Summary
Michaelmas
Term
[2015] UKSC 64
On appeal from: [2013] EWCA Civ 928
JUDGMENT
JSC BTA Bank (Appellant) v Ablyazov
(Respondent)
before
Lord Neuberger, President
Lord Mance
Lord Kerr
Lord Clarke
Lord Hodge
JUDGMENT GIVEN ON
21 October 2015
Heard on 28 July 2015
|
Appellant
Stephen Smith QC
Tim Akkouh
(Instructed by
Hogan Lovells International LLP)
|
|
Advocate to the
Court
Jonathan Crow QC
Adam Holliman
(Instructed by The Government
Legal Department)
|
LORD CLARKE: (with whom
Lord Neuberger, Lord Mance, Lord Kerr and Lord Hodge agree)
Introduction
1.
This appeal is concerned with the interpretation and application of the
standard form freezing order. It arises in the course of long-running
litigation between JSC BTA Bank (“the Bank”) and Mr Mukhtar Ablyazov (“the
respondent”) in which the Bank has to date obtained a number of judgments
against the respondent amounting in all to US$4.4 billion, none of which he has
satisfied. Throughout much of this litigation the respondent was represented by
solicitors and counsel. Indeed they filed a detailed notice of objection to the
grant of permission to appeal to the Supreme Court and signed an agreed statement
of facts and issues. However, they thereafter withdrew from the record and did
not appear at the hearing of the appeal. The court is however grateful to Mr
Jonathan Crow QC and Mr Adam Holliman who appeared as advocates to the court
and made detailed submissions on the issues in this appeal.
2.
The statement of facts and issues identifies three issues, which all
depend upon the terms of a freezing order which was made by Teare J on 12
November 2009 and was subsequently amended (together “the Freezing Order”). The
issues were: (1) whether the respondent’s right to draw down under certain loan
agreements is 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 constitutes “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 the respondent had power “directly or
indirectly to dispose of, or deal with [the proceeds] as if they were his own”.
It can be seen that these are essentially questions of construction of the
Freezing Order.
The background
3.
The background can be taken shortly from the agreed statement of facts
and issues. The Bank was one of Kazakhstan’s four systemic banks. Between 2005
and early 2009, the respondent was its chairman and majority shareholder. When
the Bank was nationalised in February 2009, the respondent fled to England and
did not return to Kazakhstan. The Bank’s case is that, while chairman, he
presided over the misappropriation of over US$10 billion of the Bank’s monies
for his own personal benefit. The Bank commenced 11 sets of proceedings in this
jurisdiction seeking compensation of about US$6 billion. In a judgment handed
down on 19 March 2013, Teare J found that two of the Bank’s former senior
officers and one offshore company formerly controlled by the respondent had
knowingly assisted in three frauds perpetrated by the respondent which led to
the misappropriation of sums exceeding US$1.5 billion. Further, on 26 November
2013, Henderson J granted the Bank summary judgment in an amount of US$295m
plus interest, in respect of the respondent’s fraudulent misappropriation of
assets shortly before nationalisation. He was debarred from defending the three
cases which went to trial, because he had failed to comply with several orders
of the court. He was not however debarred from defending the summary judgment application,
which he continued to do until just before the hearing, when he chose not to
defend. The Bank has to date entered judgment against the respondent in four
cases in an aggregate sum (as stated above) of over US$4.4 billion. No part of
these judgments has been paid by the respondent, although small sums (relative
to the value of the judgment) have been realised by the receivers appointed by
the court, who are also in the process of selling certain assets found to
belong to him.
The Freezing Order
4.
The Freezing Order includes the following provisions in so far as it
relates to the Bank and the respondent:
“4. Until judgment or
further order … the respondent must not, except with the prior written consent
of the Bank’s solicitors –
a. Remove from England
and Wales any of his assets which are in England and Wales … up to the value of
£451,130,000 …
b. In any way dispose of,
deal with or diminish the value of any of his assets in England and Wales up to
the value of ... £451,130,000 …
c. In any way dispose of,
deal with or diminish the value of any of his assets outside England and Wales
unless the total unencumbered value … of all his assets in England and Wales
... exceeds £451,130,000 …
5. Paragraph 4 applies to
all 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 power if a third party holds or controls the assets in
accordance with their direct or indirect instructions.
…
EXCEPTIONS TO THIS ORDER
9. a. Paragraph 4 of this
Order does not prohibit the respondent from spending up to £10,000 a week …
towards his individual ordinary living expenses … nor does it prohibit the
respondent from spending a reasonable amount on legal advice and
representation. But before spending any money on legal advice and
representation the respondent must notify the Bank’s legal representatives in
writing where the money to be spent is to be taken from.
b. This Order does not
prohibit the respondent from dealing with or disposing of any of his assets in
the ordinary and proper course of any business conducted by him personally.
…
19. The respondent may apply
to vary or discharge this Order …”
5.
In due course, the Court of Appeal confirmed that, (at least) in respect
of certain transactions, the respondent had no business which would enable him
to take advantage of the ordinary business proviso. So his permitted spending
was limited, for relevant purposes, to (1) £10,000 per week plus (2) a
reasonable amount on his own legal expenses. The Bank maintains that this
exception does not allow a defendant to fund a co-defendant’s legal expenses.
The Loan Agreements
6.
The issues in this appeal have proceeded on the basis that the
respondent entered into two binding and effective loan facility agreements,
dated 1 September 2009 and 1 April 2010, with a BVI company called Wintop
Services Limited (“Wintop”) and a further two agreements, dated 17 August 2010
and 1 December 2010, with another BVI company called Fitcherly Holdings Limited
(“Fitcherly”), (collectively “the Loan Agreements”). In each case the
respondent was described as the borrower and Wintop and Fitcherly were
respectively described as the lenders. I note in passing that the Bank does not
accept that Wintop and Fitcherly were third party lenders as the respondent maintains.
Rather, the Bank contends (and Christopher Clarke J (“the judge”) held (at
[2011] EWHC 2664 (Comm), para 71) that there was “strong ground for believing”
that they were the respondent’s “creatures or conduits”. However this appeal
and the decisions of the lower courts have proceeded on the basis that the Loan
Agreements are binding and effective.
7.
Clause 1 of each agreement provided for a loan facility of £10m and
contained the following material terms under the heading “AMOUNT AND TERMS OF
THE LOAN:
“1.1 Facility. The Lender
hereby agrees, subject to the terms and conditions set forth herein, to extend
a loan facility to the Borrower in the principal amount of 10,000,000 GBP (ten
million Great Britain pounds) (“the Loan Facility”). The loan facility shall be
made available to the Borrower for two years as of the Date of the Agreement
(“Availability Period”).
1.2 Disbursement. The Loan
Facility shall be disbursed in a form agreed by the Parties in one or several
disbursements … upon the Borrower’s written request …
1.3 Interest. The Loan
Facility shall bear interest at the rate of 5% (five per cent) per annum. Interest
for each Tranche shall accrue daily from the Date of Disbursement of such Tranche
until repayment in full of the principal of the Tranche and all accrued
interest thereon …
1.4 Repayment. All
Tranches, together with all accrued and unpaid interest thereon, shall be payable
by the Borrower upon the Lender’s request, but not earlier than four years
after the Date of the Agreement …
…
1.6 Cancelation of the Loan
Facility. Notwithstanding section 1.1 hereof, any undrawn portion of the
Loan Facility may be cancelled upon delivery to the Borrower of a written cancellation
notice by the Lender.
…
1.8 Binding Effect for the
Borrower. … this Agreement constitutes the legal, valid and binding obligations
of the Borrower, enforceable against the Borrower in accordance with its terms …
…
1.11 Binding Effect for
the Lender. …this Agreement constitutes the legal, valid and binding obligations
of the Lender, enforceable against the Lender in accordance with its terms …
1.12 Use of Proceeds. The
proceeds of the Loan Facility shall be used at the Borrower’s sole discretion.
The Borrower may direct the Lender to transfer the proceeds of the Loan
Facility to any third party. …
1.16 Assignment. … The
Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of the Lender.”
8.
The Loan Agreements have been fully drawn down and pursuant to them the
respondent has directed payments including (i) over US$16m to his former
solicitors, Stephenson Harwood, (ii) about US$500,000 in relation to a property
on Bishop’s Avenue in London, (iii) about US$119,000 to corporate services
providers associated with him and (iv) about US$390,000 to lawyers acting for
other defendants to the Bank’s claims. The Bank submits that, if the respondent
had been using his own money: payment (i) would only have been permitted to the
extent that the legal fees were reasonable; payment (ii) would only have been
permitted to the extent that his weekly spending on individual ordinary living
expenses did not exceed £10,000; and payments (iii) and (iv) would not have
been permitted without the consent of the Bank or the permission of the court
(such payments not constituting either individual ordinary living expenses or reasonable
legal expenses).
The Bank’s application
9.
By an application notice dated 14 October 2011, the Bank applied,
amongst other things, for declarations that if the Loan Agreements were valid
agreements: (a) the respondent’s rights thereunder were assets for the purposes
of the Freezing Order and (b) any drawings under the Loan Agreements could only
lawfully be made pursuant to the exceptions provided for in paragraph 9 of the
Freezing Order.
The proceedings at first instance
10.
At first instance the judge dismissed the Bank’s application for the
reasons given in a judgment handed down on 4 July 2012 [2012] EWHC 1819 (Comm);
[2012] 2 All ER (Comm) 1243. Expressed shortly, the judge held (1) that the
respondent’s right to borrow was not to be regarded as an “asset” within the
meaning of the Freezing Order: paras 75 and 82; (2) that his exercise of the right
to borrow did not constitute “disposing of” or “dealing with” his assets within
the meaning of the Freezing Order: paras 77 and 82; and (3) that even if the
Bank were right in submitting that the Freezing Order was also capable of
bearing the meaning for which it contended, the Freezing Order did not do so
unambiguously. He held that if there were two possible constructions, the court
should, in a matter of this kind, which may give rise to a penal sanction,
adopt the construction most favourable to the putative contemnor. It followed
that, since this was such a case, the Freezing Order should be construed in
favour of the respondent: para 81.
11.
In so holding, the judge accepted (para 76) that it was “not … possible
to ignore the fact that choses in action are, in law, assets” but said that his
conclusions were supported by what he considered to be the “odd effects” which
would follow if the Bank were correct (para 78), and would otherwise give rise
to “intractable questions of valuation” (para 79). The judge refused permission
to appeal.
The proceedings in the Court of Appeal
12.
Permission to appeal to the Court of Appeal was granted on paper by
Mummery LJ but the Court of Appeal (Rimer, Beatson and Floyd LJJ) dismissed the
Bank’s appeal for the reasons given in a judgment handed down on 25 July 2013:
[2013] EWCA Civ 928, [2014] 1 WLR 1414. The leading judgment was given by
Beatson LJ, who (at para 1) identified the issues before the Court of Appeal as
follows: (a) whether a contractual right to draw down under an unsecured loan
facility qualifies, either generally or in particular circumstances, as an
“asset” for the purposes of the standard form freezing order and (b) whether,
if the right to draw down is an “asset”, the defendant’s exercise of the right
by directing the lender to pay the sum drawn down to a third party constitutes
“disposing of” or “dealing with” an asset.
13.
Beatson LJ identified three principles as of particular relevance. They
were (i) the enforcement principle, namely that “the purpose of a freezing
order is to stop the injuncted defendant dissipating or disposing of property
which could be the subject of enforcement if the claimant goes on to win the
case it has brought, and not to give the claimant security for his claim” (para
34); (ii) the flexibility principle, namely that “the jurisdiction to make a
freezing order should be exercised in a flexible and adaptable manner so as 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 the effective enforcement of those orders” (para 36); and (iii) the
strict construction principle, namely that, because the consequences of breach
are serious, injunctions must be “clear and unequivocal” and “strictly
construed” in favour of the addressee (para 37). Mr Smith QC told us that these
three principles had not been described in this way in the course of argument
in the Court of Appeal, which I of course accept. It is however convenient to
use Beatson LJ’s nomenclature in this judgment.
14.
At paras 38-39 Beatson LJ held that there were tensions between his three
principles. Between paras 40 and 63 he discussed the question whether there was
a principled objection to the recognition of the rights under the loan facility
agreements as assets for the purposes of a freezing injunction and concluded
that the answer was no. Between paras 64 and 91 he considered (a) whether the
terms of the current standard Commercial Court form of freezing order make choses
in action such as those under the Loan Agreements “assets” within the order and
(b) if so, whether drawing down a loan amounts to disposing of, dealing with or
diminishing the value of the assets. Beatson LJ concluded that the answer to
both questions was no and that the appeal should be dismissed. Rimer LJ agreed
with Beatson LJ that the appeal should be dismissed and expressed his own short
reasons. Floyd LJ agreed with Beatson and Rimer LJJ and set out further short
reasons. The Court of Appeal refused permission to appeal to the Supreme Court
but permission was granted by Lord Mance, Lord Sumption and Lord Hughes on 21
February 2014.
The Bank’s case in this appeal
15.
The Bank contends, on the assumption that the Loan Agreements create
genuine obligations with third party lenders, that there were created relevant
“assets” which could only be dealt with in accordance with the Freezing Order.
As to the meaning of “asset” the Bank has alternative cases. Its primary case
is that all choses in action, including the respondent’s rights to borrow, fall
within the definition of “assets” in the Freezing Order. Its alternative case
is that the proceeds of the Loan Agreements were “assets” within the meaning of
the extended definition at paragraph 5 of the Freezing Order because the
respondent had power “directly or indirectly, to dispose of, or deal with [the
proceeds] as if they were his own”. Both those propositions were challenged by
the respondent and are now challenged by the advocates to the court. The issues
in the appeal are essentially those set out in the statement of facts and
issues as originally agreed and set out in para 2 above.
Discussion
16.
The argument in this appeal and in the courts below has included
discussion of many of the now numerous decisions on the correct approach to
freezing injunctions. However, it is important to note that the Freezing Order
is not challenged in this appeal. It is not said that it ought not to have been
made. Nor is it said, either that the court had no jurisdiction to make an
order in the wide terms contended for on behalf of the Bank, or that, if it
made such an order, it was wrong to do so as a matter of discretion. The sole
question is what the Freezing Order in fact made means. It is also important to
note that the answer to the question of construction does not depend upon any
analysis of the respondent’s conduct. The history is set out in a number of
judgments including paras 2-5 of Beatson LJ’s judgment in the Court of Appeal,
where he described what he called the context. This included a decision by
Teare J in February 2012 in which he held that the respondent was in contempt
of court. Contrary to a clear promise to be present at the sentencing hearing,
the respondent instead left the United Kingdom. It appears that he subsequently
went to France, where he has been detained awaiting extradition to Russia or
Ukraine. It is in these circumstances that he has not been represented before
us.
17.
In para 5 of his judgment in the Court of Appeal Beatson LJ said that
the context in which the scope of the Freezing Order falls for decision is one
in which a court might be tempted to stretch legal analysis to capture what are
seen as the merits or lack of merits of the case before it, but it is important
not to succumb to that temptation. I agree. The question is simply what the
Freezing Order means. If it is desirable that a broader meaning should be given
to it than is appropriate applying ordinary principles, the solution is not to
give it a meaning which it does not have but to vary the order (and the
relevant standard form of order) appropriately for the future. As Beatson LJ
observes in his para 1, the form of order used in this case is the standard
Commercial Court form of freezing order set out in Appendix 5 of the Admiralty
and Commercial Courts Guide.
18.
In this appeal both Mr Smith for the Bank and Mr Crow, as advocate to
the court, agree that the Court of Appeal was wrong to have regard to what
Beatson LJ described as the flexibility principle. It is agreed that, whatever
the position might be if the court were construing a contract, the flexibility
principle has no role in the construction of the Freezing Order as an order of
the court. As Mr Crow colourfully put it, the flexibility principle is that the
court must be agile in this game of cat and mouse between claimants and
defendants to make sure that it is making new orders to meet new avoidance
measures, but that is not a justification for the expansive interpretation of
an order which has already been made. I agree.
19.
I further agree that orders of this kind are to be restrictively
construed in accordance with Beatson LJ’s strict construction principle, which
he described in this way in para 37:
“The third
principle follows from the ‘fundamental requirement of an injunction directed
to an individual that it shall be certain’: Z Ltd v A-Z and AA-LL [1982] QB 558, 582 per Eveleigh LJ. It is that, because of the penal consequences of
breaching a freezing order and the need of the defendant to know where he, she
or it stands, such orders should be clear and unequivocal, and should be
strictly construed: Haddonstone Ltd v Sharp [1996] FSR 767, 773 and 775
(per Rose and Stuart-Smith LJJ); Federal Bank of the Middle East Ltd v
Hadkinson [2000] 1 WLR 1695, 1705C and 1713C-D (per Mummery and Nourse
LJJ). In Anglo Eastern Trust Ltd v Kermanshahchi [2002] EWHC 1702 (Ch) Neuberger
J stated: ‘A freezing order, which has been referred to as a nuclear weapon,
should … be construed strictly’ because the court is ‘concerned with an order
which has a potentially draconian effect on the commercial and economic freedom
of an individual against whom no substantive judgment has yet been granted’.”
He added at para 66 that strict construction is also an
aspect of the “great circumspection” with which Lord Mustill, in Mercedes
Benz AG v Leiduck [1996] AC 284, 297, stated that the jurisdiction should
be exercised. I agree. One of the reasons for this principle, as I see it, is
the risk of oppression.
20.
What then of Beatson LJ’s enforcement principle? As quoted in para 13
above, it is that the purpose of a freezing order is 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, and not
to give the claimant security for his claim. The principle has been put in much
that way, not only by the courts below in this case but in many of the decided
cases: see eg JSC BTA Bank v Solodchenko [2010] EWCA Civ 1436, [2011] 1 WLR 888 per Patten LJ, para 49(1) and Longmore LJ, para 52. Aikens LJ agreed
with both. Thus Longmore LJ said that the purpose of a freezing injunction is
to preserve a defendant’s assets, subject to dealings in the ordinary course of
business so that, if and when a judgment is pronounced, the defendant still has
assets to meet that judgment. See also the cases referred to in para 23 below.
21.
The expression “assets” is capable of having a wide meaning. For example
it can include a chose in action. However, like any document, a freezing order
must be construed in its context. That includes its historical context. It is
for that reason that, in giving the leading judgment in Solodchenko,
beginning at para 17 Patten LJ explained the development of the relevant
clauses in the standard forms of freezing injunction. He referred first to Federal
Bank of the Middle East Ltd v Hadkinson [2000] 1 WLR 1695 in which the
Court of Appeal had to decide whether an order in the standard form of freezing
order at that time was effective to cover assets which were held in the
defendant’s name but which belonged beneficially to third parties. The Court of
Appeal held that it was not.
22.
In Solodchenko Patten LJ cited extensively from the judgments of
Mummery and Nourse LJJ in Hadkinson. He explained at para 20 that the
issue in Solodchenko was whether the subsequent changes to what had by
then become the standard form of injunction made any difference. As Mummery LJ
noted at p 1708, Hadkinson was decided in the 25th year after the
original decision in Mareva Cia Naviera SA v International Bulkcarriers SA [1975] 2 Lloyd’s Rep 509 and, as he put it, many thousands of orders must have been
made in that form which had been in operation for many years. In no case over
those years had it been suggested that the expression “assets or funds” used in
the then standard form of injunction extended to sums not beneficially owned by
the defendant.
23.
Mummery LJ said at p 1709F that he started from the position that in
everyday usage the expression “his assets” refers to assets belonging to that
person, not to assets belonging to another person. He then focused on the context
in which the expression was used in the order. In doing so he identified the
purpose of a freezing injunction in essentially the same terms as described by
Beatson LJ in this case and by others in subsequent cases. Mr Crow referred to
a large number of dicta to like effect, including the following: Siskina
(Owners of Cargo lately laden on board) v Distos Cia Naviera SA [1979] AC
210, 253D per Lord Diplock; A v C (Note) [1981] QB 956, 960 per Robert
Goff J; A J Bekhor & Co Ltd v Bilton [1981] QB 923, 941-942
per Ackner LJ; the Mercedes Benz case [1996] AC 284, 300F and 302C, per
Lord Mustill; Camdex International Ltd v Bank of Zambia (No 2) [1997] 1 WLR 632, 636H, per Sir Thomas Bingham MR; C Inc Plc v L [2001] 2 Lloyd's Rep 459, para 31, per Aikens J; Fourie v Le Roux [2007] 1 WLR 320, para
21, per Lord Scott; Solodchenko [2011] 1 WLR 888, paras 32 and 49(1), per
Patten LJ; Lakatamia Shipping Co Ltd v Su [2015] 1 WLR 291, para 46, per
Rimer LJ and, most recently, JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev
[2015] EWCA Civ 139, para 14, per Lewison LJ.
24.
In Hadkinson Mummery LJ concluded thus at p 1709H:
“In my judgment, the language of
the freezing order, read in context and with regard to the object of the order,
naturally refers to assets and funds belonging to the defendant and which are
and should remain available to satisfy the claim against him. Assets and funds
which belong, or, as in this case, are assumed to belong, beneficially to
someone else would not be available for that purpose.”
25.
Mummery LJ then referred (at p 1710E) in particular to the well-known
judgment of Robert Goff J in Searose Ltd v Seatrain UK Ltd [1981] 1 WLR
894, 897. He noted Robert Goff J’s reference to the value of and the need for
the Mareva jurisdiction and to the care to be taken to ensure that such
orders are only to be made for the purposes for which they are intended, namely
“to prevent the possible abuse of a defendant removing assets in order to
prevent the satisfaction of a judgment in pending proceedings”, and that they
do not bear harshly upon innocent third parties. Mummery LJ concluded at p
1711B that the “hallowed” or standard form of freezing order referring to “his
assets or funds” is not apt, without the addition of words clearly extending
its effect, to cover an unidentified bank account held in the name of and under
the control of Mr Hadkinson but which is assumed not to be his beneficially.
26.
Thus, as it seems to me, the decision in Hadkinson supports the
conclusion that the context of a freezing order has been of particular
importance in determining its true construction in a particular case. In my
opinion, that is a sensible approach which we should not reverse. It is
supported in a number of types of case, as is demonstrated by the judgments in Solodchenko.
27.
Paragraph 6 of the form of order considered in Solodchenko was
very similar to that in paragraph 5 of the order in the instant case, which is
quoted in para 4 above. Paragraph 6 was in these terms:
“Paragraph 5 applies to all the
freezing respondent’s assets whether or not they are in its 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 freezing respondent’s assets include any asset which it has the power,
directly or indirectly, to dispose of or deal with as if it were its own. The freezing
respondent is to be regarded as having such power if a third party holds or
controls the asset in accordance with its direct or indirect instructions.”
I see no relevant distinction for present purposes
between paragraph 6 of the order in that case and paragraph 5 of the order in
the instant case. However, as Patten LJ observed in para 17, they were both
different from the standard forms of order in the CPR up to 2002 in respect of
assets both within the jurisdiction and outside the jurisdiction. In both
orders the injunction restrained the defendant from disposing of or dealing
with his assets whether in his own name or not and whether solely or jointly owned.
However, the pre-2002 form of order did not include the extended description of
assets contained in the last two sentences of paragraph 6 of the order in that
case or of paragraph 5 of the order in this case or the additional words (ie “whether
the respondent is (or respondents are) interested in them legally, beneficially
or otherwise”) which now appear in the form of freezing order contained in the
Commercial Court Guide.
28.
In paras 24-32 Patten LJ gave his reasons for concluding that the
last two sentences of paragraph 6 (or here paragraph 5) did not have the effect
of including trust assets. However, in para 33 he recognised that the basis of
the decision in Hadkinson was that the then standard form of freezing
order did not extend to trust assets but that the Court of Appeal in Hadkinson
recognised that it would be possible to frame an order in a way which did
have the effect of freezing trust assets and that in exceptional circumstances
it might be appropriate to make an order in that form. In Solodchenko
itself all three members of the Court of Appeal ultimately concluded that,
although the last two sentences of paragraph 6 (here paragraph 5) did not have
the effect of extending the order to trust assets, the effect of the amendments
to the first part of paragraph 6 (here paragraph 5) did have that effect.
29.
The approach of the courts has thus been to approach the language of the
forms of order cautiously but to recognise that the forms have gradually been
extended. That seems to me to have been a sensible approach. So, for example,
in Cantor Index Ltd v Lister [2002] CP Rep 25 the court held that a
defendant who borrows money increases his indebtedness but does not dispose of,
deal with or diminish the value of his “assets” within the meaning of the then
standard form of freezing order. By borrowing money and spending the borrowed
money the defendant may reduce his net asset position but that is not what he
is restrained from doing by the standard form of wording. The text books are to
much the same effect. So, for example, in Hoyle on Freezing and Search
Orders, 4th ed (2006), para 4.28 it is said:
“The test must be whether the
assets will be available on execution of a judgment and if they are they can be
the subject of the order, as its purpose is to aid the court’s process. It
would otherwise be illogical to include them in the order.”
See also Gee on Commercial Injunctions, 5th
ed (2004), para 3.015 and to similar effect Biscoe on Freezing and
Search Orders: Mareva and Anton Piller Orders, 2nd ed (2008), para 1.12:
“A freezing order … provides a
fund from which the applicant’s claim may ultimately be paid in competition
with other unsecured creditors of the respondent.”
However it adds at para 1.12(e) that the usual terms do
not prevent the respondent borrowing money thereby increasing the total
indebtedness.
30.
Both the 2013 and the current edition of the White Book say that a
freezing order restrains the respondent from dealing with his assets but does
not prevent him from borrowing money, thereby increasing his overall indebtedness.
They both cite two decisions of Neuberger J at first instance, namely Cantor
Index Ltd v Lister [2002] CP Rep 25 and Anglo Eastern Trust Ltd v
Kermanshahgi [2002] EWHC 1702 (Ch).
31.
I was at one time attracted by the arguments on behalf of the Bank on
issues 1 and 2 as set out in the agreed statement of facts and issues. After
all Beatson LJ said at para 60 that there was no difficulty in principle in
finding that the choses in action representing the rights under the four Loan
Agreements initially qualified as assets under the Freezing Order. In ordinary
legal parlance they would I think be regarded as assets.
32.
The Bank relies upon a number of cases in which the courts have treated
choses in action as assets for the purpose of a freezing order. For example, in
CBS United Kingdom Ltd v Lambert [1983] Ch 37, 42, although the case was
not itself concerned with choses in action, Lawton LJ observed in connection
with what is now section 37(3) of the Senior Courts Act 1981:
“… there are no limitations put
upon the word ‘assets’, from which it follows that this word includes chattels
such as motor vehicles, jewellery, objets d’art and other valuables as well as
choses in action.”
Recently, in Templeton Insurance Ltd v Thomas [2013] EWCA Civ 35, which considered whether goodwill was to be regarded as an asset,
the Court of Appeal held that it was, following Darashah v UFAC (UK) Ltd [1982] WL 222281; The Times, 30 March 1982. In the course of his judgment Rix LJ said
at para 18:
“It seems obvious that goodwill is
among the most important intangible assets of a business. The fact that
goodwill is an intangible makes it no less an asset than other intangibles,
such as choses in action.”
33.
There is force in the Bank’s case that what used to be called the Mareva
injunction has been extended in many ways since its inception, as for
example to permit worldwide orders and to permit orders in respect of trust
assets. There is also force in the point that choses in action have come to be
regarded as within the ordinary meaning of “assets”.
34.
However, as stated above, context is of particular importance in
construing orders such as the Freezing Order in this case. The origin of the Mareva
jurisdiction was consistent with the enforcement principle. In its
historical context the word “asset” was prima facie part of a fund which would
be available to the judgment creditor. The cases and legal writings referred to
above show that there has over the years been a settled understanding that
borrowings were not covered by the standard form of freezing order.
35.
In reaching his conclusions Beatson LJ considered in some detail the
effect of the decisions of the Court of Appeal in Hadkinson and Solodchenko,
especially the latter, where the words added to the standard form enabled the
court to make an order covering assets apparently held as trustee or nominee
for an innocent third party: see para 50, where Beatson LJ said that the
recognition that it is legitimate in some circumstances to include within a
freezing order property which appears to be held by a defendant as a nominee or
trustee shows that the enforcement principle is not absolute. He added in para
52 that, since it was indisputably the case that the choses in action that were
the borrower’s rights to draw down under the Loan Agreements “belonged” to the
respondent, the case was stronger than in Solodchenko and there was a
stronger case for regarding all choses in action which undoubtedly belonged to
an injuncted defendant as qualifying as assets within the freezing order even
though, by the time of judgment, it might be the case that the claimant-creditor
would not be able to enforce against a particular chose in action.
36.
Those considerations arose out of wording which had been added to the
standard forms of order. Under the standard form of order before the addition
of the words at the beginning and in the last two sentences of paragraph 6 (or paragraph
5), those considerations would not as I see it have been accepted. The decided
cases and the principles set out in the text books seem to me to demonstrate a
cautious approach to the standard terms, when construed in their context.
37.
Reliance was placed upon the decision of the Court of Appeal, Criminal
Division, in R v Kohn (1979) 69 Cr App Rep 395, where it was held that
an overdraft facility was property which could be the subject of a charge of
theft. Reference was also made to some aspects of insolvency law. However, to
my mind examples from different areas of the law are of very little assistance
because there is no real doubt that a right to draw down moneys under a loan
agreement could be construed as an asset. The question is whether it is
appropriate so to construe it in the context of a freezing order.
38.
None of the cases relied upon by the Bank seems to me to support its
case in so far as it relies upon the standard form of freezing order. The
authorities do 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. While it would be open to this court to reverse those
decisions, I do not think that it would be appropriate to do so. They have
stood for many years and have been accepted both by the courts and the legal
writers. Clarity is important and so is certainty in the context of penal
orders. I would therefore answer the question posed by issue 1 in the statement
of facts and issues in the negative. I would hold that the respondent’s right
to draw down under the Loan Agreements does not qualify as an “asset” within
the meaning of the Freezing Order if it is construed without reference to the
extended definition in the second sentence of paragraph 5. If that is correct,
I do not think that anything the respondent had done amounts to disposing of,
dealing with or diminishing the value of “assets” as that word has been
construed in the original forms of freezing injunction; that is without
reference to the extended definition in the second sentence of paragraph 5. I
would therefore also answer the question posed by issue 2 in the negative. It
follows that I would dismiss the Bank’s appeal on those issues.
39.
I have however reached a different conclusion on issue 3. The position
seems to me to be different in the more recent forms, which were used in this
case and in Solodchenko. I would hold that the proceeds of the Loan
Agreements were “assets” within the meaning of the extended definition in paragraph
5 of the Freezing Order in this case and would allow the appeal on this ground.
For convenience I repeat paragraph 5, which I have already set out in para 4
above. It reads:
“5. Paragraph 4 applies to
all 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 power if a third party holds or controls the assets in
accordance with their direct or indirect instructions.”
40.
The Bank submits that the respondent’s right to draw down the loans was
an “asset” within the second sentence of paragraph 5 because it was an asset
which the respondent had the “power, directly or indirectly, to dispose of, or
deal with as if it were [his] own”. As I see it, an instruction to the lender
to pay the lender’s money, which is what it was, to a third party is dealing
with the lender’s assets as if they were his own.
41.
I would accept the Bank’s submission that the question which the
extended definition poses is whether the respondent had power to direct the lender
what to do with the funds that it was contractually obliged to make available
to him. I would further accept its submission that the answer to that question
is yes. Beatson LJ said at para 87 that he did not find this an easy question
to answer but he dismissed the argument for a number of reasons as follows.
42.
First, he said (at para 87) that the power to deal with the chose in
action was “subject to the lender’s consent and to the lender not cancelling
the facility”. I agree with the submission made on behalf of the Bank that that
is not the relevant question. As to consent, the only provision in the Loan
Agreements of possible relevance is clause 1.2, which provides “that the Loan
Facility shall be disbursed in a form agreed by the Parties”. That clause
provides only for an agreement as to the form of disbursement and is irrelevant
for present purposes. While it is true that clause 1.6 gives the lender a right
to deliver to the borrower a written cancellation notice, unless and until such
a notice is given, the respondent has his rights as borrower under the
agreement, which by clause 1.11 expressly constitute legal obligations binding
on the lender. Those obligations include clause 1.12, which provides that the
proceeds of the loan facility shall be used at the respondent’s sole discretion
and includes a power to direct the lender to transfer the proceeds to any third
party.
43.
Secondly, Beatson LJ said (also at para 87) that the argument has a
bootstraps element. However I would not accept that view for the reasons given
on behalf of the Bank. Paragraph 5 of the order extends its scope to things
which are not actually in the respondent’s ownership, so that there is no
element of bootstraps because the basic premise is that the respondent’s right
would not otherwise be viewed as an “asset”.
44.
Thirdly, Beatson LJ observed (at para 88) that the extended definition
of “asset” was “primarily designed to catch assets which the defendant claimed
he held on trust”. However, I would accept that that is not correct because it
is only the additional words at the beginning of the clause which catch assets
which the defendant holds on trust. I respectfully disagree with the conclusion
that the words of paragraph 5 were drafted “for a different purpose”. Finally,
I am unable to accept the view that the relevant words are not clear. In my
opinion they are.
45.
Floyd LJ dismissed this part of the Bank’s argument by saying (at para
98) that the money in the lender’s hands, before being transferred to a third
party, was not the respondent’s “to deal with as if it were his own”. For my
part, I would not accept that because it seems to me to overlook the terms of the
Loan Agreements. Under clause 1.12 of each agreement the respondent had an
unfettered discretion (or power) to use the proceeds as he wished, which
expressly included the power to transfer the proceeds to any third party.
46.
Rimer LJ also dismissed the argument, but for a different reason. He
said (at para 103) that paragraph 5 “is about, and only about, dealings with ‘assets’”
of the respondent. I respectfully disagree. It is true that that was the case
under the previous form of order (as construed in the cases referred to above)
but the whole point of paragraph 5 is to extend the meaning previously given to
“assets”. In Solodchenko Patten LJ acknowledged that the new wording
catches assets which are contained within a Liechtenstein Anstalt. Assets which
the respondent owned beneficially were caught by the original word “assets”.
Assets which the respondent owned legally but not beneficially were caught by
the Commercial Court extended definition (but not otherwise, according to the
Court of Appeal). The last two sentences of paragraph 5 are designed to catch
assets which are not owned legally or beneficially, but over which the
defendant (here the respondent) has control.
47.
In this context Mr Crow invited the court to adopt the judge’s reasoning
in para 83 of his judgment as follows:
“83. I do not regard the
extended description or the Commercial Court words as altering the position.
These provisions were drafted for a different purpose. There was, in my view,
no asset of which Mr Ablyazov had legal or beneficial ownership or control of
which he made a disposal or with which he dealt. Mr Ablyazov had a right to
require the Lender to procure that third parties were paid (in a form which was
to be agreed: clause 1.2). But he had no right of ownership or control in
respect of any particular asset[s] nor any right to dispose of or deal with any
asset as if it was his own. He exercised his right to borrow and, upon his so
doing, the Lenders disposed of monies, which, until they reached the payees, the
Lenders owned and controlled and alone had the power to deal with as their own.
It was up to the Lenders to decide what monies to use for the payment and, until
payment was made, they could change their mind. In consequence of the payment
to the payees, Mr Ablyazov incurred an obligation to repay the Lender. As in Anglo
Eastern Trust it is not necessary to treat the money paid by the Lenders as
being at some notional scintilla temporis the property of Mr Ablyazov or
as disposed of or dealt with as if it was his own or held or controlled in accordance
with his instructions.”
48.
In my opinion, that is too narrow an approach to the new sentences at
the end of paragraph 5 of the form of order used in this case. As stated in
para 46 above, the whole point of the extended definition of “assets” is to
catch rights which would not otherwise have been caught and, in particular, 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”. On the facts
of this case, as I see it, the respondent did not own the relevant assets but
under the Loan Agreements had power directly or indirectly to dispose of, or
deal with them, as if they were his own.
49.
The whole focus of the second and third sentences of the paragraph is
the respondent’s power to deal with the lender’s assets as if they were his
own. It follows that the focus of the second sentence of paragraph 5 is not on
assets which the respondent owns (whether legally or beneficially) but on
assets which he does not own but which he has power to dispose of or deal with
as if he did. Further, as I see it, the fact that he incurs a liability at some
stage to reimburse the lender is immaterial. Finally, I do not read the last
sentence of paragraph 5 as a restriction on the scope of the second sentence but
(as Lord Hodge suggested in the course of the argument) as expansionary.
50.
For these reasons I would answer the question posed in issue 3 in the
statement of facts and issues, namely whether the proceeds of the Loan
Agreements were “assets” within the meaning of the extended definition in paragraph
5 of the Freezing Order because the respondent had the power “directly or
indirectly to dispose of, or deal with [the proceeds] as if they were his own”,
in the affirmative. It follows that I would allow the appeal on this ground.
Conclusion
51.
I would dismiss the Bank’s appeal on issues 1 and 2 but allow it on
issue 3. I would invite the parties to make submissions in writing on the form
of order and on costs within 21 days of this judgment being handed down.
