The results of KPMG's Fraud Barometer showed a significant increase in fraud cases in 2021, confirming the general upward trend in this area. My colleagues recently prepared an update on the case of Hewlett Packard v Lynch, described as one of the most expensive and high profile fraud trials in recent history.
In this blog piece, I look at another recent decision of the High Court which considered the remedies available to a claimant company following a fraud perpetrated by one of its directors. The case is of interest because it demonstrates the scope of potential remedies available to victims of fraud.
A secret nominee in the purchase of hotels
The liquidator of Hotel Portfolio II UK Limited (HPII) sued Mr Ruhan, its former director and Mr Stevens in connection with the sale and subsequent on-sale of three London hotels. The liquidator claimed that companies ostensibly associated with Mr Stevens were acting as Mr Ruhan's secret nominee in the purchase of the hotels from HPII and thereby assisted Mr Ruhan in breaching the duties he owed to HPII. To prove that Mr Stevens was acting as a nominee, the liquidator required to show that following the sale of the hotels Mr Ruhan still exercised substantial control over them and held a position of superiority over Mr Stevens, giving him instructions or commands, which were invariably complied with.
The judge found that Mr Stevens had acted as Mr Ruhan's nominee and so Mr Ruhan was required to account to HPII for the secret profits generated from the subsequent sale of the hotels by Mr Stevens' companies (this is known as "an account of profits"). Those profits had been used by Mr Ruhan to invest in, or repay loans secured on various of Mr Ruhan's other projects.
Dishonest assistance and remedies
The judge also held that the liquidator could elect for the remedy of equitable compensation against Mr Ruhan. This is a remedy available for what are known as "equitable wrongs" (e.g. breach of trust, breach of fiduciary duty, knowing receipt etc). It has the aim of compensating the claimant for the losses it has suffered.
What is perhaps significant about this case is that in finding that Mr Stevens had dishonestly assisted Mr Ruhan, the liquidator was also entitled to the remedies of an account of profits or equitable compensation against Mr Stevens. The judge was persuaded that the profits made by Mr Stevens, in the form of payments made to him for the dishonest assistance provided, ought properly to be accounted for to HPII.
Furthermore, because Mr Stevens was in nominal control of the secret profits generated by the subsequent sales and applied those profits for Mr Ruhan's purposes, on Mr Ruhan's instructions, the judge was satisfied that Mr Stevens played a sufficient role to meet the requirements of the equitable wrong of dishonest assistance and was liable for the loss caused by his failure to hand-over the profits to HPII.
The case is a good example of how these kinds of remedies can be deployed where more traditional remedies may not be available. In this case a proprietary claim (i.e. where a claimant has as a right to proceed against an asset in the defendant's hands) was capable of being defeated if the liquidator was unable to identify or trace the secret profits generated. That was a real risk where Mr Ruhan had used the profits to make investments or repay loans associated with other projects in which he was involved.
By seeking an account of profits and equitable compensation it allowed the liquidator to claim for the loss suffered by reason of Mr Ruhan’s failure to account to HPII for those profits. The judge was prepared to extend those remedies against Mr Stevens on the basis that the loss of profits would never have been earned but for Mr Stevens’ dishonest assistance.
These remedies were available to HPII notwithstanding that the price paid for the hotels was not less than the market rate and so a claim based on sale at an undervalue was not open to the liquidator. HPII accepted that it could not have made the profits from the subsequent sale of the hotels or sold the hotels for a higher price or on better terms. Its claim was wholly based on the loss of profits which Mr Ruhan was able to achieve by reason of his undisclosed self-dealing with HPII. In so doing, the liquidator has the potential to achieve a significant recovery for HPII's creditors.
The significance of interim protective measures
The civil remedies available where there has been a breach of trust, breach of fiduciary duty, dishonest conspiracy or misappropriation of company assets can be combined with various interim protective measures such as worldwide freezing injunctions and search orders.
Freezing orders stop the defendant from dealing with their assets until judgment is made in the claim. This can give the victim of the fraud comfort in knowing that there will be assets available to satisfy a judgment if they are successful in their action. Search orders require a defendant to allow a claimant's representatives to enter his premises and to search for, copy and remove documents or material. The ability to recover and preserve such material can be crucial to the success of the action. In this case, the liquidator was able to use similar powers to a search order to obtain documentation that greatly assisted the liquidator's action.
Those who find themselves victims of fraud should not dismiss the option of civil action given the variety of remedies available when it comes to trying to recover the losses they have suffered.