Cyprus: Commercial Fraud

Commercial fraud is not a cause of action in itself. It covers a wide range of activities which encompasses cause of action involving deliberate actions which usually amounting to dishonest or criminal conduct. Where there is evidence indicating that there may have been a fraudulent conduct, a Claimant might plead the following causes of action:

  • Conspiracy;
  • Deceit ;
  • Dishonest assistance;
  • Conversion;
  • Breach of fiduciary duty;
  • Breach of trust;
  • Abuse of confidence;
  • Fraud on power;
  • Unconscionable bargains; and
  • Restitutionary causes of action

ADVANTAGES OF PLEADING FRAUD

Pleading fraud, gives to the Claimant the following advantages:

  • Possibility of lifting the corporate veil;
  • Establishing the fraudsters liability even if the corporate veil is not lifted; and
  • Limitation and exclusion clauses are ineffective.

LIFTING THE CORPORATE VEIL

Cyprus Courts will respect the doctrine of separate corporate personality in a standard case in contract, or negligence.

The doctrine of separate corporate personality provides that:

  • Ownership and control of a company are not by themselves, sufficient to dislodge the principle of separate corporate personality: (see SALOMON -v- SALOMON).
  • The corporate veil, cannot be lifted simply because it is necessary for the interests of justice, or because the company is involved in impropriety: (see TRUSTOR AB -v- SMALLBONE).
  • In a claim in contract, or in respect of negligence, is the company (being a separate legal personality itself) and not the director, shareholder or employee which owes the relevant duty to the Claimant.

PIERCING THE CORPORATE VEIL - THE PUPPET AND THE PUPPETTEER - AVOIDANCE OF CONTRACTUAL OBLIGATIONS.

There are cases, where a person subject to a contractual obligation, has employed a company to evade that obligation, and the Court has ordered the person and the company to comply with the obligation describing the company as a "Sham".

  • GILFORD MOTOR CO LTD -v- HORNE: Formation of company by a person to avoid a contractual covenant not to compete with the claimant.
  • JONES -v- LIPMAN: The puppeteer, transferred a land he sold to the claimant, to the puppet company, in order to avoid specific performance of the sale contract. The court issued an order of specific performance of the contract of sale, against the puppeteer and the puppet company, because the latter was the creature of the puppeteer, a device and a sham, a mask which he held before his face, in an attempt to avoid recognition by the eye of equity.
  • There has to be impropriety and use of the corporate structure to avoid or conceal liability (see WOOLFSSON -v- STRATHCLYDE REGIONAL COUNCIL and ADAMS -v- CAPE INDUSTRIES).
  • In ANTONIO GRAMCI SHIPPING -v- STEPANOVS, the Court lifted the corporate veil to make liable the controllers of companies, as if they were joint contracting parties with the companies.
  • In DADOURIAN -v- SIMMS, the corporate veil was not lifted, because the company although involved in fraud, was a properly constituted company, whose existence was not based on fraud.
  • In LINSEN INTERNATIONAL -v- HUMPUSS SEA TRANSPORT the English Commercial Court held that:

    1. There are circumstances, in which a court may lift the corporate veil, so as to ignore transactions, which are plainly a sham.
    2. However, abuse of the corporate structure subsequent to the conclusion of contracts, cannot be used to pierce the corporate veil, in the sense of rendering third parties, liable under contracts, concluded prior to such abuse.
    3. The Gramci case, was distinguished because in that case the court found that the Claimant had a good arguable case, that the whole purpose of the corporate structure, was to perpetrate a fraud, and that both the chartering companies, and the charterparties themselves, were effectively a sham or façade from the outset.
  • VTB CAPITAL PLC -v- NUTRITEK INTERNATIONAL CORP. and others

    In the above case, the Claimant alleged a fraud by the defendant. VTB had entered into a loan agreement with RAP, for the acquisition of six Russian dairy companies, and three other companies ("the Target Companies") from NUTRITEK. When RAP defaulted on the loan, VTB alleged that NUTRITEK had made fraudulent misrepresentations in order to induce VTB, to enter into the loan agreements. These representations were to the effect that RAP, was not under NUTRITEK's control, and that the value of the Target Companies was greater than their actual worth. The fourth defendant was a Russian citizen, residing in Moscow, who the Claimant alleged was the ultimate beneficial owner and controller of both NUTRITEK and RAP.

    The Court held inter alia that

    • It was inappropriate, to allow the doctrine of lifting the corporate veil, to be used to make a contractual claim against the wrongdoing controller of a company, primary because it was fundamentally inconsistent with a fraud allegation, to claim damages for such of contract.
    • The Gramci decision, was not followed because involved tearing up the law of privity of contract.
    • The real basis of imposing liability, was when there was some independent wrongdoing by the controller, referred as wrongdoing "dehors" the company, which had to be linked to the use of the corporate structure, to avoid or conceal liability, and what was important was whether the Company was being used as a sham at the time of the relevant transaction, and not when the company was set up.
    • That piercing of the corporate veil could only occur to provide the claimant with the effective remedy, where the interposition of the sham company would, if effective, deprive him of that remedy.

ESTABLISHING THE FRAUDSTERS LIABILITY WHERE THE CORPORATE VEIL IS NOT LIFTED

Even where the court does not lift the corporate veil, there are some circumstances, in which the courts have been ready to find directors personally liable:

  • Personal liability in tort for the fraudulent misrepresentation of the company, because it is no defence to a claim in deceit, that the representation was made by the individual, on behalf of the company, and not personally.

In DADOURIAN, the Court found that the directors acted in a common design, to make fraudulent misrepresentations to the claimant and they were liable in deceit, notwithstanding that the contract was with the company.

DISADVANTAGES OF PLEADING FRAUD.

By pleading fraud, the Claimant might be faced with the following inter alia disadvantages:

  • Fraud has to be pleaded with particularity so that the defendant knows precisely the case, which he has to meet. Failure to do so, might lead to the striking out of the case.
  • Higher standard of proof

Despite the fact that the allegations for fraud, may amount to allegations of criminal conduct, the relevant standard of proof in a corporate fraud claim, is strictly only the usual civil balance of probabilities.

However the reality is that, where fraud is alleged, the court will require the Claimant to reach a more exacting standard.

STRATEGY

As fraud is difficult to prove, it is important to decide on what steps shall be taken from the outset to be able to collect evidence to prove, and plead the case as well as to identify all wrongdoers, and trace and recover the stolen assets.

The following steps shall be considered:

Third party disclosure

  • Norwich Pharmacal applications;
  • Bankers Trust applications; and
  • Anton Piller orders;

Freezing injunctions

  • Mareva injunctions;
  • Chambra injunctions, to block assets held by, or registered into the name of third parties, but which are beneficially owned and controlled by the defendants wrongdoers;
  • Appointment of an Interim Receiver, over the assets of the defendant;
  • Gagging order (to block the third party no to alert the defendant wrongdoer about the existence of the legal proceedings);
  • An order ordering the Defendant wrongdoer, to disclose on oath, the location and value of its assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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