Civil fraud is by now, a booming practice area for English courts. Allegations of fraud have risen considerably in large-scale, commercial cases. As early as 1759 Lord Hardwicke remarked that 'Fraud is infinite'. This remains true today.
Civil fraud (as opposed to criminal) concerns a private action in civil courts, with a ruling made by a judge. It involves the application of principles from contract law (breach of contract based on bribery and corruption) to tort (unlawful conspiracy), trusts (breach of fiduciary duty) and company law issues (ownership & control). According to the leading practitioner’s text, fraud is commercial or quasi-commercial activity which involves the infliction of economic harm on a claimant to obtain a commensurate and illegitimate gain. Such conduct is intentional and usually dishonest, or at least unconscionable.
A key theme in civil fraud currently is how courts are adapting to the challenges posed by globalisation, by fraudsters operating in multiple jurisdictions. As a case study, this article will explore the Ablyazov litigation, a long saga of civil fraud litigation involving $5 billion misappropriated from BTA Bank by Mukhtar Ablyazov, a Kazakh investor and former opposition politician, between 2005 and 2009. The cumulative litigation has set historic precedents for future civil fraud cases.
On the one hand, international fraudsters like Ablyazov challenge the powers of English courts. Even though Ablyazov was charged, enforcement remains a pressing issue with billions left unaccounted for. However, the article will focus on the court procedures used - freezing orders, receivership orders, and contempt of courts applications – to show how this litigation acted as a stimulus to innovation in procedural case law, allowing the development of clearer legal principles to tackle fraudsters operating across the globe. In this way the Ablyazov litigation was a double-edged sword.
1. Freezing order
BTA Bank successfully obtained a freezing order against Mr. Ablyazov in November 2009. This included an order to disclose the extent and location of Ablyazov and his associates’ assets. A freezing order is an injunction preventing the disposal of assets by the respondent. The relevant test is objective, referring to the “risk of dissipation”. The Ablyazov litigation helped clarify this objective test.
The primary issue regarding the freezing order concerned the meaning of “his assets” within the new standard form freezing order. This was said to “include any asset which he has the power, directly or indirectly to dispose or deal with as if it were his own”. Crucially, this power extends to third parties holding or controlling the asset, in accordance with direct or indirect instructions.
Prior editions of the Commercial Court Guide did not include assets held by the respondent for the benefit of a third party. The question before the Court was whether the revised wording had the effect of including assets a respondent holds as trustee or nominee for a third party. For Proudman J, the words “legally, beneficially, or otherwise” drew a distinction between assets held legally and those held beneficially. This would indeed include assets held by respondent as trustee or nominee for a third party.
This was relevant because Ablyazov had sought to raise finance, entering into loan agreements with third party companies whom he directed to pay lawyers directly. The Bank argued this was a breach of the freezing order. Ablyazov disagreed: borrowing money did not amount to the disposing of, dealing with or diminishing the value of any of its assets.
In response, the bank made two arguments. As well as arguing that the loans breached the freezer, the Bank relied on the wide definition of assets therein. Both were rejected by the Court of Appeal in 2013. In the leading judgment, Beatson LJ explained the three principles vital to the construction of a freezing order.
1. The first, most important principle was the “enforcement principle”, whereby “the purpose of a freezing order is to stop the injuncted defendant dissipating or disposing of property which could be the subject of enforcement if the claimant goes on to win the case it has brought. The purpose was singularly not to give the claimant security for his claim.
2. The second was the “flexibility principle”. This was designed to adapt freezing orders to the tactics used by “wily” operators. The major concern underpinning this principle was the role technology could play, in preventing effective enforcement.
3. The third, was the “strict construction principle”. This held that due to the gravity of the consequences of breaching a freezing order, a defendant ought to know where they stand. A freezing order needed to be clear and strictly construed.
Beatson LJ held there existed a tension between the application of the three principles when interpreting a freezer. The enforcement and flexibility principles weighed in favour of a purposive and open interpretation, to prevent unscrupulous defendants from creatively evading their application. Yet the last principle favours a narrow, literal construction, especially given the harsh effects of a freezing order on the economic activity of any individual against whom judgment has not been granted. Beatson considered the loans were not “assets” under the terms of the standard form freezing order, and the appeal ought to be dismissed. The strict construction principle was especially prominent within his reasoning.
The Supreme Court, however, disagreed with the Court of Appeal, holding this was too narrow an interpretation. The key point was control of the assets, namely that via the loan Mr Ablyazov had “unfettered discretion to use the proceeds as he wished”. The entire purpose of the extended definition of the freezing order was to catch rights, in particular any “asset which they have the power directly or indirectly to dispose of, or deal with as if it were their own”. The result of the Supreme Court decision in 2015 was that it would be exceptionally difficult for a defendant to circumvent the standard exceptions to a freezing order through using borrowing or credit facilities. Otherwise, they risk facing the serious consequences of breaching a court order. This reflects the willingness of the court to adapt to the ever-evolving ways a respondent might try to circumvent the effectiveness of freezing orders.
Ownership or control?
Yet this decision contravened the earlier Court of Appeal decision in Lakatamia Shipping. Here the company’s assets were not covered by the extended definition of assets in the new standard form freezing order.
Recent case law has sought to resolve these conflicting judgments. In FM Capital Partners v Frederic Marino & Others  the court held that even if the respondent is the sole shareholder or a director of a company, it does not automatically mean the company’s assets are subject to the freezing order. The critical question is whether the respondent has such a degree of control over the company’s assets that the company forms the “wallet” of the respondent. Then in any freezer with the extended definition freezing order, those assets will be subject to the freezing order. The key determinant then, is control of the company, not ownership. This principle entails that the precise percentage share and level of control a respondent has over a company will be pressing questions in litigation.
It is clear then, the courts have expanded the powers of freezing orders but remain cautious. Freezing orders, as the “strict construction” principle reminds us, are a powerful weapon in the court’s arsenal. Given the uncertainty, stress, and reputational consequences for businesses, they are not to be expanded indiscriminately. It is ultimately a question of balance. This conflicting play of principles will continue to determine the future of the freezing order.
2. Receivership order
One of the main issues was that Ablyazov’s assets were held through a complex scheme involving nominees. He argued this was necessary to protect him from the illegal actions of the president of Kazakhstan, Ablyazov being a former Kazakh opposition leader. But the bank, worried about the transparency of Ablyazov’s disclosure of assets and the risk that he might dissipate them, applied for the appointment of a receiver over these assets, in support of the freezing order. A receivership order is an order that the person’s assets be put in the hands of an official with certain powers and duties to deal with that property. The Court has the power to order the appointment of a receiver under section 37(1) of the Senior Courts Act 1981, where it appears just and convenient to do so.
Teare J granted the receivership order, on the basis that Ablyazov’s conduct in the proceedings had left Teare J unable to trust him not to deal with his assets in breach of the freezing order. Any risk to Ablyazov could be minimised by the terms of the receivership order. This was because Ablyazov could still operate the affected businesses and make bona fide decisions relating to the management of his investment portfolio. This decision was upheld by the Court of Appeal.
This case clarified the test for the appointment of a receiver. A receivership order will normally be justified if the freezing order provides inadequate protection, where there is a measurable risk a defendant uses its complex asset-holding structure to breach its terms. Important to note, though, is that a receivership order is very expensive. Teare J asked the bank to put up £40 million in support of the receivership. The receivership was extended, to cover 600 of Ablyazov’s undisclosed companies. In further global litigation like the Fairfax Circuity Court, the 19th Judicial Circuit of Virginia, the jury reached a verdict recognising the receivership order against Ablyazov. The same result was found by the Supreme Court of the Seychelles.
Receivers, then, are a potent if very specific tool used by English courts, allowing them to adapt to the challenges of globalisation by responding directly to complex, multi-jurisdictional asset-holding schemes. The judgment here was limited but significant. It represented the willingness of courts to assist clients and practitioners by providing greater clarity in relation to the tools available in fraud litigation.
3. Contempt of court
Contempt of court is the next measure to take in a civil fraud dispute when the terms of a freezing or receivership order are breached. Mr Ablyazov duly faced this application.
Contempt of court has a high threshold. On the right facts it is entirely justified, but the Ablyazov litigation is not a “formula” that will work in every fraud case. The Chernukhin v Deripaska litigation is instructive in this regard. Here the contempt of court application was found to have been instituted for motives of “revenge and personal animosity”. Nevertheless, the main result of contempt of court here was that by 2012 Ablyazov received a 22-month prison sentence for contempt of court. By then Ablyazov, had already fled on a diplomatic passport and has lived in the French Riviera ever since. The main result of contempt of court was that Ablyazov was debarred from defending himself further in proceedings. This arose due to the long-standing principle that an individual in contempt of court lacks the right to be heard by the court.
Contempt of court applications further evolved by way of a 2018 judgment in the Supreme Court, undertaken against Mr. Ablyazov’s son-in-law, Ilyas Khraprunov. Following this judgment, being in contempt can constitute “unlawful means” in a tort claim for unlawful means conspiracy. Consequently, parties affected by a failure to comply with a court order can claim not solely against the contemnor, but against all complicit parties. It was found Khrapunov assisted Ablyazov in causing financial loss to the Bank through dealing with Ablyazov’s assets overseas. This breached both the freezing order and the receivership order. As a result, claimants can now allege that aiding a party to breach a freezing or other court order can constitute unlawful means, satisfying the conspiracy tort. This expands the pool of assets targetable through an unlawful means conspiracy claim.
In an even clearer sign of the’ willingness of English courts to adapt to the challenges posed by a globalised world, the Supreme Court confirmed the English courts had Lugano Convention jurisdiction over any conspiracy claim, so long as it was hatched within the United Kingdom, even if the remaining aspects of this tort occurred overseas. Again, this conspiracy related to the joint efforts to breach the freezing order and receivership order. This meant that even though on these facts, Mr Khrapunov was living in Switzerland, the Bank could rely on Article 5(3) of the Lugano Convention, under which the “making of the agreement in England” is regarded as the “harmful event which set the tort in motion”. Once again, we have evidence of English courts gradually expanding the range of tools available to civil fraud litigators. This clearly limits the ability of fraudsters to enlist additional parties, or move to other jurisdictions, in order to circumvent freezing orders. It might be gradual, and evolutionary but the clarification of principles that underlie civil fraud is nonetheless to be welcomed and signals the increasing global reach of English courts.
Although Ablyazov remains a free man, his proposed extradition to Russia overturned by the French courts, the evolution of legal principles is highly important. The key theme throughout has been that the litigation has steadily expanded the scope of the freezing order, and the clarification of “his assets” in the standard test freezing order, subject to the control principle – remains helpful. If anything, this wariness to expand the scope of the freezing order is a testament to the power freezing orders give English courts, and their ability to impact businesses globally. The litigation further clarified the test for a receivership order. It even expanded contempt of court to encompass the tort of unlawful conspiracy, along with allowing litigators to sue in England, so long as there is a good enough arguable case the conspiracy was hatched there. This could be enough to set the tort in motion. Cumulatively, there are more tools than ever to counter international fraudsters. It is through the sum of legal precedent generated, and how courtroom battles incentivised judges to clarify underlying legal principles applicable to civil fraud litigation, that English courts made progress in adapting to the challenges of globalisation.
There have been some material successes. For example, after years of court battles, the proceeds from the sale of Ablyazov’s four properties in and around London were the first funds that BTA was to see. However, though beneficial in terms of legal precedent, the picture in terms of enforcement is hardly rosy. As of November 2020, BTA Bank had recovered approximately $45 million of the more than $6 billion it claims Mr. Ablyazov stole. The real victims in this case, however, are those hardest hit by Ablyazov’s activities: Kazakh pensioners who saw their retirement funds disappear and thousands of homebuyers in Almaty who invested in properties which were never built. Therefore, the impact of the Ablyazov litigation is a double-edged sword for English courts.