Coming up trumps

When the pack of cards that is the economy collapses, financial integrity comes under the microscope. This is because lenders need to improve their cash balances; businesses thus need to improve theirs and those who have been able to camouflage the murkier side of their business activities are now finding they have nowhere to hide.

And protective measures are being taken as early as possible to avoid exposing the 'victim' of commercial wrongdoing to any greater risk.

Every flaky pound

When times are good, the loss of money by some commercial misfeasance might be seen as par for the course, but when growth shrinks, tracking down every flaky pound becomes increasingly important.

During growth times, financial institutions and commercial entities generally fear the reputational damage that comes with being exposed as having weak financial management systems, and so take steps to brush financial wrongdoing under the carpet. In a recession, the need to be able to account for '“ and pursue '“ those disappearing pounds becomes more important.

The most frequent circumstances where fraud is likely to be exposed in this market include:

• Over lending on commercial property where the valuation has been over-ambitious '“ the kind that assumes continued growth in property values;
• Extravagant lending arrangements resulting from overly optimistic business growth predictions;
• Debt factoring against an overly optimistic order book;
• Extensive borrowing for expansion, with the business hitting a brick wall and not being able to pay its debts;
• Hospitality to potential purchasers of services or business which crosses the line between the acceptable and the corrupt.

A changing model

In good times, the 'in-house' approach would be to resolve issues by internal investigation and resolution.

Only in the most serious of cases would corporate enterprises have turned to outside help '“ usually their own accountants '“ for that purpose. These accountants would, in the guise of audit work, investigate irregularities and then only in those really bad cases, in conjunction with their clients, report the matter to the authorities. This way of working now appears to be changing.

Increasingly solicitors are being asked to carry out these inquiries. This is plainly advantageous to the client: in using a legal mind, the investigation will be focused not only on finding out what happened but also on taking preparatory steps to enable effective corrective and recovery measures to be established.

In addition, unlike inquiries conducted by accountants or other investigators, an inquiry conducted by a lawyer, in contemplation of potential litigation or in the context of giving legal advice, will be confidential and will most likely attract legal professional privilege.

This work for the lawyers will involve, in the first place, having an eye on witness statement preparation and moving towards civil injunctive relief or preparing a report for the police.

Such an inquiry might, and sometimes does, expose the suspicion or actuality of commercial wrongdoing within the body corporate, which will lead to careful decisions having to be made as to whether and if so to what extent disclosure may have to be made to the Serious Organised Crime Agency (SOCA). The lawyers' drafting skills will be necessary in instances such as this to ensure that the disclosure is properly phrased.

Properly, fully and frankly

But the lawyers' drafting skills will not end there. In the event that the corporate or financial wrongdoing uncovered warrants disclosure to an investigative or prosecuting authority, the lawyers' skills will be paramount in ensuring that the report of the events that have been investigated is properly, fully and frankly prepared. This will entail detailed inquiries by the lawyers, involving analysis of documents (not just of a financial nature) and '“ importantly '“ interviewing staff and senior officers of the body corporate.

The lawyers' skills in that regard are well honed and established and would be of great benefit to any commercial enterprise that is trying to delve deeply into the business activity to find out what really happened.

Thereafter the lawyers' role will involve, in some cases, negotiating with the prosecuting authority as to whether there will be a prosecution and, if so, the type of charges and whether there would be a confiscation order against the self-reporting company. In addition to the question of whether or not there should be a confiscation order, if one is to be applied for there will need to be significant discussions about the level of the benefit from the identified criminal conduct '“ which in the case of a commercial enterprise will be steeped in complications as the bad has to be extracted from the otherwise legitimate business activities. Once that benefit is determined in the case of a commercial entity that is still trading, that figure is likely to have to be the amount of the confiscation order. Thus the discussions around this figure will be crucial.

The discussions and negotiations might also involve discussions about implementing a corporate compliance plan. And of course, before getting to the question of charges, the lawyers' primary task would be to try and persuade the relevant authority not to bring proceedings and, if there are to be proceedings, to approach the matter on the basis of a civil recovery case. All the main prosecuting agencies (SFO, RCPO and CPS) have the right to resolve matters by civil recovery. Such an approach was recently taken by the SFO in a case involving overseas corruption.

As the authorities encourage whistle blowing, so the need for self-vigilance and then in appropriate cases, self-reporting, becomes highly focussed. Consider the company that is trading at the margins of respectable behaviour. The risks of internal or external whistle blowing becomes more acute as the financial squeeze bites and those rowing for the shore do so in an attempt to protect themselves. Tactically, a company in this difficult position might deflect attention from its own situation by whistle blowing on another.

Freezing orders

The last few weeks are proving that, as everyone rows quickly for the shore to avoid the financial tsunami, those who have been concerned in financial/commercial wrongdoing will be exposed to the risk of litigation for the recovery of any free assets. Couple that with a much more determined approach by the authorities to protect their weakening financial position and the result is an increase in litigation '“ in particular an increase in protective litigation, freezing and restraint orders (appointment of provisional liquidators being the primary example).

What does this mean for the litigator? An ability to be able to react quickly, whether in preparation for a freezing order application by a 'victim' client, or if on the receiving end of such an order, for the alleged malefactor.

From the victim's point of view, the key is to turn the allegation into a comprehensive, full and frank account of the wrongdoing together with the value of the loss alleged and the role of the malefactor. Obviously all contact with him will be disclosed as well as any known matters that might undermine the application. In addition regard must be had to what is known '“ and there might have to be investigations quickly carried out '“ of the malefactor's assets. There is little point in seeking a freezing order if there are no assets to freeze.

As to the malefactor, upon receipt of the order ensure that you have the supporting witness statement, the note of anything said and copies of anything produced to the court.

It is important, from a very early stage to satisfy yourself, that the case put by the claimant has disclosed the position fully and frankly to the court.

Classic examples of non-disclosure are the relationship between the claimant and your client, particularly in terms of recent involvement with him. It might have been forgotten for instance that the claimant and the defendant had been involved in discussions and a compromise agreement had been hammered out, which was then bypassed in favour of the precipitous freezing order!

Ensure that there is reasonable provision for legal expenses and that the terms of the order for living expenses and any disclosure sought is reasonable and proportionate for your client's needs.

There is likely to be a requirement for disclosure. This will need to be complied with very quickly '“ people always complain about having to disclose the extent and whereabouts of their assets, saying that it will take days. In fact we all know that in reality we could, on the back of a fag packet (or in the case of most litigators a small sweet wrapping) list our assets. So this is something that can usually be complied with quickly. It will serve you well to tell the claimants' lawyers that there will be cooperation from the defendant. This should make requests for further legal funding a little easier to be agreed.

Of course if the freezing order is for a defined sum and that sum can be found then the fastest way to achieve the discharge of the order is to secure that sum in a way that might satisfy the claimant. This could be done in a number of different ways including giving undertakings or offering some sort of security or enforceable guarantee.

Restraint orders

With the increase in activity by the authorities in the field of commercial wrongdoing and the right of the investigator to seek a restraint order as soon as a criminal investigation begins, it is likely that there will be an increase in the seeking of worldwide restraint orders. The power to grant these orders is vested in the Crown Court and such orders are made in the same terms as a freezing order. The court must discharge an order obtained in contemplation of an investigation if proceedings are not brought within a reasonable time. What is reasonable will clearly depend on all the facts of the case, in particular the extent to which the investigation is dependent on mutual assistance.

Property freezing orders

Should civil recovery proceedings be contemplated by the authorities, there are powers to seek, at an early stage, one of two types of order. The first is a property freezing order '“ the same as a freezing order but relating to property that it might be alleged had been obtained by or in return for the conduct. The second is an interim receiving order which operates in addition to freezing the property as above to give a receiver the rights and responsibilities of investigation.

An interim receiver's appointment is not wholly the right of an accountant. It has been known for the authorities to appoint solicitors to act as interim receivers, and that is perhaps a good example of how the landscape is changing.

So, while the transactional lawyers and the commercial property lawyers wonder if their world has changed forever, it is plain that the well-rounded litigation lawyer has a most interesting future ahead.