Jersey Unreported Judgments

Property - application for an interim injunction.

[2019]JRC091

Royal Court

(Samedi)

21 May 2019

Before     :		Sir William Bailhache, Bailiff, and Jurats Ramsden and Thomas.
Between	Michael John Cornish		First Plaintiff
	Susan Margaret Cornish née Lowe		Second Plaintiff
And	Brelade Bay Limited		Defendant

Advocate N. M. C Santos-Costa for the Plaintiffs.

Advocate J. D. Garrood for the Defendant.

judgment

the bailiff:

1.        The Plaintiffs purchased a property at Windward Lane, La Route des Genets, St Brelade from the Defendant by contract passed before the Royal Court on 19^th December, 2014.  This property was part of a development site comprising three properties together formerly known as Windward House.  We will refer to the whole site as "the Development Site".  The property purchased by the Plaintiffs is now known as Edlington House ("Edlington") and the remaining two properties within the Development Site will be described where relevant as "Windward 2" and "Windward 3" respectively. 

2.        There was a preliminary agreement also dated 19^th December, 2014, entered into between the Plaintiffs, the Defendant and Trinity Joinery (2005) Limited ("the Contractor"). This was subsequently varied by a variation agreement between the same parties dated 4^th October, 2016, ("the Variation" and collectively described as "the Agreement").  By the Agreement, the Defendant agreed to convey Edlington to the Plaintiffs, and furthermore agreed with them to procure the completion of the development of Edlington by the Contractor in accordance with the building contract which the Defendant entered into with the Contractor. 

3.        The Plaintiffs claim that there have been various breaches of the building contract by the Contractor for which the Defendant has responsibility under the Agreement.  It is said that it is a very significant claim, amounting to some £3.025 million, although that is only the total current estimate.  The prayer in the Order of Justice currently seeks an order for payment to the Plaintiffs of damages with interest, and costs. 

4.        The Order of Justice was issued on 10^th December, 2018, and the Plaintiffs have issued a summons for freezing and disclosure orders.  This judgment refers to the summons for those orders, argument having been heard inter partes on 14^th January, 2019. 

The competing claims

5.        The Plaintiffs say that the Defendant is a special purpose vehicle incorporated for the sole purpose of developing the Development Site and selling it on.  Windward 2 and Windward 3 are in the sole ownership of the Defendant, and the affidavit evidence is to the effect that these are the Defendant's only assets.  Those properties are intended to be sold as shells, and the building work in relation to Windward 3 has been completed and estate agents in the Island have been retained. 

6.        The Plaintiffs contend that at an earlier hearing in relation to a caveat which they had lodged, to which reference is made later in this judgment, counsel for the Defendant made it plain that funds were needed to develop the remaining two properties in the Development Site and reference was made to paragraph 13 of the Court's judgment of 28^th August, 2018, where the submission was recorded that the Defendant had work to complete on the remaining properties forming the Development Site but needed to borrow money against the property to complete that work. 

7.        The conclusion which was drawn was that any sale proceeds from Windward 3 would not be applied to the completion of Windward 2.  The Plaintiffs therefore asserted that there was a real risk that any judgment awarded in their favour would be rendered nugatory once Windward 3 had been sold, particularly if no further works were carried out to Windward 2, leaving the Defendant with no assets or insufficient assets, and a freezing order was therefore necessary. 

8.        The Plaintiffs also made reference to inter partes correspondence between Messrs Collas Crill on behalf of the Plaintiffs and Messrs Carey Olsen on behalf of the Defendant.  It was noted that the Defendant had offered to undertake not to dispose of its interests in its immovable property assets save on 24 hours' notice in writing to the Plaintiffs.  The Plaintiffs had responded that they would be prepared to accept an undertaking from the Defendant not to dispose of its interest in immovable property assets in any way as would diminish the value of the immovable property assets and that it would not encumber its immovable property assets in any way save on 7 days' notice in writing.  

9.        As alternative undertakings, it was later put forward that the Defendant should lodge £4 million in a separate escrow account following receipt of the proceeds of sale of Windward 3, pending the resolution of the current dispute between the Plaintiffs and the Defendant, or alternatively that the directors of the Defendant provide an undertaking that the sum of £4 million would not be distributed to shareholders or disposed of in any way following receipt of the proceeds of sale of Windward 3 until the current dispute between the parties was determined.  Those offers from the Plaintiffs were rejected by Messrs Carey Olsen on behalf of the Defendant. 

10.      The Plaintiffs also asserted that they had no clear knowledge of the Defendant's ability to meet a claim, no knowledge of the value of the Defendant's assets or the extent of the Defendant's indebtedness to any entity or individual, nor indeed were they aware of the identity of the directors and shareholders of the Defendant. 

11.      Thus the claim was for an interim order preventing the Defendant from dissipating its assets to less than £5 million and, further or alternatively, a series of disclosure orders in relation to the value of the Defendant's assets, the extent of its indebtedness and the identity of the directors and shareholders. 

12.      At the time of the hearing the Defendant had not filed an answer to the order of justice, but the argument adduced by Advocate Garrood on behalf of the Defendant can be summarised in this way.  There was provision under the preliminary agreement for a snagging period which did not expire until July 2018, and although the Defendant had made every effort to cooperate with the remediation of snagging items, it had been thwarted by the lack of cooperation, refusals and obstacles placed by the Plaintiffs.  Secondly the Plaintiffs had the benefit of a latent defects insurance policy.  Thirdly, the Plaintiffs had already received liquidated damages for late completion.  Fourthly, the Plaintiffs were indebted to the Defendant in the sum of approximately £563,000. 

13.      As to the freezing order it was contended that the Plaintiffs had failed to make full and frank disclosure, had failed to give any or any sufficient disclosure of material facts and matters which were detrimental to their claim and had failed to make any or any sufficient disclosure of facts which might cause the Court to refuse the application for injunctive relief. 

14.      Windward 3 was to have been sold in the last quarter of 2018, and the price at which a sale had been agreed (it ultimately did not proceed) would have provided sufficient assets to discharge both the secured loan and provide working capital for the development of Windward 2.  Given the operation of the le tout tel qu'il est clause in the conveyance and the agreed damages provisions, the Plaintiff's claim had little or no merit.  The balance of convenience lay firmly against granting any form of injunction and furthermore the Plaintiffs had provided no evidence of likely dissipation.  Finally the proportionality of a freezing order in the sum of £5 million to protect a debt which on the Plaintiffs' own case was approximately £3 million but which the Defendant claimed was spurious and inflated, was clearly lacking. 

Caveat

15.      It is appropriate to record that a decision by the Court, as mentioned earlier, was given on 28^th August, 2018, and reported at Cornish and Cornish v Brelade Bay Limited [2018] JRC 153.  That judgment related to an application by the Defendant to lift the caveat which Advocate Santos Costa had lodged on behalf of the Plaintiffs.  The caveat was in fact lifted on the grounds of material non-disclosures in that:-

(i)        The possibility of a latent defects insurance policy was not raised with the Court at all when the caveat was lodged. 

(ii)       The fact that a substantial payment had been made by the Defendant to the Plaintiffs for late completion was not raised at all when the caveat was lodged, and indeed emphasis had been placed by Advocate Santos Costa on the enormous damage which the Plaintiffs had suffered from the delay in completion. 

(iii)      It was a material non-disclosure to omit mention of the fact that the Defendant had a claim against the Plaintiffs, then thought to be some £300,000 in terms of the balance of monies due under the building contract. 

16.      The Court also noted that before lodging a claim for a caveat, a creditor should notify the defendant that he has a claim to make and should explore the possibility of alternative security.  That had not taken place. 

17.      Those material non-disclosures led to the caveat being set aside and the Court then considered whether or not it should be re-imposed in the light of the information now made available.  The Court concluded it should not do so - the non-disclosure of the latent defects policy went directly to the extent of the risk which the applicants were actually carrying and was a serious non-disclosure.  Furthermore the evidence of any dissipation of assets by the Defendant was weak. 

18.      Finally the caveat was not imposed because a caveat would have effect over all of the real estate of the Defendant, and it seemed to the Court wrong that the whole of estate should be frozen in respect of an unquantified claim which might only amount to 1/10th of the value of that estate. 

The law

19.      Advocate Santos Costa submitted that there were six main requirements for a freezing order to be granted:-

(i)        The applicant must have a good arguable case on the merits. 

(ii)       The applicant has made full and frank disclosure. 

(iii)      The applicant must provide particulars of his claim and particulars of the points against his claim. 

(iv)      The applicant must show grounds for believing the defendant has assets within the jurisdiction.  

(v)       The applicant must explain why there is a real risk of dissipation. 

(vi)      The applicant must give an undertaking in damages. 

20.      The authorities in support of those propositions are Johnson Matthey Bankers Limited v Ayra Holdings Limited. [1985] JLR 208 and Numbers 12 and 13 Britannia Place Limited v J & G (Property) Limited [1989] JLR 34. 

21.      The Defendant did not take substantial issue with this approach, albeit reliance was placed on the later case of Goldtron Limited v Most Investments Limited [2002] JLR 424.  Thus Advocate Garrood asserted that it was no part of the Court's function at an interim stage to try to resolve factual disputes on which the claims of either party might ultimately depend, nor to decide difficult questions of law which called for detailed argument and mature consideration.  Furthermore, he submitted that the Defendant should not be prevented from using its assets for a purpose which does not conflict with the purpose of a freezing injunction - as for example the making of payments which the Defendant in good faith considers it should make in the ordinary course of business.  It was also now common practice that the order should normally specify a maximum sum that was frozen, and it should not be used to prevent a defendant from living as he has always lived (in the context of a personal defendant) or from paying legal costs to defend the proceedings.  The order should also make reasonable provision for the protection of third parties and should include notice of their right to seek any variation.  

22.      The summary of the Court's practice in relation to freezing orders is broadly accurate and subject to what follows we are content to adopt it. 

23.      It is necessary, however, to say something further about the duty of full and frank disclosure.  That duty exists principally where the Court is faced with an ex parte application for a freezing order.  Because the Court in those cases hears only one side of the argument, it is the duty of the applicant to disclose fully all matters relevant to the application, whether of fact or of law, which are or may be adverse to it.  In Memory Corporation PLC v Sidhu [2000] 1 WLR 1443, CA, Mummery LJ said at page 1459 that it was a "high duty" and required the applicant to make full, fair and accurate disclosure of all material information, and to draw the Court's attention to significant factual legal and procedural aspects of the case.  The applicant must show the utmost good faith and disclose his case fully and fairly.  He must, for the protection and information of the defendant, in the evidence in support of the application, summarise his case and the evidence on which it is based.  He must identify the crucial points for and against the application and not rely on general statements and the mere exhibiting of numerous documents -and, as was said in Goldtron, he must not hide disclosure of relevant points against him in a mass of material which only the most assiduous of judges would discover on reading the papers.  He must investigate the nature of the claim asserted and the facts relied upon before applying for the freezing order, and he must identify any likely defendants. 

24.      It is a particular duty of the advocate to see that the correct legal procedures and forms are used, that a written skeleton argument and properly drafted order are prepared by him personally and lodged with the Court before any oral hearing, and that at the hearing the Court's attention is drawn by him to unusual features of the evidence adduced, to the applicable law and to the formalities and procedures to be observed.  These are all matters covered by the judgment of Mummery LJ in Memory Corporation PLC [supra]. 

25.      Underlying the obligation of full and frank disclosure is that it is an ex parte application.  Where the application for a freezing order is made on notice, as was the position here, the obligation for full and frank disclosure does not arise in the same way.  Clearly the Court is giving no indication that a party need not be frank in its submissions to the Court - of course it should.  However, it is no longer necessary for a party to set out in detail all the points which might be taken against him if the other party were present, because the other party is present and has the opportunity, through his advocate, to make his case. 

26.      To the extent that the Defendant argued that there had been a lack of full and frank disclosure in the Plaintiffs' application, the Court in this case was therefore unimpressed by that submission.  It was for the Defendant to put forward the case on which it relied raising all points as to the balance of convenience and so on which were considered to be material to the exercise of the Court's discretion. 

27.      Secondly the jurisdiction of the Royal Court to grant freezing injunctions is a judge-made jurisdiction which has closely followed the judicial innovations in the courts of England and Wales.  In that jurisdiction, as here, the courts do not regard freezing orders as appropriate in order to give a potential creditor - which is what the Plaintiff is until he obtains judgment - a preference over any other creditors who might, for example, have already established their claims; nor is the freezing order a litigation weapon designed to bring a defendant to its knees to prevent it from defending a claim which is brought against it.  The freezing order is not intended to provide a plaintiff with security for its claim but rather is to restrain a defendant from evading justice by disposing of its assets otherwise than in the ordinary course of business.  A plaintiff however has no interest in the assets themselves - he has no proprietary interest in them because the limit of his position is that he has a claim. 

28.      When assessing the balance of convenience as to whether or not to impose a freezing order, the Court must consider what evidence there is from a plaintiff as to the likelihood of the defendant moving its assets or dissipating them.  It has been said that there must be objective reasons for making that assertion or submission.  Indeed in O'Reagan v Lambic Productions Limited 139 New LJ 1378 (1998) Sir Peter Payne said that unsupported statements or expressions of fear carry little weight - see also Fulford J in Rosen v Rose [2003] EWHC 309, 27th January 2003. 

The present application

29.      Applying these principles to the present application, we note that there is an active dispute between the Plaintiffs and the Defendant as to the quality of the Defendant's contractor's building work at the property which the Plaintiffs have bought from the Defendant.  Significant poor workmanship is alleged and denied and significant sums are clearly involved.  This is not therefore a clear case at this stage of the Plaintiffs, having established liability, looking for post judgment security. 

30.      We also noted that in their contract of acquisition on 19^th December, 2014, the Plaintiffs bought "In perpetuity a certain house (under construction) known as 'Edlington House' and formerly bearing the number 1 'Windward', with the underground car park, indoor swimming pool, gatehouse, gardens and lands dependent thereto and the interest in the common areas hereinafter described and appurtenances ...".  It is clear that the house was not complete at the time of purchase because it is referred to as "under construction".  The contract provides as follows:-

"The property was sold with all and such other rights, appurtenances and dependencies as may attach thereto, in the state in which it was at the date of sale with all its apparent or hidden defects ('vice caché'), if any, situate in the Parish of St Brelade, in the Vingtaine of Noirmont."

31.       The property was sold with immediate proprietary possession but the Plaintiffs granted to the Defendant an irrevocable and exclusive right to occupy the property for the purposes of completing various works at the property, the whole in accordance with the terms of a private agreement between the Defendant, the Plaintiffs and Trinity Joinery (2005) Limited.  That appears to be the only relevant reference to the agreement for the purposes of the present application, although we do note that the consideration for the sale of the property, namely £8,442,664.59 was to be paid for value on the Tuesday next following the passing of contract before the Court which is at least consistent with some acceptance of practical completion in accordance with the agreement. 

32.      We mention these provisions in the contract of acquisition because it indicates that there is at least the potential for an argument over the extent to which the vice caché clause affects what is set out in the agreement as the obligations of the Defendant towards the Plaintiffs.  We have heard no argument on that and express no view of it other than to note the potential for argument, which is a matter which goes to the balance of convenience. 

33.      We also note that there is argument between the parties as to the applicability of a latent defects insurance policy.  We have seen a copy of the policy and noted the competing claims in that respect.  It does not seem to us to be appropriate at an interim stage to express a view as to whether the latent defects policy applies or not.  The Plaintiffs say that it does not, and the Defendant says that it does.  Whether it does or does not apply may well be affected by factual findings in the judgment after trial of the main action, and even then the insurance company concerned will not be a party and any factual findings may not therefore bind it.  Nonetheless we can say at this stage that it is not obvious to us that the latent defects policy does not apply.  That being so, we do not place weight on Advocate Santos Costa's submission that if there is no remedy against the Defendant, the Plaintiffs will be without any remedy at all. 

34.      However we now turn to what seems to us to be at the heart of issue, namely the question of possible dissipation. 

35.      The Plaintiffs assert that if the Defendant pays away the proceeds of sale of Windward 3 to its shareholders, that would result in the value of the Defendant being commensurately lower.  The distribution of the entirety of the sale proceeds of Windward 3 to the Defendant's shareholders could be deemed to be unjustified conduct.  The Plaintiffs assert that where the officers of the Defendant have not provided the Plaintiffs with any degree of comfort with regard to the Defendant's ability to meet a judgment entered against it, that gives rise to an adverse inference in respect of the real risk of dissipation, which, it is said, can be inferred.  In particular the Plaintiffs have no independent information as to the value of Windward 2, nor whether there are any loans or debts which may be in existence and relevant to the Defendant's ability to meet its obligations to the Plaintiffs in the event that the Plaintiffs are successful in court. 

36.      In this respect, the Plaintiffs rely upon the fact that the Defendant is a special purpose vehicle designed to develop and sell these three properties and that once the properties are sold and the proceeds distributed to the Defendant's shareholders, the Defendant will have no purpose and in all probability will cease to exist. 

37.      In the caveat judgment [2018] JRC 153 at paragraph 39(iii) the Court said in relation to the evidence available at that time that:-

"The evidence of any dissipation of assets by the Respondent is weak.  Essentially, it depends upon the acceptance by the Respondent that it is a special purposes vehicle which was incorporated for the purposes of carrying out the development.  That of course means that it is likely to have limited assets outside the development site for the purposes of enforcing any judgment - but in our view one cannot necessarily deduce from the fact that a special purpose vehicle has been used the conclusion that those having direction and control of that vehicle would so arrange its affairs as to make the enforcement of any judgment against it impossible or ineffective."

38.      We endorse those remarks.  The mere fact that one is dealing with a special purpose vehicle does not presuppose that the directors and shareholders of that corporate vehicle will so conduct the company's business that it will be unable to pay its proper debts when they fall due.  Indeed, if they did so, they might well find themselves personally liable for the company's debts in accordance with usual company law principles.  On the assumption that the Plaintiffs proceed on a timely basis with their claims, any distribution of assets by the Defendant to its shareholders in the knowledge that these claims by the Plaintiffs are outstanding would almost certainly be ineffective were there to be a désastre pursuant to the relevant provisions of the Désastre (Jersey) Law 1990. 

39.      Advocate Santos Costa has complained that the Defendant is owned through a complicated and opaque structure.  He submits that this leads to "the inevitable conclusion that the ultimate beneficial owners and directors of the Defendant have sought to distance themselves personally as much as possible from the underlying corporate structure".  

40.      Somewhat surprisingly, he chose to rely on Holyoake and another v Candy and others [2017] EWCA Civ 92 where the Court of Appeal set aside the grant of a notification order at first instance by which the judge had made an order restraining the defendants from dealing with their assets without first giving the claimants' solicitors advance notice in writing.  Gloster LJ said this at page 1155, paragraph 59:-

"Third, in relation to the judge's conclusion that the corporate structure of the defendants' companies and the corporate reorganisation in 2014 - 2015 were (at least) capable of contributing to the evidence of risk:

(i) I agree that - if the defendants had shown that there was a risk of the defendants dissipating their assets - the defendants' links to complex and offshore corporate structures and the potential to transfer value rapidly and invisibly through corporate reorganisation could contribute to that risk.  This is because a complex corporate structure or corporate reorganisation could enable a party who is minded to dissipate assets to do so.

(ii) However, the mere possibility of a party using a complex corporate structure or corporate reorganisation to dissipate assets, without more, does not equate to a risk of dissipation.  Otherwise, the burden of proof would be reversed: parties subject to a freezing order application would be compelled to show that they would not dissipate assets in that way.

(iii) This emphasis is important.  An applicant must show a risk of dissipation as opposed to it being merely possible (without more) that the claimant could dissipate in that way:

(a) In Mediterranean Feeders LP v Bernd Meyering Schiffahrts 5 June 1997, the Court of Appeal approved Tuckey J's rejection of the proposition that a freezing order was appropriate where there might be a temptation to dissipate assets - but no evidence whatsoever that the claimant to the application would yield to it. Evans LJ said:-

'Given the nature of the Mareva jurisdiction and given the fact that it is not, as the judge says: 'A means of obtaining advance security for a claim', it is inevitable that before the court can be satisfied that there is a risk of dissipation, in the sense in which that term has been used, the court must consider whether there is any evidence that in the particular case the asset will be dissipated rather than otherwise.  If there is no such evidence then, in my view, it would be wrong for the injunction to be granted.'

(b) Several cases have emphasised that there is nothing implicit in complex, offshore corporate structures which evidences an unjustifiable risk of dissipation. As Arnold J put it in VTB Capital PLC v Nutritek International Corporation [2011] EWHC 3107 (Ch) at [233] (approved by the Court of Appeal [2012] 2 Lloyd's Rep 313, para 174):-

'It is not uncommon for international businessmen, and indeed quoted UK companies, to use offshore vehicles for their operations, particularly for tax reasons.  This may make it difficult to enforce a judgment. But in that respect, claimants such as VTB have to take defendants such as Mr Malofeev as they find them.  More is required before the court will conclude that there is a risk of dissipation.'

...

(iv) In the present case, there was no (or only minimal) evidence to suggest a risk of the defendant's dissipating their assets.  There was also nothing about either the corporate structure or the ongoing corporate reorganisation that was suggestive of a risk of dissipation. In relation to the corporate structure: it is not unusual to have a large number of companies without a 'TopCo' in a commercial property business; there was no evidence in this case that the companies were set up or being used for wrongful purposes; and there was no allegation in the claim that any fraud was facilitated by the use of offshore companies (or similar).  As to the corporate reorganisation, on the claimants' own evidence, the creation and dissolution of companies had been ongoing prior to the first intimation of the claim in May 2014.

(v) Once again, the judge's reasoning reflects a shift in the burden of proof. The judge was in my view wrong to take into account that one could not entirely rule out the possibility the defendants might possible use or reorganise the corporate structure so as to frustrate a future judgment. The possibility of doing so was not evidence which supported a real risk."

41.      Advocate Santos Costa submits that Windward 3 is up for sale and that the intention to dispose of that asset is therefore irrefutable.  We assume that the intention is indeed to put up the rest of the Development Site for sale at some point or another so as to maximise the return from the development.  We do not see that that is remotely any evidence which suggests dissipation.  All it means is that the company's real estate may be converted into the company's cash. 

42.      It is said that the names of the individual directors and shareholders of the defendant are obscured.  We do not see that that is so.  Advocate Garood submitted to us that his clients had given information about the underlying corporate structure.  The Defendant is a joint venture between Comprop Limited, a Jersey company and Mr Joseph Bourke, the ultimate owner of the original building contractor.  He advised the Court that the directors of the Defendant were Mr Tom Scott junior, Mr Finton Kennedy and Mr Joseph Bourke.  Mr Marie, who had sworn an affidavit on behalf of the Defendant was the managing director of Comprop.  In any event, the time to raise issues of that nature was when the Agreement was being negotiated - it seems to us that the present application merely demonstrates that the Plaintiffs are belatedly seeking to improve their original contractual position. 

43.      Finally it was said by Advocate Santos Costa that by correspondence dated 31^st October, 2018, Messrs Carey Olsen advised that Windward 2 was unencumbered.  However, a general charge in the sum of £2 million, being a loan from Sealeyham Investments Limited to the Defendant (Sealeyham is a shareholder in Comprop) had been registered on 7^th September, 2018.  It was said that this showed the directors of the Defendant had an intention to mislead on the part of the Defendant.  However, Advocate Garood told us unequivocally that the letter sent by Messrs Carey Olsen was his mistake and not that of the Defendant.  Advocate Santos Costa accepted that professional assurance from Advocate Garrood and in those circumstances there is no further mileage to be taken from this complaint. 

44.      In our judgment, there is no sufficient evidence of any intention to dissipate assets so as to render a judgment which might be obtained following completion of the litigation unenforceable.  In those circumstances, the application for an interim injunction fails the required tests, and the application is accordingly refused. 

Authorities

Cornish and Cornish v Brelade Bay Limited [2018] JRC 153

Johnson Matthey Bankers Limited v Ayra Holdings Limited [1985] JLR 208

Numbers 12 and 13 Britannia Place Limited v J & G (Property) Limited [1989] JLR 34.

Goldtron Limited v Most Investments Limited [2002] JLR 424

Memory Corporation PLC v Sidhu [2000] 1 WLR 1443,

O'Reagan v Lambic Productions Limited 139 New LJ 1378 (1998)

Rosen v Rose [2003] EWHC 309

Désastre (Jersey) Law 1990

Holyoake and another v Candy and others [2017] EWCA Civ 92