Summary

On 21 October 2015, the Supreme Court made a landmark decision on the construction of freezing orders.  This unanimous judgment is the latest decision in the long-running litigation between JSC BTA Bank of Kazakhstan (the “Bank”) and Mr Ablyazov, its former chairman (the “Respondent”), who is alleged to have misappropriated US$10 billion of the Bank’s funds.  In 2009, the Respondent was made subject to a freezing order preventing him from removing his assets from England and Wales or in any way disposing of, dealing with or diminishing the value of those assets.  Shortly afterwards, he drew down US$40 million under various loan agreements.

Overturning the Court of Appeal decision, the Supreme Court held that the proceeds of the loan agreements were ‘assets’ for the purposes of the freezing order (even though the Respondent’s rights under the loan agreements themselves were not).  The Court also provided welcome clarification as to the scope of the Commercial Court’s standard freezing order wording.  Despite the Court’s broad interpretation of the definition of ‘assets’, its cautious analysis in reaching this conclusion also serves as a reminder that the courts construe freezing orders strictly, in view of the significant restrictions these measures place on a person’s right to deal with their own property.

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 own 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, it will only be granted where (1) the court considers it just and convenient to do so, (2) the applicant has shown it has an arguable case, and (3) there is a real risk of disposal of the assets that could otherwise be used to satisfy a judgment.  The Supreme Court’s decision in JSC BTA Bank v Ablyazov [2015] UKSC 64 provides welcome clarification of the scope of the Commercial Court’s standard freezing order wording.

The facts

The Respondent was the chairman and majority shareholder of the Bank from 2005 to 2009, at which point the Bank was nationalised and the Respondent fled Kazakhstan for England.  The Bank subsequently brought 11 actions against the Respondent in England, claiming he had misappropriated over US$10 billion of the Bank’s money during his time as chairman.  The Bank has so far been successful in four of these actions but the Respondent has not paid any of the judgments, which currently amount to $4.4 billion.

In November 2009, the Bank obtained a freezing order on the Commercial Court’s standard form, which provided among other things that the Respondent must not, without the prior written consent of the Bank’s solicitors: (1) remove from England and Wales any of his assets; or (2) dispose of, deal with or diminish the value of any of his assets in England and Wales (the “Freezing Order”).  ‘Assets’ was defined in paragraph 5 of the Freezing Order as including all the Respondent’s assets whether or not they are in his name, solely or jointly owned or whether the Respondent has a beneficial interest in them, as well as “any asset which [the Respondent has]power, directly or indirectly, to dispose of, or deal with as if it were [his] own.”  This additional language, extending the definition of assets, was added to the standard form of freezing order in 2002, but its effect had not before been tested in the courts.

In 2009 and 2010, the Respondent entered into four loan agreements with two BVI companies, each of which provided for a loan facility of £10 million (the “Loan Agreements”). The Loan Agreements were then fully drawn down and the Respondent used the funds to make payments in relation to a property, as well as to lawyers and other corporate service providers.  On discovering these arrangements, the Bank applied for declarations that the Respondent’s rights under the Loan Agreements were assets for the purposes of the Freezing Order and that any drawings under the Loan Agreements could only be made in accordance with the exceptions to the Freezing Order.  The Bank also argued that the Loan Agreements were not genuine arms’ length transactions because the BVI companies were in fact conduits of the Respondent, however all three courts proceeded on the basis that the Loan Agreements were binding and effective.

The Bank’s application was dismissed at first instance on the basis that the rights under the Loan Agreements did not fall within the definition of “assets” in the Freezing Order.  This decision was upheld by the Court of Appeal.

The issues

The Bank’s appeal to the Supreme Court centred around three issues concerning the construction of the Freezing Order:

  1. whether the Respondent’s right to draw down under the Loan Agreements is an ‘asset’ within the meaning of the Freezing Order;
  2. if so, whether the exercise of that right by directing the lender to pay the sum to a third party constitutes ‘disposing of’, ‘dealing with’ or ‘diminishing the value of’ an asset; and
  3. whether the proceeds of the Loan Agreements were ‘assets’ within the meaning of the extended definition in paragraph 5 of the Freezing Order.

The Supreme Court decision

The Court noted at the outset that it must not “succumb to the temptation” to stretch its legal analysis to capture the merits of the case (or the lack thereof).  Rather, the sole question before the Court was simply “what the Freezing Order in fact made means.”  It was recalled that freezing orders are to be construed restrictively in light of the penal consequences of breaching an order and the need for defendants to know where they stand.

In Lord Clarke’s judgment (with which all four other judges agreed), he considered that the context of a freezing order is of particular importance in determining its true construction.  He noted that the courts have taken a “sensible” cautious approach to the language of freezing orders but have also recognised that the forms of order have gradually been extended.  He took the view that ‘assets’ is capable of having a wide meaning, but that both case law and legal writings (including the Civil Procedure Rules) show a settled understanding that borrowings are not covered by the standard form freezing order.  Accordingly, in relation to issues (1) and (2), the Court held that the right to draw down under the Loan Agreements does not qualify as an ‘asset’ and therefore exercising that right did not amount to disposing of, dealing with or diminishing the value of ‘assets’.  He dismissed the Bank’s appeal on those issues.

However, Lord Clarke reached a different conclusion on issue 3 - whether the proceeds of the Loan Agreements were ‘assets’ within the meaning of the extended definition in the Freezing Order.  He considered that the question to be asked in relation to this issue was whether the Respondent had the power to direct the lenders under the Loan Agreements as to what to do with the funds that the lender was contractually obliged to make available to the Respondent.  In light of the terms of the Loan Agreements, the Court held that the answer to this question was ‘yes’.  Although the Respondent did not own the assets, he had the right to give instructions to the lenders in respect of them as if they were his own.  This situation is caught by the last two sentences of the extended definition in paragraph 5, which are designed to cover assets which are not owned legally or beneficially by the addressee of the order, but over which the addressee has control.  The Court therefore held that the proceeds of the Loan Agreement were ‘assets’ within the meaning of the extended definition in paragraph 5 and allowed the Bank’s appeal on the final ground.

Comment

This judgment provides welcome clarification of the meaning of ‘assets’ in the Commercial Court’s standard freezing order, which now clearly covers assets that are not owned legally or beneficially by the addressee of the order, but over which the addressee has control.  Although the decision is important in this respect, it is not an example of the Court departing from existing law or adopting a novel or expansive approach to freezing orders.  As Lord Clarke noted, the issues raised a straightforward question and legal analysis – “what does the Freezing Order mean?”  There was no need for the Court to analyse the Respondent’s conduct or consider if the Freezing Order should even have been made.  Instead, it focused simply on what the extended definition of ‘assets’ in the Freezing Order was designed to catch.

The Supreme Court’s guidance will likely provide some reassurance for freezing order applicants that, by using the Commercial Court’s standard wording, they will capture a wide range of activities that the defendant could potentially carry out.  The Court has also arguably closed a potential loophole which could be exploited by defendants to avoid the strict terms of an order.  However, despite the Court’s broad interpretation of the definition of ‘assets’, its cautious analysis in reaching this conclusion also serves as a reminder that the courts construe freezing orders strictly, in view of the significant restrictions these measures place on a person’s right to deal with their own property.  Applicants should give careful consideration to the drafting of these orders to ensure that, in the event of challenge, they stand up to scrutiny.