England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Rolls Building, 7 Rolls Buildings Fetter Lane, London EC4A 1NL
		27/03/2017

Mr Justice Mann :

Introduction

1. This judgment gives my reasons for the decision which I indicated I had reached on 24^th March, in favour of the intervener in this action.
2. This is an application by a secured creditor of a defendant against whom a freezing order has been made. The secured creditor seeks an amendment to the freezing order to the effect that nothing in the order should prevent or restrict it from enforcing any rights it might have pursuant to its facility agreement and debenture. One would have thought, at first sight, bearing in mind the nature and purpose of a freezing order, that the application might be thought to be unnecessary, or at least no more than a precaution, and that it could not be opposed, but in this case the claimant (who has the benefit of the freezing order) opposes the application for the time being on the footing that it should be delayed and determined with some rather complicated proceedings in which, it is said, the ownership of certain assets is to be determined. His submissions that the matter ought to be adjourned over to those other events is backed up by an application seeking that as specific relief.
3. The intervening third-party with the benefit of the debenture is TCA Global Master Fund LP ("TCA" -a Cayman limited partnership). It was represented by Mr Stephen Midwinter QC. The claimant was represented by Miss Marion Smith QC. The second defendant, which is the chargee under the debenture, was not represented at the hearing before me.

The facts – more detail

4. The claimant claims that all four defendants in this case are jointly and severally liable on a bridging loan for a considerable sum of money. On 2 August 2016 judgement was entered against them for a liquidated some of over US$2.5 million, and a later judgement of 24^th of November 2016 assessed further damages at over €1.3 million against the first defendant and a further sum of over US$400,000 is against all four defendants jointly and severally.
5. On 21^st year 2016 a freezing order was made against all four defendants and it was continued by Norris J on 7 July 2016. The order restrained the defendants from dealing with certain Van Dutch boats or hulls over which the first claimant also claimed a charge, restrained dealings with shares in the first defendant (again over which the claimant also claimed a charge or pre-emption rights) and contained a further general restraint on dealing with the assets of any of the respondents in the normal way. The order contained a number of disclosure orders, which had to be complied with by all the defendants. Although the claimant (Mr Taylor) claimed a charge over assets, this application turns on potential conflicts between the pure freezing order element on the one hand and the claimant's debenture on the other. Mr Taylor's charge was not deployed as the basis for resisting the order which TCA seeks.
6. That order has led to considerable satellite litigation. There were complaints about non-disclosure which led to committal proceedings and committal orders. Those orders were then followed by an application in which the third and fourth defendants, on whom prison sentences had been imposed, to "remit" the sentences. While those applications were outstanding the claimant made a further application for the committal of the third and fourth defendants on the basis of their intentional interference with the due administration of justice. In the course of all that the defendants asserted that certain assets which were thought to have been owned by the second defendant were in fact owned by some entity called Rhino, which was said in turn to be owned by a third party, namely a Mr Khodabakhsh. That claim seems to be hotly contested hand has seriously complicated what was already a fairly complicated matter. Directions have been made for further disclosure in relation to the claims about ownership and it is said that documents about this are being improperly retained and not disclosed. Mr Taylor apparently intends to enforce this new disclosure order, presumably by further committal applications. The application to remit the sentences has been dismissed. Nonetheless, what remains is a matter which it will not be straightforward to determine. It seems that the claimant is seeking to establish the true position as to ownership of assets by the medium of disclosure orders and, probably, committal applications. Miss Smith's case on these applications is that the present application should be stood over to be heard with all those other outstanding matters.
7. The interest of TCA in the matter arises via a debenture given by the second defendant on 4th November 2014 in order to secure a facility of US$2.5 million or such further sum up to US$7.5 million as might be agreed between TCA and the second defendant. The debenture contains a fixed and floating charge in familiar form. The fixed charge catches certain specified property including "all the Intellectual Property" of the second defendant, as defined. The enforcement rights include the right to appoint a receiver who may dispose of charged property. There seems to be no dispute as to the validity of that charge.
8. It is that charge that TCA now seeks to enforce. It seems to have done some sort of deal with a Florida company called Vandutch Inc, which, contrary to the suggestion arising from its name, is not related to either of the first two defendants (it takes its name from a style of boat). The agreement (by deed) between that company and TCA specifies that TCA intends to take enforcement action against the second defendant pursuant to the debenture to recover the amounts owed to it. As a result of that it is said to be expected to be in a position to be able to procure the appointment of a receiver or similar officer, and if it did it would serve a Transfer Notice which would lead to a sale by TCA. Although the deed did not impose any obligation on TCA to do so, TCA had the right to confirm that the second defendant's trademarks would be transferred to the Florida company for a sum of just over US$1 million. The agreement seems to me to be in the nature of a sort of put option. Its operation presumably must depend on whether or not any receiver can be persuaded to adopt the transaction. It presupposes that TCA will be able to appoint a receiver or similar officer.
9. TCA apparently decided that it would be a good idea to avoid any problems by asking the claimant to consent to its being able to enforce the debenture, notwithstanding the freezing order. The claimant, however, did not agree that. After some negotiation which apparently included an offer by the claimant to buy the trademarks for a sum less than TCA was hoping to obtain on the Florida company, TCA decided to make the present application in order to clear its path.

Does the freezing order as an obstacle to TCA's enforcement of its security? – the principles

10. In the absence of authority it would seem to me to be clear that principle does not stand in the way of a secured creditor enforcing its security over charged assets caught by a freezing order. The whole point of a freezing order, as is now well-established, is to prevent a defendant from dissipating its assets improperly in the face of a claim by the claimant. It is a remedy which operates personally against the defendant (or any other person identified as a respondent in the injunction and against whom the injunction is specifically directed). It does not operate so as to give security to the creditor; and it does not operate so as to affect the genuine rights of third parties over those assets.
11. The present injunction operates in exactly that way. It is in familiar form and I do not need to set out its terms in this judgement. It operates to prevent each of the defendants from dissipating or disposing of their respective assets. It does not in terms bar anyone else, who might have an independent right over the assets, from disposing of them. Third parties might be caught by the order if, for example, their acts fell to be treated as acts of the defendants, or if they were otherwise acts done so is to defeat the order in some improper way, but that is different.
12. Thus, in my view, a third party with security over property which is frozen by the freezing order would not need to obtain permission in order to exercise that security because the exercise of disposal rights under that security would not be an act prohibited by the order. If, for example, the third party uses a power of sale in order to dispose of the property, that would not be a disposal by the defendant notwithstanding any technicality which might arise out of the fact, which is common to many securities, that the exercise of a power of sale is technically done as agent for the mortgagor. Nor would it be any form of dissipation because the secured debt already exists and the secured property is already encumbered with it. The enforcement by the mortgagor would not be an infringement of the letter of the order; nor would it be contrary to the spirit of the order which, as I have explained, does not operate so as to give the claimant a prior right in the form of security over the assets. If the freezing order does not destroy, or affect, the rights of a chargee or mortgagee (which it does not) there is no reason why it should operate so as to restrain the exercise of the rights of that person. The exercise of those rights would not infringe the order. It follows therefore, in my view, that strictly speaking a chargee or mortgagee, in a normal case, would not need to obtain a release of variation of the freezing order.
13. However, Mr Midwinter drew my attention to the views expressed by Colman J in Gangway Ltd v Caledonian Park Investments (Jersey) Limited [2001] 2 Lloyds Rep 215. In that case the court granted a freezing order over the assets of the defendant. A bank, which had security over residential and commercial properties, and applied to vary the freezing order to allow it to realise its securities. That application was resisted on the basis of concerns on the part of the claimant that the bank might sell the property at an undervalue and thus deprive the claimant of the whole or part of what the judge described them as saying was "the security for the claim". Colman J ordered the variation while rejecting the proposition that the court somehow police the exercise of the security rights. He posed the question before him is being whethe the variation order should be qualified so as to fetter, or at least provide a mechanism for monitoring the terms of, a disposal (paragraph 13). He went on:

"14. The answer to this question lies in the purpose of this particular jurisdiction. It is not to provide the claimant with security for its claim. That cannot be too strongly emphasised. Its purpose is to restrain the defendant from evading justice by disposing of assets otherwise than in the ordinary course of business so as to make itself judgement-proof. A claimant has no security interest in the assets the subject of such an order. His only interest is in the enforcement of the Court's order to prevent disposal of the assets in particular circumstances.

15. When a third party, such as a bank, is given notice of such an order, it is obliged to comply so far as it possibly can with the Court's order: see Z Ltd v A-Z Ltd sup at p244, Z Bank v DI, [1994] 1 Lloyds Rep 664. However, where the bank has a security interest in the asset it is entitled to exercise its rights in accordance with its own commercial judgement, provided always that it does nothing inconsistent with the underlying purpose of the injunction. The limits of the Court's supervisory intervention are well illustrated by the decision of the Court of Appeal in Normid Housing Association Ltd v Ralphs and Mansell … It was there argued by the claimants that the defendant architects should not be permitted to settle an outstanding claim against their professional indemnity insurers in the proposed in the proposed amount , because it undervalued the claim and would thereby diminish the defendants' assets to the prejudice of the claimants who would be left with a claim against the insurers (since the defendants were effectively insolvent) which was well below the amount claimed against the defendants. The Court of Appeal discharged the injunction restraining such settlement.…

16. Clearly, if a defendant is entitled to exercise his own commercial judgement in this way consistently with bona fide conduct in the ordinary course of business, so also must a third party such as a bank which has the benefit of a security interest in the property covered by the injunction. Its duty in relation to disposal is no higher than to act in good faith in the ordinary course of its business. It should not have to justify its commercial judgement to the court in the absence of evidence that the disposal is conducive or aimed at circumventing the freezing injunction in the interests of the defendant or otherwise not in good faith. For the courts to impose on banks any more stringent fetter on their rights to realise security would represent an unwarrantable interference in the management of their security interest and would elevate the claimant's interest in property covered by such an injunction to one almost analogous to that of a chargee.

17. In this case there is no suggestion that the bank is or might be about to act collusively or otherwise than in good faith. Indeed, all London banks are likely to be very well aware of their duties where notified of a freezing injunction in respect of accounts or property of customers under their control. They will know that they will be held to be in contempt of court should they ignore such orders. In the present case the bank has adopted exactly the right course in coming to court to get the order varied so as to permit it to realise its security interest in the properties. But that is the limit of its duty. Provided that it acts in good faith and without collusion in the disposal of the properties in the ordinary course of business and provided that it holds subject to the freezing injunction any surplus of the defendants' assets remaining after satisfaction of the secured outstanding debt, it has acted consistently with its duties."

14. Thus Colman J seems to have thought that the bank was under some sort of duty to apply for permission to exercise its security, in default of which it would be in contempt of court. Despite the respect which has to be given to the views of such an experienced Commercial Court judge, I respectfully disagree with that analysis. The source of Colman J's views seems to be the case referred to in paragraph 15 of his judgement. In that case Lord Denning set out the basis of a freezing order (then a Mareva injunction). He described the "usual type of case" and said that:

"Every person who has knowledge of [the injunction] must do what he reasonably can to preserve the asset. He must not assist in any way to the disposal of it. Otherwise he is guilty of a contempt of court." ([1982] 1 QB 558 at 572H.)

In my view, in saying that Lord Denning is referring to disposal by the defendant. He was not intending to refer to all disposals (though, of course, the most obvious case is one affected by or on behalf of the defendant). So far as banks are concerned, Lord Denning said:

"Arrest of a bank account

So also here, once a bank is given notice of a Mareva injunction affecting goods or money in its hands, it must not dispose of them itself, nor allow the defendant or anyone else to do so – except by the authority of the court. If the bank or any of its officers should knowingly assist in the disposal of them, it will be guilty of a contempt of court. For it is an act calculated to obstruct the course of justice…" (Page 573F-G)

15. Those views were not intended to deal with a situation where the disposer has his or her own rights which are being enforced and who does not do an act which falls to be viewed as a disposal by the defendant or a dissipation of the asset. Withdrawing money from a bank account is likely to involve a disposal of the money by the defendant, and it is therefore prohibited. A bank which allows it is participating in that disposal by the defendant. That is what banks must be wary of and should not facilitate or permit. I do not consider that, for present purposes, Lord Denning was saying any more than that, and insofar as Colman J read more into it then I would respectfully disagree. It is worthy of note that a wide construction of the dicta which would have prevented the defendant from receiving a sum due to him was disclaimed by a differently constituted Court of Appeal in The Law Society v Shanks [1988] 1 FLR 504.
16. In the circumstances I do not consider that Lord Denning's case provides any basis for saying that a secured creditor who seeks to enforce its security over the asset held by the bank would need to get a variation of the judgement to do so. In the normal case one would not expect such enforcement to be a disposal by the defendant. Nor would such a disposal amount to aiding and abetting a disposal by the defendant. It would be an exercise of the secured creditor's own independent rights. Accordingly I would respectfully disagree with the suggestion by Colman J in paragraph 17 of his judgement that somehow there is a "duty" on the bank to apply for a variation, if that is what he is saying. I am comforted in this disagreement by the fact that, judging by the report, there does not seem to have been much or any argument as to whether the bank needed to apply in the first place. The thrust of the judgement concerns whether, assuming that the bank had to apply or was indeed applying, some constraints should be put on the actions of the bank. Furthermore, it was not a case in which the bank was asking whether it might make dispositions of the defendant's money standing to the credit of the defendant's bank account. That sort of thing would have fallen within Lord Denning's dicta; what the bank was proposing did not.
17. In all the circumstances I prefer the principled approach which determines that, in a normal security enforcement situation which does not involve anything which could properly be classed as a disposal by the defendant, which is not collusive (in an infringement of the order) and which does not amount to aiding and abetting a breach of the order, a secured creditor does not need a variation of a freezing order. That approach also happens to lead to a sensible practical result. If it were not correct then in every freezing order case a secured creditor would have to apply for a variation, which would run up unnecessary costs, not least because, in the absence of some suggestion of collusion or sham, the claimant could never object to the variation. It may be that in some complex cases the anxiety of a secured creditor to tread warily in an apparently hostile litigation environment would lead to a safety-first approach of seeking a variation, but I do not consider it to be generally necessary in what I will call a standard case, of which this is one.

The application of those principles to this case

18. If that is right then what TCA seeks in this application is something that it need not seek. It need not seek it because it does not need it, and if it does not need it then the claimant cannot oppose it in the absence of something like collusion, which is not alleged by the claimant. That, at one level, seems to provide a clear answer to the application.
19. The claimant, however, takes a different view. It submits that the circumstances surrounding the ownership of the assets in question (the intellectual property) mean that a variation should not be granted until that uncertainty is sorted out. Miss Smith did not oppose the variation root and branch. She submitted that what should happen is that the application should be adjourned so that it could be dealt with in the context of what she anticipated would be a forthcoming resolution of the issues of ownership of the assets. He submitted that it might turn out that the trademarks (intellectual property) were not owned by the second defendant but were owned by Rhino, and it might turn out that Rhino was actually owned by some or all of the defendants other than the second defendant. Until all that was sorted out TCA should not have its variation. If it were correct that the second defendant did not own the assets in question, then TCA would have no right over the assets. It would be right for the court, as a matter of discretion, to let the freezing order do what freezing orders were supposed to do, which is just to hold the ring until matters were sorted out. That was the just and convenient course in relation to the interests of all the parties. She also pointed out that there is a danger that a court-permitted variation of the order would somehow be seen as a validation of TCA's title. In any event, it was not urgent for TCA to have this relief now. It had done its agreement with the Florida company as long ago as January, and its debt had been outstanding for some time. There was no reason why it could not wait until relevant ownership questions were sorted out in the forthcoming proceedings.
20. There are a number of problems with those submissions.
21. The first is that there is no reason why a dispute as to ownership should mean that, in an informal way (namely via the refusal of a variation) the freezing order ought to remain in place, particularly when a variation is probably not necessary in the first place. If it turns out that the second defendant has no title to assets which TCA is seeking to enforce over, then TCA commits a wrong as against the second defendant. It bears the risk of that. It is no purpose of the freezing order to protect the second defendant from that.
22. Next, there is absolutely no certainty that questions of disputed ownership will be sorted out in any meaningful way, or perhaps at all, as a result of the current trajectory of the proceedings. The proceedings and procedures in which it is said that questions of title will be sorted out are the committal and/or disclosure proceedings which I have referred to above. One can see all sorts of outcomes to those proceedings which will not involve a determination of the kind that Miss Smith holds out. The proceedings may, for example, result in some form of disclosure which does not actually prove anything conclusively but which raises questions which will have to be developed in some other way. The proceedings may result in nothing more than further prison sentences without any findings of ownership (as opposed to findings of nondisclosure). It is apparent from the description of the collateral proceeding so far that they are complex and are capable of taking many twists and turns, over an extended period of time. I can see no reason why TCA should wait for all that to play out if it does not wish to do so.
23. To cite "holding the ring" as being something that the court should achieve per se is to allow the cliche to govern the substance. It is true that freezing orders are capable of "holding the ring" as between the relevant parties, and that "holding the ring" may well be a sensible thing to do in many circumstances. However, it has no virtue per se. One has to work out what the dispute is, and who the relevant participants are, before applying the expression. There is in my view no ring to be held so far as the secured creditors are concerned.
24. The fear of a perception of some form of court approval or sanction is easily dealt with, as Mr Midwinter accepted. If there is a risk of that (which I do not consider to be very great) it can be dealt with by an appropriate "for the avoidance of doubt" provision in the order. If I make an order such a provision will be included within it in order to avoid any possibility of Miss Smith's fears being realised.
25. Last, I do not think that questions of delay or lack urgency are of any significance. They would be significant if there was something which needed to be decided and which would take some time to be decided. Since, in my view, as between the secured creditor and the claimant there is nothing to be decided, then questions of urgency to not come into it. Even if it is not urgent for the secured credit to enforce its rights, unless there is some good reason for postponing them questions of urgency (or the lack of it) to not arise. Furthermore, Colman J's findings in Gateway as to the inappropriateness of seeking to control the exercise of security rights via a control of the freezing order point away from taking this into account. The secured creditor is entitled to enforce its security at a time of its own choosing (assuming its security allows it to do that in first place).
26. Miss Smith also held out the prospect that it might turn out that the relevant assets were owned by defendants other than the second defendant (presumably through ownership of Rhino). She suggested that if TCA were allowed to exercise its security rights then it would be disposing of assets which actually belong to other defendants who are restrained by the freezing order. I confess that I struggled with the logic of the submission. If all that were to turn out to be the case then TCA would have interfered in the property rights of others (unless could somehow claim priority as being, for example, a purchaser without notice, in which case the point does not arise), but there would still be no infringement of the freezing order. The disposals would not be disposals by any of the defendants. In any event, if the acts really were wrongfull vis a vis the other defendants TCA would be likely to have to account for the proceeds back to those defendants. Accordingly, once again, neither the wording nor the substance of the order will have been contravened.
27. For the sake of completeness I record again that no part of Miss Smith's submissions were based on Mr Taylor having some sort of charge which took priority over the debenture. His charges are referred to in the freezing order, but formed no part of the case of Miss Smith. Mr Taylor was not making his own separate application for an injunction against TCA. His case merely involves binding them in, or more precisely refusing to allow them to leave, what he said was the scope of the freezing order.

Conclusion

28. For those reasons, therefore, I consider that Mr Midwinter is entitled to the relief that he seeks. It may be that he does not need it, but the court should be sympathetic to a third party that wishes to have clarity. As I have indicated, any misgivings that there might be as to whether the court is somehow giving its blessing to any aspect of what TCA proposes (whether in terms of the validity of the debenture, the validity of any sale, the propriety of any sale and the like) can be dealt with by an appropriate provision in the order. Mr Midwinter indicated that he would not oppose such provisions.
29. I would add that even if I were wrong about whether any variation is needed, so that a form of variation is required, I would find that on the facts the variation sought by TCA is entirely justified and should be granted. There is no reason for not allowing them, as a third party, to enforce their security, and none of Miss Smith's grounds of opposition would lead to a contrary conclusion.
30. I shall therefore allow the intervener's application and dismiss that of the claimant.