Jersey Unreported Judgments

2002/80

ROYAL COURT

(Samedi Division)

 

16^th April 2002 

 

 

 

 

 

Application by the Intervening Party for leave to intervene in order to vary the injunction in the Order of Justice, so as to permit it to use funds from its bank accounts to settle legal and administration fees.

 

Advocate A.D. Hoy for the Plaintiff.

Advocate K. Lawrence for the Intervening Party.

The Defendant did not appear and was not represented.

 

 

judgment

the deputy bailiff:

1.        This is an application by Active Management Software Limited ("Active") for leave to intervene in the proceedings and to be allowed to use certain of its funds, which have been injuncted, in order to pay legal and administrative expenses.

            The factual background.

 

2.        The plaintiff has issued divorce proceedings against the defendant, her husband, in the Family Division of the High Court in England.  On 23rd October 2002 the plaintiff obtained a freezing order from Coleridge J prohibiting the disposition of assets by the defendant up to a value of £6.4 million.  That freezing order included certain Jersey assets.

3.        The defendant resides in M.  He failed to attend any hearings before the High Court and, on 16th November 2001, the freezing order was extended by Charles J until trial.  On 29th November the High Court made an order for interim maintenance in favour of the plaintiff in the monthly sum of £8,584.00.

4.        Meanwhile, in support of the English freezing order, the plaintiff obtained an order of justice from the Bailiff on 29th October freezing certain assets in Jersey.  Those assets comprised some bank accounts in the name of the defendant and three accounts of Active held at Barclays Bank in Jersey.  The order of justice also ordered the defendant to disclose in writing details of all his assets in Jersey.  It further ordered various parties cited (including Barclays Bank) to disclose details of assets held in Jersey.  On 31st October 2001, in accordance with that order, Barclays disclosed details of three accounts in the defendant's name and three accounts in the name of Active.

5.        On 29th November 2001 Kirkwood J amended the English freezing order so as to permit the monthly payments of interim maintenance of £8,584 to be paid from the accounts in Jersey in the defendant's name.

6.        That order of course had no effect in this jurisdiction and accordingly, on 15th January 2002, the plaintiff obtained an amended order of justice.  The prayer of the amended order of justice sought an order that the monthly payments of £8,584 ordered by the English High Court should be paid from the funds held in the defendant's name with Barclays and that, if these funds proved insufficient, the payments should be made from the funds held in the name of Active at Barclays.  In other words, the plaintiff sought an enforcement of the interim maintenance order not only against assets of the defendant in Jersey but also against assets of Active.  The hearing of that application has yet to come before the Court.

7.        The defendant's assets in Jersey (being a mix of sterling and dollar deposits) total approximately £122,000.  Active's assets (being a similar mix of deposits) total approximately £272,000.

8.        We have received detailed affidavit evidence filed on behalf of the plaintiff.  We have also received two affidavits from Mr Charles Malet de Carteret, a director of W J B Chiltern (Jersey) Limited ("Chilterns") which company administers and provides directors for Active.  We do not need to rehearse the evidence in detail.  Suffice it to say that, on the basis of the evidence provided and in the absence of any response from the defendant, we conclude that there are strong grounds for believing the following to be the case:-

(i)        The defendant is determined to do all that he can to thwart the plaintiff's application for financial provision in the English proceedings.  He appears now  to reside in Malta.  He has made strenuous efforts to avoid service of various proceedings.  He is said by the plaintiff to be a wealthy man with assets of some £20 million.

(ii)       He is the ultimate beneficial owner of Active (although his ownership may well be indirect through other companies) and he has control of it.  In his affidavit in support of the application, Mr Malet de Carteret states that he has no authority to disclose the identity of the beneficial owner of Active.  Active is of course under no obligation to make such disclosure but, in the face of the evidence produced by the plaintiff to the effect that the defendant does control the company, such a refusal means that the Court is likely to proceed on the basis that the defendant is the beneficial owner.  We are quite satisfied on the basis of the evidence produced by the plaintiff, the refusal of Active to disclose the identity of the beneficial owner and the failure of the defendant to respond to allegations that he is the beneficial owner, that we should proceed on that basis.

(iii)      As part of his plan generally to make life as difficult as possible for the plaintiff, the defendant has decided to ignore the English High Court and this Court.  He is in contempt of the English Court by failing to comply with various orders for disclosure and he is also in contempt of this Court by failing to provide disclosure of information in relation to his Jersey assets as ordered in the order of justice of 29th October 2001.

(iv)      It is said by Mr Malet de Carteret on behalf of Active that it is a trading company providing software training and management consulting, principally in the information technology field.  We accept that that is so, but we are satisfied on the evidence before us, that it is in effect the creature of the defendant and is the vehicle through which he has  conducted his business in this field.  The defendant has the ability to divert the income stream of the company to any other vehicle of his choice.  In this respect, it is of note that only one payment (of approximately £8,000) has been received by Active since the injunctions were imposed and that was very shortly after their imposition.  If it is such an active trading company, what has happened to its income stream?  We conclude that the income that the company would normally have earned has been diverted by the defendant in view of the injunction.

We emphasise that all of these findings are provisional to the extent that we would be willing to review them in the event of the defendant producing evidence, although he would need to purge his contempt first.  We are quite satisfied that, in the absence of evidence to the contrary, we should proceed on the basis described above, for which there is satisfactory evidence in the papers before us.

            This application.

 

9.        Active seeks leave to intervene in order to have the injunction contained in the order of justice  varied so as to permit it to use funds from its bank accounts to settle legal fees and administration fees.  We say at once that we grant leave to intervene.  Clearly any third party whose assets have been frozen by injunction is entitled to apply to the Court for their release or use for certain purposes.

10.      The application falls into two parts.  In the first place Active wishes to settle outstanding legal and administration fees.  As to the latter, Active is administered by Chilterns.  They charge fees for the provision of their administration services and the provision of directors.  Outstanding fees for routine services apparently total some £2,230.  In addition the directors (provided by Chilterns) have spent time in reacting to the injunction, instructing advocates and generally determining what is to be done, particularly in the light of the claim in the amended order of justice that the company's funds should be used to satisfy the interim maintenance order.  Although Active's summons talks generally of administration expenses, Miss Lawrence made it clear in her submissions that she was not seeking payment of these one-off administration fees at this stage, although she would be making such an application in due course.  We are not entirely clear why that is and, as will be seen, we think that similar principles apply to these administration expenses as apply to legal expenses.  Falling under this first category there are also the legal fees incurred to date.  It is said that, in order to comply with their duties to the company, the directors felt it necessary to seek legal advice upon receipt of the injunction as to the extent of their duties, what the company should do etc.  We were told during the hearing that the legal fees incurred to date (including the costs of the hearing) total approximately £20,000.

11.      Secondly there are fees for the future.  As we have stated, the amended order of justice seeks an order for payment of the interim maintenance order out of the injuncted assets of the company once the assets in the defendant's own name have been exhausted.  Active wishes to oppose such an application.  It wishes therefore to be able to draw down from its funds the sums necessary to pay the legal fees and the administrative fees of Chilterns which would be incurred in connection with the defence of the plaintiff's claim against Active's assets.  Mr Malet de Carteret's affidavit disclosed that the beneficial owner of Active has been asked to provide funds for the company to meet its legal and administrative expenses but the beneficial owner has refused to inject funds for that purpose.

            The applicable principles

 

12.      It appeared from the skeleton arguments that the parties were at one on the principles which the Court should apply.  In the case of a Mareva injunction, the general rule is that the injunction should allow for the payment of living expenses and legal costs.  It should also allow for bona fide commercial liabilities.  A Mareva injunction is not intended to give the plaintiff preference over other bona fide creditors of the person whose funds have been injuncted.  The plaintiff claims no property rights in the assets, which belong to the defendant.  The person injuncted should therefore be allowed to use his funds in order to defend the proceedings, to pay essential living expenses and to settle bona fide obligations.

13.      In the case of a proprietary claim, different considerations apply.  In such cases the plaintiff alleges that the assets injuncted belong to him.  The Court therefore needs to preserve the subject matter of the claim.  On the face of it, it is not reasonable that the defendant should be able to fund his defence out of assets which may be found to belong to the plaintiff and not to him.   The Court cannot of course assume that the plaintiff's claim is necessarily justified.  The defendant is entitled to defend himself against the claim.  Nevertheless the Court adopts a more stringent approach than in Mareva injunctions and requires, amongst other things, the injuncted party to show that there are no other funds upon which he could draw to defend himself.  The principles to be applied in such cases have been authoratively set out by the Court in Appeal in Armco Inc -v- Donohue (24th September 1998) Jersey Unreported; [1998/194].

14.      Prior to the hearing it appeared to be accepted by both parties that this was not a case of a proprietary claim and that the applicable principles were those for a  Mareva injunction.  However, at the hearing, Mr Hoy referred the Court to a relatively recent decision of the Court of Appeal in Matthews-v-Matthews (2001) JLR 671 CofA.  In that case, the Court of Appeal held that an injunction in aid of matrimonial proceedings was neither a Mareva injunction nor an injunction in support of a proprietary claim.  It was different to a Mareva injunction in that the Court was being asked to preserve assets which, if the claim for ancillary relief succeeded, would be awarded in whole or in part to the plaintiff.  It followed that, in matrimonial cases, the threshold for the risk of dissipation of assets could justifiably be lower than for a Mareva injunction.  However, a matrimonial claim was not the same as a proprietary claim and accordingly the principles applied in such cases were not applicable either.  The Court of Appeal held that the test for granting a matrimonial injunction therefore lay somewhere in between.  Mr Hoy argued that the test for allowing payments out of assets injuncted in support of matrimonial proceedings therefore also fell between the test applied in respect of a Mareva injunction and that applicable in the case of a proprietary claim.  Miss Lawrence, on the other hand, argued that Matthews was concerned only with the test for granting an injunction in the first place.  It was not relevant in considering the test for payments out of injuncted funds.  Because the case of Matthews was produced at the last moment, she was not in a position to refer the Court to any English authorities on the test to be applied in respect of payments out of injuncted funds in matrimonial cases; nor did Mr Hoy refer us to any such authority.

15.      It follows that anything we say on this subject must be regarded as subject to review following more detailed argument in another case.  But it seems to us that the position in matrimonial cases is somewhat closer to that of a Mareva injunction than a proprietary claim.   The wife (we shall assume that she is usually the plaintiff for convenience) is only entitled to claim a share of the husband's assets.   These can only be calculated after allowance for payment of bona fide liabilities.  Furthermore, the husband is entitled to defend himself against the wife's claim to ancillary relief and to pay his regular living expenses in the meantime.  It seems to us that it would be a matter for decision according to the circumstances of the particular case as to whether such liabilities and expenses should be paid out of the injuncted funds.  Whether it would be reasonable to use the injuncted funds would, amongst other things, depend upon the level of funds injuncted.  If, for example, the Court has injuncted all or most of the husband's assets, the argument for allowing him to pay such liabilities and expenses out of the injuncted funds would be strong.  But where the injuncted funds comprise only a small part of his worldwide assets, the Court may well conclude that he should fund such liabilities and expenses from elsewhere, so as not to eat into funds available for the wife, although there may of course be many other factors to be taken into account.

            Application to this case

 

16.      For convenience we propose first to deal with the claims for legal and administrative expenses which would be incurred in future in defending the plaintiff's claim that the assets of Active should be used to pay for the interim maintenance order following exhaustion of the defendant's own assets in Jersey.  We are quite satisfied that, on the particular facts of this case, it would be unjust to the plaintiff to allow such expenses to be paid.  We have already stated that, in the absence of any evidence from the defendant, we regard the company as being beneficially owned by him and under his control.  We are also satisfied that he is a person who is absolutely determined that his wife will get nothing or as little as possible.  He is in contempt of both the English and Jersey courts, and in our judgment, he has probably decided to abandon Active now that its assets have been injuncted.  Furthermore he would not be unhappy to see Active's assets depleted by litigation as this would mean that less would be available for his wife, even though it would not benefit him personally.  If the plaintiff is anywhere near accurate in her assessment of his wealth, the defendant has salted away the majority of his assets in far off jurisdictions.  The only assets which the plaintiff has managed to track down so far are those in Jersey (approximately £400,000 in the name of the defendant and Active) and the house in England in which she lives.

17.      We have no difficulty in concluding that the defendant has plenty of assets with which to fund Active's legal fees if he so chooses.  The only person who will suffer if the assets of Active are used to pay the maintenance order for his wife will be the defendant as ultimate beneficial owner.  Accordingly, if he wishes to contest the claim, he is free to do so at his expense.  We see no reason why he should be allowed to litigate against his wife through the company using the limited funds which may be available to satisfy her claim to ancillary relief.  Accordingly we refuse to vary the injunction so as to permit payment of future legal fees and future administration expenses related to the litigation.  The directors will therefore be absolved from any responsibility for the fact that the company cannot defend itself against the wife's claim as they will have no funds with which to instruct lawyers or spend time considering the matter themselves.  This will put the onus where it belongs, namely upon the defendant.  If he believes that Active should contest the wife's claim, he will have to put up the necessary funds for the legal and administrative expenses of the litigation.

18.      However, it seems to us that different considerations apply to past expenses and to future routine expenses.  When they were faced with these proceedings, the directors had no alternative but to instruct advocates to advise them and to spend time themselves considering the position.  Directors owe a fiduciary duty to their company.  When the company has assets which are injuncted, it must prima facie be reasonable and proper for them to seek legal advice on whether they should defend the claim.  Having sought legal advice it must also prima facie be reasonable for the company to apply to the Court for permission to use its assets to defend itself from the plaintiff's claim to those assets.  On the contrary, if the directors were not to seek legal advice and were not at any rate to make application to the Court for the use of the funds, they might well be found to have failed to fulfill their fiduciary duty to the company.

19.      In our judgment, subject to the quantum of the accounts being proper and reasonable, the liabilities incurred by the company to its advocates in advising it to date were properly and reasonably incurred and are bona fide third party obligations of the company.  We have of course considered whether, if we refuse the application, the liability would nevertheless be paid by the defendant notwithstanding that the beneficial owner (whom we assume to be him) has so far refused.  But, for the reasons mentioned earlier, we think it probable that the defendant has chosen to abandon this company and, as he sees it, would not be willing to throw good money after bad.  We think it highly unlikely that he will feel any moral or other obligation to pay the legal fees incurred by the company.  Furthermore, as we have said earlier, the wife is only entitled to claim against her husband's net assets.  Assuming for these purposes that Active belongs to the defendant, his asset is his shareholding.  The worth of that shareholding can only be calculated after deduction of bona fide and reasonably incurred liabilities of the company.  For the reasons which we have given, we think the legal fees incurred by the directors were reasonably and properly incurred in good faith.  If the company were to be wound up, we do not see that the liquidator would have any grounds for not paying this liability even if, by then, the Court had ordered the maintenance payments to be paid from the company's assets.  Both liabilities would then fall to be paid by the company.

20.      Although we have not heard detailed argument on this -  because Miss Lawrence did not apply for such expenses at present - we think it likely that similar principles would be applicable in relation to the administration fees incurred by the company to Chilterns in respect of the services of the directors.

21.      The same principle certainly applies a fortiori to the routine administrative expenses of Active.  These have been incurred every year in order to keep the company registered and in good standing.  They have always been settled out of the company's assets.  In our judgment such liabilities of the company were properly incurred and the company is entitled to pay them out of its assets.  Furthermore, if they are not paid in future, the company will be struck off.  Accordingly we think it reasonable and proper that routine administrative expenses of Chilterns related solely to keeping the company in good standing may continue to be paid until further order.

22.      There was mention during the course of the hearing of a claim of US$100,000 against Active by a company called Management Worlds Inc.  There was correspondence in December 2001 about whether the injunction should be varied to allow payment of that liability.  In that correspondence the plaintiff suggested that the person behind Management Worlds Inc was a close business associate of the defendant with whom he was very friendly.  The matter is not before us and we have had no detailed evidence concerning the nature of the alleged liability.  We therefore express no concluded view.  However, in case our earlier comments might be thought to lead to the conclusion that such a liability should be paid out of the injuncted funds, we would wish to make it clear that we regard this as an exceptional case in view of the defendant's conduct.  Any alleged claim, payment of which would have the effect of reducing the funds available for the plaintiff, will be very carefully scrutinised by the Court.  As we have already said, it seems to us highly likely that the defendant has caused his business to be transferred out of Active so as to avoid any income coming in to the injuncted accounts.  The Court is unlikely therefore to look sympathetically on a payment to a close associate which would have the effect of reducing the funds in these accounts.

23.      In summary, balancing the interests of the plaintiff and of bona fide creditors of Active, we summarise our decision as follows:-

(i)        We are not willing to vary the injunction to allow any future legal expenses to be incurred by Active in defending the plaintiff's claim against its assets.  Nor are we willing to authorise payment of any future administrative expenses incurred by reason of such litigation.  If the company is to defend the plaintiff's claim, it will have to be funded by the shareholder.  We are satisfied that the shareholder has ample funds to so do if he wishes.

(ii)       We are however willing to vary the injunction so as to permit payment of reasonable legal fees incurred by Active up to the conclusion of this hearing.

(iii)      We also vary the injunction so as to permit payment of routine administrative fees to Chilterns both to date and until further order.

(iv)      Although Miss Lawrence indicated that the claim for administration fees set out in the summons was limited to routine expenses, the reasoning which underlies our decision to allow past legal expenses would appear to be equally applicable to past administrative expenses incurred as a result of the litigation.  Accordingly, subject to any observations of Mr Hoy, such past administrative expenses are likely to be authorised.

(v)       The plaintiff should be given an opportunity to consider the reasonableness of any legal and administrative fees incurred to date and to be satisfied that routine administrative expenses are indeed of that nature.  Accordingly no payment may be made from the injuncted funds unless twenty-one days prior written notice has been given to the plaintiff's advocate setting out full details and justification for the payment.  This will give the plaintiff time to bring the matter back to Court if she objects to the amount of the proposed payment.

(vi)      Although it is implicit in any event, we make it clear that either party has liberty to apply.  In particular, if the directors consider that, as a result of new developments, their fiduciary duties require them to take further action, they may apply to the Court for review of the position in the light of such developments.

24.      After preparing the above judgment, we were sent the fifth affidavit of Mr Michael Reason, solicitor to the plaintiff.  This showed that, from information derived from the hard disc of the computer used by the defendant before he left the matrimonial home, the gross fees of Active had grown consistently from 1990 to 1996 to reach US$77,800 and £194,158 by 1996.  Figures after 1996 were not on the hard disc.  Mr Reason contended that there was no reason to think that the fee income of Active would have declined since then and that these figures provided strong support for the contention that the defendant had diverted Active's income stream since the imposition of the injunctions.  We agree.  However, as can be seen from paragraph 8(iv) of the judgment, we had already reached that conclusion even in the absence of this new evidence.  The new evidence therefore makes no difference to our decision.  Accordingly we did not think it necessary to reconvene for additional submissions at further expense to the parties.

 

Authorities

Armco Inc -v- Donohue (24th September 1998) Jersey Unreported; [1998/194].

Matthews-v-Matthews (2001) JLR 671 CofA.

Atlas Maritime Co WSA-v-Avalon Maritime Ltd: "The Coral Rose" (No.1)(No.2)(No.3). 1991) 4 All ER 769.

Baptiste Builders Supply Ltd-v-Smith (1^st August, 1995) Jersey Unreported.