On 14 October 2015, the Court of Appeal overturned a decision that two payments had been made in breach of a freezing order. The order prohibited the respondent to the freezing injunction application from dealing with or disposing of any of its assets other than in the ordinary and proper course of business. The Court held that the judge at first instance had taken too narrow a view in construing this exception and that, in light of the specific facts of the case, the freezing order had not been breached.
Background - what is a freezing order?
A freezing order is a form of injunction that prevents a party from disposing of or dealing with its assets. They protect claimants against the risk of defendants dissipating their assets before judgment can be obtained and enforced. Given the severe constraint a freezing order imposes on a party’s freedom to deal with its own assets, it will only be granted where the court considers it just and convenient to do so, the applicant has shown it has an arguable case, and there is a real risk of disposal of the assets that could otherwise be used to satisfy the judgment. The Court of Appeal’s decision in Emmott v Michael Wilson and Partners Ltd  EWCA Civ 1028 is an example of the English courts’ unwillingness to allow freezing orders to impinge upon a party’s genuine commercial dealings.
The underlying dispute between the parties arose out of a partnership agreement that had broken down and led to arbitration. A freezing order was granted in support of an arbitration award made in Mr Emmott’s favour in late 2014. It contained the normal exception that the order did “not prohibit the Respondent from dealing with or disposing of its assets in the ordinary and proper course of business”.
In early 2015, Mr Michael Wilson (the sole director of Michael Wilson and Partners Ltd (“MWP”)) made two payments to Kazholdings Inc (K1) and its wholly owned subsidiary Kazholdings LLP (K2), of approximately US$1.8 million and US$ 1.2 million respectively. MWP claimed that these payments were in relation to a secured loan provided by K1 to MWP and overdue rent and associated charges relating to premises let to MWP by K2. Mr Emmott alleged that the loan was a “fiction” and that the rent allegedly due was “grossly inflated”. He submitted that these payments therefore fell outside the exception in the freezing order and constituted breaches of the order.
At first instance, Smith J considered some of the surrounding circumstances of the payments. He noted that the largest repayment of the loan that MWP had made prior to the $1.8 million was just $525,000 and that no repayment had been made at all between 2011 and 27 April 2015. He made similar observations in relation to the rent payment and also noted that the arrears of rent had not been reflected in MWP’s balance sheet. The judge concluded that the facts showed the payments were not made in the ordinary and proper course of business. He imposed a substantial fine on MWP and sentenced Mr Wilson to eight months in prison for contempt for breaching the freezing order.
The Court of Appeal’s ruling
On appeal, the Court noted that for payments to fall within the exception they must be both (a) in the ordinary course of business and (b) in the proper course of business, which are separate and cumulative requirements. It was noted at the outset that the first instance judge had considered that the loan was genuine and that he was not in a position to reach a conclusion on the question whether the rent was inflated, so would accordingly ignore that suggestion. The Court assumed that the judge had therefore proceeded on the basis that the payments were in the ‘proper’ course of business and that the only finding to be made was whether they were also in the ‘ordinary’ course of business.
The Court held that Smith J had taken too narrow a view of the exception, and had not taken account of a number of relevant factors, including that:
- four loan repayments totalling $1.143 million were made in short order in 2010;
- there had been similar substantial gaps of time between repayments before; and
- the payments related to pre-existing liabilities, some of which were secured and so related to assets which would not have been available to satisfy the arbitration award in any event.
The Court also viewed the judge’s reliance on the accounting treatment of the rent arrears as ‘misplaced’. The Court emphasised that when interpreting such exceptions, it is not helpful to substitute for the phrase ‘ordinary course of business’ synonyms such as ‘routine’ or ‘recurring’. A discrete or ad-hoc transaction is capable of being in the ordinary course of business. In light of all the facts of the case, the Court found that the payments were made in the ordinary and proper course of business and so allowed MWP’s appeal.
The Court of Appeal concluded its judgment by noting that what amounts to payments or disposals in the ordinary course of business is a ‘highly fact-sensitive question’. The Court emphasised it had reached its conclusions in light of the specific facts of the case and was not attempting to provide a more general description of a ‘payment in the ordinary course of business’. The judgment serves as a reminder that the underlying purpose of a freezing order is not to give the claimant security for his claim, but to prevent the dissipation or concealment of assets that would otherwise be available to satisfy a judgment.
It also confirms the UK courts’ strict approach to the scope of freezing orders. Where the facts suggest the defendant has made repayments in good faith to discharge a pre-existing liability, a court is unlikely to find that the freezing order has been breached. At the same time, the lower court decision shows that the penalties for breach of a freezing order can be severe, including custodial sentences for those involved, where appropriate.