Civil Fraud actions relate to deliberate and often dishonest conduct, fraudulent misrepresentation or deceit.

Alleging fraud is a serious matter. Both solicitors and barristers have ethical codes of conduct that requires material that establishes, on the face of it, a case of fraud.

Depending on the facts, there are different possible causes of action, including fraudulent misrepresentation / deceit, breach of fiduciary duty, unlawful means conspiracy and unjust enrichment.

Civil fraud has differing characteristics to that of non-fraud causes of action (e.g. breach of contract). By way of example, there is no defence of contributory negligence, a party can lift the corporate veil on a company (i.e. assessing who is in real control of a company such as sole trader companies, etc. rather than just considering the corporate entity), limitation clauses are ineffective, and there are potentially extended time limits to bringing a claim.

There is also a greater scope of recoverable damages, because the loss does not need to be foreseeable (as it does in breach of contract or negligence), although it must be shown that losses were as a direct result of the defendant’s representation.

Fraudulent Misrepresentation / Deceit

There are four necessary elements, all of which need to be established:

1.the defendant makes a false representation to the claimant;
2.the defendant knows that the representation is false or is reckless as to whether it is true or false;
3.the defendant intends that the claimant acts in reliance on it; and
4.the claimant does act in reliance on the representation, suffering loss as a result.

It follows that if the defendant honestly believes his representation to be true, there is no fraud. The claimant therefore must prove absence of honest belief to succeed. The reckless aspect opens other avenues to success. For example, it is sufficient to establish that the defendant suspected that the representation might be inaccurate, or neglected to make enquiries to check the same, which may catch a wider set of circumstances. Further, there is a subjective element in determining what the defendant thought (i.e. the mental element). There is no need to establish a dishonest motive.

For oral fraudulent misrepresentations, there is a potential statutory defence that the defendant needs to have made the representation intending that the claimant obtains money / goods on credit. Case law has established that where the representation is in an email, this will suffice for the defence.

Where a representation is true when made, but subsequently becomes false, and where the defendant knows this, this can potentially amount to fraudulent misrepresentation where the defendant fails to inform the claimant as to the change in circumstances. The relevant period is before a contract is concluded.

Damages for fraudulent misrepresentation also includes expenditure wasted in relying on the representation / contract. Claimants may also recover the costs of legal proceedings because of the representation, lost profits, the loss of passing up other profitable opportunities, damages for distress and inconvenience, and aggravated damages for injury to feelings.

Breach of Fiduciary Duty

A fiduciary duty is where there is a relationship of trust and confidence, and a party acts on behalf of / for the benefit of the other. Examples of fiduciary duties are where they are owed by directors to their company, professional advisers to their clients, trustees to their beneficiaries, and agents to their principals.

A fiduciary is to act for the benefit to those they owe a duty to, and consists of:

1.having no position of conflict;
2.not profiting at the expense of those they owe a duty to (e.g. misuse of property);
3.having undivided loyalty, e.g. avoiding putting himself in a position where his duty to another party conflicts with those he owes a duty to; and
4.confidentiality, e.g. not to disclose information obtained in confidence from those they owe a duty to.

Where a fiduciary has obtained money from those that they owe a duty to, the claimant can seek an account of profits. Other remedies include an injunction, setting aside a transaction, and damages where loss results. Where breach of a fiduciary duty involves deceit, a claimant may potentially obtain damages even where there is no contractual link.

Unlawful Means Conspiracy

Unlawful means conspiracy arises where two or more persons / corporate entities agree to take joint action, using unlawful means, which results in damage to another, and that there was an intention to cause injury where it is reasonably foreseeable that they conspiracy may injure the target.

Notably, there must be concerted action. Where a party has simply facilitated an action by another party, unknowingly, such a party would not be liable and would be able to defend the allegation of unlawful means conspiracy.

With regard to knowledge of the conspiracy to cause harm, where a party clearly suspects facts but deliberately did not make enquiries so as to avoid confirmation of such facts, the Courts are likely to consider this as being dishonest.

Similarly, standing by with a blind eye and allowing an unlawful act to take place would assent to a fraud, and could result in an actionable cause of action of unlawful means conspiracy.

What are “unlawful means” in the context of a conspiracy claim? Specifically, the unlawful aspect must be the means of inflicting harm, i.e. not that there is an unlawful aspect at some point arising on the facts. Unlawful means can cover both criminal actions and civil wrongs. This is wide and non-prescriptive because the Courts have previously stated that a general rule should not be established given the wide range of possible conspiracies.

Unjust Enrichment

Unjust enrichment is where a party receives a benefit at the expense of another party, and such was unjust. It also includes a situation where a party benefits by saving necessary expenditure.

Unjust enrichment does not focus on whether the claimant simply made a loss that they could have avoided (e.g. due to carelessness). Instead, it looks at whether the defendant benefitted at the claimant’s expense.

It can be established that there is unjust enrichment where, for example, a claimant has transferred money to a defendant.

One defence to unjust enrichment is referred to as change of position: where the defendant’s circumstances have changed so detrimentally that it would be unjust for them to repay the benefit / money. A factor in this is determining whether it would be fair for the defendant to be expected to pay back the money, for example.

In addition, for the defence to succeed, a defendant must establish that the change of circumstances was due to the enrichment, and that he is not disqualified from using the defence (e.g. where a party acts in bad faith). Typically, this may be along the lines that all of the money has been spent, although the spending of such should be considered extraordinary. Extraordinary examples have been considered by the courts to include where a party gave up their job as a result of paying off their debts as a result of the enrichment.

One remedy includes an account of profits because of wrongdoing or breach of a fiduciary duty.

Directors’ Duties and the Companies Act 2006

The Companies Act 2006 cites that directors have the duty to:

1.act within powers;
2.promote the company’s success;
3.exercise independent judgment;
4.exercise reasonable care, skill and diligence;
5.to avoid conflicts of interest;
6.not to accept benefits from third parties; and
7.to declare interest in proposed transaction or arrangement.

There are considerations for the interplay between the different duties. For example, a director must still act within powers (i.e. according to the company’s constitution) even where he/she believes in good faith that their conduct promotes the company’s success. A key consideration is whether there is an abuse of power, with action being taken for an improper reason.

There are also duties to consider or act in creditors’ interests, as relevant for insolvency matters, although these are not fiduciary duties. In circumstances where a large creditor is unreasonably overlooked, objectively there will be the consideration as to whether an honest director would have reasonably believed that a transaction was for the company’s benefit.

Section 172(3) of the Companies Act 2006 requires directors to consider or act in the interests of company creditors. This arises where a company is cash-flow or balance sheet insolvent, on the verge of / nearing / approaching / there is a real risk of insolvency, or is likely to become insolvent, triggering the duty to creditors. This section relates to the wrongful trading provisions of the Insolvency Act 1986.

Wrongful and Fraudulent Trading

Therefore, for companies in difficulty, professional advice is necessary at an early stage where there is a risk of insolvency. Factoring in legislation, this should necessarily consider whether a company is able to pay its debts as they fall due, rather than simply focus on balance sheets.

This is because a director is exposed to the possibility of a party litigating against them for wrongful trading. Under section 214 of the Insolvency Act 1986, where a company has gone into insolvent liquidation, at some time before winding up, a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, there is a potential cause of action in unlawful trading. A liquidator of a company can apply to the court for a declaration that the director contributes to the company’s assets as the court thinks proper. This applies to a former director at the time they concluded that the company had no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration – they cannot avoid liability by simply resigning as director.

To avoid such a declaration from the court, the director must satisfy to the court that they took every step to minimise the potential loss to the company’s creditors, taking into account what knowledge a reasonably diligent person would have.

Liability occurs where in net terms a company is worse off continuing to trade, i.e. its net deficiency.

For wrongful trading, dishonesty is not required. In contrast, dishonesty is an element to fraudulent trading under section 213 of the Insolvency Act 1986. Fraudulent trading requires the director’s intent to defraud company creditors or creditors of any other person, or for any fraudulent purpose. Therefore, fraudulent trading catches a wider category of persons.

Further, fraudulent trading is also a criminal offence under section 993 of the Companies Act 2006, with the maximum custodial sentence being 10 years or a fine or both.

Misfeasance

Under section 212 of the Insolvency Act 1986, there is a remedy where, if in the course of a company’s winding up a former or current company director, or a company’s liquidator or administrative receiver or – more widely – where a person has been concerned / taken part in the promotion / formation / management of a company, company money / property has been misapplied or retained or there has been a breach of fiduciary or other duty to the company or misfeasance. Such a person could be compelled to contribute to the company’s assets by way of compensation as the court sees thinks just.

As a breach includes “other duty”, the general directors’ duties of the Companies Act 2006 listed above apply in identifying a potential breach.

In essence, misfeasance relates to misapplication or retention. It also allows a cause of action where there is negligence. One case law example includes where a company’s director negligently completed insurance forms, whereby a fire led to the company being insolvent. In that case, a claim was brought for misfeasance as the director had breached their duty of care.

Those who can bring a misfeasance claim against a company include liquidators and creditors. In addition to misfeasance, there are alternative causes of action listed above such as wrongful or fraudulent trading. This means that a party can argue concurrent liability, and any Pre-Action Protocol Letter Before Claim may bring multiple causes of action.

A prospective defendant may argue that they acted honestly and reasonably and that in the circumstances it is fair to excuse them from liability.

Personal Liability

Another advantage of pleading fraud is also that individual directors can be held personally liable for the fraudulent misrepresentation of a company. This may be a factor where a party wishes to pursue a director individually where there is the possibility of a company entering insolvency, with the formation of a “phoenix” company thereafter, without having to amend its claim.

Given the potential risk for directors of personal liability, there is a need to consider restructuring of companies in the context of reducing the risk of wrongful trading.

Currently, in respect of wrongful trading, the Corporate Insolvency and Governance Act 2020 has the effect that in deciding the amount that a director should contribute to a company’s assets, the period from 01 March 2020 to 30 September 2020 assumes no worsening of a creditor’s position. This legislation does not apply to fraudulent trading or misfeasance.

Directors’ Disqualification

Pursuant to the Company Directors Disqualification Act 1986 a disqualification order can be made whereby an individual shall not, without leave of the court, be a director of a company in any way, whether directly or indirectly, or be concerned or take part in the promotion, formation, or management of a company.

The period is to be determined by the disqualification order, but will range from 2 to 15 years.

This legislation catches shadow and de facto directors, i.e. those who do not necessarily have a formal title of “director”.

Disqualification orders can be made in insolvency matters where a director’s conduct is considered to be unfit, and matters relating to fraudulent trading, wrongful trading, misfeasance and breach of fiduciary duty.

Disqualification orders can also be made in respect of criminal matters, such as regulatory offences where there have been breaches of health and safety.

It is also a criminal offence to breach the terms of a disqualification order.

There may be pragmatic reasons for a director to accept a voluntary disqualification undertaking instead of a director’s disqualification. This is largely with a view to reducing the period of disqualification.

Overturning previous judgments obtained by fraud

Where a judgment is obtained by fraud, there is a possible action to set aside or rescind the judgment.

An issue that the courts have looked at is whether the defrauded party had the opportunity to discover the fraud before the previous trial, whether seeking to rescind is in itself an abuse of process.

The leading case on this issue is Takhar v Gracefield Developments Ltd and others, which held that lack of due diligence did not mean that seeking to set aside judgment obtained by fraud was not an abuse.

The key fact here was that the claimant asserted that her signature on a document was a forgery, however her application to rely on expert evidence by way of a handwriting expert was refused due to the imminence of trial. After losing the claim, the claimant obtained a handwriting expert, which concluded that her signature was not genuine.

The claimant applied to set aside judgment on grounds that it had been obtained by fraud. The respondents to the application countered that the application was an abuse of process, as the claimant had the documents in advance of trial and therefore could have obtained the expert report prior to trial. The claimant succeeded at this point.

However, the respondents appealed the decision to the Court of Appeal, and were successful, the court stating that the claimant must have established that evidence of fraud was unavailable at the initial trial and could not have been discovered with reasonable diligence.

Finally, the claimant appealed to the Supreme Court, and was successful.

The main points arising were that previous case law did not specifically have regard to fraud cases, and that the need for reasonable due diligence should not be imposed on the party seeking to set aside.

That said, the court stated that the court should have discretion. Further comments from the Supreme Court were that setting aside judgment obtained by fraud was a cause of action in itself, relating to the conduct of initial proceedings.

Relief / Procedural Steps

Litigation

Before steps are taken to bring proceedings against a party, ordinarily a Pre-Action Protocol Letter of Claim is sent to the other side. This sets out in outline the facts and case against the other party, setting out any causes of action, and may include what is being sought.

The opponent will then be expected to respond to the Letter of Claim. At this stage, the aim of such correspondence is for parties to understand each other’s position, make decisions as to how to proceed, try to settle the issues without proceedings, consider Alternative Dispute Resolution to assist with settlement, support efficient management of proceedings and to reduce the costs of resolving a dispute.

As part of a response, the responding party may forward pre-action disclosure in rebuttal or support of its own position.

Thereafter, a Claim Form and Particulars of Claim set out the case against the defendant, and the claim is issued after the relevant issue fee has been paid to the relevant court.

As part of the pleadings stage of a case, a Defence – procedurally – must address each and every point raised in the Particulars of Claim. Some defendants may at this stage issue a counterclaim, i.e. its own set of allegations against the claimant.

The pleadings are closed with the claimant filing and serving their Reply, or Reply and Defence to Counterclaim. A Reply is not mandatory, unless there is a counterclaim. Claimants may in any case wish to file and serve a Reply in any case, even where they are not required to do so.

Thereafter, a preliminary hearing determines what directions must be carried out by each party, including when disclosure needs to be undertaken and when witness statements need to be exchanged. Depending on the value of a case or whether a party are representing themselves as a litigant in person, there are procedural requirements that determine when costs budgets (essentially an estimate as to the costs of a case) need to be submitted.

Finally, a substantive trial will resolve the issues in the case and judgment will be awarded in favour of a party. Generally, costs follow the event, so a winning party will be able to recover their costs from the losing party.

Freezing Orders

Before a substantive trial, a claimant may wish to obtain a freezing order from the court. This is so as to preserve a defendant’s assets until judgment is obtained.

Usually this is where the claimant believes that the defendant may dissipate assets, or generally keep assets out of a claimant’s reach. This could involve a defendant withdrawing cash from a bank account.

Where assets are within this jurisdiction (i.e. England and Wales), a domestic freezing order will be used. For assets outside of or suspected as being outside the jurisdiction, a Worldwide Freezing Order is necessary.

We have considered in greater detailed Worldwide Freezing Orders separately – please refer to our separate section on this area.

Freezing orders have some requirements for the court to grant one:

1.a good arguable case;
2.a real risk of dissipation of assets (that is, the respondent(s)/defendant(s) may withdraw money or otherwise hide assets out of reach);and
3.that it must be must be just and convenient to grant the order.

A key feature of obtaining a freezing order is the duty of full and frank disclosure. This requires an applicant to disclose all material facts, even if it is not favourable. This onerous duty means that where a material fact is not disclosed, the other party may apply for the freezing order to be discharged.

Freezing orders are applied for without notice to the other side – if and when the court grants the order, the respondent has the opportunity to respond at the injunction return date, where they can seek to vary or discharge the order. Therefore, a Letter Before Claim is not necessarily sent to all defendants, as clearly such would tip off a prospective defendant and allow them the opportunity to dissipate assets.

Freezing orders also require an applicant to give an undertaking to the court, namely a cross-undertaking in damages. This essentially means that if the court later finds the freezing order to be unjust, and where the respondent has suffered loss, including damage to their reputation, the applicant is liable to compensate them accordingly.

A respondent must provide information as to asset disclosure.

Breaching a freezing order is a contempt of court, which is criminal offence that can be punished by way of a fine or up to two years in custody, or both.

Chabra Injunctions

A specific type of freezing order that may be suitable is a Chabra injunction, which takes its name from the case of TSB Private Bank International SA v Chabra.

This is suitable in circumstances where a freezing order is made against a third party (i.e. not the defendant / respondent), where they appear to hold assets on behalf of the defendant, and there is reason to suspect that the third party in reality is holding assets for the defendant / respondent in respect of whom the claimant has obtained a freezing order. This may be in situations where a party’s spouse, for example, holds assets in their own name for the benefit of the defendant / respondent.

For a party receiving an application for a Chabra injunction, a claimant / applicant must establish a good arguable case that they appear to hold assets on behalf of the real defendant.

Cross-Examination on Asset Disclosure

In circumstances in which it is believed that a party subject to a freezing order has not provided sufficient asset disclosure, or have been untruthful or evasive in response to requests for asset disclosure, an ancillary order of cross-examination in aid of asset disclosure is a possibility.

The court will grant these in exceptional circumstances, and where there is a proper purpose of revealing further assets at risk of dissipation. An order for cross-examination would therefore be where there are serious deficiencies in existing asset disclosure.

Norwich Pharmacal Order

At the start of a claim, it is possible that a prospective claimant is uncertain as to the identity of some or all defendants. Until such identification is made, a claimant requires further information to plead its claim, not least of all the actual identity of such claimants.

A Norwich Pharmacal Order can be used to require a respondent to disclose specific documents or information to the applicant.

A Norwich Pharmacal Order is used in respect of parties that are not to be defendants themselves. The respondent is expected to be mixed up in the wrongdoing, whether inadvertently and innocently or not. In order to proceed with a claim, such information is necessary for an applicant to identify the necessary defendants.

Norwich Pharmacal Orders can be used pre-action, during a claim or subsequently. As with a freezing order, an applicant has the onerous duty of full and frank disclosure. An applicant is also ordered to pay a respondent’s legal costs and the reasonable cost of providing disclosure. Similarly, for freezing orders, where banks and financial institutions incur costs to provide information / undertake steps to freeze assets in an account, they must be reimbursed by the applicant. This could be an issue where finances are an issue, as where a large number of banks will necessarily need to be contacted, it is possible that the costs of complying with a freezing order may – cumulatively – be significant.

A common example of where a Norwich Pharmacal Order is used is in respect of banks, which are able to disclose identifiers of defendants.

Search Orders

Sometimes referred to as search and seizure orders, this is an injunction requiring a defendant / respondent to allow a claimant’s / applicant’s representatives to enter the defendant’s premises to search for, copy and retain documents / material.

This is with a view to preserving evidence or property, and akin to the way in which assets would be preserved by a freezing order. Further, a search order would be suitable where the claimant believes delivery up or preservation of documents would not be enough.

As with the other ancillary orders, obtaining a search order is subject to a duty of full and frank disclosure and an undertaking in damages.

A search order does not equate to being able to force entry to the defendant’s premises. It is still possible that a defendant may disobey the terms of the order, which would prompt contempt of court.

Further, a search order requires specific documents / materials, and therefore a search order cannot be used as a means of a fishing expedition, or to unearth other documents not specifically cited in the order. Similarly, privileged material cannot be removed as part of a search order.

There are requirements that need to be satisfied before a court will grant a search order, including a strong prima facie case, very serious damage that will result from the defendant’s actions, the real possibility of destruction / disposal of material, and that the search order is not excessive or out of proportion.

In addition an independent and suitably experienced solicitor will need to be instructed as supervising solicitor, irrespective of the applicant’s solicitor’s seniority. The supervising solicitor needs to be experienced in search orders and their role is to ensure that the search order is properly executed, and before entering the premises must inform the respondent of their right to legal advice and to vary or discharge the order.