A Mandarin version of the article can be found here.
Foreign investors can at least take comfort that the English courts have available to them some exceptionally powerful tools to help the victims of fraud. We explain below the powers held by the courts in England to grant, in particular:
- Freezing orders
- Proprietary injunctions
- Norwich Pharmacal orders.
What is civil fraud?
Outside of the criminal sphere, fraud in England is not a specific claim. It is instead a blanket term that includes claims involving dishonesty in order to obtain a financial gain.
It can be harder to plead fraud claims in England than, for example, standard breach of contract claims, because where fraud is alleged the allegations need to be set out in an exceptionally detailed way, such that the defendant knows the detail of the allegations made against them that they have acted dishonestly.
Before bringing a claim that includes allegations of fraud, you should bear in mind that insurers often do not insure defendants in relation to fraud claims. Therefore if there is a low likelihood of being able to make a recovery from the fraudster without the benefit of the fraudster’s insurance, it may be better to put forward only claims that do not involve allegations of fraud, so as to maximise the chances of making a recovery from the defendant’s insurer.
What tools are available in England to tackle fraudsters?
Victims of fraud are likely to be mistrustful of the fraudster and fearful that even if the claim succeeds the fraudster may try to avoid justice by taking steps to dissipate their assets (i.e. make the assets disappear in whole or in part). English law shares the view that there is a possibility that the fraudster may attempt to take such steps, and the courts in England are able to make orders to help the prevent fraudsters from avoiding justice, including freezing orders, proprietary injunctions and Norwich Pharmacal orders.
These remedies are exceptional in the English system because they involve far reaching interference with the defendant’s property rights and rights to privacy, sometimes before such time as the fraudster has been even notified of the claim, and in any case before the case against the fraudster has been established at trial. The orders that English courts make can also have extra-territorial effect, meaning they apply to assets outside of England as well as within the jurisdiction.
In these respects, the orders outlined below go significantly further than equivalent remedies available in many other European jurisdictions, and are regarded internationally as powerful tools to help combat fraud.
It should be noted that the orders described below are not limited to claims involving fraud, however they will often be of assistance in such cases.
Freezing orders operate to stop a defendant dealing with their assets until such time as the court is able to give its judgment on the claim. They are an important tool to stop defendants from avoiding justice by attempting to dissipate their assets before a trial can be held.
The value of the assets that can be frozen is subject to the court’s discretion and limited to the value of the claim. However, the freezing order will not usually prevent a defendant from meeting their ordinary living expenses, carrying out their business in the ordinary way or paying their reasonable legal costs of defending the claim against them.
The following conditions must be met in order to obtain a freezing order:
- The applicant must have a cause of action, that is, an underlying claim.
- The applicant must have a good arguable case (this is a lower standard of proof than is needed to succeed at a trial).
- The existence of assets held by the respondent must be established.
- There must be a real risk of the respondent's assets being dissipated.
- The applicant must provide a written promise (an undertaking) to the court to cover losses suffered by the defendant as a result of the freezing order, if it is subsequently determined that the freezing order should not have been made. The applicant must also establish that it has the means to pay any such costs if ordered to do so, and may be required to provide security for such costs (particularly if the applicant is an overseas entity without a presence in the UK).
It is important to appreciate that applicants for freezing orders will typically be subject to a duty to give “full and frank” disclosure to the court. This means that the applicant must disclose all matters that are material to the court in deciding whether to grant the freezing order. This includes matters relevant to any arguments the applicant expects the respondent may make when the respondent is informed of the order. The duty of full and frank disclosure can be burdensome to applicants, however it must be complied with diligently as non-compliance may in itself give the respondent grounds for having the freezing order lifted.
A freezing injunction is a powerful tool that can provide significant reassurance to the applicant that it will be able to recover damages in the event the claim succeeds.
Proprietary injunctions are a useful tool where a claimant believes that they are the rightful owners of certain property that the defendant holds. A proprietary injunction must specify the particular property in question. The applicant must establish that it has an arguable case that the assets are its property. Once a proprietary injunction is ordered it operates to freeze the property specified in the court order until such time as the order is lifted, or the claimant has been able to enforce any judgment.
An applicant must show an arguable case (a serious issue to be tried) that the balance of convenience lies in favour of granting the proprietary injunction, and that it is just and convenient to grant the proprietary injunction.
Similarly to a freezing order, the applicant for a proprietary injunction must give an undertaking to pay the respondent’s damages if the order granting the injunction is later lifted and prove that it has sufficient funds to cover this.
Proprietary injunctions have a number of advantages to claimants:
- Unlike freezing orders, proprietary injunctions are not automatically subject to the same qualifications relating to the respondent’s ordinary living expenses or costs of business – if a case can be made that the assets in question are the applicant’s property then the assets can be frozen absolutely.
- Although restricted to assets which the applicant has an arguable case are its property, the English courts have wide powers to treat assets as the applicant’s property, if the assets in question can be shown to have been derived directly from the applicant’s property (such as where the applicant’s property has been sold to purchase a replacement asset, or where money belonging to the applicant has been used to purchase a replacement asset).
- There is no need to establish that there is a risk the respondent will attempt to dissipate the assets in question, unlike a freezing order.
- A proprietary injunction will give the applicant priority over the respondent’s creditors in the event that the respondent is insolvent.
- A proprietary injunction will typically entitle the applicant to an ancillary disclosure order, requiring the respondent to produce sworn evidence regarding the location of and other information relating to any assets to which the applicant may have a proprietary claim. An order forcing a respondent to disclose detailed information about its assets at an early stage of the proceedings can be invaluable in shaping the litigation strategy.
Norwich Pharmacal orders
A Norwich Pharmacal order (NPO) is a further important tool that is available from the English courts to help combat fraud.
An NPO compels a third party (ie a party other than the alleged fraudster) to disclose certain information to the applicant. Such orders are usually aimed at determining the identity of a wrongdoer / defendant to anticipated proceedings, but can also be used to trace stolen funds. In a civil fraud context, an NPO will usually be sought against a bank that has received stolen funds into one of its accounts. The NPO compels the bank to disclose personal information on the account holder and statements of account. This in turn allows the applicant to identify the fraudster, and to determine whether any of the funds remain or onto where they have been transferred.
An NPO is a cost-effective means of obtaining more information on the fraudster and the funds. Armed with this knowledge, a various options potentially become available to a claimant, including applying for a freezing order or a proprietary injunction, as discussed above.
Whilst nobody wishes to become the victim of a fraud, foreign investors into the UK can at least take comfort that the English courts have a wide range of powers available to them that can be used to help combat fraud by ensuring that relevant assets are identified and protected from dissipation before a trial can be held. These remedies are extraordinary remedies in the English system because of the degree of interference they involve with the defendant’s rights at an early stage of the proceedings, before a trial has been held. The courts accordingly require applicants for freezing orders and proprietary injunctions to give far reaching undertakings to the court that the defendant will be compensated if it is later determined that the orders should not have been made. Applying for such remedies is not therefore without significant risks to applicants, and investors would be well-advised to have lawyers experienced in obtaining these kinds of orders undertake an analysis of all the circumstances of a particular case so that all the possible options for obtaining effective relief can be considered at an early stage.
Written in collaboration with Chinese law firm, Zhong Lun.