This article looks at the way in which a U.S.-based victim of an international fraud can, in appropriate circumstances, utilize the powers of the English court to aid it in its recovery of the misappropriated funds. The scenario under consideration here is where:

• a company or individual based in the United States is defrauded;
  
  
• the misappropriated funds flow out of the United States and into London; and
  
  
• the defendant fraudster also has assets in a third country.

This is to be contrasted with a purely domestic U.S. fraud, where all the parties and assets are within the United States, when the cross-border element considered here is not present. Nor is there any analysis of criminal proceedings, whether in the United States or elsewhere, but instead, civil fraud proceedings brought by private litigants for the recovery of money.

The article deals with two particular topics:

• the ability of the English court to grant worldwide asset freezing orders (WFO),
  
  
• the recent guidelines set out by the English Court of Appeal on how a successful applicant for a WFO might enforce that WFO outside England and Wales.

A freezing order granted by the English court is an injunction prohibiting the defendant from dissipating his, her or its assets. Its purpose is to prevent the defendant from becoming judgment-proof before any trial or enforcement of a judgment (although it is also available post-judgment). It is known as "ancillary relief" as it does not exist for its own purposes; it must be sought in aid of an existing cause of action, even though it may be deployed before proceedings are issued in England and Wales. The English court also has the power (under the Civil Jurisdiction and Judgments Act 1982 [Interim Relief] Order 1997) to grant a freezing order in aid of substantive non-English proceedings. This power is, rightly, exercised with more caution than if the substantive proceedings were brought in England, but by allowing claimants the possibility of freezing non-English assets when there are no ongoing proceedings in England itself, the WFO has earned the description of one of English law's "nuclear weapons."

The English court's jurisdiction to grant WFOs is derived from Section 37(1) of the Supreme Court Act 1981. The applicant must show:

• a good arguable case;
  
  
• a real risk of dissipation of assets (this will usually be satisfied if it can be shown that there is a good arguable case that the defendant was involved in a fraud); and
  
  
• that the order is just and convenient in all the circumstances.

In addition to these three grounds, where the WFO is sought in aid of non-English proceedings, the applicant must also show a real and connecting link between the defendant and his, her or its assets and England.

A freezing order is an in personam remedy and so does not give any proprietary rights over the defendant's assets; rather it is an order against specific legal persons restraining them from dealing with or disposing of particular assets. It is available whether or not the defendant is domiciled, resident or present within England and Wales. A willful breach of a WFO may amount to a contempt of court with potentially penal consequences. There will, however, normally be a carve-out in the order (with appropriate safeguards) to enable the defendant to pay ordinary living expenses, legal costs and bona fide creditors from any assets which may be frozen.

Given the risk of dissipation that a WFO is designed to prevent, the applicant will often apply without giving notice to the respondent and is under a duty to give "full and frank" disclosure to the court. This means articulating all the facts and legal arguments, including what the respondent may argue by way of a defense. See Brinks MAT v. Elcombe [1988] 1 W.L.R. 1350. It is not enough to expect the court to be aware of an important issue if it is buried deep within a witness statement or exhibited document—it must be drawn to the court's attention at the hearing. The applicant will also need to provide a cross-undertaking in damages to compensate the respondent in the event that it is later shown that the freezing order was not justified.

In the scenario under consideration here, if the funds misappropriated from the U.S. company can be shown, for example, to have flowed into an English bank account belonging to the defendant, the defendant can be restrained from removing such assets from the jurisdiction of the English court and from dealing with any other assets, whether located within or outside England and Wales (provided that the claim value cannot be protected through freezing of English assets alone). As mentioned above, the U.S. company would not need to show the defendant is resident or present in England and Wales. Notwithstanding that the WFO is an in personam remedy, a copy of it would usually be served on the English bank in our scenario, which must not act in a way (such as paying away frozen funds) to defeat the purpose of the WFO; otherwise, it might be in contempt of court. The benefit of the WFO to the U.S. company in this scenario is further underscored by the fact that it may be far more difficult or impossible for the U.S. company to obtain a worldwide freezing injunction before a U.S. court.

At the same time that it applies for a WFO, the U.S. company would be advised to ask the English court for a disclosure order, directing the defendant to provide a sworn affidavit containing information about the location and value of any relevant assets anywhere in the world. This can be an extremely useful tool in building up a picture of what assets are available against which a subsequent judgment can be enforced, and assisting the U.S. company to trace the proceeds of the fraud.

The party obtaining the WFO will normally be required to give an undertaking not to seek to enforce it in another jurisdiction without the English court's permission, so as to avoid the defendant facing a multiplicity of actions. It may of course be necessary, as alluded to above, for the U.S. company to protect itself by taking such enforcement proceedings in the local court of the country in which the defendant's assets have been frozen. In the recent decision of Dadourian Group Int. Inc. v. Simms & Others [2006] EWCA (Civ) 399, the English Court of Appeal considered for the first time the exercise of its discretion when a party wishes to enforce the WFO outside England and Wales.

The Dadourian case arose out of an arbitration to resolve a dispute between the parties concerning an agreement to manufacture hospital beds and related equipment. The arbitrators found in the applicant's favor, and damages were awarded in the sum of $4.5 million. The applicants then applied for and were granted a WFO at first instance against the first four defendants. This initial WFO contained an undertaking by the applicants not to attempt to enforce the order outside of England, Wales or France, without permission of the court. After discovering that some of the defendants held assets in Switzerland, the applicants successfully applied for permission to vary the WFO so that it could be enforced in Switzerland. The variation to the WFO would have allowed the applicants to seek orders in Switzerland, including, crucially, an order that would confer a charge or other security against the respondents or respondents' assets, i.e., a higher form of relief than the purely in personam relief under the WFO. The defendants appealed the variation, contending that before enforcement of the WFO, the applicant should be required to establish a strong case that the defendants held assets in Switzerland and that there was a real risk of dissipation. Lady Justice Arden disagreed, dismissing the appeal. She set out the following guidelines that the court would apply, in its discretion, in considering whether to permit a party to enforce a WFO outside England. Commentary is provided, as relevant, on each guideline.

Guideline 1—The principle applying to the grant of permission to enforce a WFO abroad is that the grant of that permission should be just and convenient for the purpose of ensuring the effectiveness of the WFO, and in addition, that it is not oppressive to the parties to the English proceedings or to third parties who may be joined to the foreign proceedings.

[Lady Justice Arden recognized that a primary reason for giving permission to enforce would be to safeguard the position of the applicant in relation to assets in the foreign jurisdiction. Importantly, where there was a dispute as to whether assets held by a third party in the foreign jurisdiction were in fact owned by the defendant, the English court had no preference for that dispute to be resolved before it, acknowledging that questions of ownership could be more easily determined by the court or where the asset was said to be located. The court also emphasized that it could retain control to ensure that the WFO was not oppressive, by granting permission to enforce on terms such as that the applicant give a cross-undertaking in damages to any third party affected by the enforcement.]

Guideline 2—All the relevant circumstances and options need to be considered. In particular, consideration should be given to granting relief on terms; for example, terms as to the extension to a third party of the undertaking to compensate for costs incurred as a result of the WFO and as to the type of proceedings that may be commenced abroad. Consideration should also be given to the proportionality of the steps proposed to be taken abroad, as well as the form of any order.

[This echoed Guideline 1. The English court may stipulate the types of actions to be commenced abroad and require the claimant to report back to it.]

Guideline 3—The interests of the applicant should be balanced against the interests of the other parties to the proceedings and any new party likely to be joined to the foreign proceedings.

Guideline 4—Permission should not normally be given in terms that would enable the applicant to obtain relief in the foreign proceedings which is superior to the relief given by the WFO.

[The Court of Appeal specifically referred to the fact that the Swiss court was able to provide relief which may have been superior to the relief afforded to the claimant under the WFO. The WFO prevented the defendant before the English court from dissipating the foreign assets, whereas the remedy that might be obtained in the Swiss courts would be equivalent of a charge (i.e., a secured proprietary interest in the asset), thereby conferring a [superior] security interest over the relevant assets. If the foreign relief was superior to the WFO, the court might be less willing to grant permission to the applicant to bring proceedings abroad. The court will, in these circumstances, want to hear evidence on the nature of the foreign orders available.]

Guideline 5—The evidence in support of the application for permission should contain all the information (so far as it can reasonably be obtained in the time available) necessary to enable the judge to reach an informed decision, including evidence as to the applicable law and practice in the foreign court, evidence as to the nature of the proposed proceedings to be commenced and evidence as to the assets believed to be located in the jurisdiction of the foreign court and the names of the parties by whom such assets are held.

[The English court will obviously need to be furnished with evidence as to how long the foreign proceedings are likely to take and the costs involved, and the likelihood of the foreign court granting an order against a third party holding assets alleged by the claimant to belong to the defendant, as well as possibly issues as to the right to a fair trial in a foreign jurisdiction. It may be that the court would be more comfortable in granting permission to enforce the WFO in the foreign jurisdiction if the defendant had a presence there, and the foreign court could therefore exercise a personal jurisdiction over the defendant. Litigants will be assisted in these cross-border cases by the practicality acknowledged by the Court of Appeal that it can be time-consuming to gather exhaustive information on the foreign process, and so applicants only need obtain what they can in the time available.]

Guideline 6—The applicant must show that there is a real prospect that assets caught by the WFO are also located within the jurisdiction of the foreign court in question.

[Despite the defendants' argument that the applicants needed to prove that there was a strong case that the assets within the WFO were located in Switzerland, the court rejected this test in favor of the lesser "real prospect" test, as it can often be difficult in these cases to ascertain exactly what assets are held abroad and by whom.]

Guideline 7—There must be evidence of a risk of dissipation of the assets in question.

[This is the principle behind the granting of the WFO by the English court in the first place, and if the applicant can show a real prospect that the assets in the foreign jurisdiction are beneficially owned by the defendant, this burden is likely to be discharged by the evidence already filed in the English proceedings.]

Guideline 8—Normally, the application should be made on notice to the respondent, but in cases of urgency, where it is just to do so, the permission may be given without notice to the party against whom relief will be sought in the foreign proceedings; but that party should have the earliest practicable opportunity of having the matter reconsidered by the court at a hearing of which he has given notice.

So what can be gleaned from the Dadourian guidelines for the U.S. company in the scenario under consideration? To some extent, the Dadourian guidelines are a matter of common sense and simply seek to balance the effectiveness of the claimant's remedy with the inconvenience and cost to the defendant of defending additional proceedings. The major concern for the U.S. company would be the English court's reluctance to grant permission where the foreign proceedings would afford greater relief than the English WFO (as was the case in Dadourian). In such circumstances, if worried that the defendant or a third party holding assets will not respect the WFO, the U.S. company should give early thought to simply launching substantive proceedings in the foreign jurisdiction rather than England, particularly if it will be able to seek a more advantageous order in the foreign court, where the assets are located. That foreign court will often also be the more natural venue in which to argue whether the assets in question do belong to the defendant.

The requirement that an applicant only has to show a "real prospect" that the relevant assets exist in the foreign jurisdiction is perhaps the most encouraging aspect of the Dadourian decision, as it can be difficult for a claimant to show any more than this in these types of cases. This is particularly so if the defendants have taken steps to segregate assets in trusts or other vehicles, or if the suspected assets are in jurisdictions where client confidentiality and beneficial ownerships are closely guarded. In cross-border fraud, the ability to enforce a WFO obtained in the English court in the jurisdiction where the suspected proceeds of the fraud are located, may well be critical to the successful outcome of the proceedings. In this respect, the Dadourian guidelines will bring clarity, flexibility and practicality to the pursuit before the English courts by U.S. victims of international fraud.