Mold v Holloway (1), Jacques (2) (as yet unreported)
The High Court has ruled that assets owned by a third-party but controlled by a Respondent to a Freezing Order can be frozen if evidence shows the Respondent intends to dissipate them so as to frustrate a future civil judgment. This is a significant judicial development as, up until now, it has been against “settled principles of company law” to apply a Freezing Order to such assets, even if the Respondent is a shareholder in the third-party company.
The facts in Mold v Holloway
The case involved a claim against two directors for breach of statutory and fiduciary duties. The Claimant had successfully obtained a Freezing Order against the directors in August 2023.
The directors had shares in several other companies (the third-party companies), one of which they held over 50 per cent. However, the assets of the third-party companies were initially deemed separate enough to fall outside the scope of the Freezing Order.
In January 2024, the Claimant received a series of text messages and phone calls believed to be from the directors saying they planned to strip the assets of the third-party companies. The Claimant asserted that the text messages and phone calls showed:
- The directors had taken control of the third-party companies, and
- They planned to dissipate the assets in order to frustrate a possible future civil judgment.
The Claimant took immediate action to vary the Freezing Order under section 37 of the Senior Courts Act 1981, so it covered the third-party companies. They argued that the scope of the Freezing Order should not depend on whether the directors were legal owners or beneficiaries of the assets but rather whether they exercised actual control over the companies and those assets.
The High Court’s decision
The Court concluded it was right to extend the Freezing Order to cover the assets of the third-party companies even though the directors did not wholly own them. This marked a clear departure from TSB Private Bank International S.A. v Chabra [1992] 1 WLR 231 which held that in order to grant an injunction against a third party to proceedings, the claim to the injunction had to be ‘ancillary and incidental’ to the cause of action against the initial Defendant.
The standard form of a freezing injunction is in the annexe to Practice Direction 25A of the Civil Procedural Rules (or Appendix 11 of the Commercial Court Guide, for use in the Commercial Court).
Paragraph 6 provides the following in respect of a worldwide injunction:
Until the return date or further order of the Court, the Respondent must not—
- remove from England and Wales any of its, her or his assets which are in England and Wales up to the value of £ ; or
- in any way dispose of, deal with or diminish the value of any of its, her or his assets whether they are in or outside England and Wales up to the same value.
Paragraph 7 states Paragraph 5 (which deals with assets limited to England and Wales) applies to:
“all the Respondent’s assets whether or not they are in his own name and whether they are solely or jointly owned [and whether the Respondent is interested in them legally, beneficially or otherwise]. For the purpose of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions”.
The Court considered the case of JSC BTA Bank v Ablyazov [2015] UKSC 643, in which the Supreme Court looked at the issues of control and ownership. In JSC Lord Clarke noted that “the whole point” of the broad definition of the standard form is to catch assets which otherwise would not be caught.
Whether third-party assets should be captured by an injunction comes down to who ‘controls’ them. The Court considered and distinguished FM Capital Partners v Marino and others [2018] EWHC 2889 (Comm), because, in the instant case, the directors had control over the company and its assets even though they were not the majority shareholders or sole directors and did not have beneficial ownership.
The Claimant’s evidence that the directors planned to dissipate the third-party company’s assets showed that the directors planned to act in their own interests. This meant that they, not their respective companies, would directly and personally control the third-company’s property. Therefore, the third-party company’s assets were captured by the extended definition in paragraph 7 of the Standard Order and fulfilled the necessary element of control for the purposes of the Ablyazov decision. In addition, the fact that the directors showed that they were willing to breach their fiduciary duties and/or defraud creditors by dissipating assets satisfied the requirement for a material change of circumstances that would permit a variation of the original Freezing Order.
Comment
The Court’s decision in this case makes commercial sense. It would be illogical for a Freezing order to be refused where Defendants in a civil claim had:
- Taken over control of a third-party company, and
- They clearly demonstrated that they planned to get rid of certain assets in order to frustrate any future court orders.
For those applying for a Freezing Order, this case illustrates that the scope of the injunction can extend to third-party assets where, although they are not owned by the Respondent in the traditional sense, the Respondent does exercise sufficient control to dissipate the assets to the detriment of the Claimant in future litigation.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect sanctions in place at the time of writing, 16 October 2024. This article does not constitute legal advice. For further information, please contact our London office.
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