N. Pirilides & Associates LLC discusses the ancillary ‘free-standing’ assistance of fraud victims in asset recovery through Cyprus courts
It is not exaggerating to say that the rates of what we lawyers refer to as a case of ‘commercial fraud’ or ‘civil fraud’, remain at record highs all around the globe and Cyprus is not an exception to this record as the economic globalisation is increasing businesses’ exposure to fraud and the sophistication of the fraudsters’ schemes is reaching across national boundaries. On top of that, with Cyprus being considered for over two decades as an important international business/financial center, mainly because of its beneficial corporate tax rate and wide network of Double Taxation Treaties, the set-up of complex corporate structures with various layers of companies from different jurisdictions often includes Cyprus. Inevitably, cross-border transactions which involve Cypriot entities may end up with commercial fraud being committed from a Cyprus company or a company managed and controlled from Cyprus. Therefore, our courts have become a hub for cross-border fraud litigation which usually employs the issue of freezing injunctions in various jurisdictions other than the country where the substantive proceedings have been initiated.
One question we are increasingly being asked to advise on is whether it is possible to obtain interim freezing injunctions in aid of foreign court proceedings without first having to instigate substantive proceedings in Cyprus. In other words, whether Cyprus courts have jurisdiction to issue the so-called ‘stand-alone’ or ‘free standing’ injunctions which, as the name suggests, ‘stand-alone’ in the sense that an injunction can be issued where no other substantive relief is sought within the jurisdiction.
2. The current situation with ‘free-standing injunctions’ in Cyprus
As things currently stand in Cyprus, a free-standing injunction could be issued in aid of foreign court proceedings only where there is a relevant bilateral or multilateral treaty which provides for such a pre-emptive relief and which links Cyprus with the country where the court proceedings have been initiated. More specifically, Cyprus courts have jurisdiction to issue this type of injunctions only in aid of court proceedings pending before courts of member states of the European Union pursuant to Regulation no. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters or in aid of international commercial arbitration cases by the use of section 9 of the Cyprus International Commercial Arbitration Law of 1987, Law no. 101/1987.
The proposed new CPR will include a provision allowing a foreign litigant to apply to the Cyprus courts for injunctive relief in aid of foreign court proceedings or anticipated court proceedings, even where there are no substantive proceedings in Cyprus.
In other words, a fraud victim cannot request alone the issue of a freezing injunction or any other injunction in aid of the foreign court or arbitration proceedings since such a request could not be considered as a substantive claim under our civil procedure rules (‘CPR’). Unlike other common law jurisdictions, Cyprus lacks the necessary legal framework providing for such jurisdictional power and is now clearer than ever before that it is the right time for a reform in this area of the law in order to incorporate this helpful tool in our jurisdiction as an ancillary remedy to foreign proceedings.
3. The future of ‘free-standing injunctions’
The future in this area seems promising and there is indeed light at the end of the tunnel as the long-awaited change of our CPR is closer than ever before. The proposed new CPR, the first draft of which have been presented officially by the Supreme Court of Cyprus in mid-2021, will include a provision (Part 25.4 of the new CPR) allowing a foreign litigant to apply to the Cyprus courts for injunctive relief in aid of foreign court proceedings or anticipated court proceedings, even where there are no substantive proceedings in Cyprus. This development will make available the relief of the so-called ‘free-standing injunction‘ or as it was called by many prior the overturning of the Black Swan decision, a ‘Black Swan injunction‘.
Obviously, the aforesaid reform will benefit fraud victims who are seeking recovery through assets situated in Cyprus and of course, it will add strength and efficiency to the existing pre-emptive remedies available in Cyprus. Admittedly the battle against fraud by its victims is definitely not an easy task, though the anticipated availability of the remedy of a ‘free-standing injunction‘ in Cyprus is bringing us much closer to curbing cross-border fraud.
4. The available tools
With Cyprus being a common law jurisdiction, the influence of the latter on the Cyprus legal order is making available in Cyprus the same tools as for a victim of fraud in the UK or other common law countries. Therefore, both tracing and recovery consist of the rules developed by common law to deal with situations where assets have been fraudulently misappropriated.
The jurisdiction of Cyprus courts to issue an injunction derives mainly from the provisions of section 32 of the Courts of Justice Law no. 14/1960, the relevant provisions of the Civil Procedure Law (Cap. 6), the principles of equity and of course case law which evolved rapidly in this field over the last decade.
The main tools available in Cyprus to trace information of the whereabouts of misappropriated assets as well as to secure them for recovery include the following:
- Freezing (‘Mareva‘) and ancillary disclosure orders;
- Third party disclosure orders (‘Norwich Pharmacal‘);
- Search orders (‘Anton Piller‘);
- Appointment of interim receivers.
The future in the battle against fraud and asset recovery looks brighter than ever! In the globalised world that we live in today, this development will armour fraud victims with a vital tool directed straight towards the enforcement of obligations to satisfy judgments which do not currently exist.
The aforesaid proposed legislative amendment to the CPR in Cyprus reflect the importance of injunctions in preserving the rights of a litigant before judgment is rendered in foreign proceedings, by freezing assets situated in Cyprus or revealing important information from parties residing in Cyprus who have become mixed up in a fraudulent scheme, helping thus the victims to pursue their claim in a foreign jurisdiction against those ultimately responsible and of course to eventually recover their losses.
Kyriakos Karatsis, partner