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Fraud

Fraud Insights: Worldwide freezing order continued despite allegations of delay

A recent decision of the High Court in PJSC National Bank Trust and PJSC Otkritie Bank Financial Corporation v Boris Mints and others [2019] EWHC 2061 (Comm) found that it was appropriate to continue a worldwide freezing order in circumstances where there was a good arguable case that the Defendants had used complex structures and methods, involving substantial sums of money, to defraud the Claimant banks despite the absence of any recent evidence of dissipation by the defendants. It could reasonably be inferred that individuals who used these methods to defraud the Claimant banks in this way and on this scale might readily resort to similar methods to render their major assets proof against enforcement in response to proceedings being taken against them.

The Claimant banks alleged that very substantial loans to companies in or connected to the O1 Group (alleged to be owned by the First Defendant), which were on commercial terms, secured by valuable assets and performing were repaid using the Claimant banks’ own money and were replaced with illiquid and uncommercial bonds which were of negligible or questionable value (the “replacement transactions”).

A worldwide freezing order was granted against the Defendants in June 2019. At the return date in July 2019, the judge found that on the evidence, there was a good arguable case that the replacement transactions were dishonest and corrupt and that although it was necessary to scrutinise the dishonesty alleged to see whether it pointed to the conclusion that assets were likely to be dissipated, the judge found that this conclusion followed from the nature of the transactions, their value and the manner in which they were carried out. In particular:

  1. The transactions, if the Claimant banks’ case was correct, had as their object the removal of valuable assets which were available as security to the Claimant banks for the liabilities of the borrowers and their replacement by illiquid and unmarketable assets. The object of the fraud was to take existing security away from the Claimant banks.
  2. The transactions were on a very substantial scale – US$572m.
  3. The means by which the replacement transactions were accomplished, and then the way in which the assets released from the pledges were dealt involved a complex web of corporate entities in various jurisdictions.

In those circumstances, the judge held there was a real risk of dissipation (notwithstanding that proceedings in Russia had been commenced some 20 months earlier), and that it was just and convenient to continue the worldwide freezing order against the Defendants.

Comment:

Bethany Histed an Associate in the Fraud Defence and Business Disputes team at Mishcon de Reya LLP says:

The case confirms that, whilst it is necessary to show both a “good arguable case” and “real risk of dissipation” in order to decide whether it is just and convenient to grant a worldwide freezing order, there may often be overlap between the two and the evidence in support of a good arguable case that the defendants have been guilty of dishonesty and the means employed by the defendants, may also provide the basis for demonstrating a real risk of dissipation. Here, where individuals had used substantial transactions involving a number of corporate entities in various jurisdictions to dissipate corporate assets, it could reasonably be inferred that those individuals might readily resort to similar methods to protect their assets from enforcement proceedings. This is particularly the case where no evidence had been produced by the defendants to explain the commercial rationale for the transfer or to demonstrate that full value was received for the assets transferred.  

Annabel Thomas a Partner in the Fraud Defence and Business Disputes team at Mishcon de Reya LLP says:

This decision makes clear that when considering risk of dissipation, the evidence must be considered as a whole. As the judge found, if there are very large transactions carried out within a period of a year or two prior to the application for a worldwide freezing order, it may well be material evidence substantiating a risk of dissipation. Whilst potential applicants for a worldwide freezing order should move quickly to maximise their prospects of successfully freezing assets, there is no requirement for the applicant to identify recent dissipatory transactions. If there has been delay in making an application, it will be important for an applicant to provide detailed reasons for any delay and to demonstrate a genuine belief in the need for the order.  

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