User's blog

Blog

  • 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.

    Contact Us

    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
  • EncroChat : How France’s Supreme Court Decision affects the UK

    EncroChat : How France’s Supreme Court Decision affects the UK

    11 October 2022 – French Criminal Division of the Court of Cassation provided a landmark ruling on evidence from hacked EncroChat.
    It could affect hundreds of criminal investigations, prosecutions, and investigations in the UK.

    “If you have any questions regarding this article or require any advice relating to this article, please contact Eldwick’s Senior Partner, Mohammed Sarwar Khan who has developed a specialist practice in Encrochat“

    The Court found that French investigators and prosecutors had failed to supply a certificate to authenticate intercepted phone data obtained from EncroChat phones as required by French law. It was also held that French police did not disclose, on the grounds of defence secrecy, how Dutch and French authorities undertook the hacking operation on EncroChat in which 120 million messages from more than 30,000 EncroChat phone users were recovered.

    The French decision has enormous implications for those in the UK who have been convicted or are currently being prosecuted or investigated because of information gained from the EncroChat hack. The general consensus is that if the evidence obtained through the hack is unlawful in France, then the UK courts are likely to reach a similar conclusion. This opinion is backed up by the fact that both Germany and Ireland have respectively suspended/ chosen not to use evidence obtained from EncroChat.

    What is EncroChat?

    EncroChat was a European communication network and service provider which allowed users who installed the software on their Android phones to make encrypted calls, send encrypted messages, and author encrypted notes. EncroChat software also provided a ‘panic’ button that when pressed would immediately erase the phone’s contents. A self-destruct function was also available.

    This all sounds very James Bondish and to an extent it is. EncroChat provided the seemingly secure communication platform that previous solutions such as burner phones and Pretty Good Privacy’ (PGP) could no longer give.

    It must be emphasised that EncroChat was not used exclusively by those involved in criminal activity. The encryption and panic button features proved useful for those engaging in infidelity or for people who, for lawful reasons, wanted to ensure secure communications.

    The French and Dutch hacking operation successfully blew EncroChat’s security apart. The question ever since has been “can the evidence obtained from the hacked data be challenged as unlawful”?

    Can Encrochat intercepted communications be relied on in UK criminal cases?

    Section 56(1) of the Investigatory Powers Act 2016 (IPA 2016) provides that evidence obtained from live monitored communications (for example phone tapping) is deemed unreliable if the interception was conducted in the UK and at least one of the parties to the communication is present in the country.
    To be relied on in a court in England and Wales, the prosecution will need to prove that any EncroChat interception took place in France. This is an extremely tricky undertaking, especially given that French authorities are refusing to disclose their methodology.

    Why did the French court rule that evidence can be challenged by the defence?

    The case arose from an appeal concerning the judgment of the Nancy Court of Appeal in the matter of Saïd Zaoui, who was arrested in June 2020 and indicted on charges of importing narcotics and possession of weapons and ammunition following the EncroChat hack. Because the investigative technique used by the police came under the category of national security, the defence was not able to assess how the hack was done. However, French law states that in such cases, the police must produce a ‘certificate of truthfulness’. The court in Nancy ruled that the police did not have to produce the certificate.

    The Court of Cassation stated the lower court erred in this decision and referred the case back to a Metz court to establish if a certificate of truthfulness exists.
    Highly reliable sources have indicated that there is no such certificate in existence.

    Solicitor encrochat law french ruling

    What will happen with UK cases involving EncroChat evidence?

    In September 2022, the Investigatory Powers Tribunal (IPT) heard that the National Crime Agency (NCA) “deliberately concealed” information when it applied for a warrant to access hundreds of thousands of intercepted messages and photographs from EncroChat. The inceptions were accessed as part of Operation Venetic which led to the arrest of 1,550 people across the UK plus the seizure of 115 firearms, £54m in cash, and substantial quantities of illegal drugs.

    Also, the Court of Appeal ruled that data acquired through EncroChat were admissible as evidence as they were accessed through equipment interference rather than interception, the latter of which would have triggered the provision contained in Section 56(1) of the IPA 2016 (see above). But criminal defence solicitors have argued in the IPT that the NCA failed to fully explain to the judge who authorised the EncroChat surveillance warrant how the French and Dutch authorities were obtaining the data. This allowed the NCA to acquire a Targeted Equipment Interference (TEI) warrant which ensured the evidence obtained was admissible in court. Defence solicitors told the IPT that the correct warrant for the EncroChat operation would have been a Targeted Intercept (TI) warrant. TI evidence can not be relied on in court.

    Concluding comments

    The French decision is likely to strengthen defence solicitors’ arguments against the NCA’s “tenuous basis” for a TEI warrant. UK solicitors have a basis to challenge any convictions, prosecutions, or investigations relying on hacked Encrochat evidence.

    If you have been convicted, arrested, or are currently being investigated regarding EncroChat data, you must contact us immediately. Our highly experienced criminal defence solicitors will advise you on what to do in light of the French court’s decision.

    For more information on this area, please read previous articles and/or watch videos we have published on the topic:

  • 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.

  • Crypto – the Prodigal Asset?

    Crypto – the Prodigal Asset?

    As Heraclitus said: “There is nothing permanent except change.”

    Every innovation is met with suspicion if not derision. Planes and trains were seen as the work of the Devil, whilst some wanted the car outlawed- ironically the very early vehicles were battery not gasoline powered.

    There was marked antipathy to UK commercial TV when launched in the 1955. Some thought it would not last and that all we needed was the BBC. Wind the clock forward and it’s the BBC having to find its niche in a world of multi-providers and new technologies providing novel ways to view programmes and pay for them. Content has changed exponentially courting questions as to what are the boundaries of free speech?

    The internet and social media have yet to be tamed and regulated. The UK’s Online Safety Bill 2022 shows the tension between free speech and protecting the vulnerable.

    Crypto and its supporting technologies are the latest to be under the gaze. Admittedly crypto has scored some own goals thanks to the gung-ho anti-regulatory mentality of FTX (and fall out consequences like Block Fi). Whilst ‘the fake it until you make it’ maxim now looks like a route map to prison food given the conviction of Elizabeth Holmes, founder of Theranos.

    Whilst we can be scathing of crypto let’s not forget it is only about 14 years that established ‘analogue’ banking was under scrutiny and pushed capitalism to the brink. The effects are still being felt economically, socially and legally.

    Crypto has the potential to be the fundamental catalyst in changing capitalism, and in the right hands (human and AI) the capacity to further democratise society.

    However, to do so it needs several important elements.

    The first important aspect is to ensure trust and transparency. Crypto using more acronyms than a tin of alphabet soup only antagonises matters and shrouds matters in mysticism when the sector should be earning trust as well as broad acceptance. Even Tesla’s Elon Musk resisted calling tyres ‘rotating mobility aids.’

    Make sure the adults are in the room. And by that I do not mean tropes of yesteryear but like-minded people from all backgrounds, ages and nationalities who are willing to embrace change but not change for changes sake. Also, don’t regard regulation and accountability as a death knell to creativity and innovation.

    The courts and lawyers accept that there is risk to everything. What you regulate is ensuring people know what they are letting themselves in for and that there is proper transparency and accountability. We should not protect people from failing but we should protect them from people who make failing inevitable whether because their approach to crypto business is fraudulent or just damn feckless.

    Legislators need to understand blockchain and crypto. Also, regulation should be agile and responsive. Also, keep it simple. The more complex and unfathomable the laws the more chances of creating uncertainty and loopholes that undermine the purpose of the legislation. If existing legislation works then just adapt to crypto.

    As with climate change and the Internet, crypto is a borderless market yet most legislation is derived from jurisdictions. There is already divergence on definitions of crypto assets, for instance between the proposed EU Markets in Crypto-Assets (MiCA), and the UK’s proposed amendments to the Financial Services and Markets Bill (FSMB).

    The FSMB defines a crypto asset as: 

    “Crypto asset’ means any cryptographically secured digital representation of value or contractual rights that:

    • Can be transferred, stored or traded electronically, and
    • That uses technology supporting the recording or storage of data (which may include distributed ledger technology).”

    Whilst MiCA adopts a more forensic analysis and definitions will cover certain types of NFTs (non-fungible tokens).

    Seemingly, the FSMB will not cover NFTs whilst the UK’s Digital, Culture, Media and Sport Committee launching an enquiry how best to regulate NFTs. 

    The US securities law such as the Securities and Exchange Commission (SEC) may treat certain types of NFT as securities. 

    NFTs play an increasing role in the creative industries but their application exceeds these valuable sectors.

    Ideally, crypto needs international courts and universal standards- but given the NFTs examples above it is not likely to happen any time soon. 

    Common Law should provide consistency but variation occurs, for instance compare Australia and UK court decisions as to whether crypto assets are a form of property. 

    Ensure that blockchain and also crypto are green using renewable energy. 

    The biggest goal for crypto is to re-define the application of business and also give choice as to the type of money or unit of value we use.

    We would be aghast if there was only one type of fashion, car, phone or cheese; we have choice and so it should be with money and its utility.

    Central governments and banks fear that they will lose control over collecting taxes, monetary policy and so forth; an immutable blockchain should make tax collection easier! 

    The right utility weighting can ensure crypto money has real value and not something built on quicksand. The current mantra of we value it because we do can only be taken so far.

    Currently, the wealth of a country or person is based on fairly crude profit and loss principles. 

    Smart blockchain technology can trace and account for specified qualities and once verified a value can be attributed, for instance, if a company has an excellent employment record then a value is attributed. 

    Likewise, if you can show that production does not include use of carbon or a supply chain does not exploit children then a value can be given. As such, profitability is measured in terms of additional identifiable qualities rather than just what is produced or services provided.

    Such an approach helps productivity, help stem inflation as each crypto assets would be linked and valued against identifiable parameters not just on market whim. 

    The legal groundwork exists. For instance, S414 C (7) Companies Act 2006 says companies need to take account of factors such as such as environmental matters, including the impact of the company’s business on the environment. Also, requires consideration of social, community and human rights issues. 

    Whilst the Directive on Corporate Sustainability Due Diligence and Amending Directive (EU) 2019/1937 will apply to EU and non-EU companies generating a net turnover of more than €150m in the EU in the financial year preceding the last financial year. The Directive is likely to be adopted by 2023 and take effect during the next three to five years.

    Blockchain will be a significant driver in the application of these laws and influence how companies are perceived and valued.

    This does not prevent central governments imposing rules of engagement.

    It is easy to look backwards through rose tinted glasses and resist change.  As Leo Tolstoy said: ‘Everyone thinks of changing the world, but no one thinks of changing himself” 

    One way we could change ourselves is to embrace blockchain and crypto and, like a child, nurture them so they become inspirational and constructive adults.

    Julian Wilkins of Eldwick Law

    Consultant Solicitor and Notary Public

    Member of the Chartered Institute of Arbitrators

    CEDR Accredited Mediator

  • Lovely jubbly: the Intellectual Property Enterprise Court finds that Del Boy is a literary work

    Lovely jubbly: the Intellectual Property Enterprise Court finds that Del Boy is a literary work

    BBC sitcom Only Fools And Horses might have broadcast its last episode almost two decades ago, but that hasn’t stopped Del Boy and co from having their day in court.

    The Intellectual Property Enterprise Court case of Shazam Productions v Only Fools the Dining Experience [2022] EWHC 1379 IPEC is notable for stating for the first time in English law that copyright can exist separately in a character and not only the script. The case concerned copyright infringement of John Sullivan’s genius writing of Only Fools And Horses (OFAH) quoted throughout the judgment.

    In short, Del Boy has made legal history. Shazam Productions Limited (Shazam) was formed by the late John Sullivan, who owned the rights to the OFAH scripts. His family continues to licence those rights, for instance to the BBC, which had originally produced the TV series, and for a successful West End theatre version of OFAH.

    The Dining Experience and others had created a theatrical experience for its audience by providing an interactive three-course meal, while actors played the characters of Del Boy and his young brother, Rodney. The actors had the appearance, behaviour, voice and phrases of OFAH characters.

    Although the Dining Experience created a script, it used jokes from the original series. The characters were also replicated, albeit, according to the defendants’ evidence, in an exaggerated way. The Dining Experience also used the music and lyrics written by Sullivan from the OFAH TV show.

    The judge analysed recordings of OFAH whilst reading their scripts. Although the scripts were acted by a stellar cast, the character development was clearly set out on the page. Sullivan’s scripts served as a diecast for the distinctive characteristics of the characters, especially Del and Rodney Trotter. With Del Boy, there was the mispronounced French and stock phrases such as ‘Lovely jubbly’ and ‘Cushty’. The character was indiscernible from the script and its dialogue.

    The characters were not clichés or tropes either, but fully rounded with their DNA set out in the writing. The thoroughness of the characters was such that the presiding judge was satisfied the character was a literary work for copyright purposes.

    The judge did not create new law but applied it for the first time in England by following the test for subsistence of copyright identified in European Union (EU) law. This is a two-prong test fulfilling the ‘originality requirement’, namely being the author’s own intellectual creation, and ‘identifiability requirement’, whereby the character manifests itself in an identifiable manner that is objectively unique and distinguishable from another character. Although an EU law test, it pre-existed Brexit so remains part of English law.

    Further, the court determined Del Boy’s character was a literary work under UK copyright law, which has a closed list of works that can be subject to copyright. As an aside, the EU test of subsistence of copyright law (still valid UK law) does not allow a closed list as exists under UK copyright legislation.

    The Shazam case demonstrates that careful character development and embedment within scripts may create an additional copyright in the character, separate from the overall script. Rights-holders of the most identifiable fictional icons from TV may wish to consider whether copyright exists in their characters.

    Apart from copyright protection, the Shazam decision lends support to a ‘passing-off’ action where the copyright owner asserts their goodwill associated to a character. Therefore, any unauthorised attempt by a third party to portray a character may be regarded as by giving the impression their use was endorsed by the copyright owner.

    There may also be circumstances where a distinct character can enhance the existence of format rights, normally a ragbag of detailed rights and creations such as set designs, trademarks and intricate format bibles assiduously recording the facets of a show.

    So there it is. Character-led drama and comedy create not only masterpieces but additional IP rights, if your characters display sufficient distinctiveness. Lovely jubbly.

    This article was written by Julian Wilkins, an Intellectual Property solicitor at Eldwick Law.  It was recently published in Television International Business.

  • Claims against a Director for Breach of Duties

    Claims against a Director for Breach of Duties

    If a director breaches these duties, it may be possible for shareholders to bring a claim. Contact one of our solicitors.

    [contact]

    What are the directors’ duties?

    The general duties of a company director are found in sections 171-177 of the Companies Act. They are:

    • A company director must act per the company’s constitution and only exercise their powers for the purposes for which they are given (section 171).
    • A company director must act in good faith and promote the success of the company for the benefit of its members (section 172 (1)).
    • A company director must exercise independent judgment. They may take on board the advice or opinion of others, the ultimate decision must be theirs (section 173).
    • A company director must exercise reasonable care, skill, and due diligence when undertaking their duties (section 174).
    • A company director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe the company and either their personal interests or other duties owed to a third party (section 175).
    • A company director must not accept any benefits which are conferred on them due to their position as a company director (section 176).
    • If a company director has an interest in a proposed transaction or arrangement with the company this must be declared to any fellow directors (section 177).

    Examples of breach of directors’ duties cases

    • In 2019, ClientEarth sued, as a minority shareholder, Polish energy company Enea alleging that the company’s strategy to build a 1GW coal-fired power station in northeast Poland as part of a joint venture with another Polish energy firm, Energa posed an indefensible risk to investors in the face of rising prices for carbon and growing demand for renewables. Moving forward with the project would constitute a breach of the board of directors’ fiduciary duties of due diligence and acting in the best interests of the company and its shareholders.
    • In Fairford Water Ski Club v Cohoon [2021] EWCA Civ 143 the director of a company that owned a lake and surrounding land was ordered to repay £350,000 after failing to declare his interest in a water skiing school that operated on the lake at a particular directors’ meeting.

    Breach of directors duties penalties

    What can be imposed?

    There are several sanctions the court can make if a director is found to have breached their duties, including:

    • Damages – if the director has been negligent in performing their duties they may be required to pay damages to the company.
    • Injunctions – an injunction order can be made to prevent a director from conducting a breach or continuing to breach their duty.
    • Restoration of property and/or profits – the court can order a director to return property and/or repay any profits gained through the breach.
    • Reversing of a contract – if a director signs an agreement that goes against the company’s intentions it can be rescinded.

    Can the company ‘forgive’ a director for a breach of duty?

    Yes, section 239 regulates the company’s right to ratify (forgive) conduct by a director amounting to negligence, default, breach of duty, or breach of trust in relation to the company. The ratification decision must be made by resolution of the members and neither the director nor anyone connected with them can be part of the resolution.

    Most importantly, a breach of duty that results in a decision that threatens the solvency of the company or causes a loss to its creditors cannot be ratified.

    In cases of negligence, default, breach of duty, or breach of trust claims, the court can relieve a director of liability in whole or in part if:

    • They acted honestly and reasonably, and
    • Having regard to all the circumstances of the case, the court believes it is reasonable to excuse the director.

    Concluding comments on breaching directors duties

    Civil litigation in cases involving directors’ duties is a highly complex area of law and requires the involvement of commercial disputes solicitors.

    Take for example the Enea case mentioned above which concerned shareholders bringing a claim against the board for, in broad terms, failing to consider environmental and climate change matters in their decision making.
    These types of directors’ duties claims are guaranteed to rise as the science around the impact of company actions on climate change becomes clearer.

    This, and other types of directors’ duties claims, such as conflicts of interests or negligence, can involve cross-border and joint venture elements, adding to the complexity of the matter.

    If you are facing a regulatory or criminal investigation or prosecution, seek experienced legal advice 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 the law in place at the time of writing, 19 January 2024. This article does not constitute legal advice. For further information, please contact our London office.

    Contact Us

  • What Should I Do if My Assets are Frozen?

    What Should I Do if My Assets are Frozen?

    In April 2022, Swiss prosecutors announced that they would release around 400 million Swiss francs which had been frozen in a Swiss bank account for several years. The money belonged to five unidentified people who were being investigated by Swiss authorities on suspicion of money laundering. The original investigation concerned 14 people, among them members of the late former Egyptian President Hosni Mubarak’s circle. More than 210 million francs had been released at an earlier phase of the investigation. Prosecutors concluded after eleven years that there was not enough evidence to support claims that those under investigation were involved in organised crime and money laundering.

    Having property and/or assets frozen due to targeted sanctions or being investigated or prosecuted for criminal activity such as money laundering, fraud, terrorist financing, or other organised criminal activity can not only affect you personally, but also your family, employees, business partners, and suppliers. In this article, we explain what a freezing order/injunction is and what you can do to have the order lifted.

    What is a freezing order?

    A freezing order, also known as a Mareva injunction, is a court order which prevents the defendant from dealing with, or disposing of, property or assets mentioned in the order. It is important to note that, as confirmed in the Court of Appeal decision in Crowther v Crowther [2020] EWCA Civ 762, a freezing order is not meant to provide the applicant with security for their claim, instead, its purpose is to prevent a defendant from evading justice by disposing of an asset so that a future judgment against them cannot be satisfied.

    Freezing orders are not handed down lightly. They are known as the “nuclear weapon” of the law (Bank Mellat v Nikpour (1985) FSR 87) and the court will only use its discretion to grant a freezing order if it is just and convenient to do so.

    A freezing order can be made without you receiving any prior notice (known as ex-parte). It is important to understand that the injunction does not mean that you have been found liable or that your assets no longer belong to you. However, your day-to-day life will likely be immediately impacted by the order. Therefore, the first thing you must do is contact a solicitor who is experienced in the variation and discharging of freezing orders. They will examine the details of the injunction and advise you on what you can and cannot do with your assets.

    Within a week or so of the order being granted, you will be required to attend a hearing known as a ‘return date’. In practice, it is up to you to provide reasons that the injunction should be varied or discharged. Unless there is a clear reason for the injunction to be lifted, for example, it has been made against the wrong person, strategically it can be beneficial to allow the freezing order to remain in place whilst your solicitor gathers the evidence required to make a robust challenge. The priority at this stage is securing access to funds to pay your day-to-day living expenses and legal fees.

    What type of assets can be frozen?

    Most types of assets can be frozen, including cars, stocks and shares, property, art, cryptocurrency, business assets, and bank accounts. The order covers existing assets and those acquired whilst the freezing order is in place.

    A freezing order can apply within the UK and/or in specific foreign countries. It is even possible to obtain a worldwide freezing injunction.

    How are third parties affected by freezing orders?

    One of the main reasons the courts require vigorous evidence when it comes to granting freezing orders is that third parties such as banks, insurance companies, suppliers, and business partners (to name but a few) can be negatively affected.

    If a third party possesses assets which are subject to a freezing order they must comply with the injunction and ensure they do not allow the person subject to the order to commit a breach. Breaching the freezing order can result in a fine, asset seizure or imprisonment, not to mention the reputational damage if details of the breach are reported in the media.

    How can I have a freezing order varied or discharged?

    A freezing injunction can be varied or discharged either by consent or via a court application.

    Consent

    The freezing order may allow parties to agree to vary its terms or discharge it. The main benefit to variation or discharge by consent is that it is less expensive than making an application to the court and negotiations can remain confidential.

    Your solicitor will advise you as to whether the terms of the freezing injunction allow for variation or discharge by consent. If the claimant unreasonably withholds consent and an application to the court is required, the judge may order the claimant to pay your legal costs if you win your case.

    Application to the court

    The court can vary or discharge a freezing order following an application by you or a third party affected by the injunction because:

    • The claimant has not done what the court required them to do when granting the freezing order, for example providing the required information and authorisation to your bank to ensure you can access reasonable funds to cover living expenses.
    • The terms of the injunction are deemed oppressive.
    • The claimant is delaying pressing ahead with their claim. Lord Justice Glidewell stated in the case of Lloyds Bowmaker Ltd v Britannia Arrow Holdings [1988] 1 W.L.R. 1337, that “a plaintiff who succeeds in obtaining a Mareva injunction is in my view under an obligation to press on with his action as rapidly as he can so that, if he should fail to establish liability in the defendant, the disadvantage which the injunction imposes on the defendant will be lessened so far as possible.”
    • The claimant has not provided full disclosure to your legal team.

    When applying for a freezing order the claimant will normally be required to provide a ‘cross-undertaking’ (promise) to financially compensate you and any third parties affected by the freezing injunction should it turn out it was improperly obtained.

    Wrapping up

    Varying or discharging freezing orders requires your solicitor to engage in smart tactics and the ability to successfully do this only comes with experience. For example, putting a claimant on notice that you plan to sue for damages as evidence shows that the injunction should not have been granted often motivates the claimant to consent to a variation or discharge. Therefore, swiftly instructing an experienced litigation solicitor is key to dealing with all legal aspects of a freezing order.