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Compared to claimants in “ordinary” litigation, the claimant in a fraud case is likely to reach the recovery stage of a claim with one or more of the following significant advantages:
Draconian Court Orders
Draconian Court Orders such as the search order or the freezing order are
likely to have produced damning evidence against the fraudster.
Although some defendants will fight to the very last, many will see the writing
on the wall at an early stage of the case after these orders have been executed
against them.
The pressure of the Court orders and having the evidence “out in the open” often
puts the fraudster in the state of mind where a very favourable settlement can
be agreed.
Response to Disclosure Orders
The fraudster’s (or third parties’) response to disclosure orders is likely
to have revealed the whereabouts of assets against which a judgment can be
enforced.
Freezing orders
Freezing orders may have secured those assets so that the fraudster cannot
dissipate or hide them so as to avoid the consequences of a judgment.
Alternatively, your own initial investigations may have identified assets.
Most litigants prefer the certainty of a negotiated settlement to the costs
of taking a case to trial, especially when no competent lawyer can ever offer a
client a guarantee of success.
This gives even greater value to the psychological pressure to settle that
most fraud defendants will face after Court orders have been executed against
them.
When settling a case, everything is about negotiation and bargaining power.
The claimant in a fraud case, with clear evidence of wrongdoing to hand and the
fraudster’s assets secured, can generally obtain a good deal as long as the
defendant is willing to talk at all.
There is, after all, little objective reason for the defendant to incur
significant legal costs fighting what is likely to be a losing battle. Some
legal issues do need to be borne in mind when settling a case.
There needs, of course, to be some comfort that the defendant will actually
pay up. This can be best achieved by requiring the settlement monies to be paid
into the defendant’s solicitor’s client account prior to the parties actually
signing a settlement.
Other alternatives include the defendant consenting to a judgment being
entered against him or her at the Court, or a form of Court order that expressly
requires a specific payment to be made.
If the defendant then fails to make a payment, it will not be necessary to
sue him all over again for breach of contract (the route that would have to be
taken if a settlement was concluded in the form of a simple agreement between
the parties).
Instead, the claimant need only seek further sanctions from the Court in
respect of the defendant’s breach of the terms of the judgment or order. In
extreme cases, parties “in contempt of court” can be committed to prison until
their contempt has been purged.
Not every case will settle, though, and not every defendant will abide by the
terms of a settlement. In these cases, how do you go about turning a judgment
into cash in hand?
The legal system provides for a number of different enforcement mechanisms,
the most common of which are covered below.
These methods are available to any successful litigant, but can be especially
useful in fraud cases.
Third Party Debt Orders
Any third party who owes a debt to the fraudster can be required to pay that
debt to the victim of the fraud in satisfaction of the judgment.
The most common example is a bank account held by the fraudster (or held by
someone else but only as a mere nominee for the fraudster). The credit balance
on a bank account is analysed legally as being a debt owed to the account holder
by the bank.
The bank can be ordered to pay over that balance to someone who has a
judgment against its customer.
If a trading company has been a party to the fraud committed against you,
then all of the debts on its books are potentially available to satisfy the
judgment.
You can obtain third party debt orders against the debtors of the company so
that they will be required to pay to you, instead of to the company, the amounts
they owe.
Charging Orders
If the fraudster owns property, such as land or shares, an order can be
obtained charging those assets over to you.
The charge will be registered at the Land Registry or at Companies House as
appropriate.
The next step is to obtain an order for the sale of the assets and payment of
the proceeds of sale to you. It is important to ascertain in advance whether any
other individuals may try to assert any interest in the property.
For example, obtaining an order for the sale of a matrimonial home,
especially where there are children resident, where only the husband has had
judgment entered against him can be a very drawn out process.
Tracing remedies
Technically, a “tracing” remedy is one which a claimant would apply for from the
outset of his Court proceedings.
The value of this type of remedy comes into play when judgment has been
obtained, though, and the claimant is looking to make his recovery. In some
cases, the fraudster may have bought land, buildings, shares or other
substantial assets with the proceeds of his fraud.
This can set up an especially attractive form of recovery. Where an asset has
been acquired with the proceeds of a fraud, the victim can “trace” his losses
into the asset itself. This means that the victim is not necessarily limited to
recovering the simple value of the loss.
For example, if a fraudster had used his ill-gotten gains to buy property in
London while the housing market was still rising sharply, then the value of that
property might have increased significantly by the time the victim obtained
judgment. In those circumstances, a much better deal for the victim than simply
recovering the monetary value of his loss would be to “trace” into the asset
itself.
The law will effectively treat the asset as having been acquired as a form of
“investment” for the victim by the fraudster. The victim will be entitled not
only to the amount of the original “investment” but also to the capital gain
made on the appreciating asset since the time of purchase.
In this manner, in some cases it is actually possible for a victim to recover
more than he has lost as a result of the fraud.
Awards of damages by a Court are often accompanied by an order for the payment
of interest (at the “judgment rate” of 8% p.a.) on those damages, but the use of
a tracing remedy may allow a windfall recovery beyond anything capable of being
reached through an interest payment.
Seizure and auction of goods
Despite the reforms of the Civil Procedure Rules and encouragement to lawyers to use as little Latin or technical jargon as possible, some small elements of the old “regime” survive to this day.
When a defendant is not paying the amount he has been ordered to pay by a judgment, another means of enforcement available to the winner of the case is to have the defendant’s goods seized and then sold at auction.
This process is started by getting the Court to “seal” a “writ of fieri facias”
(available as of right as long as the defendant is not paying up and the
judgment is more than 14 days old).
The writ directs a sheriff to go to the defendant’s home or business premises
(in the case of defendant companies). Once there, the sheriff can take “walking
possession” of goods pending any disputes as to whether or not particular items
can be seized (for example, there are rules preventing the seizure of a
craftsman’s tools).
The goods can then be sold off at auction and the proceeds will be paid over
to the party owed money under the judgment (less an amount for the sheriff’s
expenses).
There are more enforcement measures available than have been mentioned above,
but most are unlikely to have any relevance in a fraud claim. For example, a
claimant who needs to resort to an “attachment of earnings” (a weekly or monthly
proportion of the judgment debtor’s salary) is unlikely to make anything
remotely approaching a complete recovery.
The prospects for recovery (and the means by which the recovery will be made)
should be investigated from the outset. Unless you are satisfied that assets
will be available against which a judgment can be enforced, there is usually no
point in bringing the claim at all.
Sometimes claims will be brought to establish a precedent, to send a message
to other potential fraudsters or to satisfy regulators.
In our view, though, a claimant should normally view from a “return on
investment” perspective, and embark upon a claim only when the realistic
prospects of recovery are well in excess of the costs to be expended.
To approach a case on any other basis is to risk throwing good money after
bad.
Dan Morrison is a Partner in Litigation and a member of the Corporate Investigations and Asset Recovery Group at Mishcon de Reya.
Ben Gallagher is a Solicitor in Litigation at Mishcon de Reya.
Source:
Credit Control Journal
First published in Volume 26, No 6, 2005
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