Court confirms principles required to fortify undertaking in damages in investment fraud claim

In a recent decision, the court confirmed that parties subject to freezing orders will have to adopt something similar to an open-book accounting approach in these circumstances, and explain how they might mitigate any potential losses caused by the freezing order.

The court was ruling in an appeal concerning the fortification of a freezing order which was imposed over the assets of several respondents to a civil fraud claim over property investment schemes.

The claim is being run by a steering committee of some of the alleged victims, and eight of these gave an undertaking in damages and provided extra security by subscribing to an insurance policy with a £500,000 limit.

One of the defendants to the claim, Nicholas Spence, had previously taken out a US$9.3m loan with bank Coutts & Co. Spence submitted evidence suggesting that in light of the freezing order against him, Coutts was likely to demand repayment of the loan and realisation of a sterling deposit which was security for that loan. Spence said he would suffer a loss if this happened, due to the exchange rates between the US dollar and pounds sterling.

Spence and other respondents applied informally to increase the amount of fortification in light of Spence’s potential loss. The High Court agreed to increase the amount of fortification to £800,000, but this decision was appealed by the claimants’ steering committee.

Upholding the appeal, the Court of Appeal found Spence failed to demonstrate a good arguable case that he would suffer loss as a result of the freezing order, saying the likely losses were “inherently speculative and incapable of intelligent estimation”.

Civil fraud expert Andrew Herring of Pinsent Masons said the case highlighted some of the challenges faced by respondents who are unwilling to provide the extensive level of detail required by the English courts in response to civil fraud claims, and particularly claims involving freezing orders.

“The ‘cards on the table’ approach to disclosing evidence in the English courts is one of its hallmarks and a key reason why it is favoured by international litigants and fraud victims,” Herring said.

“Lawyers sometimes describe the requirement to fortify the cross-undertaking in damages as the ‘price of a freezing injunction’. Naturally, in order to increase this price, respondents to freezing injunctions will sometimes exaggerate – or even invent – the losses they claim they will suffer as a result of the freezing injunction. The judgment in Spence gives claimants important protection in this regard,” Herring said.

The case also highlighted some of the practical issues facing large groups of alleged victims of investment fraud in the English civil courts. The case involves 448 claimants that paid over sums ranging between £3,000 and £170,000 between 2012 and 2019, with alleged losses totalling over £45 million.

Pinsent Masons civil fraud expert Andrew Barns-Graham said the case highlights the myriad of options faced by investment fraud victims.

“Specialist civil fraud law advice should always be considered to pre-empt and navigate these practicalities, as well as advise on the legal basis of the claim itself,” Barns-Graham said.

“In practical terms, the Spence judgment will help to make civil fraud claims more affordable for claimants. It is also welcome news for funders who are looking to invest funds in fraud cases, where freezing injunctions are a valuable means of obtaining information about the defendants’ assets and devising the enforcement strategy at the outset of the litigation,” Barns-Graham said.