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  • How Sanctions Against Russia Affect the Insolvency Process in the UK

    How Sanctions Against Russia Affect the Insolvency Process in the UK

    Introduction:

    In an insolvency case involving both UK trustees and Russian Bank Creditors, the High Court issued guidance in regards to the potential breach of the 2019 Regulations surrounding sanctioned entities. The significant criminal and civil penalties potentially arising from this case make it a consequential and relevant case for UK arbitration and litigation lawyers to consider and understand. The final ruling deals with three key questions, as outlined in the court proceedings and expanded upon below.

    Case Summary:

    Anatoly Motylev, a Russian national residing in London as of 2015, faced cross-border insolvency proceedings between the United Kingdom and Russia that raised key legal issues for the UK trustees involved in the case. Under Section 44 of the Sanctions and Anti-Money Laundering Act 2018, statutory protection could be provided to those involved, on the condition that the decision to either exclude or include Russian Bank Creditors in Motylev’s UK insolvency proceedings were performed under “reasonable belief” that it was in compliance with the 2019 Russia (Sanctions) (EU Exit) Regulations. Therein lay the complication of confirming the necessary “reasonable belief” of whether the Russian Bank Creditors were subject to sanctions against Russia and thus excluded from proceedings, or otherwise. The decision to exclude them without having established this would expose the trustees to be held liable to the Russian Bank Creditors for civil damages. The reverse would expose them to facing significant criminal and civil liabilities under the current UK sanctions regime. So, the Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] claimants applied for a declaration essentially seeking guidance from the High Court and the judgment of Nicholas Thompsell, sitting as a Deputy High Court Judge, for directions under 303 (2) Insolvency Act 1986.

    Background:

    Relevant here is the case between Mints and Litasco coming prior, being the first of its kind to handle the adoption of ‘control’. As such, the Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] case attempts to resolve the opposing views raised by the former, specifically in its addressing of question one of three key questions of the case. These can be found in greater detail in the sections below.

    Decision:

    The court held that the trustees would not be in breach of UK Sanctions and thus not liable for allowing the sanctioned entities, Russian Bank Creditors, to take part in UK insolvency proceedings, prior to distribution. More specifically, the sanctioned entity was permitted voting rights in the creditors’ decision procedures and within the creditors’ committee. Read on to ‘What Does this Mean for Future Insolvency Cases?’, in which the reasoning behind this is considered.

    What is meant by ‘Control’ in regards to the law?

     

    In what circumstances a person should be regarded as being owned or controlled directly or indirectly by a designated person?

    This is a difficult question because Regulation 7(4) finds direct or indirect ownership or control where “it is reasonable … to expect that P (i.e. a designated person) [is] able … to achieve the result that the affairs of C (i.e. a Russian entity) are conducted in accordance with P’s wishes.”

    Depending on the interpretation of Regulation 7(4), if the designated person is Vladimir Putin, this would imply that every single entity in Russia is controlled indirectly by him, as argued in Mints. In Litasco, the judges were reluctant to extend the interpretation “so far as to extend to companies of whose existence the putative controller was wholly ignorant and whose affairs were conducted on a routine basis without any thought of that controller.”

    Reconciling Mints and Litasco, Deputy Judge Nicholas Thompsell [paragraph 76] breaks down ‘control’ into four types, with the fourth category being the core of the discussion:

    1.  De jure control: this exists where there is an absolute legal right to exercise control embedded, for example in the constitution of a company or a body;
    2. Actual present de facto control: this exists where the putative controller is manifestly “calling the shots” (to adopt the language used in Mints) with no legal right to do so;
    3. Potential future de jure control: the creation of this category is, to DJ Thompsell, the main reason why the words “(if P chose to)” are included in Regulation 7(4). This would exist where, although the designated person enjoyed no current legal right of ownership or control, the designated person had the legal means to obtain ownership or control. The most obvious example of this, would be where the designated person had an option or a forward contract to acquire a majority shareholding in a company; and
    4. Potential future de facto control. This would exist where although there was no evidence that the putative controller was currently exercising de facto control, there is some good reason to believe that the putative controller could, if he or she wished, exercise control in some manner. DJ Thompsell states: “For reasons I will expand on below, whilst this category must exist theoretically, I believe its existence in practice will be very rare.”

    DJ Thompsell held that a strict interpretation of the fourth category would imply that every billionaire  could be “regarded as having control of every company that the billionaire could clearly afford to purchase” and every gun holder could be “regarded as having control of every organisation that he might be able to coerce by making use of that weapon.”

    Based on this and the facts of the case, three questions need to be considered.

    3 Key Questions of the Case:

    Question 1: Do designated persons have control of the Russian bank creditors?

    Despite the significant influence they hold, the judge found no evidence of present or future de jure control by Governor Nabiullina or President Putin over the liquidators appointed by the DIA. Thus, neither had the right to direct how liquidators should perform their statutory duties. Furthermore, there is, at the time of writing, no current evidence of de facto control. There is no public evidence that either Governor Nabiullina or President Putin have interfered with any liquidation processes managed by the DIA. While future de facto control is theoretically possible, it would be difficult to obtain without the breach of constitutional norms, requiring cooperation from others, and incurring significant political and reputational costs. Thus, it is unlikely they could easily exert such control.

    “Whilst Governor Nabiullina, and President Putin each have significant influence as to the supervision and senior management of the DIA, they do not, I consider, have any direct or indirect ability to control the individuals appointed as liquidators in the management of specific liquidations being conducted by the DIA. I do not consider it at all likely that those with a supervisory role within the organisation could as a matter of right direct how individual liquidators should discharge their statutory duties.”

    [Paragraph 120 of the judgement]

    “They might also be able to bring this about by appointing placemen (or placewomen) to the post of General Director and then to the Management Board, and thereby via those placees get to a position where they could ensure that the individual liquidators acted according to their orders. Any such arrangement would, however, likely require the cooperation of those persons and of the Duma and could be expected to involve the expenditure of political and/or reputational capital, as it would be obvious to the world that it was improper for them to interfere in a statutory process.”

    [Paragraph 122 of the judgement]

     

    Question 2: Is voting caught by sanctions?

    The judge determined that exercising voting rights in bankruptcy is not “using” funds as defined by sanctions regulations. Voting does not alter the status of the debts themselves or constitute dealing with them as funds. The only exception would be if voting directly led to the distribution of funds to a sanctioned person. Additionally, voting rights are not considered “financial assets or benefits” under the regulations. Prohibiting sanctioned creditors from voting would disrupt the bankruptcy process, potentially leading to significant delays, legal complications, and contrary outcomes to the majority creditor’s interests.

    “Turning to the second argument, voting rights under the bankruptcy machinery cannot themselves be regarded as “benefits” so as to fall within the definition of “funds”. Such voting rights have no value per se, and cannot be divorced from the statutory machinery of the bankruptcy process. Also, there is a strong argument that the phrase “ financial assets and benefits of every kind”, notwithstanding the words following “ (but not limited to)” needs to be read sui generis with the following list of assets set out in s.60(1) and voting rights are clearly not of the same nature to the type of financial rights set out there.”

    [Paragraph 146 of the judgement]

    “Where (as here) sanctioned creditors make up a majority of the creditor pool, there would be a serious risk of the bankruptcy developing contrary to the views of the majority creditor. In any case, there is a likelihood of unnecessary delay, uncertainty, court applications and licencing applications to OFSI.”

    [Paragraph 151 of the judgement]

     

    Question 3: Are the trustees in breach of regulation 18(a)?

    The judge agreed that the Trustees are not violating Regulation 18A for three reasons.

    First, their statutory duties as Trustees in Bankruptcy do not involve “financial services” as defined by the regulations. Second, they are not providing services aimed at “foreign exchange reserve and asset management.” Third, even if their services were considered “financial services,” they are not providing them to any prohibited persons under Regulation 18A. The Trustees’ actions are focused on managing the bankrupt estate under court supervision, not on serving specific creditors.

    “First, they are undertaking the statutory functions of a Trustee in Bankruptcy and these statutory purposes do not include anything that falls within the definition of “financial services” within s.61 SAMLA. Whilst the words at the beginning of s.61(1) “ any service of a financial nature” are very wide, I consider it is clear that they should be read sui generis with the list of activities following (notwithstanding that these wide words are not limited to that list).”

    [Paragraph 159 of the judgement]

    “Thirdly, even if the Trustees could be said to be providing “ financial services” for the purpose of “ foreign exchange reserve and asset management”, they are not providing such services to any of the persons listed in Regulation 18(2) (even if you take the view (as I do not) that the Russian Bank Creditors are under the control of Central Bank). The Trustee’s services are provided in relation to the Bankrupt’s estate under the supervision of the court. Whilst the Trustees may have duties that can be enforced by creditors it would be wrong to think of them as providing services to particular creditors.”

    [Paragraph 161 of the judgement]

    What does this mean for future insolvency cases?

    DJ Thompsell concluded by issuing a declaration stating that the following did not constitute “funds” or “economic benefits”, for the purposes of the 2019 Regulations:

    • the voting rights of creditors involved in a creditors’ decision procedure, under the bankruptcy provisions of the Insolvency Act 1986 and the Insolvency Rules 2016 (applicable to England and Wales)
    • the rights of creditors to participate in and vote at creditors’ committees

    Additionally, using such right or accepting the votes of the creditors would not be considered as dealing with “funds” or “economic benefits”, also for the purposes of the 2019 Regulations.

    Nevertheless, the judge did also order the increased monitoring of the sanctioned entities, by the trustees, in order to ensure that there was no change in the position of said entities, at the very least prior to a distribution.

  • How To Bring An Anti-Suit Injunction

    How To Bring An Anti-Suit Injunction

    If you have an Arbitration Agreement in place that allows for arbitration to be brought in England and Wales in the event of a dispute, you can apply for an Anti-Suit Injunction (ASI) from an English Court. This will stop the other party to the Arbitration Agreement from bringing a claim in another jurisdiction.

    In The Angelic Grace [1995] 1 Lloyd’s Rep 87, Lord Millet gave his reasons for granting ASIs (at page 96):

    “There is no good reason for diffidence in granting an injunction to restrain foreign proceedings on the clear and simple ground that the defendant has promised not to bring them.”

    This article provides a helpful toolkit and FAQs on bringing an ASI. If you require further information, please get in touch with us so we can help.

    Contact Us

     

    What is an injunction?

    An injunction is a court order that requires a party:

    • To do a specified act (mandatory injunction) or
    • To refrain from doing a specified act (prohibitory injunction).

    Whether or not to grant an injunction is at the Court’s discretion. Interim injunctions can be made while other Court proceedings are pending or can be a final remedy to a dispute.

    Why would I want to bring an Anti-Suit Injunction?

    There are several reasons why Applicants for ASIs want to prohibit someone from bringing Court proceedings in another country. You may believe, rightly or wrongly, that you will not get a fair trial in a foreign forum. You may also see clear advantages in terms of costs and ease of enforcement of the judgment (presuming you are successful) if a court in England and Wales hears your case.

    However, one of the main reasons for obtaining an ASI is that, as mentioned above, legal proceedings breach an existing agreement to arbitrate.

    English Courts can bring an ASI concerning any proceedings in any country.

    What are the penalties for breaching an ASI?

    The penalty for breaching any injunction, including an ASI, is severe. A breach is classed as Contempt of Court. The Court can impose significant fines and even impose a custodial sentence. Therefore, it is doubtful that a person, especially if they have significant personal and/or professional ties to the UK, would risk breaching an ASI.

    What is an Anti-Anti-Suit Injunction (AASI)?

    An AASI will provide a mechanism to guarantee actions taken by the Applicant to protect and uphold their legal rights, including the operation of an ASI, are not made useless by pre-emptive measures or counteractions taken by the Respondent. The principles governing the issuance of an AASI are similar to those of an ASI.

    In cases where foreign proceedings have been brought despite the existence of an Arbitration Agreement, the Courts have granted an AASI to make the Respondent stop any ongoing proceedings.

    Examples of Anti-Anti-Suit Injunctions

    Renaissance Securities (Cyprus) Ltd v Chlodwig Enterprises Ltd & Others

    An example of an ASI and AASI can be found in the case of Renaissance Securities (Cyprus) Ltd v Chlodwig Enterprises Ltd & Others [2023] EWHC 2816 (Comm), where the English High Court granted an ASI and an AASI to a company to stop the Respondents, who were subject to UK and US sanctions, from bringing proceedings in Russia under Article 248 of the Russian Arbitrazh Procedural Code (APC).

    Linde GMBH v. Ruschemalliance LLC

    Shortly before the Renaissance Securities decision, a Hong Kong Court in Linde GMBH v. Ruschemalliance LLC [2023] HKCFI 2409 continued an ASI to stop legal proceedings initiated by a company in Russia. The proceedings breached an Arbitration Agreement based in Hong Kong. The Court rejected arguments that Russian jurisdiction laws, particularly Article 248.1 of the Russian Arbitration Procedural Code, invalidated the Arbitration Agreement.

    Airbus Canada Limited Partnership v Joint Stock Company Ilyushin Finance Co

    Another clear example of where the Courts saw clear reasons for granting an ASI was in Airbus Canada Limited Partnership v Joint Stock Company Ilyushin Finance Co [2024] EWHC 790 (Comm), which involved a contract for the supply of aircraft. The Defendant, (Ilyushin Finance), was a sanctioned entity under Canadian and UK law. It wanted to recover a part payment made to the Claimant (ACLP). ACLP stated that it was unable to pay any money to Ilyushin Finance because of the sanctions.

    The contract between the parties was governed by New York law and stated that disputes should be determined by LCIA arbitration seated in London. But the Arbitration Agreement did not say what law governed the Arbitration Agreement.

    Rule 16.4 of the LCIA Arbitration Rules (LCIA Rules) states that the law applicable to the Arbitration Agreement and the Arbitration should be the same law as is used in the seat of arbitration unless the parties agree otherwise.

    Ilyushin Finance brought legal proceedings in a Russian Court asking for the contract to be terminated and the part payment to be returned. It relied on Russian law provisions which gave Russian Courts jurisdiction to decide claims brought by sanctioned parties, irrespective of jurisdiction and Arbitration Agreements (Russian Law Provision).

    ACLP secured an without notice ASI to stop the Russian legal proceedings. Ilyushin Finance ignored the English proceedings and commenced fresh proceedings in Russia seeking an AASI in respective of the ASI granted to ASI. ACLP applied to the English Court for a final ASI, and for a mandatory injunction requiring Ilyushin Finance to discontinue the Russian court case, as well as an order barring any enforcement of the Russian Court proceedings.

    ACLP was granted every requested application as it proved that the Russian proceedings breached the Arbitration Agreement. Ilyushin Finance tried to argue that it could not access justice through an LCIA arbitration due to sanctions, a claim that was firmly rejected. Under the general licences issued by the Office of Financial Sanctions Implementation (OFSI), a sanctioned entity can access frozen assets for the purpose of covering LCIA costs, and UK legal advisors can be paid from frozen assets as they were providing legal services to a sanctioned entity. In addition, special licences covering additional expenditure could be obtained for litigation or arbitration in England.

    It was significant that an anti-enforcement injunction was granted to ACLP. The Court concluded there was a real risk the Russian Court would continue proceedings and give a judgment despite an ASI being in place. Therefore, it was a practical to grant an anti-enforcement injunction to protect ACLP’s interests.

    EU Sanctions Against Russia

    In June 2024, the EU published its 14th package of sanctions against Russia. The package introduced a provision that (subject to certain exceptions) bans direct or indirect engagement in any transaction with a party that has lodged a claim against an EU operator in the Russian Court to obtain an injunction, judgment, or other relief in reliance on Article 248 of the APC, relating to a contract or transaction that has been impacted by sanctions.

    But this August, Russian Courts struck back. The Commercial Court of the Sverdlovsk Region (CCSR) refused to enforce an Arbitration Institute of the Stockholm Chamber of Commerce (SCC) award in PESA v UralTransMash. The case involved a dispute about a supply contract between JSC PESA Bydgoszcz (PESA) and JSC UralTransMash (UralTransMash). The contract contained an SCC arbitration clause. PESA alleged that UralTransMash did not pay for goods that had been supplied and brought arbitration proceedings in the SCC. UltraTransMash applied to the Russian Courts for an ASI to halt the SCC arbitration.

    The Russian Supreme Court ruled that a presumption existed that a sanctioned entity was obstructed from getting justice via arbitration and therefore, Russian Courts had exclusive jurisdiction not only over the dispute but the granting of an ASI.

    The SCC continued with the arbitration and ruled in PESA’s favour. PESA applied to the CCSR for the Arbitration Award to recognised and enforced in Russia. The CCSR refused on the grounds of public policy. It stated that breach of the exclusive jurisdiction of Russian Courts under article 248.1 of the Civil Procedure Code provides grounds for the non-enforcement of an award. It also stated that recognising and enforcing an award against a Russian strategic company in the context of “legal aggression by unfriendly countries” went against Russian private and public interests.

    The PESA case makes clear that an Arbitration Award made despite the fact the Russian Courts issued an ASI will not be recognised or enforced in Russia. But that does not mean it cannot be recognised and enforced in another jurisdiction.

    How do I apply for an ASI?

    Once you understand that an ASI is required, you must act fast. The longer foreign proceedings go on, the more challenging it will be to get an injunction.

    An ASI application is made under section 37(1) of the Senior Courts Act 1981, which gives the High Court the power to grant an injunction in all cases where it is just and convenient to do so. As the Applicant, you must provide evidence that shows legal proceedings have begun in a foreign country or are imminent.

    Except in rare cases, ASI applications are made ‘on notice’, which means the Respondent will be informed of the application and given a chance to appear in Court and argue why the Court should not grant the ASI.

    If an ASI is granted on an interim basis, you will typically be required to give an undertaking to pay the Respondent damages if the ASI is subsequently discharged and its implementation caused the Respondent loss.

    Concluding comments

    If you have an Arbitration Agreement you need to be confident that you can use arbitration as a dispute resolution method so you can take advantage of its benefits, for example, the ability to enforce an award in another country. An ASI and AASI are legal tools that can be used to force the Respondent honour the terms of an Arbitration Agreement and ensure they do not bring Court action in another country.

    Following the CCSR in PESA v UralTransMash, problems will occur if an ASI has been issued by Russian Courts because any subsequent Arbitration Award will not be recognised or enforced in Russia. If you are facing this particular challenge, you need to speak to an experienced international arbitration specialist immediately.

    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, 25 August 2024. This article does not constitute legal advice. For further information, please contact our London office.

  • Cooperation between Eldwick Law and the Ministry of Justice of the Republic of Uzbekistan

    Cooperation between Eldwick Law and the Ministry of Justice of the Republic of Uzbekistan

  • What To Do If You Are Accused Of Tax Evasion Or Tax Fraud

    What To Do If You Are Accused Of Tax Evasion Or Tax Fraud

    Can you be jailed for tax evasion in UK?

    Yes. Crown Court sentences can reach 7 years, and cheating the public revenue carries a maximum of life imprisonment.

    If you are convicted of tax evasion in the Magistrates’ Court, you could be sentenced to a maximum of six months in prison and/or an unlimited fine. Crown Court convictions may result in up to seven years in custody and/or an unlimited fine. Under the Sentencing Guidelines for fraud, bribery, and money laundering offences, aggravating, and mitigating factors can increase or decrease the final sentence.

    Where the offence was committed before 12th March 2015, the maximum fine is £5,000.

    The maximum sentence is life imprisonment if you are convicted of cheating the public revenue. In reality, sentences are far shorter and are decided under the Sentencing Guidelines.

    Recent UK Tax Evasion Prison Sentences

    Case Offence Amount Evaded Sentence Year
    Michael & Stephen Hirst Cheating the public revenue (offshore tax evasion) £3.2 million Custodial sentences 2024
    Kevin Ratcliffe Cheating the public revenue Multi-million tax evasion scheme 27 months’ imprisonment 2025
    Nigel Harker Undeclared income / tax evasion Undeclared trading income 19 months’ imprisonment 2024

     

    What is tax evasion?

    When it comes to tax evasion, an offence is committed when a person engages in dishonest practices to reduce or avoid paying tax.. The Prosecution has to prove that you dishonestly evaded paying tax rather than just “avoided” doing so.

    The Taxes Management Act 1970 (TMA 1970) provides for the offence of income tax evasion. Section 106A states that a person commits an offence if they are knowingly concerned about the fraudulent evasion of income tax by themselves or another person. The offence does not apply to things done or omitted before 1st January 2001.

    Other ways a person can defraud HMRC, or the Department for Work and Pensions (DWP) include:

    • Making a false statement (whether written or not) relating to income tax.
    • Delivering (or causing to be delivered) a false document relating to income tax.
    • Failing to account for VAT.
    • Withholding PAYE and National Insurance.
    • Failing to register for VAT.
    • Failing to disclose income.

    As well as statutory offences, there is a common law offence of cheating the public revenue.

    Concerning the evasion of income tax, the Prosecution must prove that the Defendant was “knowingly concerned in the fraudulent evasion of income tax.” This is known as the mental element of the offence.

    What is the difference between tax evasion and tax avoidance?

    Tax evasion is the deliberate non-payment of tax, for example, not declaring taxable income and accepting cash-in-hand payments to reduce tax liability. On the other hand, tax avoidance, or “tax planning”, is the mitigation of tax liability through legal methods, for example, setting up trusts to protect assets or offshore companies.

    Tax avoidance is legal, but evasion is not.

    Can you be jailed for tax evasion in UK?

    If you are convicted of tax evasion in the Magistrates’ Court, you could be sentenced to a maximum of six months in prison and/or an unlimited fine. Crown Court convictions may result in up to seven years in custody and/or an unlimited fine. Under the Sentencing Guidelines for fraud, bribery, and money laundering offences, aggravating, and mitigating factors can increase or decrease the final sentence.

    Where the offence was committed before 12th March 2015, the maximum fine is £5,000.

    The maximum sentence is life imprisonment if you are convicted of cheating the public revenue. In reality, sentences are far shorter and are decided under the Sentencing Guidelines.

    What powers do HMRC officers have when investigating a tax evasion matter?

    HMRC officers have wide ranging powers derived from a number of statutes, including the Police and Criminal Evidence Act 1984 (PACE 1984), which provides HMRC investigating officers with the following powers:

    • Ability to request the surrender of documents.
    • Authorisation to enter, search, and seize evidence on premises occupied or controlled by you if you are arrested.
    • Arrest and interview you.

    HMRC officers also have powers, in certain circumstances, to conduct covert surveillance, access financial information, and freeze assets.

    What is ‘dishonesty’ concerning tax evasion offences?

    The majority of tax evasion offences require individuals to engage in fraudulent conduct, implying an act of dishonesty. This might involve using false invoices to decrease the taxable profits of a business or knowingly understating income in an annual return. The test for dishonesty is:

    • 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?

    Dishonesty is a key element of tax evasion offences and must be proved if the Prosecution is to achieve a conviction.

    Checklist – What steps should I take if I am accused of tax evasion or tax fraud?

    Being investigated by the HMRC for tax evasion or tax fraud is a frightening experience. You may want to ignore the situation and hope it goes away, but trust us, it will not. HMRC has prosecution targets to meet and, especially given the Chancellor’s latest announcement (see above), there are concerns that the department will pursue a criminal case where in the past, a civil penalty would have been imposed.

    Below are the following steps you should take to increase your chances of favourable outcome:

    1. Do not discuss your case with HMRC, or anyone else, until you have consulted with your legal team.
    2. Do not obstruct HMRC officers since in so doing you may be committing an offence.
    3. Contact a specialist Tax Fraud Solicitor. They will quickly work to find out why HMRC suspects you of tax fraud or tax evasion. In addition, they will identify documents that are subject to legal privilege and provide an emergency response if your premises is subject to a dawn raid. An experienced Solicitor will advise you on matters of law, evidence and procedure. They will advise you on the legitimacy of any warrants executed, what you should do during an interview, and any preparation to be undertaken. Importantly, an experienced Solicitor will seek to ensure all of your rights and entitlements are protected.
    4. Ensure your organisation has a policy detailing what to do in a dawn raid, individuals who are to be responsible during this time, and key professionals to be contacted immediately, including Solicitors and Accountants
    5. Monitor any actions by HMRC, and make contemporaneous notes of key events, items seized, people spoken to, etc.
    6. Request a copy of any search records from HMRC.
    7. Ensure all documents are backed up since they may be crucial to your defence.

    Concluding comments

    Being investigated or prosecuted for tax fraud or tax evasion is incredibly serious and if convicted, you could go to prison. Our Business Fraud Solicitors have extensive experience in successfully defending complex tax fraud cases and will provide the advice and representation you need to manage an HMRC investigation or prosecution.

    To discuss any points raised in this article, please call +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, 12 August 2024. This article does not constitute legal advice. For further information, please contact our London office.

     

     

  • Case Summary – £3.6 Million Tax Fraud

    Case Summary – £3.6 Million Tax Fraud

    Background

    The Defendants were two very successful Yorkshire based property developers, accused of a complex tax fraud, which concerned the transfer of shares holding valuable property (valued in excess of £11 million after construction) into various offshore entities, including Gibraltar and the BVI.

    The allegations arose out of the infamous 2016 Panama Papers, which involved 11.5 million documents being leaked from the former Panamanian offshore law firm and corporate service provider Mossack Fonseca.

    His Majesty’s Revenue and Customs (HMRC) then commenced action against our client, invoking the COP 9 procedure, following which criminal proceedings were initiated.

    Tax Fraud Case Sentence

    The Defendants expected to receive a prison sentence in excess of 6 years, but through settlement discussions with the Prosecution, we were able to secure a sentence which did not involve any prison time or further enforcement action through Proceeds of Crime Act proceedings.

    Senior Partner of Eldwick Law, Mohammed Sarwar Khan, acted in this matter, together with Abbas Lakha KC of 9 Bedford Row (Chambers Of Steven Kay QC).

    Mr Khan regularly acts for individuals and entities accused of fraud and serious crime. If you are facing any allegations of fraud, please contact our team at Eldwick: mail@eldwicklaw.com

  • Your Toolkit For Defending A Civil Fraud Claim

    Your Toolkit For Defending A Civil Fraud Claim

    If you are facing a claim for civil fraud, here is some good news. These types of claims are extremely hard to prove.

    Commercial fraud is a complex area of law, and civil claims are often brought because the chances of a criminal prosecution are minimal. However, civil fraud claims must be taken seriously.

    The Claimant’s legal advisors will have explored other, easier-to-plead claims such as breach of contract, negligence, or an action under the Misrepresentation Act 1967. They know that making allegations of fraud or dishonesty without strong evidence may result in the allegations being struck out and wasted costs orders being made against them. So, you can be assured the Claimant has done their homework and they believe their claim has merit.

    What is commercial fraud?

    Commercial fraud is not an action in itself. The term encompasses many causes of action, such as:

    • Forgery
    • False accounting
    • False representation
    • Cryptocurrency fraud
    • Mortgage fraud
    • Online fraud
    • Insurance fraud
    • Banking fraud

    What does the Claimant have to prove to establish a civil fraud claim?

    To prove fraud, the Claimant must show, on the balance of probabilities, that:

    The Defendant made a false representation; and

    • Knew the representation was false; or
    • Had no belief in the truth of the representation; or
    • Was reckless as to whether the representation was true or false; and
    1. The Defendant intended for the Claimant to rely on the representation; and
    2. The Claimant did rely on the representation; and
    3. The Claimant suffered loss and/or damage as a consequence on that reliance.

    Will a Freezing Order be applied if a claim for civil fraud is brought against me?

    There is a high chance that the Claimant’s legal team will apply for a Freezing Order to prevent you from dissipating property or assets which may be subject to the claim.

    Most Freezing Orders are made without notice (ex parte), so you will not know the injunction has been granted until you try to deal with your assets or withdraw funds from your bank account and find you cannot.

    Should this happen, you must contact an experienced Civil Fraud Solicitor immediately.

    What is an Anton Pillar order?

    Freezing Orders are not the only intrusive injunction the Claimant may apply for. Searching Orders, also known as Anton Pillar Orders, are a form of civil search warrants. A Search Order allows the Claimant’s legal team to enter and search your premises and seize any relevant materials and documents. An Anton Piller Order’s purpose is to preserve evidence that may be in danger of destruction or concealment.

    How is a civil fraud case defended?

    After examining the Claimant’s disclosure documents and case particulars, your Civil Fraud Solicitor will advise you on the strength of the Claimant’s case.

    Case law has shown that the Courts will strike out a civil fraud case where the allegations of fraud and dishonesty have not been sufficiently particularised. Your Solicitor will meticulously examine the facts, matters, and circumstances relied upon to show that you were dishonest (and not merely negligent).

    If none of the facts “…tilts the balance and justifies an inference of dishonesty” (Three Rivers District Council [2001] UKHL 16, Lord Millett), your legal team will apply for the case to be stuck out.

    If the case proceeds to trial, the Claimant must prove you actually knew, or were reckless as to knowing, that a false representation was made. This has been made easier due to our reliance on electronic communication. In the case of Digicel v Cable and Wireless [2008] EWHC Ch 2522, Morgan J stated:

    “It is well known that people say things in e-mails which [they] would not dream of putting into a letter or a minute or a formal note. Further, in litigation involving allegations of conspiracy or similar allegations, it may only take one revealing statement in a document, perhaps in an e-mail, to show clearly what people really thought or what people were really intending to achieve, a matter that might not have been revealed in many tens of thousands of other documents in the trial bundle.”

    If you know of any electronic communication that may indicate you were dishonest or reckless as to whether dishonesty occurred, you must inform your Civil Fraud Solicitor immediately so they can build a strategy to defend against such evidence.

    Are cultural differences a defence in civil fraud claims?

    Complex fraud claims often involve cross-border issues; therefore, cultural differences and misunderstandings can arise in the proceedings.

    In Lakatamia v Su [2021] EWHC 1907 (Comm), the Court was asked to consider the cultural differences between Taiwan and the UK. Mr Justice Bryan concluded:

    “Madam Su’s submission about not applying the standards of a substantial UK company to a Taiwanese company (whatever that in fact is intended to mean) also has to be approached with some caution. Any such cultural differences would not explain, still less justify, any conduct that would amount to tortious or civil wrongdoing, whether under English or Monaco law, or a lax or inappropriate approach to corporate structures and governance whatever the law applicable to those companies. Further, there is no evidence before me of any applicable law justifying what would otherwise be wrongdoing.”

     Article 17 of the Rome II Regulation may also apply to local standards of conduct. It states:

    Rules of safety and conduct

    In assessing the conduct of the person claimed to be liable, account shall be taken, as a matter of fact and in so far as is appropriate, of the rules of safety and conduct which were in force at the place and time of the event giving rise to the liability.

    However, the Courts have made clear that cultural differences may not be used to justify wrongdoing under the applicable law, English or otherwise, nor can they excuse actions that, while lawful, are inconsistent with English public policy.

    To discuss any points raised in this article, please call +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, 16 July 2024. This article does not constitute legal advice. For further information, please get in touch with our London office.

  • Arbitration Solicitors and Agreements

    Arbitration Solicitors and Agreements

    Arbitration is a powerful alternative dispute resolution (ADR) method that is often used to settle international commercial disputes. Given the complexities of arbitration proceedings and enforcement, having an experienced Arbitration Solicitor advise you is imperative.

    Arbitration agreements are final and binding.

    Parties can choose the jurisdiction in which they wish the arbitration to take place, the rules governing the procedure, and the appointment of the Arbitrator/s. One of the reasons arbitration is a preferred method of dispute resolution for commercial entities is that Arbitration Awards can be enforced internationally. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the “New York Arbitration Convention” or the “New York Convention”, is one of the key instruments in international arbitration.

    The New York Convention applies to the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration.

    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.

    Why is it crucial to have a Solicitor draft an Arbitration Agreement?

    Parties that enter into Arbitration Agreements are often involved in contracts worth millions, sometimes billions of pounds (or dollars) involving projects or deals spanning multiple jurisdictions. For this reason alone, it is vital to ensure the Agreement is drafted by experienced Arbitration Solicitors.

    Arbitration Agreements set out essential terms such as:

    • How the Arbitrator will be selected.
    • Where the arbitration will be heard (the seat of arbitration).
    • What law will govern the arbitration.
    • Whether the arbitration tribunal comprises one member or three.

    The former Secretary General of the International Chamber of Commerce (ICC) International Court of Arbitration, Frederic Eisemann, identified the term’ pathological clause’ in relation to Arbitration Agreements in an article written in 1974 (La clause d’arbitrage pathologique, Commercial Arbitration Essays in Memoriam Eugenio Minoli, UTET 1974). Mr Eisemann stated that a ‘pathological clause’ was one that was so badly written that it could be invalidated and therefore futile.

    He went on to state four criteria that must be met to ensure a clause in an Arbitration Agreement is effective.

    A clause should:

    • Produce mandatory consequences for the parties.
    • Exclude the intervention of state courts in the settlement of the dispute.
    • Give powers to the arbitrators to resolve the disputes likely to arise between the parties.
    • Permit a procedure which leads, under the best conditions of efficiency and rapidity, to the rendering of an enforceable award.

    The Arbitration Agreement is core to successful arbitration and extremely complicated to draft. Therefore, it is essential to have it written by an experienced Arbitration Solicitor who understands the arbitration process and how it applies to your market sector and particular organisation.

    What part does a Solicitor play in an Arbitration hearing?

    In addition to drafting the Arbitration Agreement, an Arbitration Solicitor plays a significant role before, during, and after the arbitration itself. They will:

    • Advise and assist with the selection of Arbitrators (in line with the terms of the Arbitration Agreement).
    • Advise on the law governing the arbitration and how this will affect your position.
    • Inform you about arbitration costs.
    • Gather evidence and witness statements.
    • Prepare written submissions that are presented to the Arbitrator.
    • Explain the award to you and advise you on enforcement options, including the provisions of international conventions.

    Who pays for arbitration costs, including the legal fees?

    In England and Wales, parties to an arbitration can agree in advance on how costs are allocated, subject to some exceptions; however, this is rare in practice. The Arbitral Tribunal can award costs.  Section 61(1) of the Arbitration Act  1996 provides that:

    “the tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties.”

    It is generally accepted that the Tribunal will award costs unless the parties agree otherwise. In most cases, arbitrations are conducted by the parties and Tribunal on the basis that the Tribunal will make an award dealing with the allocation of costs.

    Final words

    Domestic and International commercial disputes are by nature complex and often involve multiple claims and counter-claims. Arbitration provides a straightforward, confidential way of resolving matters. An Arbitration Solicitor will advise you on a strategy before Arbitration proceedings, markedly increasing your chances of a successful outcome and preserving 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, 12 April 2024. This article does not constitute legal advice. For further information, please contact our London office.

  • LCIA Arbitration Rules Explained

    LCIA Arbitration Rules Explained

    What are the key rules of LCIA Arbitration?

    If you plan to commence arbitration in the LCIA, you must be aware of the following:

    • The appointment of Arbitrators is by the LCIA Court; however, parties can agree to make a nomination.
    • There is a presumption in favour of a sole Arbitrator.
    • A Tribunal can be quickly put together or an emergency Arbitrator appointed if required.
    • Arbitrations can be consolidated in certain circumstances.
    • Early determination of claims/counterclaims/issues are available.
    • Security for claims and costs is available.
    • Appeal rights are waived unless otherwise agreed.
    • Costs are calculated without regard to disputed amounts.
    • There are staged advance payments for costs.
    • Proceedings and awards are confidential.

    What do Claimants and Defendants need to do before the LCIA Arbitration?

    The following is a step-by-step guide to bringing an arbitration in the LCIA:

    Claimants

    1. Check the arbitration provisions in the contract to see if there is a clause covering LCIA arbitration. Also check any clause amendments which may cover the selection of an Arbitrator, the type of dispute that can be referred to arbitration, and rights of appeal.
    2. Check that the claim is not statutory or contractually time-barred.
    3. Consider whether interim provisions are required to protect your position, for example a freezing injunction.
    4. Begin case preparation, including locating documents and identifying those that are privileged, collecting witness statements, and retaining an expert witness.
    5. If the clause allows parties to nominate an Arbitrator, identify someone you prefer and have funds available for advance payments of their costs.

    Respondent

    1. Check the Arbitration Agreement to ensure the dispute that has led to the claim falls within the Agreement’s scope. If there is a potential jurisdictional issue, you will need to prepare your challenge.
    2. Identify potential counter claims or cross claims.
    3. Examine the claim to see if it is time-barred.
    4. Apply for interim measures such as security for costs.
    5. Prepare your defence case.

    To book a meeting with our lawyers, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Our LCIA-experienced arbitrators

    Who do I contact in the LCIA?

    Prior to the Tribunal being formed, all communications should be sent to the Registrar and the other party must be copied in unless the matter is purely administrative.

    An Arbitrator who is participating in the selection of the Presiding Arbitrator can consult with any party to gain insights into the candidate’s suitability.

    Unless the Tribunal decides otherwise, once the Tribunal is formed, all communications must take place between the parties and the Tribunal, with the Registrar copied in.

    How is arbitration commenced?

    To commence an Arbitration, the Claimant must serve a Request for Arbitration along with the prescribed fee. The Respondent serves their Response and the Tribunal is then appointed.

    The Request and Response set out:

    1. The dispute/s to be arbitrated, and
    2. The parties’ respective cases.

    How is the award made?

    Article 15.10 of the LCIA Rules 2020 provides that the Tribunal:

    “shall seek to make its final award as soon as reasonably possible and shall endeavour to do so no later than three months following the last submission from the parties (whether made orally or in writing), in accordance with a timetable notified to the parties and the Registrar as soon as practicable (if necessary, as revised and re-notified from time to time). When the arbitral tribunal (not being a sole arbitrator) establishes a time for what it contemplates should be the last submission from the parties (whether written or oral), it shall set aside adequate time for deliberations (whether in person or otherwise) as soon as possible after that last submission and notify the parties of the time it has set aside.”

    The award will be made in writing and set out the reasons for the Arbitrator/s decision. Separate awards can be made at different times concerning dissimilar matters.

    In summary

    Commencing arbitration in the LCIA requires a thorough knowledge of the rules and guidance, especially when the issues are related to cross-border matters. Instructing an experienced Arbitration Solicitor will ensure the process runs smoothly and your best interests are protected.

    To book a meeting with our Lawyers, 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, 2nd May 2024. This article does not constitute legal advice. For further information, please contact our London office.

  • Freezing Orders: A Complete Guide

    Freezing Orders: A Complete Guide

    What is a Freezing Order?

    A Freezing Order is an interim injunction issued by the Court to prevent assets from being dealt with or disposed of by the Respondent. Assets that can be frozen, including bank accounts, shares, investments, land and property, such as art, cars etc.

    Why would someone apply for a Freezing Order?

    The person or body applying for a Freezing Order does so because they strongly suspect that the Respondent will attempt to hide or get rid of assets that may become subject to a Court Order at a later date or an individual has become a designated person under sanction regulations.

    A Freezing Order can also be sought after trial or determination, typically to preserve assets until judgment has been enforced.

    Can a Freezing Order application be made without notifying the Respondent?

    Absolutely – in fact, most Freezing Orders are made ‘ex parte’ (without notice) to prevent the Respondent from defeating the injunction by disposing of or hiding assets as soon as they get wind of an application.

    In Re First Express Ltd [1991] BCC 782, the Court stated that there are two conditions that must be satisfied to apply for a Freezing Order without notice successfully:

    • Firstly, giving notice “appears likely to cause injustice to the applicant by reason either of the delay involved, or the action which it appears likely that the respondent or others would take before the order can be made;
    • Secondly, when the court is satisfied that any damage which the respondent may suffer through having to comply with the Order is compensatable under the cross-undertaking, or that the risk of un-compensatable loss is clearly outweighed by the risk of injustice to the applicant if the order is not made.”

    In cases of ‘exceptional urgency’, applications for Freezing Orders will be heard without notice. Exceptional urgency applications don’t need to meet the conditions set out in Re First Express.

    What does an Applicant need to prove to obtain a Freezing Order?

    We must make clear that a Freezing Order will only be granted if the Applicant makes an exceptionally robust case and provides substantive evidence. They must show that:

    • There is a cause of action against the Respondent (although, in some cases, an interest meriting protection may be sufficient), and the Applicant has a strong case.
    • There is a real risk that the assets will be hidden or disposed of; and
    • It is just and convenient to grant the Freezing Order, taking into account Applicant’s conduct (clean hands – see below), the rights of (and any impact upon) any third parties who may be affected by the Freezing Order, and whether the injunction will cause legitimate and disproportionate hardship for the Respondent.

    The Applicant must also make a full and frank disclosure of all the material facts to the Court, even if they do not support the Applicant’s claim. In addition, the Applicant will be required to make several undertakings to the Court, including an undertaking in damages, i.e. a promise to compensate the Respondent if it is found that the Freezing Order should not have been granted.

    What is meant by “the Applicant must have ‘clean hands’”?

    Freezing Orders are what is known as an ‘equitable’ remedy, and the Court has full discretion as to whether or not they are granted. An Applicant must overcome two hurdles to obtain an equitable remedy, namely:

    1. They must come to equity with ‘clean hands’, i.e. be free from wrongdoing themselves; and
    2. When applying for the injunction, they must act diligently and promptly.

    Can a Freezing Order apply outside the UK?

    Yes, a Freezing Order can apply worldwide or within specifically named countries.

    To minimise the risk of oppression, courts in England and Wales insist on having some control over the international enforcement of Freezing Orders. Also, Freezing Injunctions are not binding on third parties outside the jurisdiction until the Order has been registered, recognised and enforced in the local court/s.

    Wrapping up

    A Respondent can apply to the Court to have a Freezing Order varied or discharged. If you discover you are subject to a Freezing Order, the most crucial action is to contact our experienced Civil Litigation Solicitor immediately. They will advise and represent you, ensuring your best interests are always protected.

    To discuss any points raised in this article, please call us on +44 (0) 203 972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect sanctions in place at the time of writing, 11 June 2024. This article does not constitute legal advice. For further information, please contact our London office.

  • Drafting Arbitration Agreements In Light Of International Sanctions

    Drafting Arbitration Agreements In Light Of International Sanctions

    In international business, drafting Arbitration Agreements that can withstand the complexities of cross-border sanctions is akin to constructing a legal fortress.

    Arbitration Agreements play a pivotal role in protecting a company’s commercial interests by providing a framework for resolving disputes quickly, confidentially, and cost-effectively.

    However, sanctions against countries such as Iran and Russia present unique challenges that complicate arbitration proceedings.

    In this article, we explore how to draft rigorous Arbitration Agreements that can protect your interests should international sanctions impact your project or venture.

    What is the effect of international sanctions on arbitration proceedings?

    Sanctions are a range of measures put in place by individual governments, regional groups (for example the European Union or the African Union) or the United Nations to achieve one or more of the following:

    • Prevent escalation of or settle conflicts.
    • Curtail nuclear proliferation.
    • Deal with terrorism and human rights violations.

    Types of sanctions include:

    • Economic – impose commercial and financial penalties, for example levying import duties and/or blocking exports of certain goods.
    • Diplomatic – reducing or recalling diplomats or cancelling high-profile international meetings.
    • Sport – preventing the sanctioned country’s athletes from competing in international events.
    • Targeted/smart sanctions – imposes travel bans and asset freezing orders on individuals, companies, or other entities such as terrorist organisations.
    • Military sanctions – these are used as a last resort and can involve targeted military strikes and arms embargoes.

    Sanctions can negatively affect arbitration proceedings in the following ways:

    • Enforcement Issues: Sanctions can render Arbitration Awards unenforceable if courts in sanction-enforcing jurisdictions refuse to recognise them.
    • Choice of Arbitrators: Selecting Arbitrators can be problematic if their involvement breaches sanction rules.
    • Logistical Barriers: Conducting hearings and investigations may be challenging due to travel restrictions, limited access, and prohibitions on financial transactions.
    • Evidence Gathering: Collecting evidence in sanctioned countries is often a tangled process due to regulatory obstacles.

    What Is an Arbitration Agreement?

    An Arbitration Agreement is the cornerstone of any arbitration proceedings. It outlines the framework by which disputes will be resolved and often includes the following key components:

    • The law governing the agreement.
    • The jurisdiction that determines the procedural law governing the arbitration.
    • Whether the arbitration will be institutional, whereby the process is administered by an arbitration body, or ad hoc, where the arbitration is conducted independently.
    • The procedural rules that govern how the arbitration is conducted.
    • The language in which all arbitration proceedings and documents are communicated.
    • How the Arbitrator will be appointed and the expertise they must have.

    How can Arbitration Agreements be drafted

    When drafting Arbitration Agreements that can withstand the rigours of international sanctions, it’s crucial to anticipate potential issues. Here are some strategies to consider:

    • Inclusion of a Sanctions Clause: A robust sanctions clause explicitly addressing potential restrictions and outlines how the parties will handle logistical challenges. This could include substituting alternative Arbitrators or venues and specifying the conditions under which an Arbitral Award can be enforced.
    • Choice of Jurisdiction: Selecting an arbitration seat in a neutral jurisdiction that is less susceptible to sanctions ensures better enforceability. Jurisdictions such as England and Wales or Singapore are preferred because of their impartiality and predictable legal systems.
    • Institutional Framework: Involving a well-recognised arbitration institution, such as the London Court of International Arbitration (LCIA), provides procedural oversight and established rules to navigate the complexities of sanctions.
    • Choice of Rules and Governing Law: Selecting procedural rules and governing law that provide flexibility ensures that the agreement is adaptable to changing circumstances.
    • Fallback Clauses: Include fallback clauses that specify alternative venues and arbitrator selection processes if the primary options are affected by sanctions.
    • Multi-tier Dispute Resolution Mechanisms: Incorporating multi-tier dispute resolution mechanisms such as mediation before arbitration can help resolve issues at an early stage.

    What are the best practices when drafting an Arbitration Agreement where sanctions may impact proceedings?

    To further protect your commercial interests when drafting an Arbitration Agreement, consider these practical measures:

    • Regularly reviewing and updating the agreement will ensure it reflects current sanctions policies and changing geopolitical landscapes.
    • Protect sensitive commercial information through secure communication channels, confidentiality protocols, and Non-Disclosure Agreements (NDAs).
    • Clearly specify the enforcement mechanisms to reduce uncertainties, and choose institutions with a track record of handling disputes related to sanctions.

    Final words

    In light of the geopolitical challenges presented by international sanctions against countries such as Iran and Russia, drafting a robust Arbitration Agreement is crucial for businesses engaged in cross-border transactions and ventures. The agreement must be carefully crafted to address enforcement issues, logistical barriers, and potential Arbitrator challenges.

    Incorporating fallback clauses, multi-tier resolution mechanisms, and choosing neutral jurisdictions can help mitigate obstacles and the potential for further disputes. By regularly reviewing and updating your Arbitration Agreements, you can robustly protect your best interests.

    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, 14th May 2024. This article does not constitute legal advice. For further information, please contact our London office.