Follow the money

How do you get your money back from a potential fraudster who has siphoned the money off into planes, luxury houses abroad and mysterious accounts? The English courts have a broad range of remedies available to help.

This is a complex area but to help you work out whether the English courts might help you (or your clients), we have blended together a number of real life scenarios into the case study below. 

Case Study

Mr Swindle is a British born aviation magnate who runs a US headquartered business offering private chartered flights called "Whyfly Inc".  Whyfly Inc is wholly owned by Mr and Mrs Swindle.  The business consists of a small fleet of mature private jets and a network of regional offices located in hangars across a number of private airfields in the US, Europe (including the UK) and China.  

Whyfly Inc obtains a US$20m loan from Aerobank, an international bank specialising in aviation finance.  Mr Swindle tells Aerobank that this is needed to grow the European side of the business.  The loan is governed by English law and secured over a fleet of three new business jets and is conditional on Mr Swindle providing a personal guarantee.  The new fleet is owned by Whyfly Inc's UK subsidiary, Whyfly Limited.    

Unfortunately, there isn't the appetite in Europe for private chartered business travel that Mr Swindle projected and profitability rapidly declines.  Whyfly Inc struggles to service the loan and the high overheads start to take their toll.  As Whyfly Inc’s financial position deteriorates, Aerobank is finding Mr Swindle is becoming increasingly unresponsive to their letters and calls and eventually he stops responding altogether.  Aerobank decides to call an event of default so that the loan becomes immediately repayable.  In total, Whyfly Inc and Mr Swindle owe Aerobank US$22m inclusive of interest. 

The recently appointed CFO of Whyfly Inc tells Aerobank that she does not recognise the most recent sets of accounts Mr Swindle has given Aerobank and Whyfly Limited only bought two of the three new jets.  Further, a number of Whyfly's fleet have since been impounded due to non-payment of landing fees, with most of the fleet grounded in the UK and two new jets in China.  Mr and Mrs Swindle have fled back to their country estate in the UK in the hope that they'll be out of reach of the US authorities. 

First steps

It looks like Mr Swindle has turned crooked and there is a high risk of asset dissipation.  Given the high value nature of the assets involved, attempting to recover the outstanding amount against those assets is a worthwhile exercise.  If Aerobank did not have enough money to fund the recovery process, it could consider obtaining funding from specialist third party funders. 

A tactical decision needs to be made about what type of remedy to pursue and where.  In this scenario it is clear that high on the list of priorities will be to protect the assets, so Aerobank needs to act quickly.  There are likely to be other high value assets out there, but Aerobank isn't yet in a position to identify all of them. 

Aerobank will need to decide in which jurisdiction to seek relief first; England is a contender given (among other things) the location of several of the fleet, but Aerobank will also want to go after the assets in the US and China. 

Several of the jets having been grounded in England, Whyfly Limited’s status as registered owner of at least two of the jets, the loan documents being subject to English law and the Swindles having fled back to their English country house, makes Aerobank decide to start in England. 

As well as enforcing the security over the jets in China, Aerobank could consider:

1. making a winding-up petition against the UK based subsidiary, Whyfly Ltd.  This takes the control of Whyfly Limited out of Mr Swindle's hands immediately upon the appointment of a provisional liquidator.  As well as pursuing Whyfly Ltd's assets, liquidators can make use of a number of provisions under the Insolvency Act 1986, such as the right to obtain "property, books, papers or records" of a company and to require directors to provide information.  The act also vests the court with certain powers, such as requiring any person "whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company" to attend court or produce documents; or

    

2. a two-pronged approach of (i) preserving the assets by obtaining a freezing injunction; and (ii) mapping what assets are available to be enforced against.

The liquidator will have more powers than Aerobank.  However, if appointed, the liquidator will act in the best interests of all Whyfly Ltd's creditors, so Aerobank will lose control of the process and the proceeds recovered will need to be applied first to the liquidator's fees and then shared with Whyfly Limited's other creditors.  Aerobank decides that the second option is best here. 

What is a freezing injunction?

A freezing injunction or freezing order prevents a party from disposing of or dealing with their assets pending the outcome of a final judgment of a claim.  It often referred to as the "nuclear option" of remedies available to English courts and so is only granted in exceptional situations. 

A freezing order has the advantage of applying to all asset classes (i.e. not just property, but bank accounts, shares etc), whether within or outside the jurisdiction.  The freezing order will take effect immediately upon its being pronounced (even if the order has not yet been drawn up and served on the parties subject to the order).

As Aerobank gathers more information on Whyfly Inc and Mr Swindle’s asset profile, it can apply for specific assets to be made subject to the order as necessary.  It is important to appreciate the order is only interim in nature, however; Aerobank will need to progress the substantive claim (the injunction will not be granted if Aerobank has no intention of doing this).  This is because the injunction is not a cause of action in itself and is intended only to preserve assets to satisfy any final judgment; it will not give Aerobank priority over any other creditors.

What needs to be proved?

In order to obtain a freezing injunction, Aerobank need to show that:

• The English court has jurisdiction to hear the substantive claim and there are assets in the jurisdiction.
• There is a substantive cause of action for which Aerobank has a good arguable case (in this instance the substantive claim is an action in debt under the loan and under the personal guarantee).
• It is just and convenient to grant the injunction: this is the main consideration and means the injunction would not be granted if it would cause some injustice to the respondent that outweighs the benefit to the applicant.
• There is a real risk the respondent would dissipate the assets.
• Aerobank would need to provide certain undertakings to the court which would include an agreement to pay damages to the respondent if the injunction was improperly obtained.

Whom should Aerobank obtain the freezing injunction against?

Aerobank could consider applying for freezing injunctions against both Whyfly companies and Mr Swindle as an individual.  Consideration should also be given as to whether the freezing order should be applied to Mrs Swindle; in appropriate cases the courts will adjoin third parties to a freezing order even though no cause of action lies against them.  Aerobank will need to show it is likely that she is in possession of assets beneficially owned by Mr Swindle over which Mr Swindle retains control.  

What will be covered? 

The injunction would cover all assets belonging to the parties named in the order, whether known to Aerobank or not, up to the amount specified in the injunction i.e. in this instance the injunction would apply to all assets up to the value of Whyfly Inc's outstanding indebtedness under the loan. 

Where will the injunction apply?

The cross-border nature of this dispute suggests that Aerobank should apply for the freezing injunction to be applicable also to assets outside the jurisdiction (otherwise referred to as a worldwide freezing injunction).   This is advisable in situations where the assets in the UK are by themselves unlikely to be sufficient to cover the claim, something which Aerobank will need to demonstrate to the court before the injunction can be given worldwide status. 

How does the injunction work?

The injunction applies to the defendants personally and so affects all of their assets worldwide.  However, defendants may choose to ignore the order and to make sure that it has teeth, Aerobank will need to serve the order on any third parties who may be involved with the Whyfly companies' assets or those of Mr Swindle, for example banks where accounts may be held.  Those third parties will then be obliged to take steps to prevent the Whyfly companies or Mr Swindle dealing with their assets, for example by blocking their accounts. 

However, the injunction will not automatically be enforced worldwide; Aerobank will still need independently to enforce the injunction in those jurisdictions where assets are located, i.e. the US and China.  The mechanics of this process can be complex, depending on which conventions apply in the relevant countries for the recognition of judgments obtained in England.  Local counsel assistance will be required for this process.  

Practical steps Aerobank will need to follow

Aerobank can make its application to the English court for a freezing order on a "without notice" basis to avoid tipping off the defendants or their associates.  However, in those circumstances, where the defendants cannot defend themselves, Aerobank has an onerous obligation to give "full and frank" disclosure when seeking the injunction, including explaining in detail why the application is made without notice and drawing the court's attention to all evidence (both favourable and unfavourable to Aerobank) which will affect the court's decision as to whether to grant the injunction. 

A cross-undertaking as to damages will need to be provided by Aerobank, by which Aerobank will be required to pay any damages due to any party named in the injunction if it later emerges that the injunction was improperly obtained. 

Following the grant of the injunction, Aerobank will then need to serve the freezing order on the parties named in order and, as mentioned above, any third parties who may have control of the assets. 

Aerobank will also be under a duty to pursue the main claim without delay in parallel with its enforcement activities in respect of the freezing order. 

What can Aerobank do to identify Mr Swindle's other assets?

When making the application to the English court for a freezing injunction Aerobank can ask the court to include an order that Mr Swindle and each of the Whyfly companies disclose all the assets owned by them anywhere in the world.  Any failure to comply with these disclosure requirements can be considered contempt of court and result in a prison sentence for individuals (a sanction which the courts are not shy to impose - see ISC Mezhdunarodniy Promyshlenniy Bank and Another v Pugachev). 

To guard against any risk that the Swindles will leave England before Aerobank has all the information it needs, Aerobank may also want to consider asking the court to require the Swindles to deliver up their passports to eliminate any risk they may flee the jurisdiction once they find out about the legal proceedings against them.

Beyond the disclosure orders set out in the freezing injunction, there are a number of other information gathering approaches Aerobank could consider:

1. Search order:
    

   Search orders would allow Aerobank's lawyers (under the supervision of independent lawyers) to enter the Swindles' country house or Whyfly Ltd's office to search for and take any documents or information.  The procedure for obtaining a search order is similar to that which applies in relation to obtaining a freezing order. However, the search order will only apply to premises within the English jurisdiction and they are granted by the court only in extreme situations (for example, where there is a real risk that the defendant will destroy documents).

2.  "Norwich Pharmacal" order:
   
   

   Less draconian than a search order, Norwich Pharmacal orders are a useful means of obtaining disclosure against third parties to a dispute and are often used against banks in fraud situations.  An applicant needs to show that the respondent has become mixed up in or otherwise facilitated the wrongdoing (whether knowingly or innocently).

   In this instance the two main candidates against whom Aerobank should consider obtaining a disclosure order are the Swindle’s banks and the bank of the UK based subsidiary as possible recipients of the proceeds of the loans.  This might yield information on the whereabouts of any funds that Areobank can trace their claim into (see below).  Similar remedies are available in the US in respect of any US banks operated by Whyfly Inc and Mr and Mrs Swindle; local counsel assistance should be obtained accordingly.

   It is also possible to apply for a non-party disclosure order against these entities as part of the substantive proceedings against the Swindles and the Whyfly companies, the test for which is slightly different in that Aerobank would have to show that the documents are likely to support its case and are necessary to resolve the proceedings. 

3. Enquiry agents/Desktop research
   
   Enquiry agents can provide a way of collecting useful information, but they can be expensive and they should not obtain information by unlawful means; information so obtained may be inadmissible and risks the enquiry agent and those instructing them being exposed to criminal and civil liability.  A further layer of complexity regarding the conduct of enquiry agents has been introduced by the Data Protection Act 1998 which imposes onerous obligations on anyone in possession of personal data; this can result in the enquiry agent and the client being criminally liable for any actions of the enquiry agent that contravene the DPA. 
   
   Desktop research can sometimes be a fruitful (and safer) source of information.  Public sources of information such as Companies House, the Land Registry, etc and equivalents in all the relevant jurisdictions should be considered. 

The fruits of the pre-action steps taken above reveal:

• Mrs Swindle has recently bought a house in the South of France;
• Mr Swindle's accountant was bribed US$250,000 to misstate Whyfly Limited’s accounts to Aerobank when applying for the loan.
• The Swindles own several offshore family trusts in the BVI.

Can Aerobank establish a claim to the house in the South of France?

Yes, this is a possibility.  The English courts have the power to extend a freezing order to assets not owned by a defendant but over which they have effective control (see JSC BTA Bank v Solodchenko).  In the case of property belonging to a party's spouse the courts have been willing to extend a freezing order to such property if in reality it can be shown the property belongs to the defendant e.g. if Mrs Swindle had not paid any consideration for it, or the property was acquired shortly after the loan was granted.   

In this case from the outset Aerobank would most likely have applied for Mrs Swindle to be a party to the freezing order which would have been sufficient to cover the property located in the south of France.  Were that not the case, Aerobank should promptly apply to the Court to ensure this asset is covered; it looks likely that the house has been acquired with the proceeds from the loan and Aerobank can "trace" its claim into the house.  Tracing is a process under English law which allows a party to assert a proprietary interest in an asset which represents an original asset against which that party could have made a claim (i.e. in this case the loan proceeds are represented by the house).  

Again, once judgment against the house had been obtained, it would still be necessary to then bring separate enforcement proceedings in France against those assets with the assistance of local counsel.

Is there any scope to trace the loan proceeds into the hands of Mr Swindle's accountant?

Yes.  There are equitable remedies and processes available under English law that can be applied against the recipients of misappropriated property such as the accountant in the example above.  In this case there may be claims based on dishonest assistance or knowing receipt that would allow Aerobank to trace the loan proceeds into the accountant’s bank account.   These remedies are based on Aerobank being able to satisfy an objective test of dishonesty on the part of the accountant by showing that an honest person would not have accepted the payments if it was known that the monies originated from the improperly obtained loan (clearly an accountant in this scenario would have appreciated the improper nature of the transaction given he assisted in the compilation of inaccurate accounts).  

Can Aerobank recover against the BVI trusts?

Maybe.  The English Court of Appeal has clarified that a party subject to a freezing order can properly be compelled to disclose information relating to any interest in any trusts whether as a beneficiary or otherwise (see ISC Mezhdunarodniy Promyshlenniy Bank and Another v Pugachev). In general, the Court has the power to make whatever ancillary orders are necessary to make the freezing order effective. 

The BVI courts have shown they are willing to grant freezing injunctions where the main proceedings are being conducted overseas in order to restrain the disposal of assets located in the BVI court’s jurisdiction.

Conclusion

As fraud gets more complex and international, a swift and carefully executed legal strategy is a necessary response. The above case study shows that the English courts have developed powerful and effective tools to mitigate the damage, pursue the wrongdoers and trace the assets.

First published in Terralex Connections July 2016