationOrderRegulation

The recent Court of Appeal decision in Dubai Islamic extended the circumstances in which security for costs will be granted, offering hope for parties who suspect but are unable to prove that the opposing party will leave any order for costs unsatisfied.

When can a party obtain security for costs?

Security for costs is a protective measure available under CPR 25.12. It can be obtained by a party against the risk of being unable to enforce any award for costs that may be granted at a subsequent stage. CPR 25.15(1) gives the court power to order security for costs of an appeal against an appellant or a respondent (who also appeals), on the same grounds as it may order security for costs against a claimant under Part 25.

A party entitled to seek security for costs only in limited circumstances. CPR 25.13(1) specifically provides that a court may make an order for security for costs under CPR 25.12 if it is satisfied, having regard to all the circumstances of the case that it is just to do so; and if one or more conditions of CPR 25.13(2) apply. Typically, applications are made where the respondent to the application is outside the jurisdiction, or is a company and there is reason to believe that it will be unable to pay the applicant’s costs. However, and of use for those involved in a fraud, an application can also be made under CPR 25.13(2)(g) where:

“the claimant [or appellant] has taken steps in relation to his assets that would make it difficult

to enforce an order for costs against him”.

Until Dubai Islamic, the problem faced by someone being sued by a claimant with a “record of dishonesty”, was that whilst the defendant might (correctly) suspect that, based on a claimant’s prior conduct, any costs liability would not be met, the claimant’s mere propensity to take steps adverse to a defendant’s financial interests was not enough to obtain security for costs. Actual steps must have been taken to make it difficult for the defendant to enforce a costs order (see Aoun v Bahri [2002] All ER 182), although those steps need not have been taken with the specific intention of defeating enforcement. As Mr Justice Langley had stated in

Compagnie Noga d’Importation et d’Exportation SA [2004] EWHC 2601 (Comm) at [117]:

“The rule is not aimed at the impecunious or the dishonest as such but at the illegitimate hiding of assets”.

Mr Justice Langley acknowledged at [118] the difficulty that this created. In many cases, a defendant will not know what the claimant’s assets are and therefore will not be in a position to show that the claimant has taken any steps to render enforcement of a costs order difficult or futile. Counsel in Noga had sought to overcome this difficult by submitting that the Court should apply what is known as a “double inference”.

The double inference(per Lord Tomlinson in Dubai Islamic at [26])

Is there a reasonable inference on all the evidence before the court that a party has undisclosed assets?

If so, the failure to disclose the assets could itself, although it might not necessarily, lead to the inference that the claimant had put them out of reach of his creditors including a potential creditor for costs.

The submission of counsel for the applicants in Noga had been unsuccessful: Mr Justice Langley refused to make the double inference. However, the Court of Appeal in Dubai Islamic held that a double inference could be made and indeed went so far as to say that it should be made in certain circumstances. Lord Tomlinson at [30] to [31] set out the threshold circumstances which would likely lead to an order for security for costs under CPR25.13(2)(g):

“Where a party seeks to suggest that he is devoid of assets and yet able to maintain an expensive lifestyle and to fund litigation on the basis of loans from his family or other third parties, it is incumbent upon him in my judgment to provide details of the nature of those loans, the terms upon which they are granted and in particular to condescend to some further detail in relation to the efforts he has made in order to obtain further funds from the same sources.

When no such details are given and when the evidence is at such a high level of generality as to say that the source of living expenses and legal expenses is mostly

Security For Costs: make no promises and tell me no lies — Dubai Islamic Bank v PSI Energy Holding Company BSC and Ors [2011] EWCA Civ 761


loans from family and family affiliated companies and third parties without any further details volunteered, it is in my judgment possible and in many cases appropriate for the court to draw the double inference”.

Non disclosure: just how bad does it have to be?

The facts in Dubai Islamic give some guidance as to when the Court will consider it appropriate to make the double inference.

The appellant (the defendant in the main action) claimed to have living expenses of £6,000 a week and had incurred considerable legal fees in defence of the underlying claim. However, he refused to provide any evidence in support of living expenses or details of an alleged first mortgagee over a property held by him as this was “private and confidential”. The claimant merely stated that his lifestyle was funded by loans from friends, family and third parties.

Whilst the court’s willingness to make the double inference expands the application of CPR 25.13(2)(g), in practice, the threshold requirement for a claimant to suggest that he is devoid of assets whilst maintaining an expensive lifestyle materially limits those parties who will benefit from the Dubai Islamic decision. It is a rare claimant who seriously opposes an application for security for costs yet simultaneously maintains that he does not have any assets. The findings in Dubai Islamic are only likely to come into play where a claimant or party to an appeal is subject to a freezing order and/or asset disclosure orders. For applicants who have already obtained a freezing order, the fact that they have already satisfied the court that there is a risk of dissipation of assets seems likely to lead to the double inference being made.

Lucy Westwood


The Masri litigation has yet again troubled the English Court on the principle of comity and provided the Court of Appeal with the opportunity to say just how important it is in international debt enforcement.

The background on Masri

The Masri litigation is a long running dispute between Mr Masri and two families who owned the Consolidated Contractors Companies Group (“CCC”). Mr Masri and the families are Palestinian, and the CCC companies in question (CCOG and CCIC, the “judgment debtors”) are incorporated in Lebanon. The judgment debtors’ primary asset is the right to lift and sell oil produced from an oil concession in Yemen. Notwithstanding the lack of connection with England, after Mr Masri commenced proceedings in the High Court, CCC expressly submitted to the jurisdiction. In 2006, after a full trial, Mr Masri obtained judgment for an amount which now estimated to be around US$100 million. However, prior to judgment being delivered, and seemingly at every point in the five years since then, the judgment debtors have been engaged in what the English Court has described as a “sophisticated” and “tireless” strategy of evading payment of the judgment debt and depleting their assets.

In December 2007, Mrs Justice Gloster appointed a receiver in respect of CCOG’s interest in revenues from the oil concession and injuncted CCOG from disposing of its interest in the oil concession (Masri No 2). A number of attempts were made by the judgment debtors to prevent Mr Masri from enforcing the judgment in Lebanon. The steps which triggered the present decision involved the directors of the judgment debtors resigning, and an application to the Lebanese court to appoint judicial administrators to the judgment debtors in the absence of any directors. The Lebanese court granted this application and ordered that the administrators not pay the judgment debt without approval of the Lebanese court. Justice Toulson said at [25], the Lebanese court’s orders “plainly forbade the judicial administrators to observe the English court’s receivership order in any way”.

In December 2010, Mr Masri applied to extend the receivership order. Consequent upon his application Mrs Justice Gloster ordered that:

1. the receivership order should include all oil and CCOG’s rights to the oil which it had under a Joint Operating Agreement for the oil concession; and

2. the freezing order and penal notice in support of the receivership order should bind the judicial administrators.

Mrs Justice Gloster did so (inter alia) because the restrictions on CCOG and the judicial administrators imposed by the Lebanese court were entirely as a result of the judgment debtors’ own actions. Mrs Justice Gloster acknowledged that the judicial administrators faced double jeopardy by having to comply with (i) the above order, or face contempt of court, and (ii) the Lebanese court’s requirement that their permission be obtained before the debt can be paid. However, Mrs Justice Gloster found that this problem could be solved by the judicial administrators resigning or appointing new directors.

The question on appeal was whether the solution to this double jeopardy was compliant with the principle of comity.

As to the first part of the order, the Court of Appeal was split. Lord Toulson considered Mrs Justice Gloster’s orders to be an exercise of exorbitant jurisdiction. The order related to a foreign company, in respect of a foreign asset, whose ultimate organ of government was the Lebanese court. Lord Toulson considered that the principle of comity required that the order be set aside. However, Lord Rimer and Lady Arden disagreed. They found that the circumstances in this case were so extreme that the court was entitled to make the unusual ancillary orders by way of equitable execution. They also confirmed that the English courts had jurisdiction over foreign property when a receivership order operated in personam, rather than in rem.

In respect of the second part of the order given by Mrs Justice Gloster, the Court of Appeal was united. Whilst it is appropriate to name directors of a responding company in a freezing injunction penal notice, the judicial administrators, as officers of the Lebanese court and with limited powers, were not in an analogous position to directors. The court found that the judicial administrators should not be bound by the penal notice in the freezing order. It was therefore held that the order should not be set aside, but that references to the judicial administrators should be removed.

Judgment debtor escaping the arms of English jurisdiction? Joujou v Masri [2011] EWCA Civ 746


There is no doubt that the techniques deployed in the Masri litigation are not commonplace. Of good news for judgment creditors, the English courts seem willing to extend the law of equitable execution in appropriate circumstances to try and ensure that the interests of justice are achieved. However, concerns as to the principle of comity appear to reign supreme even where it seems clear that steps taken in overseas courts are solely for the purpose of avoiding the enforcement of an order of the English courts. As stated by Lady Arden in her judgment at [78]:

“the courts of England and Wales undoubtedly have a legitimate interest in trying to enforce the payment of the judgment debt by parties who accepted the court’s jurisdiction. However, when that interest conflicts with comity, the latter must prevail”.

There was no suggestion in Joujou that the judgment debtors’ conduct in Lebanon constituted an abuse of process under Lebanese law, or that the Lebanese courts had themselves failed to give due weight to the decisions of the English court. It appears though that, even if this were the case, the principle of comity would supersede these issues – at least in respect of company officers appointed by a foreign court. Therefore, although the order still remains, some of the sting has been removed in so far as it would normally bind individuals in the management of a judgment debtor. The decision suggests that in the future, foreign judgment debtor entities may be able to evade payment by arranging for their directors to be

replaced by court-appointed administrators.

Lucy Westwood

Stop press: an end to Masri?

The Court of Appeal’s decision was handed down on 28 June 2011. On 4 October 2011, Mr Justice Clarke gave judgment in respect of contempt proceedings against the judgment debtors. It emerged from this judgment that on 21 June 2011, the Lebanese court ordered the payment into court of all oil revenues from the Yemen oil concession and appointed the a judicial officer to advise the court on whether it would be in the best interests of the judgment debtors to pay the judgment debt (and also purge their contempt of orders of the English courts). On 22 September 2011, Mr Masri informed the court that the judgment debt had been satisfied pursuant to the terms of a global settlement agreement.


Introduction and summary

The case concerns an interim application regarding the disclosure of documents by HSBC, in the context of proceedings brought by Mr Shah and his wife against HSBC seeking damages for breaches of duty and failure to follow his instructions to process transactions whilst the bank’s requests for consent under the Proceeds of Crime Act 2002 (POCA) were pending with the Serious Organised Crime Agency (SOCA). An earlier Court of Appeal judgment, in connection with HSBC’s partially successful attempt to strike out the claim, resulted in the dismissal of a number of ways in which the Shahs had then put their case (irrationality, negligent self-induced suspicion, mistake and automatic mechanically-induced suspicion). The case continued, however, with the bank was being put to proof of a genuine suspicion. For this purpose, the Court had determined that the bank could be required to adduce evidence of the money laundering suspicions which had caused it to delay processing the transactions.

HSBC disclosed a set of documents relating to its suspicions, but redacted the names of all the individuals reporting or considering the suspicion, save for its nominated Money Laundering Reporting Officer. At first instance, Coulson J held that the names of the individuals were relevant and disclosable, but permitted limited anonymisation on the grounds of public interest immunity.

The Court of Appeal upheld HSBC’s appeal, ruling that the identity of the individuals was not disclosable under CPR 31.6. The redactions were therefore permitted, irrespective of the public interest immunity position. The Shahs’ attempt to obtain information about the identity of individual bank employees was described as a “fishing expedition”.

This ruling will be welcomed by all those involved in money laundering reporting processes at banks and other regulated firms. It provides some additional comfort that staff can report their suspicions without undue concern that they may be identified in subsequent proceedings. The Court’s ruling does, however, depend in part on the way in which Shahs’ case was articulated, following their narrow victory in the strike out application. The basis on which the genuineness of HSBC’s suspicions was challenged was a very narrow one. In turn, the documents which could be said to support that challenge were very limited. It is not impossible to envisage circumstances in which the identity of reporting employees would be relevant and disclosable.

The case also serves to re-emphasise the importance for firms of having appropriate systems in place to ensure that the suspicions which lead to reports being made to SOCA are appropriately evidenced.

Background

The proceedings generally

This ruling is the latest development in the ongoing Shah v HSBC saga, a case brought by Mr Shah and his wife, two Zimbabwean-based customers of HSBC Private Bank (UK) Limited (HSBC). The current judgment concerns disclosure of documents evidencing HSBC’s suspicions of money laundering.

The Shahs are claiming over $300 million by way of damages from HSBC for losses allegedly suffered as a result of HSBC’s delay in executing, between September 2006 and February 2007, four transactions involving transfers out of Mr Shah’s account. HSBC’s case is that it suspected the proposed transactions to involve ‘criminal property’ for the purposes of the Proceeds of Crime Act 2002 (POCA), and it therefore sought consent from the Serious Organised Crime Agency (SOCA) to make the requested transfers. (The scheme of Part VII of POCA is that a bank which would otherwise commit a money laundering offence by transferring criminal property, suspecting it to be such, will have a defence if it obtains SOCA’s consent to the transfer.)

The delay in executing Mr Shah’s instructions was alleged to have resulted in one of the intended recipients of the transfers to notify the Zimbabwean police that Mr Shah was suspected of money laundering. In turn, that was alleged to have led to the freezing and seizure in Zimbabwe of certain large investments of Mr Shah.

In January 2009, HSBC made a successful application for strike out or summary judgment on the claim.

The Shahs appealed, and in 2010 the Court of Appeal allowed their appeal. Amongst other matters, the Court of Appeal stated that HSBC could be required to prove the fact of its suspicion in the ordinary way at trial by giving disclosure and calling witnesses. Although a number of ways in which the Shahs put their case were dismissed, nonetheless, the Court ruled that there was enough to go to trial: “any claim by a customer that a bank has not

Court of Appeal rules that identity of employees making money laundering reports can be redacted when disclosing documents in Shah and another v HSBC Private Bank (UK) Limited [2011] EWCA Civ 1154


executed his instructions is, on the face of it a strong claim… there is… no reason why the bank should not be required to prove the fact of its suspicion in the ordinary way…”. For more on this judgment, click here.

The disclosure application

HSBC’s internal money laundering reporting process involved three different teams/departments: Relationship Managers, who reported suspicions to Compliance, Compliance, who reported to the Money Laundering Reporting Office (MLR Office), and the MLR Office which, through the Nominated Officer, made Suspicious Activity Reports (SARs) to SOCA.

HSBC wished to disclose only the identity of the Nominated Officer, and not the identity of any other individuals within the bank. It therefore gave disclosure of documents connected with its reporting process with the names of other staff redacted. The bank made an interim application seeking an order permitting the redactions.

In June 2011, Coulson J held that the names of the reporting staff were relevant and disclosable, but that, on the basis of public interest immunity, the employees’ names could be disclosed on a semi-anonymised basis, giving each individual a letter identifying the department in which they worked, and a number, so that the Shahs could determine the spread of employees involved in the formulation of the suspicions. The case is reported here.

Decision on appeal

The Shahs appealed against the Judge’s refusal to require HSBC to reveal the names of the employees, and HSBC cross-appealed against the Judge’s decision that its disclosure obligations required the names to be revealed in the first place. The Court of Appeal dismissed the Shahs’ appeal and allowed HSBC’s cross-appeal.

There were two key questions raised by the appeal:

• whetherthebank’sobligationtomakestandarddisclosure required it to reveal the names of the bank employees who reported their suspicions to the MLR Office; and

• ifso,whetherthebankwasentitledtomaintaintheiranonymity on the grounds of public interest immunity (PII).

Standard disclosure

HSBC’s standard disclosure obligation under CPR Part 31 r.31.6 was to give disclosure of documents on which it relied; or which adversely affected its case; or which adversely affected the Shahs’ case; or which supported the Shahs’ case; or which it was required to disclose by a Practice Direction. The identity of the employees in question could only – potentially – have fallen within the categories of documents which supported the Shahs’ case or adversely affected the bank’s case.

Lewison LJ, giving the leading judgment, stressed the need to have regard to the test in the CPR in assessing the disclosability of the documents, rather than using related tests such as “relevance”. He also emphasised that the CPR had replaced the previous Peruvian Guano test that documents “which might fairly lead [a party] to a train of inquiry” were required to be disclosed.

Given the need to assess whether the documents might support the Shahs’ case, it was important to consider what that case was. All that remained, following the earlier strike out application was that the bank was put to proof of a genuine suspicion. This would not be a difficult hurdle for the bank to overcome; it is trite to say that the threshold for ‘suspicion’ is a low, subjective one. (A person must “think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be ‘clear’ or ‘firmly grounded and targeted on specific facts’ or based on ‘reasonable grounds’” (R v Da Silva (2007) 1 WLR 303)).

Ultimately, the Court held that the identification of individuals was, at best, something that might lead to a train of inquiry which might adversely affect the bank’s case, ie the information was of a ‘chain of enquiry’ nature. Disclosure might have been appropriate under the Peruvian Guano test, but did not meet the more stringent requirements of CPR 31.6.

Good faith

The Court also dealt shortly with a tantalising hint in Coulson J’s first instance judgment that the claim that the bank did not have a genuine or good faith suspicion might be linked to the fact that a bank employee had, allegedly, asked to borrow $1.5 million from Mr Shah, which loan was refused.

It appears from the Court of Appeal judgment that the employee in question had indicated on the same day


http://www.herbertsmith.com/NR/rdonlyres/D8C55394-9D2C-4FD6-9B50-0C0CD12DBBBC/14390/ShahvHSBCupdate120210.html

http://www.bailii.org/ew/cases/EWHC/QB/2011/1713.html

that she did not need the loan after all; the transactions which were the subject of the money laundering reports took place several months later. In the circumstances, Lewison LJ stated that the suggestion that the employee in question had nursed a grudge and made a false report as a result was “fanciful”. Similarly, the suggestion that the employee was trying to punish Mr Shah for not acceding to a request not to transfer certain funds to another bank was “entirely speculative” with “no evidence to support it” and “no positive allegation to that effect made in the pleadings”. The Nominated Officer also gave evidence that the employee in question was not the source of the internal SARs.

As such, whilst the employee’s actions were described by Pill LJ as “extraordinary”, they provided no basis for concluding that the identity of the individuals making the SARs would adversely affect the bank’s case.

Public interest immunity

Given the Court’s conclusions in relation to CPR 31.6, it was not necessary to consider the public interest immunity position, and the Court declined to do so. At present, therefore, Coulson J’s first instance judgment remains the principal authority on the application of this principle in the context of SAR reporting.

Comment

This judgment will be welcomed by banks and others within the money laundering ‘regulated sector’.

The confidentiality of SARs and the identity of those who make them has been a perennial concern for reporting institutions. Disclosure of information about reporting staff members can in some cases give rise to genuine concerns about staff safety (eg in connection with suspicions relating to potentially dangerous criminals). Even where this is not the case, the possibility that the identity of individual employees might be disclosed could have a chilling effect on the effectiveness of the money laundering reporting regime. As Coulson J noted, in connection with his analysis of the PII position, if identities were to be disclosable then: “whilst the statutory duty to report may remain, it is easy to see how, in any borderline case, the bank employee who knows that he or she will not be given anonymity may err on the side of inaction”.

Of course, it remains possible that in another case, on a different set of facts, disclosure of the identity of staff members might be relevant. This judgment does not provide any blanket protection for banks. The Shahs had particular difficulty because their claim appears, on its face, weak, and the suspicion threshold, which the bank will need to prove it surmounted in making its SARs, is low. In a case where there was, for example, some positive evidence of bad faith, the position might be different. The identity of staff members might then be information which would adversely affect the bank’s case, and the bank would need to fall back on PII arguments in seeking to resist disclosure.

The case also serves to re-emphasise the importance for firms of having appropriate systems in place to ensure that the suspicions which lead to SARs being made to SOCA are appropriately evidenced. Having a documented ‘audit trail’ of the firm’s suspicions may assist both in establishing the reasonableness and genuineness of the reported suspicion, and in minimising the risk of individuals, other than the Nominated Officer, being called to give evidence of it.

Susannah Cogman


A view from Hong Kong

Summary

The most recent fraud case of prominence in Hong Kong was the Court of Final Appeal’s (Hong Kong’s highest court) decision in the Shanghai Land criminal case. In 2008, six people went to prison in Hong Kong for conspiracy to defraud relating to a Hong Kong listed company, which was later renamed Shanghai Land. Two bankers, three lawyers and a financial controller were convicted by a Hong Kong District Court for their part in the publication of incorrect statements in various public documents in relation to Shanghai Land. Following appeals to the Court of Appeal (“CA”) and recently to the Court of Final Appeal (“CFA”), the convictions of all six defendants have been overturned.

Background

The chief protagonist behind the scheme was a Chinese businessman, Chau Ching-ngai, once ranked as one of China’s wealthiest individuals. Chau’s plan was to acquire the majority shareholding in Shanghai Land through a corporate vehicle wholly owned by him. At that time, Shanghai Land had approximately HK$2.2 billion in cash reserves whilst its business activities were minimal. Chau financed the acquisition from a bank loan which he intended to repay by procuring the sale of certain real estate assets to Shanghai Land. However, this plan was problematic from a regulatory perspective (if the full facts were known, the approval of the shareholders and regulators would have been required) and the issues had the potential to jeopardise the acquisition, including the company’s listing status. Chau was therefore keen to conceal the asset injection element of his scheme and the prosecution contended that the defendants were party to such plan.

The trial, which lasted nearly 100 days, involved a detailed forensic review by the trial judge of significant numbers of emails and documents. The explanations of the witnesses as to events were considered in the light of the contemporaneous documents. In many instances, the trial judge disbelieved the witness evidence of the defendants on the face of the paper trail. The District Court in September 2008 convicted each of the six defendants of at least one charge of conspiracy to defraud the Stock Exchange, the Securities and Futures Commission, and the existing and potential shareholders of Shanghai Land by making false representations about the acquisition in various public documents in order to conceal the asset injection plan. In addition, two of the lawyers were convicted of making a false statement by

company directors. The defendants, who seemingly did not have any corrupt motive and were each of “unblemished character”, were given prison terms varying from 12 to 33 months.

On appeal, the CA in March 2010 quashed the conviction of the principal banker for conspiracy to defraud and varied the lower court’s findings in relation to two of the lawyers. Five defendants appealed against the remaining convictions affirmed by the CA to Hong Kong’s highest court.

The Court of Final Appeal

In July 2011, the CFA allowed the appeals against convictions by all five of the defendants. The CFA’s decision was based to a certain extent on technical rules of evidence – however, the CFA also added helpful comments on the duties of professional advisers. The CFA ruled (amongst other things) that the co-conspirators rule had been misused which rendered the trial on the conspiracy charges unfair. The co-conspirators rule is an approach by which what might otherwise be regarded as hearsay instead operates as evidence. In particular, the CFA found that the trial judge had failed to identify which – and how significant the volume was of – emails and documents had been used under the rule. Further, having considered the circumstances of the case, the CFA held that the proviso pursuant to s.83(1) of the Criminal Procedure Ordinance (Cap. 221) to affirm a conviction notwithstanding what had gone wrong at the trial, did not apply.

In considering the dismissal of one of the conspiracy charges against two of the lawyers, Bokhary J referred to the judgment of Ribeiro PJ in HKSAR v Egan (2010) 13 HKCFAR 314. In the Egan case, Ribeiro PJ pointed out that: “[i]n the absence of actual knowledge, a solicitor (or barrister) is bound to adopt an agnostic approach towards the client’s instructions in carrying out his professional duties since it is not his business to judge their truth or falsity. The solicitor or barrister may privately harbour distinct feelings of scepticism about his client’s story but that is wholly beside the point. Professionally, he is required to abstain from forming any belief one way or the other on the topic. For a court to attribute guilty knowledge or belief and criminal liability to the legal adviser in such circumstances would gravely endanger the fundamental right to legal advice and representation.”

Bokhary J further added that: “[t]he duty of lawyers and other professional persons is to serve their clients’ legitimate interests and do so within the bounds of the


law and professional ethics. Sometimes a court is invited to find it proved beyond reasonable doubt that a lawyer or other professional person has strayed from that duty and into criminal conduct in league with his or her client. If such a finding is to be made, the evidence in proof of it must be very plain indeed. Such evidence must be seen after strict scrutiny to admit of no other reasonable conclusion. The evidence in the present case is nothing of that kind. Indeed, it points more to Ms Fan and Mr Lai being deceived than to either of them being a deceiver.”

Comment

With Chau Ching-ngai at large, the focus was on his corporate advisers and this case highlights the real risk those advisers face for material non-disclosure. The original decision of the District Court was the cause of some concern amongst professional advisers in Hong Kong and it should not be assumed that the Court of Final Appeal’s decision will allay all of that concern where professional advisers have seemingly unwittingly been mixed up in a fraud. As demonstrated in this case, even those of “unblemished character” may be disbelieved.

However, despite the initial widespread concerns about the criminalisation of disclosure failings, it should be noted that the threshold for attributing criminal liability to professional advisers is a high one and the prosecution will only succeed where the evidence is unequivocal. As the CFA has observed, the duty of professional advisers is to serve their client’s legitimate interests and “personal scepticism” as to their client’s dealings or intentions (at least insofar as legal representatives are concerned) should not prevent them from doing so. Nonetheless, the decision of whether or not to prosecute an individual rests with the Hong Kong Department of Justice and the risk of prosecution for material non-disclosure remains. Corporate advisers should therefore take heed when negotiating and drafting documents to ensure, as far as possible, that matters are recorded accurately to avoid situations where the paper trail may support any unfavourable construction.

Richard Norridge


Introduction

Recently, a number of sources have reported the Cayman Islands decision of Quin J in Gillies-Smith v Smith’1 in May of this year. In that case (which was heard on an ex-parte basis) Quin J was requested to grant a free-standing freezing injunction relief in the Cayman Islands in support of proceedings in Ontario. Quin J granted the relief sought and in doing so appeared to follow the tread of other offshore jurisdictions such as Jersey, Guernsey and the Isle of Man. Quin J referred, as the Royal Court of Jersey did in Solvalub Ltd v Match Investments Ltd2, to Lord Nicholls’ dissenting judgment in the Privy Council case of Mercedes-Benz AG v Leiduck3. In his dissenting judgment Lord Nicholls had said:

“The court habitually grants injunctions in respect of certain types of conduct. But that does not mean that the situations in which injunctions may be granted are now set in stone for all time. The grant of Mareva injunctions itself gives the lie to this. As circumstances in the world change, so must the situations in which the courts may properly exercise their jurisdiction to grant injunctions. The exercise of the jurisdiction must be principled, but the criterion is injustice. Injustice is to be viewed and decided in the light of today’s conditions and standards, not those of yester-year.”4

The effect of Gillies-Smith has been largely tempered by the recent decision given by the Honourable Mr Justice Cresswell sitting as Judge at the Grand Court of the Cayman Islands in VTB Capital Plc v Malofeev and Others5. In this case, which although heard on an ex-parte basis took place over two days and involved detailed argument and an extensive review of the authorities, the Court was asked to grant a worldwide free-standing freezing injunction against three Defendants in support of proceedings in the Chancery Division of the High Court in England. No substantive relief was sought in the Cayman Islands. The First Defendant was a Russian citizen with controlling interests in companies in a large number of offshore jurisdictions. The Second and Third Defendants were companies incorporated in the Cayman Islands, in which, the Claimant alleged, the First Defendant had significant shareholdings.

No permission to serve out

The First Defendant was not within the jurisdiction and it was therefore necessary for the Claimant to obtain permission to serve its claim against him out of the jurisdiction (but not of course against the Second and Third Defendants who were incorporated in the Cayman Islands). The relevant provision of the rules of the Grand Court of Cayman by which permission was sought was Order 11 Rule 1(1)(b) which provides that permission may be given when:

“an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction (whether or not damages are also claimed in respect of a failure to so or the doing of that thing) provided that a claim for an interlocutory injunction shall not of itself be a sufficient ground for service of a writ out of the jurisdiction.”

The difficulty was that in Mercedes-Benz AG v Leiduck, the Privy Council had considered the interpretation of a provision of the rules of the Supreme Court of Hong Kong which were almost identical save that they excluded the words “provided that a claim for an interlocutory injunction shall not of itself be a sufficient ground for service of a writ out of the jurisdiction”. The Privy Council had confirmed that proceedings for a freezing injunction in aid of proceedings before a foreign court are interlocutory. For that reason, Cresswell J held that Order 11 Rule 1(1)(b) did not provide a basis for permission to be given to serve a freezing order out of the jurisdiction. In doing so, Cresswell J declined to follow the decision in Gillies-Smith in which permission to serve out had been granted (Cresswell J commented that it was possible a proprietary claim had been asserted in Gillies-Smith).

It is, however, worth noting that Cresswell J did nothing to disturb the decision of the Cayman Islands Court of Appeal in Deloitte and Touche Inc v John B Felderhof & Ors6 when the Court upheld a decision to grant a freezing injunction in aid of foreign proceedings against defendants who had been validly served in the Cayman Islands, notwithstanding the parties had no intention to litigate the substance of their dispute there but intended it to be determined instead of the courts of Ontario (and in fact had stayed the proceedings in Cayman Islands).

Free-standing freezing injunctions in the Cayman Islands – Time for legislative change? VTB Capital PLC v Konstantin Malofeev and Others


Free-standing freezing relief against Cayman defendants

It is also worth noting that the claim for freezing injunction against the Second and Third Defendants succeeded. Cresswell J relied upon a BVI decision of Bannister J in Black Swan Investment I.S.A v Harvest View Limited and Sablewood Real Estate7 (as subsequently explained by the same judge in Yukos CIS Investment Ltd and Wincanton Holdings BV v Yukos Hydrocarbons Investments Limited8 et al). Bannister J had said in Yukos that:

“Black Swan rests upon the willingness of the Court, in a case where the Defendant of foreign proceedings has assets within its jurisdiction, to act in aid of a claimant’s prospective entitlement to a money judgement if successful in the foreign proceedings. It depends upon the assumption that the foreign money judgment will be enforceable, by registration of otherwise, in the court within whose jurisdiction the assets are situated.”

Accordingly, Cresswell J said that he was persuaded although “not without considerable hesitation” that he should grant freezing injunctions against the Second and Third Defendants on this footing (albeit for a limited time and to allow the point to be fully agreed on an inter-partes basis). This was on the basis of the principle in TSB Private Bank International v Chabra9 that where a party holds assets that may ultimately be available for enforcement to satisfy a judgment against another party, a freezing injunction can be obtained even though there is no cause of action against the party holding the assets.

Paradoxically, the Second and Third Defendants were not parties to the English litigation. Hence the Cayman Court had declined to grant a freezing injunction against a defendant who faced a substantive claim because he could not be served with proceedings outside of the jurisdiction but permitted freezing relief against two Defendants who are not party to the substantive proceedings on the footing that they did not need to be.

Conclusion

The position therefore appears to be that freezing injunctions are available in the Cayman Islands against a defendant within the jurisdiction, or against whom a substantive claim has been served outside the jurisdiction, but not otherwise.

The judge concluded his judgment by strongly suggesting that the Rules Committee of the Cayman Court should consider whether rules enabling service of a freezing injunction outside the jurisdiction should be introduced as there were good public policy reasons why free-standing freezing of this nature should be available to Claimants. Further developments in this area are therefore possible which would be a welcome move for claimants in fraud actions.

footnotes

1. Unreported – 10 May 2011

2. [1996] JLR 361

3. [1996] 1 AC 284

4. para 308E (dissenting)

5. 28 September 2011

6. Unreported – 12 July 2011

7. BVIHCV 2009/399

8. HCVAP 2010/028

9. [1992] 1 WLR 231

Robert Hunter


The facts

The Claimant in this case, Tasarruf Mevduati Sigorta Fonu (“TMSF”), was a Turkish state organisation which had authority to bring proceedings in its own name for the recovery of losses sustained by two Turkish banks. Mr Demirel had controlled a group of companies that had previously owned the banks. The Turkish courts gave one such bank judgment in personam against a Mr Demirel in respect of damage caused to it caused by fraudulent loan transactions. TMSF sought to enforce that judgment.

TMSF had, through a series of freezing orders, discovered that in 1999 Mr Demirel had settled approximately $24 million in discretionary trusts of the Cayman Islands in which the trustee was Merrill Lynch bank and the company (Cayman Limited). Under the trust deed establishing the trusts, Mr Demirel had a power of revocation which stated:

“This Trust may be revoked, amended, varied or altered in any manner whatsoever from time to time and at any time by the Settlor by deed and delivered to the Trustees provided always that no such revocation, amendment, variation or alteration shall take effect until actual receipt of such instrument by the Trustees or with the written consent of the Trustees thereto if such revocation, amendment, variation or alternation would increase or extend the obligations, liabilities or responsibilities of the Trustees.”

TMSF applied in the Cayman Islands Courts to appoint equitable receivers in order to exercise Mr Demirel’s power of revocation, as part of the claim to enforce the Turkish judgment. In the meantime, Mr Demirel had been declared bankrupt by the Turkish Court.

The insolvency law issues

Until the late 19th century English insolvency law suffered from a major defect. A line of cases held that creditors could obtain a debtor’s assets, but a bankrupt could not be compelled to exercise a power that he held for the benefit of creditors. This defect was remedied by a series of statutes which culminated in the Insolvency Act 1986. Section 283(4) of the 1986 Act, for example, ensures that the “property” of the bankrupt includes his powers over property. This enables a trustee in bankruptcy to exercise the bankrupt’s powers (as well as use his assets) for the good of all the creditors who improve in his insolvency.

An equitable receiver, however, is not covered by this legislation. If a judgement could be enforced by appointing a receiver to exercise the judgment debtor’s power it would give the creditor who enforces it in this way the obvious advantage of circumventing the insolvency and obtaining the fruits of the power for himself. Moreover, equitable receivers have frequently been appointed over property, rather than powers.

The Cayman Islands decisions

The power to revoke a trust appears to be a more a “mere power” than “property”. Largely for that reason, the court of Grand Cayman both at first instance and at the appeal stage declined to permit the exercise. The Grand Cayman Court of Appeal, for example, characterised the question as:

“The question, therefore, is whether a power of revocation should be available to a single creditor by way of equitable execution, so as to enable that single

Accessing Offshore Trust Assets: equitable execution over the power of revocation Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited and Others

Background

It is common for Fraud claims to involve attempts by the Claimant to set aside or get access in some way to money that Defendants have placed in trusts. A technique frequently used to do so is for the Court that to appoint someone who will have vested in him the rights that the Defendant possesses. Sometimes, a court will appoint a trustee in bankruptcy who may seek to set the trust aside under applicable insolvency laws or exclusive rights over it that had previously belonged to the Defendant.. In TMSF v Merrill Lynch the method considered was the appointment by the Claimant of a receiver by way of equitable execution in respect of the Defendant’s power to revoke a trust that he had created, in order to thereby reach funds held in trust by the Defendant.


creditor to procure its execution and to recover all the settled assets to satisfy his judgment debt. We have concluded, in agreement with the Chief Justice, that if such an advance in the law is to be made, it must be made by legislation.”1

The Privy Council decision

The matter was then appealed to the Privy Council. The Privy Council was struck by the growing flexibility of the court’s approach to equitable receivership following the decision in Masri v Consolidated Contractors International (UK) Ltd (No. 2)2. In this case, the Court of Appeal held that the appointment of a receiver is not limited to choses in action which were presently available for legal execution. For example, it would be possible to appoint an equitable receiver over future debts that were undoubtedly located abroad. Accordingly, the Court of Appeal permitted the appointment of an equitable receiver to exercise the power. It rejected the arguments of the Respondents that:

“Unless and until the power is exercised, the donee is not the owner of the property subject to the settlement (unless he is also the trustee) and cannot be treated as owner of the property. The powers are not property. Legal title is vested in the trustee, and validly created trusts should not be destroyed to the detriment of the innocent beneficiaries of those trusts.”3

According to Lord Collins:

“In the opinion of their Lordships the decisions in Masri (No 2) and its predecessors lead to the conclusion that in the present case the jurisdiction should be exercised. The powers of revocation are such that in equity, in the circumstances of a case such as this, Mr Demirel can be regarded as having rights tantamount to ownership. The interests of justice require that an order be made in order to make effective the judgment of the Cayman court recognizing and enforcing the Turkish judgment.”4

His lordship went on to say:

“There is no invariable rule that a power is distinct from ownership. Nor (as the cases on the rule against perpetuities show) is there an invariable rule that any departure from the distinction between power and property is effected solely by legislation.”5

On the final question of whether the discretion to make the order should be exercised, the Privy Council considered that there had been no serious suggestion that there would be any prejudice to any third party, and TMSF had undertaken to make the proceeds of the trust available to Mr Demirel’s creditors as a whole. There was therefore no reason that the discretion should not be exercised.

footnotes

1. Para 23 (para 31 of the Court of Appeal decision).

2. [2008] EWCA Civ 303, [2009] QB 450 (“Masri (No 2)”

3 Para 29

4. Para 59

5. Para 60

Implications

With transparency of tax liabilities increasing internationally, some offshore jurisdictions are hoping to win business through asset protection. Jurisdictions that wish to do so are currently considering whether to specify in their trust legislation that the powers of overseas trustees in bankruptcy will not be recognised for the purposes of exercising any power over a trust and, in particular, power of revocation. The story will not end with TMSF and Merrill Lynch.

Elizabeth Brogan


Following Sinclair v Versailles2 it is possible to maintain a proprietary claim only to assets which came into the fiduciary’s hands as a result of a transaction about which the principal makes no complaint. Misdirected company property and opportunities for companies are therefore regarded as potential subject matter for a proprietary claim against company directors who are deemed to have acquired trustee like control of them perfectly property. In contrast, bribes and secret commissions received by directors from third parties are not. The director received them only as a result of a transaction of which the company complains.

Most fiduciaries who negotiate a bribe for themselves in order to induce their principals to enter into a contract could presumably have got their principals a better deal. The questions addressed in Cadogan v Mark Tolley was whether it is therefore possible to characterise the bribe as an “opportunity” held on trust for the principal in order to found a proprietary claim.

Sinclair v Versailles revisited – proprietary claims for opportunities?

Introduction

In our last bulletin we covered the Court of Appeal decision in Sinclair v Versailles which had declined to follow the Privy Council decision in AG v Reid, deciding instead that bribes and secret commissions were not potential subjects for a proprietary claim. The distinction that Lord Neuberger drew in Sinclair v Versailles between those claims that gave rise to proprietary remedies and those that did not was as follows. He said:

“In cases where a fiduciary takes for himself an asset which, if he chose to take, he was under a duty to take for the beneficiary, it is easy to see why the asset should be treated as the property of the beneficiary. However, a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary. There can thus be said to be a fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant.”1

In other words, if assets come into the Defendant’s hands only as a result of conduct about which the Claimant was complaining there was no proprietary claim. If the Defendant already held the asset on trust for the Claimant but the Claimant complains about how he dealt with it subsequently, a proprietary claim would arise. A bribe is most usually in the first category: it was never money that the Defendant held with the Claimant’s agreement. The Defendant obtains it only through conduct about which the Claimant is complaining.

One issue that remained uncertain is where the Defendant is a trustee with the Claimants consent of an intangible asset such as an opportunity. The decision in Sinclair v Versailles explicitly preserved the possibility of a proprietary claim in these circumstances. Lord Neuberger said:1

“…a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant.” (emphasis added)

Introduction

The facts of the case were relatively simple. The Claimant alleged that by virtue of a number of bribes and secret commissions paid to its former officers, Defendants, they had been induced to enter into a number of unfavourable contracts. In one particular instance (the purchase of a company by the Claimants) they were able to establish that the money they parted with as purchase money could actually be found to have been received, via the vendor, as alleged secret recipients by the Defendant (“the Ribelant claims”).

Bribes as misdirected opportunities?

The Claimants had obtained a proprietary injunction freezing the alleged bribes and secret commissions on the basis that they had better title to them than those who held them. An application was made to set this proprietary injunction aside on the basis that there could be no proprietary claim. The application followed the

The decision in Cadogan Petroleum Plc and Ors v Mark Tolly and Ors1


decision of the Court of Appeal in Sinclair v Versailles and was resisted on the basis that each bribe represented a lost opportunity. As Newey J summarised the Claimant’s arguments:

“..by taking advantage of an opportunity or right which was properly that of the beneficiary”. The Claimant, said, have had the opportunity to reduce what they were to pay by at least the amount of the alleged bribes and secret commission…and the…Defendants obtained the bribes or secret commissions by taking advantage of that opportunity.”3

This argument was an ingenious (if not a little desperate) attempt to resist the authority of Sinclair v Versailles. Mr Justice Newey said:

“I am not aware, however, of any case in which an opportunity to obtain a reduced price has been considered a relevant opportunity for this purpose. In any event, I do not think that a bribe or secret commission is to be viewed as the diversion of an opportunity to obtain a reduced price.”4

Mr Justice Newey held that Sinclair v Versailles was a directly applicable authority to the effect that no proprietary which had come into the hands of a fiduciary only by virtue of conduct of which the claimant complains (for example the taking of a bribe or secret commission).

Rescission and bribery

He rejected the Claimant’s submission that the discussion of treatment of bribes in Sinclair v Versailles has been obiter. That then left the question of the Ribelant claims. Did it make any difference that the money received by the Defendants was traceable as alleged bribes as traceable to the purchase money paid by the Claimants under the contracts it was claimed the

bribes has induced? A long succession of authorities indicate two things: first that someone who has been induced to enter into the contract through bribery is entitled to rescind5 and secondly, that once he does rescind, he may well have an arguable case that he has re vested any assets that he has parted with pursuant to the contract in himself at least to the extent necessary to support a proprietary claim6. The Claimants, therefore, had a prime facie good claim to re vest the bribes passed under the Ribelant claims back in themselves and maintain a proprietary claim to them. Unfortunately, on the facts of this case, there was a insuperable difficulty: the Claimants has entered into contracts of settlement with the vendor of the company by which, knowing of the bribes they had nevertheless affirmed the contracts. The consequence of this was therefore the rescission was no longer available to them and the bribes belong to the Claimants.

There is nothing surprising regarding the reasoning in the decision save it confirms that: (a) Sinclair v Versailles is directly applicable to proprietary claims in relation to bribes; (b) there is currently no way of circumventing it by claiming that by characterising a bribe as a lost opportunity; and (c) that whilst it may be possible to maintain proprietary claims to money that has passed under a contract that the victim of bribery has rescinded, great care must be taken not to affirm that contract once the bribe has been discovered.

footnotes

1. [2001] EWHC 2286 (Ch)

2. [2001] EWCA Civ 347

3. para 29

4. para 30

5. See, for example,

6. See, for example El Ajou v Dollar Land Holdings [1994] 2 All ER 685 and subsequent authorities, Bristol & West Building Society v Mothew [1998] Ch. 1, Box v Barclays Bank Plc [1998] Lloyd’s Rep. Bank. 185, Twinsectra v Yardley [1999] Lloyd’s Rep Bank 438 (CA), Shalson v Russo [2003] EWHC 1637 (Ch)

Ben Cameron


Simon Bushell, partner Dispute resolution, London T: +44 20 7466 2024 M: +44 7785 254 891 [email protected]

Simon specialises in international commercial litigation, with wide experience in the corporate, financial services and banking sectors. He co-chairs the firm’s London based civil fraud and asset tracing, corporate crime and investigations practice, and has also been responsible for establishing the Firm’s Russian dispute resolution practice, which he manages from London.

Simon has undertaken investigations into complex, worldwide frauds, conspiracies, insolvencies, and co-ordinated multi-jurisdictional proceedings. He is highly experienced in obtaining, executing and advising on pre-action third party disclosure orders, freezing injunctions, and search orders.

Simon regularly advises in relation to investment banking disputes, breaches of trust and fiduciary duty, professional negligence, money laundering, bribery and corruption, shareholder disputes, as well as a wide variety of general commercial disputes.

Robert Hunter, partner Dispute resolution, London T: +44 20 7466 2426 M: +44 7809 200 788 [email protected]

Robert is a disputes partner and co-chair of our civil fraud and asset tracing, corporate crime and investigations practice. He is widely acknowledged as one of the UK’s most highly respected lawyers in this area. He is the only civil fraud lawyer listed as a starred individual in the Chambers UK Guide.

Robert has extensive experience in freezing, search and Norwich Pharmacal orders.

If you would like to receive more copies of this briefing, or would like to receive Herbert Smith briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please email [email protected]. You can also contact us to say whether you would prefer to receive these publications in a printed or electronic form.

© Herbert Smith LLP 2011

The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

Contacts

If you would like further information on any matters in this newsletter, please contact the partners with whom you normally deal or the partners below.


mailto:simon.bushell%40herbertsmith.com?subject=

mailto:robert.hunter%40herbertsmith.com?subject=

26

Notes

Corporate fraud, investigations and asset recovery update – November 2011

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LondonHerbert Smith LLPExchange HousePrimrose StreetLondon EC2A 2HST: +44 20 7374 8000F: +44 20 7374 0888

London (continued)StibbeExchange HousePrimrose StreetLondon EC2A 2STT: +44 20 7466 6300F: +44 20 7466 6311

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