Introduction

In the past year there have been several developments regarding fraud and asset tracing, the most prominent of which are briefly presented below. Cyprus remains one of the most cost-effective common law forums for litigating international fraud claims.

The Reform of the Cypriot Justice System

Following the review of the Civil Procedure Rules, several bills on holistic justice and judicial reform are expected to reach the plenary session of the House of Representatives in May 2022.

According to the Ministry of Justice, the reform aims at building a modern and efficient system for administering justice, and the primary objectives are the timely delivery of justice, the simplification of procedures, the effective management of the current backlog, the integration of technology and the introduction of modern IT systems.

Another aspect of the pending reform that will certainly facilitate international asset tracing is the establishment of a specialised Commercial Court. The new Commercial Court will handle high-value commercial disputes with fast track and more simplified procedures. The litigants will also have the option to choose the English language as the language of the proceedings.

Legality of Litigation Funding Agreements in Cyprus

Litigation funding is not common in domestic disputes in Cyprus given that the cost of litigation in Cyprus is much lower than in the UK and other common law jurisdictions. However, in recent years, several cross-border litigation proceedings have been initiated in Cyprus by parties who have entered into litigation funding agreements with funds situated in another jurisdiction.

Although there were no court judgments providing guidance on this matter, litigation funding was considered to potentially fall within the ambit of the common law torts of maintenance and champerty. As a result, any agreement between a party and a third person for the funding of litigation in return for a share in the proceeds could be deemed illegal and, thus, void.

Furthermore, it has been argued that parties who have entered into such “illegal” arrangements should not be entitled to the protection of Cypriot courts, or that judgments issued in favour of claimants who have received litigation funding could not be recognised and enforced in Cyprus on public policy grounds.

However, in a recent first-instance judgment, Cypriot courts seem to have taken a different view of litigation funding arrangements.

In this particular case, the claimants were successful in issuing a judgment against the defendants in litigation proceedings in the United Kingdom. After the issue of the judgment, the claimants sought to have the judgment executed against legal entities in Cyprus. The declaration of enforceability was obtained on the basis of Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, since the judgment was issued in proceedings initiated before 10 January 2015.

The defendants applied before the courts for the setting aside of the order for recognition and enforcement of the judgment on the grounds that the claimants had received funding from a third party to promote their litigation efforts and that, as a result, the execution of the issued judgment should be refused as “manifestly contrary” to the public policy of Cyprus. It must be noted that currently there is no legal framework in Cyprus regulating litigation third-party funding.

The first-instance court rejected the position of the defendants and the application for setting aside the recognition order and stated that, in the absence of Supreme Court case law regarding the torts of maintenance and champerty and the legality of litigation funding, the modern principles of common law should be applied on the basis of Section 29 of the Courts of Justice Law 14/1960.

The court went beyond examining whether litigation funding is manifestly contrary to public policy and made a finding that third-party funding is legal under Cypriot law, as well as citing the findings of the recent High Court decision in Akhmedova v Akhmedov & Ors (Litigation Funding) (Rev 1) [2020] EWHC 1526 (Fam). In order to reach its conclusions, the court drew guidance from judgments in other common law jurisdictions including Canada, New Zealand, Jersey, the Cayman Islands and Bermuda.

What is particularly interesting is the fact that the application for setting aside, pending before the court, would only be successful if the recognition of the judgment could be considered “manifestly contrary” to public policy, which is a difficult standard to meet. In other cases, actions which would be considered illegal in Cyprus (including a criminal offence), such as charging interest above the maximum allowed rate provided by law, were found to not be “manifestly contrary” to Cypriot public policy.

It must be noted, however, that the aforementioned judgment regarding litigation funding is merely a first-instance judgment, and as a result is not binding on other courts. However, it may be an indication of the evolution of the approach of Cypriot courts to this matter.

Norwich Pharmacal/Disclosure Orders against Cypriot Service Providers and Professional Trustees in Aid of Execution of a Foreign Judgment

In recent years it has become more and more common for service providers in Cyprus, acting either as nominee directors, nominee shareholders or trustees of clients, to be the recipients of applications for the issue of disclosure orders against them in aid of foreign proceedings that are pending or will be initiated in the future against their clients.

Although the applicable principles under Cypriot law in cases where litigation is imminent or pending are rather clear, the same cannot be said about the requirements for the issue of disclosure injunctions against professional trustees in aid of execution of an already issued judgment in a foreign jurisdiction.

Recently, a district court has provided valuable clarity to the murky area of disclosure requests sought against local service providers acting as trustees of Cyprus International Trusts (CITs) in aid of the enforcement of a foreign judgment against a third party, and while cross-border litigation proceedings involving the trust structures are pending.

In a very high-profile Norwich Pharmacal/disclosure order (NPO) case earlier this year, related to a multi-million cross-border dispute, the district court had to decide whether, under the circumstances, a disclosure order should be issued in order to facilitate the execution of a judgment issued in the UK against a third party.

The disclosure order was sought against Cypriot professional service providers who had acted in the past as trustees and/or advisors of several Cypriot International Trusts. The claimants alleged that the defendant in the UK proceedings had funnelled assets through the trusts and that information held by the former trustees of the CIT would potentially enable the execution of the issued judgment.

The court rejected the claimants’ application for disclosure orders, and its analysis in this case is very instructive with regards to cases where an NPO is sought in Cyprus, but the substantive dispute is pending overseas. The court referred to the UK Court of Appeals judgment in Ramilos Trading v Buyanovsky [2016] (“Ramilos”) and considered that, since the Cypriot statutory framework is very similar to the Evidence (Proceedings in other Jurisdictions) Act 1975 that was considered in Ramilos, Norwich Pharmacal relief was not available to the applicants.

The court held the following.

• The Norwich Pharmacal relief is not available simply because a foreign judgment has been entered. Instead, the court clarified that a Norwich Pharmacal order against the trustees will be issued if the claimant is able to establish that the respondent professional service providers were mixed up in dishonest attempts to defeat execution of the judgment.
• In cases involving trust structures, the claimant must show that the professional trustees were parties to a dishonest arrangement. The “shamming intent” must be shared by both the third party/settlor and the trustees, who must be parties to the dishonest arrangement at the time that the trusts were created.
• The court held that the purpose of a Norwich Pharmacal order is not to be used for wide-ranging discovery, or for the gathering of evidence, but to be strictly limited to necessary information. The provision of oral or documentary evidence in assistance of foreign judicial proceedings has always been exclusively statutory. Even though the boundaries between information and evidence are not always clear since information can be converted to evidence, courts must refuse to issue a Norwich Pharmacal order for obtaining evidence that will be used in foreign proceedings, and the applicants must proceed in accordance with the provisions of the available statutory framework.
• Where the requested information can be obtained by other means either abroad or in Cyprus, applications for Norwich Pharmacal/disclosure orders may be considered abusive.

It is evident that the issue of Norwich Pharmacal/disclosure orders against service providers and/or professional trustees in aid of execution of a foreign judgment is not straightforward and significantly more cumbersome than disclosure proceedings initiated before or at the outset of litigation, and the level of involvement required is significantly higher.

It must be noted, however, that the aforementioned judgment is merely a first-instance judgment, and as a result is not binding on other courts.

Order for the Arrest of a Ship in Aid of Proceedings Pending before the Courts of Another EU Member State

In a recent case the Supreme Court, in its jurisdiction as Admiralty Court, provides valuable guidance on whether an order for the arrest of a ship could be issued in aid of proceedings pending in another member state on the basis of Regulation 1215/2012.

The claimants had submitted a lawsuit in Greece claiming the ownership of the ship, and were also able to have an interim order for the arrest of the ship issued by a Greek court. However, at a later date the Greek court cancelled the issued order for the arrest of the ship.

After the order was cancelled, the ship sailed from the port of Elefsina and arrived in Cyprus. While it was situated in the port of Larnaca, the claimants applied without notice to the other parties before the Supreme Court and were successful in issuing a new order for the arrest of the ship.

Subsequently, the owners of the ship applied for the cancellation of the issued order claiming that the Cypriot court did not have jurisdiction to issue the arrest order and, furthermore, that the arrest order should not have been issued since the Greek court, before which the main proceedings were pending, had already considered a similar application for the issue of an arrest order and had, eventually, rejected it.

At first instance, the Cypriot court dismissed the application for cancellation of the order and found that the Cypriot court had jurisdiction to issue ship arrest orders in aid of proceedings pending in other member states. It must be noted that this was the second time the Supreme Court, in its admiralty jurisdiction, considered that the arrest of a vessel in aid of proceedings pending abroad was possible on the basis of Article 35 of Regulation 1215/2012.

Furthermore, the court found that the issue of the arrest order was appropriate given the circumstances of the case.

An appeal was filed, and the ship remained under arrest pending the appeal.

The Supreme Court decided in a very recent judgment that the first-instance judgment was wrong and the application for cancellation of the order should have been successful.

The Supreme Court considered that such relief cannot be considered to be “in aid” of the foreign proceedings in cases where the primary court could have granted an order for arrest of the ship but declined to do so.

Despite the outcome in this specific case, it seems that the Supreme Court has left open the possibility that vessel arrest orders can be issued by the Cypriot admiralty courts, in the appropriate circumstances.

Cryptocurrency Fraud: Asset Tracing and Enforcement before Cypriot Courts

All over the world, cases involving cryptocurrency fraud have increased significantly. However, litigation involving cryptocurrency or crypto-assets fraud has proven to be complex and requires special considerations compared to litigation involving more traditional assets.

Courts in the UK have issued several judgments that have recognised crypto-assets as property that can be the subject of proprietary injunctions (see AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (Comm)).

Furthermore, in Fetch.ai Ltd v Persons Unknown [2021] EWHC 2254, the UK court issued a worldwide freezing injunction against the unknown perpetrators, as well as Bankers Trust and Norwich Pharmacal orders for information held by the cryptocurrency exchange in order to be able to promote their claim against the fraudsters. Similar relief was provided in Mr Dollar Bill Limited v Persons Unknown and Others [2021] EWHC 2718 (Ch).

Very recently, the first ever third-party debt order (formerly known as a garnishee order) in relation to crypto-assets was granted by the UK High Court (see Ion Science Ltd v Persons Unknown (unreported, 28 January 2022)).

However, it must be noted that certain special considerations must be taken into account regarding litigation involving cryptocurrency. One of the most prominent issues that affects the approach of the courts is their volatility. The value of crypto-assets fluctuates significantly over time, and as a result, a freezing injunction against such assets may cause disproportionately more harm to a defendant who will be prohibited from liquidating his/her investment (see Toma v Murray [2020] EWHC 2295).

Cypriot courts are expected to follow the case law of the UK courts and, as a result, crypto-assets are considered property under Cypriot law – and similar protection and interim relief can be provided in Cyprus to victims of crypto-fraud. Consequently, crypto-assets will be capable of being traced and enforced against under Cypriot law.

Cyprus arises as a very attractive forum for crypto-asset fraud litigation since the cost of litigation is significantly lower than in other common law jurisdictions.

Furthermore, Cyprus is one of the very few common law jurisdictions in the European Union that allows for the issue of worldwide freezing injunctions, which are an essential weapon in the arsenal of any crypto-asset fraud victim.

Litigation regarding crypto-assets is expected to grow exponentially over the next few years, and it is essential for litigators and courts alike to adapt their approach in order to effectively protect the victims of crypto-fraud.

Service of Legal Documents to Entities under Receivership and the Locus Standi of the Receivers and Managers

The Supreme Court of Cyprus clarified that in cases where a receiver and manager (R&M) is appointed over the assets of a legal entity pursuant to the terms of a floating charge, and certain legal proceedings affect or may affect the assets under the scope of the receivership, then (a) the R&M must be served with the legal documents and be notified about any legal proceedings against the legal entity, and (b) the R&M (not the board of directors) has the exclusive right and locus standi to represent the legal entity in the pending legal proceedings.