England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Andrew Smith

		Royal Courts of Justice Strand, London, WC2A 2LL
		14/10/2015

Lord Justice Lewison:

1. On 5 December 2014 HHJ Mackie QC granted a freezing injunction against Michael Wilson & Partners Ltd ("MWP"). The order contained an exception in standard terms which stated:

"This order does not prohibit the Respondent from dealing with or disposing of any of its assets in the ordinary and proper course of business."

2. The order also contained provision permitting the parties or anyone served with it to apply to discharge or vary it. The main issue raised on this appeal is whether two payments made by MWP, which would otherwise have been prohibited by the freezing order, were permitted as a result of the exception. By his judgment given on 17 July 2015 Andrew Smith J held that they were not.
3. It is not necessary to say much about the underlying dispute. MWP is a company incorporated in the BVI which provides legal and business consultancy services in Kazahkstan and Azerbaijan. Mr Michael Wilson is the sole director of MWP. Mr Emmott entered into a form of partnership agreement with MWP, but the relationship broke down. Following the breakdown the parties were engaged in an arbitration which resulted in an award made in favour of Mr Emmott. The freezing order was granted in aid of that award.
4. Among MWP's clients were the Assaubuyev family, their companies, bank and trusts. MWP had claimed more than US$4.2 million in fees from them, and success fees in addition. The claim was ultimately compromised on 2 March 2015 by a settlement agreement. On 17 March 2015 MWP received into its bank account in Kazakhstan the sum of US$4.6 million odd. MWP then made the two payments which are alleged to have been breaches of the freezing order:

i) A payment of US$1,856,500 to Kazholdings Inc, a BVI company ("the KHI payment") and

ii) A payment of US$1,232,515 to Kazholdings LLP, a subsidiary of KHI ("the LLP payment").

5. In his tenth witness statement dated 20 May 2015 Mr Wilson described the KHI payment as follows:

"Repayment of part of the principal of the Secured Loan, advanced to cover the costs incurred (in mediation, arbitration, the SCCO, the QBD and the Court of Appeal, paying costs orders and in providing for security for costs) in chasing and recovering the debt from the Assaubayevs/Hawkinson/Gold Lion, given their default from February 2011 until March 2015."

6. He described the LLP payment as follows:

"Office Rental, Service and Maintenance (including VAT at 12%)"

7. Mr Emmott's position, set out in his fourth witness statement dated 29 May 2015, is that Mr Wilson controls KHI and, since the LLP is a wholly owned subsidiary of KHI, controls that too. He alleges that the loan from KHI to MWP is "a fiction", and that Mr Wilson has produced no evidence to demonstrate its reality. Although there are documents associated with the alleged loan, Mr Emmott says that they are "bogus". He says that the rent allegedly due is "grossly inflated" and any agreement to pay it is a sham.
8. Mr Wilson replied to those allegations in his seventh witness statement dated 3 June 2015. He said that without KHI there would be no MWP because banks were not willing to lend. He said that the loan was secured at the outset by a fixed and floating charge over all MWP's assets; and that there were further advances made from time to time. The rate of interest was 5 per cent over US LIBOR which, he said, was a reasonable rate. Mr Wilson also denied that he controlled KHI. He accepted, however, that LLP was a wholly owned subsidiary of KHI. In his eleventh witness statement dated 15 July 2015 Mr Wilson said:

"Almost all foreign investors in Kazakhstan, including MWP… structure their affairs in an appropriate and tax-efficient manner, typically funding their operations not through injections of cash equity, but instead through financing and loans. …

Thus, indeed, KHI financing MWP was always, and still is, an appropriate, robust, compliant and tax efficient solution. This is especially the case because law firms and business consultants cannot borrow from local banks, who prefer to lend only against physical assets, and not to mere service providers, and even if they could … borrow from local banks, interest rates are penal…"

9. Mr Wilson also gave written evidence about how MWP came to take a lease of its offices in Almaty, Kazahkstan from LLP; and produced monthly invoices from LLP to MWP. In summary his account was that MWP had entered into an agreement for lease with a company called Bazis-A Corporation. Under the terms of the agreement MWP was required to fit out the offices. Bazis-A Corporation terminated the agreement just before MWP had finished the fit-out, but after it had terminated the lease on its former offices. It was in those circumstances that LLP decided to buy out Bazis-A Corporation, thus preventing MWP from becoming homeless. He denied that the rent was an inflated one; and went on to say that it had been reduced following the world financial crisis. He repeated much of this in his eleventh witness statement.
10. The judge decided that each of the disputed payments was a breach of the freezing order. At a subsequent hearing on 10 August 2015 he imposed a substantial fine on MWP and committed Mr Wilson to prison for contempt for a term of eight months in relation to each payment, the two terms to be served concurrently. Both MWP and Mr Wilson appeal against the judge's order: Mr Wilson as of right, and MWP with the judge's permission. No Respondent's Notice has been filed by Mr Emmott, so the question for us is whether the judge was right for the reasons that he gave. We are not concerned with the question whether his order might be upheld on different or additional grounds.
11. It is common ground that the burden of proof in an application for committal for contempt lies on the applicant and that the standard of proof is to the criminal standard. This applies also to the question whether a disputed transaction falls within the exception: Nokia Finance SA v Interstone Trading Ltd [2004] EWHC 272; JTC BTA Bank v A [2010] EWCA Civ 1141 at [79]. It was thus for Mr Emmott to prove that the disputed transactions were not covered by the exception; not for MWP to prove that they were. I reject the suggestion that the judge failed to apply the appropriate burden and standard of proof. He directed himself at [2] that the applicable standard was the criminal standard; and at [15] he rejected Mr Emmott's case on the genuineness of the KHI loan because Mr Emmott had not satisfied him to the requisite standard that the money had not been lent. Plainly he regarded the burden as lying on Mr Emmott and the requisite standard as being the criminal standard.
12. In any event, in his judgment on the substantive application the judge did not make factual findings on disputed evidence adverse to MWP or Mr Wilson. There were really only two aspects of the case that gave rise to disputed issues of fact:

i) Was the loan from KHI bogus as Mr Emmott alleged, or was it genuine as Mr Wilson alleged;

ii) Was the rent for the Almaty offices inflated as Mr Emmott alleged, or was it the market rate as Mr Wilson alleged?

Everything else was an evaluation of the facts.

13. On the first of those questions the judge said that Mr Emmott had not persuaded him to the required standard that KHI had not lent money to MWP. He must have proceeded, therefore, on the basis that there was a genuine secured loan. On the second of those questions the judge said that he was not in a position to reach a conclusion on the question whether the rent was inflated and said that he would ignore that suggestion. We, too, must proceed on that basis.
14. The KHI loan agreement was dated 23 July 1998. Under its terms KHI agreed to lend MWP those amounts that MWP might request that were necessary to finance its business and to maintain its branch in Almaty, and which were approved by KHI. Clause 4.1 of the agreement provided for the payment of interest. Clause 4.2 provided that MWP would repay the principal amount of the loan, together with all interest accrued due, on receipt of written notice from KHI. On 22 November 1998 MWP granted KHI a fixed and floating charge to secure repayment of the loan. Clause 9 of the charge defined the assets subject to the charge in wide terms and expressly included "present and future receivables".
15. A schedule of draw down and repayments shows a steadily increasing balance outstanding under the loan agreement. Repayments were infrequent: the first were not made until February 2005. Further repayments were made in May and June 2006; and four repayments (totalling $1.143 million) were made in fairly short order between September and November 2010. There were four more repayments in 2011, the last in October of that year; and thereafter no further repayment until the repayment in dispute. Both at the time when Mr Emmott's claim was quantified in the arbitration (30 October 2014) and at the time of the disputed payment the outstanding balance due to KHI was $27 million odd. On 25 April 2015 KHI made a written demand, pursuant to clause 4.2 of the loan agreement, for payment of $1,856,500; and it was in response to that demand that the KHI payment was made.
16. There was some connection between Mr Wilson and KHI, the precise nature of which was not fully explained. By the date of the hearing on 17 July 2015, the judge had been informed that, at an earlier arbitration hearing between the parties, MWP's witnesses had explained that KHI was part of the Wilson "family affairs" and that the arbitrators had found that KHI was ultimately owned and controlled by Mr Wilson, albeit that Mr Wilson had denied that fact. By the date of the hearing in August 2015, Mr Wilson's evidence was to the effect that:

i) as he had previously asserted, he did not own or control KHI;

ii) KHI's sole shareholder, a Liechtenstein Anstalt, WFA –Windsor Fine Arts Establishment ("WFA"), was the same as MWP's sole shareholder;

iii) WFA was owned by the Settignano Foundation, which was not owned or controlled by Mr Wilson, but his family were "ultimately, potential discretionary beneficiaries of any distributions from the Settignano Foundation";

iv) as from some time after October 2008, KHI had taken "significant investment and loans" from a third party, Seven Seas Corporation, and a Mr Patrick O'Mara, who controlled Seven Seas Corporation, had been appointed a director of KHI to represent such interests;

v) consequently, after that date, KHI "could no longer be run solely for the benefit of the originating Wilson Family Foundation, but emerged to expand its operational contacts and revenue generating capabilities; thus, Third party funders' and investors' interests, including those relating to Mr O'Mara/Seven Seas, should be considered."; see KHI's letter to MWP dated 6 August 2015.

17. But Mr Wilson explained (and the judge accepted) that in Kazakhstan it was usual for businesses (including law firms) to be financed by related entities rather than by what in the UK would have been normal banking facilities.
18. There were a number of lease agreements in evidence; the first dated 1 March 2008, and the last dated 27 February 2015. The first of these agreements created a lease term expiring on 1 March 2014; and the last of them extended the term to 1 February 2016. Rent accrued monthly; and was revised from time to time. It was also invoiced monthly. The rent was last fixed on review by the lease agreement dated 1 July 2013. A statement of account showed an opening debit balance of $168,000 at the beginning of 2012. It also shows that when the rent was last reviewed in July 2013, it reduced from $46,000 per month to $32,000 per month. The account goes on to show regular payments being made towards the accruing rent, but less than the full amount due. Thus the total arrears increased over time; and by the time of the disputed LLP payment stood at $1.23 million. The LLP payment discharged the arrears in full.
19. The issue was whether the payments made fell within the exception to the freezing order. In order to fall within the exception a disposal of assets (including a payment) must be both (a) in the ordinary course of business and (b) in the proper course of business. These are separate and cumulative requirements. They are also highly fact-sensitive questions. What is in the ordinary and proper course of business will, of course depend on what business is carried on by the respondent in question, and how it is carried on. A payment which might be made in the ordinary and proper course of one business may not satisfy that description in the case of a different business. Likewise a payment which might be made in the ordinary and proper course of a business carried on in one location, may not satisfy that description in the case of the same kind of business carried on in a different location. In the present case the business of MWP is that of the provision of legal and business consultancy services, principally in Kazakhstan.
20. Whether a payment is made in the "proper course of business" is likely to depend on the purpose of the payment. If the payment is to be made in order to discharge a pre-existing liability of the business incurred in good faith, then it is difficult to see how that would not be the "proper course of business". In the present case, having decided (or assumed) in MWP's favour that the KHI loan was genuine and that the rent was not inflated, it seems to me that the judge must have proceeded on the basis that both payments were made in the "proper course of business". He certainly made no finding that they were not.
21. So the question then was: were the payments made "in the ordinary … course of business". That is not necessarily the same as asking whether the payments themselves were "ordinary": it is the course of business that the exception deals with. It is thus the course of business that must be "ordinary".
22. The underlying purpose of a freezing order is not to give the claimant security for his claim. Nor is it to rewrite the law of insolvency. The primary (and some would say the only) purpose of a freezing order is to prevent the dissipation or concealment of assets that would otherwise be available to satisfy a judgment: see JSC BTA Bank v Ablyazov (No 10) [2013] EWCA Civ 928, [2014] 1 WLR 1414 at [35] and [36] (Beatson LJ). Thus the repayment in good faith by a defendant of pre-existing liabilities is a transaction that the court is likely to permit: The Angel Bell [1981] QB 65. A second principle of relevance is the approach to the interpretation of a freezing order. It has been frequently said that such an order must be "strictly construed" and that if there are two possible interpretations of it a defendant who acts in accordance with one possible interpretation should not be held to be in contempt: Redwing Ltd v Redwing Forest Products Ltd (1947) 64 RPC 67; JSC BTA Bank v Ablyazov (No 10) at [37]. The words of the order must be given their ordinary meaning, but the purpose for which freezing orders are made will influence that meaning: JSC BTA Bank v Ablyazov (No 10) at [64] to [66]. I agree with Mr Lavender QC, appearing for MWP, that it is not helpful to substitute for the phrase "ordinary course of business" synonyms (or approximate synonyms) like "routine" or "recurring." A transaction which is neither of those may well be properly regarded as being in the "ordinary course of business". One example was that in Normid Housing Association Ltd v Ralphs [1989] 1 Lloyds Rep 274 where a firm of architects settled a claim against their insurers. The court was careful not to attempt to define what was meant by the "ordinary course of business" but Lloyd LJ said at 276:

"Of course a settlement of this kind is not something that happens every day. But that does not mean that when it does happen it is not in the ordinary course of business."

23. Another example, which Mr Lavender gave in argument, was the payment of damages for unlawful discrimination or compensation for unfair dismissal at the suit of an employee.
24. In JTC BTA Bank v A [2010] EWCA Civ 1141 Maurice Kay LJ said at [57]:

"As Robert Goff J recognised in The Angel Bell, freezing orders … are not in terms limited to disposals or dealings with assets which amount to dissipation. That qualification would render the order practically useless and its policing impossible. Instead, the form of order now contained in the annex to the CPR and in the Commercial Court Guide imposes a blanket restriction on dealings with or disposals of assets up to a stated value but caters for the principles enshrined in the Angel Bell by containing an express exception for disposals in the ordinary and proper course of business and a general right for the defendant to apply to the court for permission to carry out a particular transaction not falling within that exception. It was under a general liberty to apply of this sort that the order in the Angel Bell was made."

25. He went on to explain what fell within the exception at [74]:

"We do not, however, accept that any transaction (even if not dissipatory in nature) can properly be described as one in the ordinary course of business. As explained earlier, the standard exception on which paragraph 9(b) is modelled provides a limitation on the scope of the injunction thereby enabling routine business transactions to be conducted without reference to the court. But dealings or disposals which are not part of the ordinary business of the defendant in that sense do not necessarily fall foul of the purpose of the freezing order. They merely require the approval of the court or the claimant before they are carried out and so enable the court to scrutinise what, on its face, may not appear to be a routine or regular transaction."

26. The first of the quoted sentences is, if I may say so, a little obscure. What I think Maurice Kay LJ meant was that he was not accepting that every transaction that was not dissipatory in nature could be described as one in the ordinary course of business. With that I would respectfully agree.
27. At [76] he added:

"This format points, in our view, to the standard exception about disposals in the ordinary course of business being given a narrower rather than a wide meaning. Transactions in the ordinary course of business in the case (e.g.) of a trading company will include all its usual purchases and disposals and the payment of its trade and other liabilities as they fall due."

28. As Mr Lavender submitted, Maurice Kay LJ certainly contemplated the payment of both "trade" and "other" liabilities as they fell due as being within the scope of the exception. Thus to restrict the scope of the exception to the payment of "trade creditors" is as unhelpful as any other paraphrase.
29. The judge considered the ledger entries relating to the KHI loan that Mr Wilson had produced in evidence. In his view they showed two things of importance. First, that the largest repayment that MWP had ever made before the disputed payment was $525,000: less than a third of the disputed payment. Second, that no repayment at all had been made between 2011 and 27 April 2015. These facts are not disputed. It was these facts that led the judge to the conclusion that the disputed payment could not be described as being made in the "ordinary course of business." He considered also that the fact that there was some association between MWP and KHI also made it difficult to say that the repayment was made in the ordinary course of business, although he would have come to the same conclusion even without that factor.
30. In my judgment the judge took too narrow a view. First, although it is true that the largest individual payment before the KHI repayment was $525,000, he overlooked the fact that four repayments (totalling $1.143 million) were made in fairly short order between September and November 2010. Second, although there was a substantial temporal gap between the previous repayment and the KHI repayment, there had been similar temporal gaps before. Third, no repayment was due until a written demand had been made, and no written demand had been made between the date of the last previous repayment and the demand that triggered the KHI repayment. Thus the KHI repayment was repayment of a pre-existing liability as it fell due. Fourth, the KHI loan was a secured loan, so that assets falling within the security (which included present and future receivables) would not have been available to satisfy the arbitration award. Fifth, although the amount of the payment may well be relevant where what is in issue is discretionary spending or investment, it is of much less significance when the repayment in question is obligatory and related to liabilities which long pre-dated the making of the freezing order. In such a case it is the nature of the obligation which is more weighty. Sixth, the judge overlooked the fact that the KHI repayment was not the repayment of the whole outstanding balance. It was in fact less than one tenth of the balance outstanding at the date when Mr Emmott's claim was quantified. Seventh, the association between MWP and KHI had no bearing on the question, given the judge's acceptance of Mr Wilson's evidence that this method of financing service providers was usual in Kazakhstan. Eighth, the judge did not in terms reject Mr Wilson's explanation that repayments of the loan were made as and when MWP was able to gather in receivables. I would set aside the judge's decision on this issue.
31. Turning to the LLP payment, the judge observed that before the disputed payment of $1.2 million the largest payment on account of rent had been $20,000. Mr Wilson's evidence, in his seventh witness statement, was that LLP had allowed rent arrears to accumulate in the light of other demands on MWP. This was not, therefore, a case of a trading entity paying its trade debts as they fell due. On the contrary, it was a case of MWP paying off accumulated arrears of rent. Once again the judge supported his conclusion by referring to the connection between MWP and LLP; and also to the treatment of rent arrears in MWP's accounts.
32. Mr Shepherd QC, appearing for Mr Emmott, accepted that payment of rent under a lease of offices used for the purposes of the defendant's business was a transaction in the ordinary course of business. If MWP had paid the monthly rent in full as it fell due, he accepted that there could have been no cause for complaint. Mr Shepherd sought to draw inferences from the timing of the payments, and submitted in his skeleton argument that:

"The circumstances in which this occurred make it clear beyond doubt that the object was not to pay bona fide debts in the ordinary and proper course of business but was the latest device in a strategy to evade the reason for the grant of the Freezing Order." (Emphasis in original)

33. However, since no Respondent's Notice has been served, the emphasis on the alleged impropriety of the payments is not an argument open to Mr Emmott on this appeal. Mr Shepherd did not argue that the payment of arrears of rent in itself fell outside the scope of the "ordinary course of business". It is plain that the rent was accruing (and invoiced) monthly; and that it was a liability that pre-dated the award in Mr Emmott's favour. It is also plain from the schedule of draw-down and repayments of the KHI loan that, until the settlement of the Assaubuyev claim, MWP did not have the wherewithal to pay the rent in full. It did, however, make regular payments on account of the rent. Once again, in my judgment, the judge's concentration on the amount of the payment, as compared with previous payments on account of the rent, was too narrow a view. The judge's reliance on MWP's accounting treatment of the rent arrears was also, in my judgment, misplaced. He did not suggest that the accounting treatment cast any doubt on the genuineness of the liability for rent; and if he had meant to do so, that would have been (a) inconsistent with his acceptance that the transactions were proper and (b) contrary to the documentary evidence which the judge did not say that he rejected. I do not, therefore, understand what significance the judge attached to the accounting treatment or why he thought that it bore on the nature of the payments themselves. I would also set aside the judge's decision on this issue.
34. I have reached these conclusions on the facts and the evidence of this case. I do not intend to attempt any broader description of what, on other facts, might amount to payments or disposals in the ordinary course of business. As I have said the answer to that question is highly fact-sensitive. However, for the reasons I have given I would allow the appeals. The remaining points argued do not arise for decision, and anything I might say about them would be obiter.

Lady Justice Gloster:

35. I agree. I would stress, however, that, as Lewison LJ has pointed out, what amounts to payments or disposals in the ordinary course of business is a highly fact-sensitive question. The fact that, in this case, this court takes the view that the repayment of some part of the outstanding loan balance and the payment of outstanding rental arrears, to what were, on the evidence, corporate entities associated with MWP, were indeed in the ordinary course of MWP's business, does not predicate that in all circumstances the repayment of indebtedness to associated companies will be regarded as falling within the "ordinary course of business" exception to a freezing order.

Lady Justice Black:

36. I agree with both judgments.