Powers of the Court: The risks of alleging fraud

A recent case of Crowther v Crowther & Ors [2020] EWHC 3555 (Fam) serves as a useful reminder of the court’s powers to make costs orders in relation to preliminary issues and the risks of alleging fraud.

The background of the case

Mr and Mrs Crowther had a successful shipping business. Their marriage had broken down and they had become embroiled in acrimonious financial remedy proceedings.

Mrs Crowther had obtained freezing injunctions against Mr Crowther along with a number of third parties who had been joined to the proceedings (‘the Castle parties’). 

Mrs Crowther alleged that she and Mr Crowther were the beneficial owners of 5 ships worth between £7 - £10 million. She alleged that only the legal title (and not the beneficial ownership) of the vessels was transferred in 2012 and that these transfers were with the initial intention of defrauding HMRC and subsequently to impact her matrimonial claims. 

The Castle parties considered that they owned 4 of the 5 ships as these had been transferred legitimately as part of the financial restructuring of the Crowther’s’ business, which had been in financial difficulty, and that the companies controlled by Mr and Mrs Crowther owed one of the parties (Mr Knight) approximately £5 million. They and the husband strongly denied Mrs Crowther’s allegations of fraud and conspiracy.

In light of the respective claims, the court ordered that these issues were to be tried as a preliminary issue. This would enable the court to determine who was the beneficial owner of the vessels, who was the beneficial owner of funds held by the Castle Parties, who was entitled to receive the chartering income and whether Mr and Mrs Crowther owed any money to the Castle Parties.

A week prior to the hearing, the court was informed that Mrs Crowther and the Castle Parties had reached an agreement. The Castle parties were to pay Mrs Crowther £750,000 (first lump sum of £80,000 to be paid on 24.12.20) and release her from £5,632,639 unpaid charter income and over £1million of other alleged loans. She was to discontinue all claims against them on a no admissions basis and there was to be no order for costs.

Importantly, (although strangely), the husband was not party to the negotiations leading up to that settlement nor the agreement itself. The judgement indicates that he only became aware of the agreement the same day that the court was informed.

At the hearing that followed, consideration was given as to how this agreement impacted upon the matrimonial claims and Mr Crowther. Whilst it appeared that Mrs Crowther’s position was initially that she continued to seek various claims against Mr Crowther, this was quickly changed to withdraw these. 

In circumstances where Mrs Crowther had agreed not to pursue a claim of beneficial interest against the Castle Parties, it is impossible to see how she could have continued to claim that Mr Crowther had a beneficial interest. With regards to the alleged sums owed by the Crowthers’, at the hearing it was confirmed that Mr Crowther would also not be pursued personally for the debt and that the company to whom the money was owed was in liquidation. This meant that the preliminary issues had been resolved.

Mr Crowther accordingly sought his costs with regards to the preliminary issues. Mrs Crowther sought to persuade the court that the question of costs should be postponed to be considered holistically at the end of the financial remedy proceedings and relied upon a long list of Mr Crowther’s misconduct in the proceedings in further support.

The court did not accept that any of the reasons put forward by the wife justified not making an order at this stage. On the question of Mr Crowther’s misconduct the court considered that much of this might now be understandable in light of the withdrawal of the allegations and in any event was largely irrelevant to the question of costs on the preliminary issue. In so far as his conduct increased his own costs, it was considered that this could be dealt with on detailed assessment. 

Much of the disclosure and work done with regards to the preliminary issue would now have no bearing on the financial remedy application and as such there could also be differentiation of the costs associated with the preliminary issue as opposed to the underlying financial remedy application. 

The court also considered that there was no justification to hold off consideration of the costs of the preliminary issue until the financial remedy proceedings had been concluded. The wife was therefore ordered to pay the husband’s costs of the preliminary issue on an indemnity basis and to pay £80,000 on account of those costs.

The general rule in financial proceedings is that the court will not make a costs order save where conduct issues arise. However, preliminary applications such as the one in this case fall outside of that general rule. In such cases the usual starting point is that “costs follow the event”. In plain English, this means that the loser pays the winner’s costs.

In this case, there had been no findings in relation to the claims made by the wife, she had discontinued her claim. In those situations, there is a presumption that the defendant (ie her husband) should be able to recover his costs. The reasoning behind this is that a claimant chooses to issue proceedings and pursue a claim, whereas a respondent has no choice. If a claimant subsequently decides to withdraw the claim, it is absolutely right that the defendant should be able to recover his costs.

The situation was compounded by the nature of the claims that had been made, i.e fraud. Such allegations are extremely serious and have not only serious ramifications with regards to the outcome of proceedings but can cause huge reputational damage and invariably serve to increase the costs and inflame hostilities. 

It is a long standing principle that whilst the standard of proof to establish fraud is the civil standard (i.e balance of probabilities) the evidence relied upon must be commensurate with the seriousness of the conduct alleged. It is considered entirely improper and the court will react adversely to speculative allegations of fraud made without solid evidence. 

That adverse reaction means that if you make a claim of fraud and fail, the court will likely order you to pay costs on an indemnity basis and if you make a claim of fraud but then discontinue it, there is a presumption that the court should order costs on an indemnity basis unless there is a valid explanation as to why you have decided that your claim is bound to fail and not pursued it and so denied the defendant a chance to vindicate himself. In circumstances such as these, it is not surprising that the court made the order it did.

Should you have a similar situation or be in need of specialist advice in relation to divorce and separation, our team of specialist lawyers are available for an initial 15 minute free chat. I can be contacted on 01206 217205 or alternatively email me at [email protected].