Supreme Court holds that a loan amounts to an "asset" within the meaning of a standard freezing order

http://www.bailii.org/uk/cases/UKSC/2015/64.html

The first instance and Court of Appeal decisions in this case were reported in Weekly Updates 24/12 and 29/13 respectively.

The claimant obtained a freezing order against the defendant preventing him (in the usual way) from disposing of, or dealing with, any of his "assets". The respondent entered into four loan agreements, each giving him the right to borrow up to £10million, which the defendant then used to pay legal costs and living expenses (in excess of the "reasonable" amount for legal expenses and £10,000 per week for living expenses allowed by the freezing order).

At first instance, it was held that an "asset" should be construed in the way it would be understood to a businessman, not a lawyer, and did not include a right to borrow. The Court of Appeal upheld that decision, finding that the terms of the order had not made the right to borrow an asset. The Supreme Court has now allowed the appeal from that decision.

The Supreme Court unanimously held as follows:

  1. When construing a freezing order, the court must look at what it says and not what ought to have been ordered. The Court of Appeal had held that certain legal principles govern the courts' approach to freezing order, one of which is flexibility. However, the Supreme Court held that the flexibility principle has no role in the construction of a freezing order. The Supreme Court agreed with the Court of Appeal that freezing orders should be construed strictly. It also found that the order should be construed in its context (including its historical context).
  2. The courts, together with textbook commentary, have long supported the view that a freezing order does not prevent a respondent from borrowing money. Even though the right to borrow money is, "in ordinary legal parlance", an asset, that is not how the matter has been approached previously. Although the Supreme Court could overturn those earlier decisions, it did not find it was appropriate to do so: "Clarity is important and so is certainty in the context of penal orders".
  3. However, the order had contained the following wording: "For the purpose of this Order, the respondent's assets include any asset which it has power, directly or indirectly, to dispose of, or deal with as if it was its own. The respondent is to be regarded as having such power if a third party holds or controls the assets in accordance with its direct or indirect instructions". This wording appears as paragraph 6 of the standard form freezing order annexed to PD25A.

It was held that the Court of Appeal had been wrong to take into account that the power to deal with the loan monies was subject to the lender's consent. The respondent could use the loan proceeds as it wished and could direct payment to a third party. Accordingly, the loan proceeds fell within the meaning of "asset" in paragraph 6: "The whole focus…of the paragraph is the respondent's power to deal with the lender's assets as if they were his own".

COMMENT: The Supreme Court decision in effect overturns prior caselaw on the point, even though the rationale for those earlier decisions has been allowed to stand. By concentrating on a different part of the standard freezing order, the Supreme Court's decision will prevent defendants borrowing large sums to pay out to third parties before defaulting on the loans and thus possibly enabling lenders to obtain judgment against the defendant's assets before the claimant's claim can be established (and so in effect making the claimant "judgment proof"). That, of course, is on the proviso that the freezing order actually made contains the wording in paragraph 6. But this decision means that the standard wording would have to be amended toexclude loan proceeds, as opposed to an amendment to include borrowing as an asset (as was previously the case). The decision could be significant for respondents, since borrowing includes not just loans but also, for example, payments by credit card and payments from an overdrawn account (where the overdraft facility has not been exhausted).