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  • Reciprocity Between English & UAE Courts: Recent Developments in Foreign Judgment Enforcement

    Reciprocity Between English & UAE Courts: Recent Developments in Foreign Judgment Enforcement

    Background: Recognition of Foreign Judgments in England & Wales

    Enforcement of UAE Court Judgments in the UK

    In Lenkor Energy trading v Irfan Iqbal Puri [2020] EWHC 75 (QB), the High Court held that in accordance with the law on recognition of foreign judgments, a decision of a Dubai court of competent jurisdiction is enforceable in the UK, provided the judgment, and not the “underlying transaction upon which the judgment is based” did not offend public policy. On the facts, the Court deemed that enforcement of the Dubai Court judgment in the Lenkor case would not be contrary to public policy. Lenkor was and continues to be significant for it established that enforcement of judgments issued by UAE courts are not contrary to public policy per se, paving the way for the possibility of further enforcement on a case by case basis.

    Criteria for UAE Court Judgment Enforcement

    Article 85 of UAE Cabinet Resolution No. 57 of 2018 (hereafter referred to as “Article 85”) contains the law on enforcement of foreign judgments. It sets out the following criteria which must be satisfied cumulatively for a foreign judgment to qualify for enforcement in the UAE:

    1. Judgments and orders delivered by a court in a foreign country to be executed in the UAE in accordance with the same conditions prescribed in the law of that foreign country for executing judgments and orders issued within the State (Article 85(1)).

    2. The courts of the UAE must not have exclusive jurisdiction over the dispute for which the foreign judgment or order was issued and the foreign courts that issued the judgment or order have jurisdiction as prescribed within their own law (Article 85(2)(a)).

    3. The judgment or order must be issued by a court in accordance with the law of the country in which it was issued and must be duly ratified (Article 85(2)(b)).

    4.The litigants involved in the case in which the foreign judgment was delivered must have been summoned and adequately represented (Article 85(2)(c)).

    5. The judgment should have acquired the force of res judicata (Article 85(2)(d)).

    6. The judgment does not conflict with any judgment or order issued by a court of the UAE and is not otherwise contrary to public policy or morals (Article 85(2)(e)).

    On September 13, 2022, in response to the decision in Lenkor, the UAE Ministry of Justice drafted a directive addressed to Dubai courts in which it opined that the condition of reciprocity set out in Article 85(1) of UAE Cabinet Resolution No. 57 of 2018 had been satisfied by the decision in Lenkor, which arises as precedent within the English common law system and therefore encouraged Dubai courts to find Article 85(1) fulfilled when considering whether to enforce English court judgments or orders.

    Recent development: Emirates NBD Bank

    Concerns that Lenkor was no more than an isolated decision have been largely addressed by the recent decision in Emirates NBD Bank PJSC v UAE Citizen* and Others [2023] EWHC 1113 (Comm). The case background is as follows:
    *At the request of the individual involved, their name has been omitted from this summary.
    A citizen of the UAE, who held the position of beneficial owner and director of a Dubai-based company that went into liquidation in September 2014, along with other directors (referred to as “the Guarantors”), provided personal guarantees to Emirates NBD Bank to secure a loan for the company.
    During the liquidation process, the Bank initiated legal proceedings in the Dubai Courts against the company and the Guarantors to recover the outstanding amounts. The litigation escalated to the Dubai Court of Cassation, which ruled in favor of the Bank, ordering the Guarantors to pay AED 211.3 million (approximately £47.5 million).
    Having been unable to recover the sums due in the UAE, the Bank sought to enforce the Dubai Court’s judgment against the assets in the UK of one of the Guarantors. However, prior to the Dubai Court of First Instance entering judgment against him, this individual transferred his assets to his son while retaining beneficial title, in actions the Bank argued were intended to defraud creditors. The individual contended that the Dubai Court Judgment should not be enforced on the grounds that it violated the rules of natural justice, due to the reliance on a report by an expert appointed by the Dubai Court that referred to a law no longer in effect.
    Affirming the Lenkor precedent, the Court held that the Dubai Judgment was enforceable. It rejected the argument to withhold recognition of the Dubai Court judgment on the basis presented, considering the reference to the repealed law merely a “procedural irregularity”. Consequently, the Court issued a monetary judgment against the individual, also finding that the asset transfer to his son was partially executed to defraud creditors.

    Analysis on the future of reciprocal enforcement in the UK & the UAE

    Emirates NBD Bank is a welcome development providing more certainty with respect to the enforcement of UAE court judgments in England and Wales. In addition to affirming the principle of reciprocity upheld in Lenkor, Emirates NBD Bank suggests that English courts will not readily impeach a foreign judgment on the ground that its enforcement or recognition would be contrary the rules of natural justice. As such, we can expect the trend set by Lenkor to continue in so far as English courts are concerned, giving creditors that have secured judgments in their favor in the UAE the confidence to pursue enforcement in England and Wales.

    There is yet to be a case in which a UAE court has either recognised or enforced an English court judgment. While the directive issued by the UAE Ministry of Justice is promising and can signal future symbiotic enforcement in the UAE, the reciprocity established by English courts in Lenkor and Emirates NBD are not on their own sufficient to satisfy Article 85. The conditions for the enforcement of foreign judgments set out in Article 85 are cumulative and may be difficult obstacles to overcome. In addition to the conditions set out in Article 85, UAE courts must consider whether a judgment is contrary to public order, a doctrine enshrined in Article 3 of the UAE Federal Law No. 5 of 1985 on Civil Transactions which provides that a decision or order must not conflict with the fundamental principles of the Shari’ah.

    It must also be borne in mind that the UAE is a civil law jurisdiction in which courts are not bound by precedent. Accordingly, while English courts may consider UAE Judgments to be enforceable as a matter of precedent, UAE judges have wider discretion to find otherwise.

    As matters stand, there is no bilateral enforcement treaty between the UK and UAE with respect to reciprocal enforcement of court judgments.

    Key Takeaways:

    • Emirates NBD confirms the decision in Lenkor further affirming the enforceability of UAE court decisions in England and Wales.
    • There have been advances across both jurisdictions towards reciprocity.
    • Absent a bilateral treaty between the UK and UAE providing for reciprocal enforcement, enforcement of UK court judgments in the UAE will be subject to the criteria set out in Article 85 and the requirement of Shari’ah compliance.
    • UAE courts operate within a civil law jurisdiction and therefore have wider discretion to decide on enforceability on a case by case basis.
  • New Defence Available In Russian/Ukraine War Sanctions

    New Defence Available In Russian/Ukraine War Sanctions

    On 20 June 2023, the Russia (Sanctions) (EU Exit) (Amendment) (No 2) Regulations 2023 (the Regulations) came into force.

    Established under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), the Regulations amended the Russia (Sanctions) (EU Exit) Regulations 2019 (Russia Regulations) to establish a clearer legislative basis to enable certain assets to remain frozen/immobilised until Russia pays compensation to Ukraine “for damage, loss or injury suffered by Ukraine as a result of Russia’s invasion of Ukraine on or after 24 February 2022.”

    Existing finance, shipping, and trade sanctions have also been extended under the Regulations.

    The new sanctions relate to non-government controlled Ukrainian territory “the Autonomous Republic of Crimea” and city of Sebastopol and non-government-controlled areas of the Kherson and Zaporizhzhia oblasts (administrative district or region) of Ukraine.

    These reflect the changing demographics now under Ukrainian control.

    The Regulations introduce a defence to the strict liability offence under section 68(1) of the Customs and Excise Management Act 1979 relating to the prohibition on exportation of certain goods to, or for use in, non-government-controlled areas of the Donetsk, Kherson, Luhansk, and Zaporizhzhia oblasts.

    What is the purpose of the Russia (Sanctions) (EU Exit) Regulations 2019?

    Before the amendment, the Russia Regulations were for the purposes of ‘encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty, or independence of Ukraine.’
    The explanatory memorandum to the Russia Regulations states that they reflect the UK’s position that Russia is fully responsible for the war in Ukraine and the damage caused, including to Ukraine’s critical infrastructure.

    The amended sanctions are designed to contribute to the objective of ensuring Russia pays compensation for the damage it has caused.

    What is the defence to the strict liability offence under section 68(1) of the Customs and Excise Management Act 1979?

    Section 68(1) reads:

    68 Offences in relation to exportation of prohibited or restricted goods.

    (1) If any goods are—

    (a) exported or shipped as stores; or

    (b) brought to any place in the United Kingdom for the purpose of being exported or shipped as stores,

    and the exportation or shipment is or would be contrary to any prohibition or restriction for the time being in force with respect to those goods under or by virtue of any enactment, the goods shall be liable to forfeiture and the exporter or intending exporter of the goods and any agent of his concerned in the exportation or shipment or intended exportation or shipment shall each be liable on summary conviction to a penalty of three times the value of the goods or [F1level 3 on the standard scale], whichever is the greater.

    The defence under the Regulations in relation to section 68(1) is available in circumstances where a person had no knowledge or reasonable cause to suspect that the prohibited goods were destined for the non-government-controlled areas of the Donetsk, Luhansk, Kherson, and Zaporizhzhia oblasts.

    What are the anticipated future developments in sanctions against Russia?

    In a press release dated 19 June 2023, the British government affirmed its commitment to maintaining sanctions until Russia paid compensation to Ukraine for the damage caused by the Russian invasion.

    The statement confirmed that a legislative route was being introduced to ensure frozen Russian assets are donated to Ukraine to help fund reconstruction.
    Laws are also anticipated to mandate that “persons and entities in the UK, or UK persons and entities overseas, who are designated under the Russia financial sanctions regime, must disclose assets they hold in the UK.”

    Russians who are already subject to sanctions are now able to apply to have their frozen funds released for the express purposes of donating money to support reconstruction in Ukraine.

    It is important to note that no relief from sanctions will be offered in exchange for making donations.

    Wrapping up

    Sanctions involve a complex web of domestic and international law, much of which is beyond the scope of this article. Therefore, it is imperative to check each transaction related to Russia or any other country subject to sanctions individually and seek legal advice as to you and/or your organisation’s legal position.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email wt@eldwicklaw.com

    Note: The points in this article reflect sanctions in place at the time of writing, 13th July 2023. This article does not constitute legal advice. For further information, please contact our office.

  • Court Of Appeal Confirms Principle That Reflective Loss Cannot Be Recovered

    Court Of Appeal Confirms Principle That Reflective Loss Cannot Be Recovered

    Background to the decision

    The Claimants were former shareholders in a company called Motoriety (UK) Ltd (Motoriety) which provided software solutions for the motoring industry. In 2015, Motoriety sought investment from Automobile Association Developments Limited ( better known as the AA). It also looked to enter an arrangement to offer AA’s customer base of four million personal members and nine million business members access to its software. In addition, the AA said it would send out MOT reminders to five million members over the coming 12 months, a representation the Claimants later stated they relied on.

    Motoriety and the Claimants secured an investment agreement with the Defendant in which the Defendant agreed to subscribe for 50% of the share capital of Motoriety, receive a place on the Board, and benefit from a call option for the remaining 50 % of share capital. Motoriety subsequently granted a software licence and associated intellectual property rights to the Defendant. In 2017, Motoriety went into administration and was purchased by another company in the AA group.

    The Claimants stated they had relied on false representations by the Defendant, and this led to them entering into the agreement. They also claimed that the Defendant breached implied terms of the contract by taking specific actions that undermined the basis of the agreement. These factors, alleged the Claimants, resulted in Motoriety falling into administration.

    The Defendant applied to have the claim struck out on the basis it was barred by the reflective loss principle. Applying the Supreme Court decision in Marex Financial Ltd v Sevilleja [2020] UKSC 31 (see below), His Honour Judge Paul Matthews agreed with the Defendants and struck out the claim.

    The Court of Appeal’s discussion of the reflective loss principle

    In dismissing the Claimant’s appeal, the Court of Appeal turned to the leading case of Marex Financial Ltd v Sevilleja, in which the UK’s most senior judges confirmed the definition of the reflective loss principle made by Lord Reed in Johnson v Gore Wood & Co [2002] 2 AC 1.

    “a shareholder cannot bring a claim in respect of a diminution in the value of his shareholding, or a reduction in the distributions which he receives by virtue of his shareholding, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, even if the defendant’s conduct also involved the commission of a wrong against the shareholder, and even if no proceedings have been brought by the company”.

    Lord Reed explained that the rationale behind the principle was that where the rule applies:

    “the shareholder does not suffer a loss which is recognised in law as having an existence distinct from the company’s loss. On that basis, a claim by the shareholder is barred by the principle of company law known as the rule in Foss v Harbottle (1843) 2 Hare 461 : a rule which (put shortly) states that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself”

    In Burnford, the Court of Appeal went on to set out several points that can be drawn from various case law authorities, namely:

    • The reflective loss principle applied where a shareholder brought a claim in respect of loss (in the form of a reduction in share value or in distributions) which they had suffered in their capacity as a shareholder, as a consequence of loss sustained by the company, and in respect of which the company had a cause of action against the same wrongdoer.
    • The fact a shareholder can prove they have an independent claim against the Defendant does not negate the application of the reflective loss principle. To circumvent the principle, the Claimant would need to demonstrate they had suffered a separate and distinct loss. A reduction in share value or distributions resulting from losses by the company does not qualify as a separate and distinct loss.
    • Specific correlation between the shareholder’s and company’s losses was not required for the principle to apply.
    • Because the reflective loss principle is so established, the Court has no discretion as to whether it is applied or not.
    • When deciding whether the principle applied, the Court would examine the facts that were present when the loss occurred, not at the time the claim was brought.
    • If the company has no claim against the Defendant, the reflective loss principle will not apply.

    What does Burnford and ors v Automobile Association Developments Limited mean for shareholders?

    The Court pointed out that although several case law authorities had grappled with the principle of reflective loss since the decision in Marex, there was no ambiguity concerning the rule. If the company has a claim against the Defendants, then unless shareholders can show they suffered a separate and distinct loss from that experienced by the company, they cannot bring a civil law claim.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect sanctions in place at the time of writing, 5th March 2023. This article does not constitute legal advice. For further information, please contact our London office.

    See the article on Chambers&Partners

  • How Are Arbitration Awards Enforced In England and Wales?

    How Are Arbitration Awards Enforced In England and Wales?

    One of the benefits of using Arbitration to resolve international disputes is that Arbitration awards can be enforced in domestic courts.

    This is achieved through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, known as the New York Convention (NYC), the Geneva Convention on the Execution of Foreign Arbitral Awards 1927, and the 1965 Convention on the Settlement of Investment Disputes (ICSID) Additional Facility Rules.

    Engaging experienced commercial arbitration solicitors can significantly streamline the process of dealing with these conventions and ensuring the effective enforcement of arbitration awards.

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    Even if the Arbitration hearing took place in another jurisdiction, if you are the successful party and the Respondent has assets in England and Wales, you can apply to the English Courts to enforce the award.

    Before discussing enforcing an award, it is worthwhile briefly setting out how Arbitration works.

    What are Arbitration and Arbitration awards?

    Arbitration is a powerful alternative dispute resolution (ADR) method that is often used to settle international commercial disputes. Parties must agree to submit a dispute to Arbitration, therefore, it is essential to have a carefully drafted Arbitration Agreement either included or attached to the main commercial contract.

    Arbitration agreements are final and binding. Parties can choose the jurisdiction they wish the Arbitration to take place in, the rules governing the procedure, and the appointment of the Arbitrator/s.

    Arbitration in England and Wales is governed by the Arbitration Act 1996, therefore, if you plan to enforce an award in this jurisdiction you must have regard for the Arbitration Act 1996 from the outset.

    What are the distinct types of Arbitration awards?

    It is vital to note that although the term ‘Arbitration award’ appears to form a single concept, there are different types of awards. A partial award will dispose of certain points put forth for Arbitration, but not all. For example, the Arbitration Tribunal (the Tribunal) may make a final award concerning some of the main claims but leave decisions on other claims and any counter-claims for a later date. Only the matters that have been determined in a partial award are enforceable.

    The Tribunal may also make provisional awards that are not final and therefore unenforceable as such. Examples of provisional awards include interim injunctions and interim payments.

    The ideal situation is where the Tribunal makes a final, and therefore enforceable, award covering all the claims and counter-claims put forward by the parties, however, you cannot take for granted that this will occur.

    How does the New York Convention help me enforce an award?

    The NYC, which has been signed by over 160 countries (including the UK), is the main instrument of international arbitration. Signatory States have agreed to recognise and enforce awards made in countries other than the one in which recognition and enforcement of the award is sought. In terms of resolving commercial disputes, the NYC makes Arbitration a more attractive option than litigation as, due to the fewer number of reciprocal judgment recognition and enforcement arrangements the UK has with foreign legal jurisdictions, it is often easier to enforce an Arbitration award made in a signatory State than a court order made in a foreign jurisdiction.

    How can I increase my chances of successfully enforcing an Arbitration award?

    Having a well thought out strategy when drafting/negotiating an Arbitration Agreement and before commencing Arbitration can dramatically increase the chances of having an award enforced. Therefore, consider:

    • Ensuring that the State in which you and the other party agree for any Arbitration proceedings to take place are signatories to the NYC.
    • Investigate which States the other party’s assets are located in. If they reside in a NYC State enforcement will be relatively straightforward. If not, you will need to obtain local legal advice on enforcing any award obtained.
    • Enforcement under the NYC is most commonly resisted on the grounds of public policy. Public policy is a vague concept and the courts in different States take varying approaches. Therefore, be sure to think about any potential public policy issues that could relate to your commercial activities before choosing an Arbitration jurisdiction. 
    • To ensure that the award debtor has sufficient assets with which to pay any award made, it is useful to apply for a freezing injunction during Arbitration proceedings. A freezing injunction can also be granted by a court in England and Wales post-award to support enforcement.

    Final words on arbitration in England and Wales

    International commercial disputes are by nature complex and often involve multiple claims and counter-claims. Arbitration provides a straightforward, confidential way of resolving matters. By ensuring you obtain the legal advice required to build an enforcement strategy before Arbitration proceedings, you can markedly increase your chances of a successful outcome and preserve necessary commercial relationships.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect sanctions in place at the time of writing, 09 February 2023. This article does not constitute legal advice. For further information, please contact our London office.

  • Disclosure Of Cryptocurrency Assets In Divorce Financial Settlement Proceedings

    Disclosure Of Cryptocurrency Assets In Divorce Financial Settlement Proceedings

    Cryptocurrency assets may be in trouble in terms of increasing fraudulent activity and volatile market values but experts are firm – digital assets are not a fad and the market is continuing to grow. It is approaching a total capitalisation of $1 trillion and the number of people trading in cryptocurrencies is increasing year on year. For divorcing couples, especially those who are high-net-worth (HNW) disclosure of cryptocurrency assets is becoming increasingly commonplace. Therefore, when negotiating a financial settlement, you need to ensure your Divorce Solicitor is experienced in cryptocurrency assets.

    Cryptocurrency remains a mystery to many of our family law clients, therefore, in this article we deep dive into the various legal matters crypto assets can raise in divorce financial settlement proceedings.

    What is cryptocurrency?

    Cryptocurrency is a digital currency that can be used to purchase goods and services (the UK beauty retailer Lush takes crypto as a form of payment on its website). When Argentinian football superstar, Lionel Messi transferred to French club Paris Saint-Germain, he received part of his $30 million package in cryptocurrency. You can also invest in cryptocurrency assets in the form of purchasing the currency directly or investing in crypto funds and companies. Crypto assets can take different forms, for instance non-fungible tokens (NFTs) which can represent different property for instance digital art.

    Where is cryptocurrency kept?

    Cryptocurrencies are managed using blockchain technology which means they are outside of the central banking and financial system, albeit subject to anti money laundering laws. Therefore, no ‘currency’ actually exists. Instead, cryptographic keys are stored in ‘wallets’ which are managed by a centralised crypto exchange (CEX).

    This may sound confusing, however, it is no different than notes and coins which are worthless in themselves (as paper and metal) but have a value attached which can be used to purchase goods and services.

    Do cryptocurrency assets have to be disclosed in family law proceedings?

    Cryptocurrency is considered an asset in family law proceedings and therefore must be disclosed. The Courts have considerable powers at their disposal to seek disclosure and value cryptocurrency assets, although their volatile exchange rate can make this a challenging exercise.

    One of the attractions of dealing with cryptocurrency assets is that transactions can be made anonymously, or in the case of Bitcoin, the most well-known cryptocurrency, pseudonymously. This can lead to disputes where one spouse believes the other is hiding cryptocurrency assets in order to keep them out of the divorce financial settlement.

    Can cryptocurrency assets be traced?

    As there is no centralised ownership register for cryptocurrency assets a specialist forensic expert may need to be instructed to establish where such assets are held and their approximate value. In theory crypto assets are represented by an immutable record on blockchain, but given the number of cryptocurrencies that have been lost by hacking or just not been accounted for there is an argument to say not all blockchain systems are failsafe.

    If there is evidence that your spouse is engaging in cryptocurrency transactions in order to hide or dispose of the assets so they do not become part of the financial settlement, your Divorce Solicitor may be able to obtain a freezing order. Case law in recent years supports the principle that cryptocurrency is a form of property. This will prevent them from dealing with or disposing of their cryptocurrency assets for as long as the injunction is in place. The order can be extended to cover not only your spouse but also any CEX that may facilitate potential transactions.

    What if cryptocurrency assets cannot be traced?

    If it becomes clear that the assets cannot be found despite the best efforts of forensic experts, your Family Law Solicitor may be able to persuade the Court that the assets do in fact exist by providing evidence such as bank statements or tracked wallet transactions showing dealings in cryptocurrency. If your Solicitor’s argument is successful, the Family Court Judge, after considering all the factors under section 25 of the Matrimonial Causes Act 1973, may award you a larger share of the overall matrimonial assets ‘pot’ after taking into account the approximate value of the undisclosed cryptocurrency assets. Additionally, persuade the court that any financial settlement is not on a ‘clean break’ basis allowing the opportunity to recover further income or assets as evidence of crypto assets materialise.

    Concluding comments

    Although cryptocurrencies have technically been around since the 1980s (with Bitcoin coming into play in 2008) they are unregulated in most economies. This, along with the speed of crypto transactions, and the ability to trade anonymously with some currencies means that when it comes to tracing undisclosed cryptocurrency assets in family law proceedings, it is vital to instruct a Solicitor who has not only experience in dealing with this type of asset, but the necessary expert forensic contacts who can conduct effective traces.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect the law in place at the time of writing, 19 January 2023. This article does not constitute legal advice. For further information, please contact our London office.

  • Financial services and markets bill: How the UK might become a new Hub for crypto

    Financial services and markets bill: How the UK might become a new Hub for crypto

    Does The Financial Services and Markets Bill have the Crypto Factor?

    Regulation or innovation? One question on everyone’s lips is whether these terms are mutually exclusive in the world of cryptocurrency. At present, there is a backdrop of considerable uncertainty: war impacting the distribution of key commodities such as grain; UK recession; UK currency falling in value against the dollar; and a deteriorating standard of living. This pattern is reflected globally, with 45 countries facing inflation rates of over 15%.

    The crypto horizon looks particularly gloomy when one also considers the sudden and catastrophic crash of FTX last November. With an estimated $8 billion in losses, this episode undoubtedly gives crypto skeptics renewed ammunition for criticism. 

    Yet, the UK government is set on transforming Britain into ‘a global hub’ for crypto. Indeed, last July the Financial Services and Markets Act (FSMA) was introduced to Parliament. 

    The original Bill and its subsequent amendments are indicative of government attempts to chase the tails of this rapidly changing technology. It also largely mirrors progress taken on the continent, demonstrated by the EU’s Markets in Crypto Asset regulation.

    Financial Services and Markets Act: The Initial Changes

    The original version of the FSMA set out plans to recognise stablecoins as a valid form of payment, giving the Financial Conduct Authority (FCA) the power to regulate them. Those stablecoins capable of effecting payments, namely ‘digital settlement assets’, are to be brought within the Bank of England’s regularity perimeter. 

    The FSMA also clearly defines ‘digital settlement assets’ and gives HMT the power to amend this definition. This is of particular importance, as it ensures the legislation will keep pace with rapidly developing technology. 

    Further Developments

    Further amendments to the FSMA, made in November, will broaden the remit of the FCA’s powers if passed into law. Andrew Griffith explained that the changes ‘amends the Financial Services and Markets Act 2000 to clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate crypto assets and activities relating to crypto assets.’ 

    At present, the FCA’s power extends to ensuring that cryptoasset firms are employing effective anti-money laundering (AML) and financial crime procedures. However, these changes mean that cryptoassets will be treated, and thus regulated, in a similar way to shares and other more traditional securities. 

    What does this mean for cryptoasset firms?

    This regulation would essentially lead to a ‘levelling-up’ for cryptoasset firms when it comes to their compliance obligations.

    As a result, firms that are offering services relating to cryptoassets will likely require FCA authorisation. This means that any firm operating crypto exchanges, supplying investment advice or custody services in relation to cryptoassets will need to be fully registered with the financial services regulator in order to operate legally in the UK. 

    Those firms who are already registered and subject to the FCA’s AML regime must go through a separate registration process. This is because full authorisation under the FSMA will potentially mean that firms will be subject to all rules laid out within the FCA Handbook, not just those under the AML regime. Notably, this could include the Financial Ombudsman Service rules on complaints. 

    The FCA’s new powers will enable a much broader regulation of cryptoasset firms, including restrictions on advertising and selling in the UK market. This is due to a move to append ‘including where an asset, right or interest is, or comprises or represents, a crypto asset’ to Section 21 of the Act.   This represents an extension to the financial promotions regime, as Section 21 prevents the advertisement and promotion of investment activities by unregulated firms. 

    Any firms violating these rules and engaging in fraudulent activities involving cryptoassets will be at risk of fines and/or other penalties at the behest of the FCA. 

    What does this mean for consumers?

    One of the FSMA’s overall objectives is to ensure greater protection for those engaging in crypto-related services and investments. Indeed, it will undoubtedly consign more power into the hands of the consumer.

    In order for crypto to flourish meaningfully, this legislative certainty is indisputably necessary. In 2022, the Financial Lives Survey indicated that around 3 million UK consumers have already invested in cryptoassets. The FSMA will ensure greater business certainty, attracting even more investment and creating more jobs in the sector. The Act has had its second reading in the House of Lords on 10th January, and is currently going through the Upper House’s committee stage, after which there will be the report stage and third reading before the Bill reverts to the Commons for further debate. Royal Assent is expected in spring/summer this year.

  • What To Do If You Are Accused Of Fraud?

    What To Do If You Are Accused Of Fraud?

    If you are accused of fraud and are being investigated by the police or a regulatory body such as the SFO, NCA, HMRC, or FCA, it is essential that you contact an experienced Fraud Solicitor immediately. We see so many cases in which it is clear that if we had been instructed earlier, the investigation/prosecution would never have gone as far as it had. 

    Fraud is a complex crime and is extremely hard to prove to the criminal standard (beyond reasonable doubt). However, if you are convicted, depending on the nature and extent of the fraud, you could face up to ten years’ imprisonment.

    In addition, if you are accused of fraud, investigations can be long, extremely stressful, and cause untold damage to your business reputation. Without meticulous, smart, and proactive legal advice, a person or company could bring a civil claim for fraud against you at the same time the criminal investigation/prosecution is taking place.

    This is becoming more common as the civil test for liability (on the balance of probabilities) is lower than that required for criminal prosecution.

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    What is fraud?

    Fraud is the use of trickery to gain a dishonest advantage, which is often financial, over another person. Types of fraud include (but are not limited to):

    • Electoral fraud
    • Mortgage fraud
    • Beneficiary fraud
    • False accounting
    • Fraudulent trading
    • Fraud By false representation
    • Identity theft
    • Immigration fraud
    • Ponzi schemes
    • Debit and credit card fraud
    • Tax fraud
    • Insurance fraud

    In addition to the above, there are also many types of conspiracies to defraud. 

    How can I defend an allegation of fraud?

    The most common defence in either a criminal or civil fraud trial is that the Defendant did not act dishonestly. For example, if you are accused of making false representations you can argue that at the time you were unaware that what you said was untrue.

    In the case of identity theft, your defence may be that the person whose identity you have been accused of stealing permitted you to use their details.

    When establishing whether or not you have been dishonest, the Court will use the test set out by the Supreme Court in Ivey v Genting Casinos (UK) Ltd t/a Crockford [2017] UKSC 67, namely: 

    • What was the defendant’s actual state of knowledge or belief as to the facts?
    • Irrespective of the defendant’s belief about the facts, was their conduct dishonest by the objective standards of ordinary decent people?

    There are other general defences available for criminal fraud, for example, necessity, duress, and mistake. An experienced Fraud Defence Solicitor can swiftly examine the facts of your case and the Prosecution’s evidence and advise you on the defence/s that is most likely to achieve success.

    Do I need a Fraud Solicitor if I am asked to attend an interview under caution?

    Never, ever attend an interview under caution or even an informal ‘chat’ without your Solicitor present. 

    The powers of the police and other regulatory bodies “who are charged with the duty of investigating offences or charging offenders” to conduct interviews under caution are contained in the Police and Criminal Evidence Act 1984 (PACE 1984).

    If you believe you are innocent it is natural to assume that if you speak to the authorities and calmly tell them your side of the story they will promptly apologise, shake your hand, and the matter will be put down to a misunderstanding.

    Unfortunately, this is not how things work.

    The job of the police and regulatory authorities is to investigate suspected criminal activity with the aim of bringing a successful prosecution. Having a Fraud Solicitor at your side who can not only advise you but also ensure the interviewers do not overreach their powers. 

    When it comes to SFO investigations, it is important to note that it obtains its investigatory powers from section 2 of the Criminal Justice Act (CJA) 1987. Therefore, it can compel organisations/people to produce documents and other evidence, apply for a search warrant, and attend interviews. These are referred to as ‘compulsory powers.’ 

    Importantly, section 2 allows the SFO to insist a person attends an interview that is not conducted under caution nor subject to the Police and Criminal Evidence Act (PACE). Therefore, there is no right to silence and if you want to have a Solicitor present, they need to convince the investigator that they should attend and if they are so permitted, agree to restrictions regarding their conduct.

    There are two safeguards concerning the interview powers provided by section 2, namely:

    • The powers cannot be used to obtain information subject to legal professional privilege, and
    • Answers provided in a section 2 interview cannot be used in a prosecution case if one is brought against the Defendant for the offence under investigation. However, they can be used to prosecute the Defendant for an offence of misleading the investigation.

    Refusing to comply with the SFO when it is exercising a compulsory power or providing false or misleading information is a criminal offence and can lead to a custodial sentence.

    Concluding comments

    Fraud and the various powers given to the police and regulatory authorities to investigate it are incredibly vast and go beyond what can be explained in a single article. For example, because it is notoriously difficult to successfully prosecute fraud and corruption cases if an investigation does not meet the relevant criteria to bring a prosecution but property derived from crime can be identified, authorities can use their civil recovery powers to freeze and recover assets. 

    If you are accused of criminal fraud or a civil claim for fraud has been brought against you, please contact us immediately. If you are subject to a ‘dawn raid’ we can provide an emergency response. 

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com and/or contact our Head of Business Crime, Abbas Nawrozzadeh. 

  • Crypto Fraud: High Court Provides Legal Solutions

    Crypto Fraud: High Court Provides Legal Solutions

    The Courts in England and Wales have long been renowned as stable, specialist institutions in which companies can litigate complex commercial matters. The recent cases of Jones v Persons Unknown [2022] EWHC 2543 (Comm) and LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm), illustrate that the Judiciary is alive to the need to provide legal remedies in crypto fraud cases, including in situations where the identity of the fraudsters are difficult or impossible to discover.

    What is crypto fraud?

    Crypto fraud is where criminals dishonestly trick people and/or companies into parting with their cryptocurrency and/or assets via fraudulent transactions. 

    Examples of crypto fraud include:

    • Gaining access to a crypto wallet through phishing, smishing, and vishing. The cryptocurrency is then transferred to the fraudster’s account via several transactions, making it difficult to trace the funds and fraudsters.
    • Using social media platforms to advertise high-return investment or mining opportunities and asking for payment in cryptocurrency.
    • Targeting people who have been previously scammed and offering to find the funds in return for payment in cryptocurrency. The funds and the service provider then disappear.

    Jones v Persons Unknown

    In Jones v Persons Unknown, the Claimant had been fraudulently convinced to transfer the equivalent of £1.54 million in Bitcoin to a fake crypto-investment platform. The stolen Bitcoins were tracked to a wallet associated with the company Huobi, a Seychelles-based cryptocurrency exchange. 

    The case of LMN v Bitflyer Holdings Inc saw hackers access and transfer millions of dollars of cryptocurrency from the Claimant’s computer systems. The cryptocurrency transfer was traced through 26 recipient exchange addresses. Investigations showed that these exchanges were all operated by one of the Defendants or companies belonging to the same group.

    How do the decisions in Jones v Persons Unknown and LMN v Bitflyer Holdings Inc benefit victims of crypto fraud?

    It is important to remember that cryptocurrency is almost completely unregulated in the UK and its legal status varies widely around the world. Furthermore, cryptocurrency cases involve technology that is constantly evolving, and the market is enormously volatile.

    The High Court in Jones v Persons Unknown provided several case law ‘firsts’ when handing down its decision, including:

    • Creating a constructive trust between the cryptocurrency exchange to which the stolen Bitcoin was traced and the victim of the alleged crypto fraud. Although in the case of Wang v Darby [2021] EWHC 3054 (Comm) the court indicated that digital assets could, in principle, be held on trust but on the facts the Court ruled against one.
    • Making an order against the perpetrators of the fraud and the cryptocurrency exchange for the delivery up of Bitcoin.
    • Delivering the summary judgment by NFT airdrop directly into a crypto-wallet.

    The decision to impose a constructive trust between the exchange and the Claimant followed the ruling in AA v Persons Unknown [2019] EWHC 3556 (Comm) where the Court held that crypto-assets are in fact “property” for relevant purposes. The Court followed Lord Wilberforce’s opinion in the House of Lords in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (HL) at 1247–1248, where he said: “Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.” 

    Following this AA decision, the well-established legal principle that a Claimant’s proprietary interest can be enforced by way of the imposition of a constructive trust in cases where property or money stolen or obtained by fraud is traceable in equity could be applied to litigation involving crypto assets. Many other common law jurisdictions have followed a similar approach although there are exceptions: The Court of Appeal of Singapore has expressly not decided whether cryptocurrencies are a type of property see Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02. 

    In LMN v Bitflyer Holdings Inc the Claimant wanted the Court to allow it to have access to the Know Your Client data and other anti-money laundering information held by the 26 exchanges so it could resume its tracing of the misappropriated Bitcoin.

    The Court granted information orders against foreign cryptocurrency exchanges requiring:

    1. the supply of information and documentation to help identify those who hold accounts into which stolen cryptocurrency was allegedly transferred, and 
    2. where the misappropriated funds had ended up.

    These decisions assist victims of stolen cryptocurrency to trace the funds and, if a constructive trust can be established, be reimbursed by an exchange. These are incredibly powerful weapons in civil litigation involving crypto fraud as some cryptocurrencies such as Zcash and Monero provide anonymity for the sender, receiver, and holder of the funds. Bitcoin and Ether are pseudo-anonymous which is why an Information Order for disclosure of Know Your Client and anti-money laundering data is so powerful as it can reveal the identity of the people involved in the fraudulent transactions.

    What are the plans to regulate cryptocurrency in the UK?

    The Treasury is finalising plans to implement rules to regulate the crypto industry. These will include setting limits on foreign companies selling into the UK, provisions for how to deal with the collapse of companies, and restrictions on the advertising of products. The collapse of the cryptocurrency exchange FTX seems to have spurred Whitehall into urgency regarding this matter.

    The powers will be part of the Financial Services and Markets Bill, which at the time of writing is passing through the House of Lords.

    For victims of crypto fraud, the crucial step is to contact an experienced Solicitor who can advise on how to trace what has happened to the funds and apply to the Court for necessary Orders, Injunctions, and decisions to protect and restore the cryptocurrency to its rightful owner.

    Note: The points in this article reflect the law in place at the time of writing, 05 January 2023. This article does not constitute legal advice. For further information, please contact us.

    1. Since 2021 Ether transactions can be made anonymously – What is ether (ETH)? | ethereum.org
  • Rights of minority shareholders in private limited companies

    Rights of minority shareholders in private limited companies

    How can you safeguard your rights as a minority shareholder?

    1. A shareholder application to court in cases of unfairly prejudicial conduct (s.994 CA 2006)

    Commonly known as an unfair prejudice petition, a member of a company may make a petition to the court for relief where:

    • the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to interests of members generally;
    • an actual or proposed act or omission of the company is or would be prejudicial. 

    Whilst any conduct that satisfies the elements of s.994, the most important being that the conduct of the company affairs is both unfair and prejudicial, could give rise to a successful unfair prejudice petition, examples of unfairly prejudicial conduct can include:

    • circumstances where a director, who is also a majority shareholder, redirects business to himself or for his own benefit in breach of his fiduciary duties;
    • failing to allow the petitioner to be involved in the management of the company or to be consulted about decisions if the petitioner holds such rights and such exclusion is not justified by the petitioner’s misconduct;
    • exercising the power to allot shares to dilute a minority shareholder’s interest;
    • a majority shareholder awarding himself excessive and unreasonable bonuses and financial benefits. 

    Under s.994, the court will take into consideration past and present mistreatment and will have wide discretion with regards to the remedial order it may impose. A remedy which is commonly sought by a petitioner is a purchase order, which requires the wrongdoing member to purchase the minority shareholding of the petitioner.  The price at which these shares are sold is determined by the value of the petitioner’s shares prior to the commencement of the objectionable behaviour.

    Other remedies include the court’s authorisation of civil proceedings and their commencement in the company’s name; and the regulation of the company’s affairs in the future.

    Overall, as an oppressed minority shareholder, it is important to act quickly; the courts will reject any application they believe to have been made by a shareholder who has been inactive and has allowed the objectionable behaviour to continue. 

    Further reading: Directors’ Duties

    1. A ‘derivative action’ (s.260 CA 2006)

    A derivative claim is the process by which a minority shareholder can bring proceedings on behalf of a company against a director for breach of duty.  As the resulting compensation is sought on behalf of the company and it is the company that will benefit overall, not the individual shareholder. 

    The procedural route by which a derivative claim can be brought is governed by ss.260-264 CA 2006; this has superseded the procedural rules under common law and the uncertainty that came with it. The intention was to simplify and improve the law’s accessibility. Indeed, there was a demand for greater legislative certainty, especially in wake of Robert Maxwell’s pension fraud scandal.  

    Although leave of the court is not required to issue a derivative claim, permission must be obtained to proceed with the claim (s.261(1)). The court therefore has the power to scrutinise the claim before any additional steps are taken and it is important to ensure that a prima facie claim is made out to avoid permission being automatically rejected by virtue of s.261(2). 

    Under s.263(2), permission “must” be refused where:

    • directors, who are under a duty to promote the success of the company (s.172 CA 2006), would not seek to continue the claim; and/or
    • the cause of action arises from an act or omission that has been authorised or ratified by the company.

    The court will give “particular regard” to the perspective of company members who do not have a personal interest in the dispute (s.263(4)) and, amongst other things, the court will consider whether the applicant is acting in good faith (s.263(3)(a)). 

    Under s.264, it is also possible for a second member to take over from the first member and continue an existing derivative claim. This may occur if the first member has been conducting the claim in an inappropriate manner. 

    The way in which the court decides whether permission should be granted for a derivative claim is undoubtedly slightly arduous. Indeed, achieving overall success via a derivative claim is particularly difficult for minority shareholders overall. 

    Nonetheless, derivative claims are comprehensive in their application; they refer to any actual or intended acts or omissions concerning default, negligence, breach of trust, or breach of duty by directors. 

    1. A Shareholders’ Agreement

    A minority shareholder can also seek protection by entering into a shareholders’ agreement. This is a private contract between shareholders, which governs how they will act in relation to the company. It is important to note that, because it is private, it does not have to be registered at Companies House and, therefore, does not have to be made public knowledge. 

    By virtue of the agreement, signees are contractually bound to act in accordance with its terms. If they fail to do so, they may be sued for breach of contract. However, it is entirely voluntary and shareholders cannot be compelled to sign. Commonly, such agreements contain control mechanisms relating to profit distribution and the appointment of directors. 

    Moreover, they can provide minority shareholders with protection; in order to amend a contractual provision, all shareholders must be in agreement. In contrast, under the CA 2006, shareholder rights are determined proportionally in accordance with their voting rights.

    Indeed, a well drafted shareholders’ agreement ensures that minority rights are considered allied. They can, therefore, act as an appropriate dispute resolution mechanism and help to reduce the risk of acrimonious and costly litigation. 

    1. S.122 of the Insolvency Act 1986

    Finally, minority shareholders have the option of deploying a considerably more explosive action set out under s.122 of the Insolvency Act 1986, which provides that a minority shareholder can make an application to court to ‘wind up’ the company on ‘just and equitable’ grounds.

    This is undoubtedly a remedy of last resort; there are few winners, as it will result in the cessation of the company’s existence and, therefore, the loss of shareholder investment. There is, unsurprisingly, a high bar set here and the courts must be of the opinion that there is no better alternative.

     

  • Freezing Orders: Russian Oligarch Gets A Second Chance

    Freezing Orders: Russian Oligarch Gets A Second Chance

    People planning to contest account freezing orders (AFOs) will welcome the recent High Court decision in National Crime Agency v Westminster Magistrates Court, 2022 EWHC 2631 Admin where Justice Rowena Collins Rice upheld a challenge by Ingliston Management Ltd (IML) and Lodge Security Team Ltd (LST), who managed the UK personal finances of a Russian oligarch, Petr Aven, whose British assets were frozen in February 2022. Mr Aven is alleged to be close to President Vladimir Putin.

    Background to the High Court decision

    Shortly before sanctions were imposed on Mr Aven, the National Crime Agency (NCA) was informed by several banks to an ‘unusual’ pattern of activity” in nine UK bank accounts held by six persons and companies connected to Mr Aven. The HSBC accounts of IML and LST were among them. The NCA obtained, on a without-notice basis, freezing orders in relation to all nine accounts, and then a search warrant, and began further investigations.

    IML and LST applied to the court to have the AFOs set aside. The District Court Judge declined to do this, however, the freezing orders were varied to allow for personal expenditure to be paid from the accounts.

    The two companies proceeded with a judicial review challenging the lawfulness of refusal to set the orders aside. The NCA brought its own challenge against the lawfulness of the decision to vary them.

    The applicable law on account freezing orders

    To assist with understanding why the High Court criticised the District Court Judge’s decision to refuse to set the AFO aside, it is useful to set out, in non-technical terms, the applicable law that both courts had to consider.

    The Proceeds of Crime Act 2002 (POCA) sets out a complex regime which allows for prosecutors to confiscate any assets purchased with the proceeds from criminal activity.

    Under section 303Z1, the NCA can apply to a Magistrates’ Court for an AFO ‘if an enforcement officer has reasonable grounds for suspecting that money held in an account maintained with a relevant financial institution (a) is recoverable property’ – that is, in effect, the proceeds of crime – ‘or (b) is intended by any person for use in unlawful conduct’. This is referred to as the threshold question.

    An AFO prevents withdrawals and payments being made from the account.

    By subsection (4) of section 303Z1, an application for an AFO may be made without notice (ex-parte) ‘if the circumstances of the case are such that notice of the application would prejudice the taking of any steps under this Chapter to forfeit money…’.

    Section 303Z4 of the Proceeds of Crime Act 2002 (POCA) empowers a court at any time to set aside or vary an AFO. Section 303Z5 provides the court can, when exercising its power under section 303Z47, make exclusions from the prohibition on making withdrawals or payments from the frozen account. Exclusions ‘may (amongst other things) make provision for the purpose of enabling a person by or for whom an account is operated (a) to meet the person’s reasonable living expenses, or (b) to carry on any trade, business, profession or occupation’. This amounts to a variation of the AFO.

    Exclusions can be made subject to conditions. By subsection (8), the power to make exclusions must be exercised: with a view to ensuring, so far as practicable, that there is not undue prejudice to the taking of any steps under this Chapter to forfeit money that is recoverable property or intended by any person for use in unlawful conduct.

    The Russia (Sanctions) (EU Exit) Regulations 2019, regulation 11 provides for an ‘asset-freeze’ in relation to persons designated for the purpose of attracting financial restrictions. It makes it a criminal offence for anyone to ‘deal with funds or economic resources owned, held or controlled by a designated person’ if they know or have reasonable grounds to suspect that they are doing so.

    The High Court decision in National Crime Agency v Westminster Magistrates Court

    IML and LST argued that the NCA’s without notice application when applying for the AFO had been ‘muddled, misleading and inadequate.’ Furthermore, the NCA had failed in its duty of candour and the Magistrates’ Court would probably have refused the without notice AFO if they had been made aware of the true facts.

    In making his decision not to set aside the AFO, the District Court Judge drew an analogy between the AFO provisions and statutory regimes under the Sexual Offences Act 2003 and Civil Procedure Rule 3.1(7). This led him to conclude that for an AFO to be set aside, a change of circumstances must be present. The High Court rejected this, commenting that it read into the POCA a non-existent restriction on the court’s powers.

    Justice Rowena Collins Rice stated that when deciding whether or not to set aside an AFO, the court must consider the threshold questions (see above). However, she ruled that this was not the case when considering an application for variation. Instead, the provisions in Section 303Z5 (see above) should be deliberated. She went on to say that the District Court Judge made a “clear error of law” in deciding to vary but not set aside restrictions on the company accounts. The High Court Judge considered “the errors and omissions . . .. to be fundamental to the extent of making [the decision] wrong, unfair, and excessively speculative.” She said the case “needs to be considered afresh, and the decision taken properly.”

    Comment on freezing orders

    This case illustrates how difficult it is for the NCA to proactively enforce sanctions. It is worth reminding you, dear reader, freezing orders are considered the law’s ‘nuclear weapon’ and the judiciary is exceptionally sensitive to any laxity in the application for an AFO and will meticulously consider setting aside and varying applications. For example, when commenting on the court’s obligations under section 303Z5 and in particular, subsection (8), Justice Rowena Collins Rice observed:

    “These tests again require close attention to the factual matrix and an evaluative decision to be taken in all the circumstances, including giving careful attention to the scheme of the Act. What constitutes someone’s reasonable living expenses? What, apart from the absence of a variation order, is stopping the person being enabled to meet those expenses? What would be the prejudicial effect of making exclusions on the taking of taking further steps towards forfeiture? And if there is a prejudicial effect, does the court assess it to be undue, and if so why?”

    It is also important to note that the fact an applicant for a setting aside order has been sanctioned does not change the court’s approach. Instead, the circumstances surrounding the sanction will provide further information for the court to consider. For example, as an alternative to the often costly and complex AFO setting aside application, a more straightforward OFSI licence covering assets not subject to the AFO may provide a better solution.

    What matters most is that if you are subject to an AFO or UK, EU, or US sanctions you must instruct an experienced solicitor to advise you. Not only will they be alive to NCA tactics, but they can also develop a strategy that has the best chance of lifting an AFO and/or sanctions and protecting your personal and professional reputation.