Freezing Injunctions: Supreme Court clarification of standard form

Freezing Injunctions: Supreme Court clarification of standard form order
JSC BTA Bank v Ablyazov [2015] UKSC 64 (judgment delivered on 21.10.15)
The Supreme Court, reversing the Court of Appeal, has held that the extended definition of assets in
paragraph 6 of the current standard form Commercial Court freezing order includes proceeds of loan
agreements to which a defendant was party.
The facts
The relevant injunction was granted by Teare J in2009 in the course of litigation between JSC BTA
Bank (“the Bank”) and its former chairman and majority shareholder (“A”) who was alleged to have
presided over the misappropriation of over US$10 billion of the Bank’s monies for his own personal
benefit.
The Bank began 11 sets of proceedings in this jurisdiction (to which A had fled) seeking
compensation of c US$6 billion. Ultimately the Bank obtained judgments against A in 4 cases in a
aggregate sum of US$4.4 billion, all of which remained unsatisfied.
The Bank’s Freezing Order (at paragraph 4) restricted A from disposing of etc assets up to a value of
£451,130,000 and included (at paragraph 5) the following provision (taken from what is now
paragraph 6 of the standard Commercial Court form in use since 2002)
Paragraph 4 applies to all of the respondents’ assets whether or not they are in their own name and
whether they are solely or jointly owned and whether or not the respondent asserts a beneficial
interest in them. For the purpose of this Order the respondents’ assets include any asset which they
have power, directly or indirectly, to dispose of, or deal with as if it were their own. The respondents
are to be regarded as having such a power if a third party holds or controls the assets in accordance
with their direct or indirect instructions.
The form of injunction contained the usual exceptions as to expenditure on ordinary living expenses
(£10,000 per week was permitted) and a reasonable amount on legal advice and representation.
The issues for determination (essentially questions of construction of the Freezing Order) were: (1)
whether A’s right to draw down under certain loan agreements was an “asset” within the meaning of
the Freezing Order; (2) if so, whether the exercise of that right by directing the lender to pay the sum
to a third party constituted “disposing of” or “dealing with” or “diminishing the value” of an “asset”; and
(3) whether the proceeds of the loan agreements were “assets” within the meaning of the extended
definition in paragraph 5 of the Freezing Order on the basis that A had power “directly or indirectly to
dispose of, or deal with [the proceeds] as if they were his own”.
The relevant loan agreements (all of which were entered into by A after the making of the Freezing
1
Order ) had been fully drawn down and A had directed various payments from the proceeds including
(i) over US$16m to his former solicitors (Stephenson Harwood); (ii) c US$500,000 in relation to a
2
property on Bishop’s Avenue in London, (iii) c US$119,000 to corporate service providers associated
with A; and (iv) c US$390,000 to lawyers acting for other defendants to the Bank's claims.
In October 2011 the Bank applied (amongst other things) for declarations that (i) A’s rights under the
loan agreements were “assets” for the purposes of the Freezing Order and (ii) any drawings under the
loan agreements could only be lawfully made pursuant to the exceptions provided for in paragraph 9
of the order.
3
At first instance Christopher Clarke J determined the first and second issues against the Bank and in
respect of the third, concluded that the wording of the Freezing Order was ambiguous.
4
The Court of Appeal (Rimer, Batson and Floyd LJJ) dismissed the Bank’s appeal .
1
See the judgment of Beatson LJ (at [8]) in the Court of Appeal [2013] EWCA CIv 928; [2014] 1 WLR 1414.
Often referred to a “Millionaires’ Row”.
[2012] EWHC 1819 (Comm); [2012] 2 All ER (Comm) 1243.
4
[2013] EWCA Civ 928; [2014] 1 WLR 1414.
2
3
In the Supreme Court the only reasoned judgment was given by Lord Clarke JSC (with whom Lord
Neuberger, Lord Mance, Lord Kerr and Lord Hodge agreed). There was no challenge to the Freezing
Order on appeal in the sense of suggesting it ought never to have been made. The sole question was
as to its proper construction. A was not represented in the Supreme Court but the court did have the
benefit of submissions from advocates to the court as well as from counsel for the Bank.
As to the relevant principles engaged when construing a freezing order, Lord Clarke rejected as
irrelevant what Beatson LJ had referred to as “the flexibility principle” (the need to need for the court
to be able to deal with new situations and new ways used by sophisticated and wily operators to make
themselves immune to the courts’ orders or deliberately to thwart their effective enforcement). Lord
Clarke did, however, endorse a restrictive approach to construction (on the basis that the penal
consequences of breach meant that a freezing order should be clear and unequivocal). He also
agreed with Beatson LJ’s observation in the Court of Appeal that strict construction was an aspect of
the “great circumspection” with which Lord Mustill (in Mercedes Benz AG v Leiduck [1996] AC
284,297) stated that the jurisdiction to grant freezing orders should be exercised, adding that one of
the reasons for this principle was, as Lord Clarke saw it, the risk of oppression.
After noting (at [20]) the purpose of a freezing order identified in many cases, namely to stop the
injuncted defendant from dissipating or disposing of property which could be the subject of
enforcement if the claimant goes on to win the case it has brought ( but not to give the clamant
security for its claim) (or what Beatson LJ had referred to as “the enforcement principle”), Lord Clarke
went on (at [21]) to observe that the expression “assets” was capable of having a wide meaning which
could, for example, extend to choses in action. A freezing order must, however, like any document, be
construed in its context (including its historical context, and specifically the development of the
relevant clauses in the standard form orders).
Paragraph 5 of the Freezing Order considered by the Supreme Court in JSC BTA Bank was, as
Patten LJ noted in the Court of Appeal, different from the standard forms of order in the CPR up to
2002 in respect of assets both within the jurisdiction and outside it. Although both forms of order
restrained a defendant from disposing of or dealing with his assets whether in his own name or not
and whether solely or jointly owned, the pre 2002 formulation did not include the extended description
of assets contained in the last 2 sentences of paragraph 5 (ie “whether the respondent is (or
respondents are) interested in them legally, beneficially or otherwise”) now appearing in the form of
freezing order in the Commercial Court Guide (at paragraph 6).
Lord Clarke returned (at 34]) to the importance of context when construing freezing orders and noted
that the origin of the Mareva jurisdiction was consistent with the enforcement principle. His lordship
went on to observe that in its historical context the word “asset” was prima facie part of a fund which
would be available to the judgment creditor and cases and legal writings showed a settled
understanding that borrowings were not covered by the standard form order.
After describing examples from different areas of law where choses in action had been viewed as
assets as of “little assistance”, Lord Clarke held (at [38]) that the authorities relied upon by the Bank
did not support the proposition that the respondent’s right to draw down the loans was an asset within
the meaning of the Freezing Orders as originally drafted. Although it was open to the Supreme Court
to reverse such decisions, they had stood for many years and clarity and certainty were important in
the context of penal orders. He therefore answered the first question in the negative. That answer
was, however, given on the basis that the word “asset” was construed without reference to the
extended definition in the second sentence of paragraph 5. If that was correct, said his lordship, he
did not think that anything the respondent had done amounted to disposing of, dealing with or
diminishing the value of “assets” as that word had been construed in the original forms of freezing
injunction; that is without reference to the extended definition in the second sentence of paragraph 5
of the freezing order (paragraph 6 of the standard form). It followed, said Lord Clarke, that he would
therefore answer the second question in the negative.
rd
Lord Clarke did, however, reach a different conclusion on the 3 issue (whether the proceeds of the
loan agreements were “assets” within the meaning of the extended definition in paragraph 5 of the
Freezing Order on the basis that A had power “directly or indirectly to dispose of, or deal with [the
proceeds] as if they were his own”). He held (at [39]) that the proceeds of the loan agreements were
“assets” within the extended definition.
As Lord Clarke saw it, an instruction to the lender to pay the lender’s money, which is what it was, to a
third party was dealing with the lender’s asserts as if they were A’s own. The question which the
extended definition posed was, accepted Lord Clarke, whether A had the power to direct the lender
what to do with the funds that it was contractually obliged to make available to him. The answer to
that was, said Lord Clarke, yes.
Lord Clarke rejected Beatson LJ’s reasons for concluding otherwise. Although the power to deal with
the chose in action was “subject to the lender’s consent and to the lender not cancelling the facility”,
that was not the relevant question. The only provision in the relevant loan agreements involving the
lender’s consent was confined to the form in which disbursement was to be made. As to cancellation
of the facility, until such cancellation had been effected the proceeds of the loan facility were to be
used at A’s sole discretion and includes a power to direct the lender to transfer the proceeds to any
third party.
Lord Justice Beatson’s suggestion that the Bank’s argument had a bootstraps element was wrong
because paragraph 5 of the order extended its scope to things not actually in A’s ownership.
The observation by Beatson LJ that the extended definition of “asset” was “primarily designed to catch
assets which the defendant claimed he held on trust” was not correct, said Lord Clarke (acceding to
the Bank’s argument), because it was only the additional words at the beginning of paragraph 5 which
catch assts held on trust.
Lord Clarke also rejected Beatson LJ’s view that the relevant words not clear.
Lord Clarke was unable to accept the analysis by Floyd LJ to the effect that the money in the lender’s
hands (before transfer to a third party) was not A’s “to deal with as his own” as that overlooked the
contractual terms of the loan agreements (with A’s unfettered discretion to use the monies as he
wished and the power to transfer the proceeds to any third party).
As to Rimer LJ’s reason for dismissing the Bank’s argument on the third question (that paragraph 5 “is
about, and only about, dealing with “assets” of the respondent), Lord Clarke respectfully disagreed.
The whole point about paragraph 5 of the freezing order (paragraph 6 of the standard form) was to
extend the meaning previously given to “assets”. The last two sentences of paragraph 5 are designed,
said Lord Clarke (at [46]) to catch assets which are not owned legally or beneficially, but over which
the defendant (here A) has control.
Following this decision, those acting for and against applicants seeking freezing injunctions should
consider carefully what (if any) contractual rights (or other choses in action) may constitute assets for
the purposes of the order. Although paragraph 9 of the standard form order used in the Commercial
Court obliges a defendant to provide information about his assets to the claimant, there is not an
exact match between the wording in paragraph 9 and the definition of assets in paragraph 5. An
applicant for such injunctive relief may, therefore, be well advised to seek express disclosure of
assets over which the defendant has control but which are not owned legally or beneficially by him
(see further in this context, Global Maritime Investments Cyprus Ltd v Gorgonia Di Navigazione SRL
[2014] EWHC 706 (Comm)). It is also important to note that not all contractual rights or other choses
in action or their proceeds will fall within the prohibition contained in the standard form freezing order;
a defendant is not thereby restrained from dealing with or disposing of any of his assets in the
ordinary and proper course of business.
Richard Ascroft
Guildhall Chambers
October 2015