The Supreme Court has handed down a landmark judgment that impacts the interpretation of freezing orders made on the CPR and Commercial Court standard terms. In an appeal that marks the first time the Supreme Court has been invited to consider the standard form freezing order, the Court has held that the extended definition of a respondent's "assets" can include assets that the respondent does not himself own, but which he has the power to control.
The case is JSC BTA Bank v Ablyazov (No 10)  UKSC 64,  1 WLR 4754. Hogan Lovells acted for the appellant bank.
Context to the appeal
JSC BTA Bank (the "Bank") was at one time one of the largest banks in Kazakhstan. It was nationalised in the wake of the financial crisis, and found to be missing billions of dollars. Its former chairman, Mr Ablyazov, fled to England, where the Bank obtained a freezing order against him (and others) in 2009. Since then, the Bank has obtained multiple judgments against Mr Ablyazov totalling over US$ 4.5 billion, relating to fraudulent misappropriation of the Bank's funds. Mr Ablyazov was found guilty of contempt by the Commercial Court in February 2012 and sentenced to 22 months in prison; to avoid serving his sentence he fled the jurisdiction, and went into hiding until his apprehension by the French security services in the Summer of 2013, since when he has been incarcerated in France pending various criminal extradition proceedings against him.
During the course of the English proceedings, Mr Ablyazov paid for his legal costs and living expenses through a series of loan agreements with offshore companies. There were four materially identical loans each for £10m (the "Loans"), and it was assumed for the purpose of the present appeal that the lenders were genuine third parties. Unbeknownst to the Bank, Mr Ablyazov directed payments to be made to his lawyers and to those of his co-defendants, as well as to fund his living expenses. He contended that he was free to do so outside the restrictions and controls of the freezing order. The Bank applied for a declaration that this was not the case. The Bank was unsuccessful at first instance and in the Court of Appeal, and brought the present appeal to the Supreme Court.
The relevant terms of the freezing order
The freezing order was made on what is now the standard CPR and Commercial Court wording. It provided that Mr Ablyazov must not"dispose of, deal with or diminish the value of any of his assets" up to a value in excess of £450m.
Paragraph 5 of the order provided that this restriction applied "to all the respondents' assets whether or not they are in their own name and whether they are solely or jointly owned and whether or not the respondent asserts a beneficial interest in them." The final two sentences went on to give the "extended definition" of "assets": "For the purpose of this Order the respondents' assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own. The respondents are to be regarded as having such power if a third party holds or controls the assets in accordance with their direct or indirect instructions."
The freezing order contained the customary exceptions for living expenses up to a weekly cap (in this case £10,000), for dealings in the ordinary course of business, and for Mr Abyazov's own reasonable legal expenses – but not those of other defendants.
The Bank's arguments in the appeal
The Bank contended that there were created by the Loans "assets" that fell within the meaning of that term for the purpose of the freezing order, and which were therefore subject to its restrictions.
The Bank's primary case was that Mr Ablyazov's right to borrow under the Loans was itself an asset for the purpose of the freezing order, and in exercising that right he was disposing of or diminishing the value of that asset.
The Bank's alternative case was that the proceeds of the Loans were "assets" within the extended definition in paragraph 5 of the freezing order, because under the terms of the Loans Mr Ablyazov had the power "directly or indirectly, to dispose of, or deal with [the proceeds] as if they were his own".
The decision of the Supreme Court
The Court rejected the Bank's primary argument, but allowed the appeal on its alternative argument.
Lord Clarke JSC, with whom the rest of the panel agreed, held that freezing orders should be strictly construed and should be construed in their context, which includes their historical context. That context has seen a cautious approach by the courts to the wording of freezing orders, albeit that the terms of those orders have been gradually extended.
Importantly, this historical context includes two ex tempore first instance decisions of Neuberger J (as he then was), which held that a freezing order did not restrain a respondent from incurring a liability and thereby impairing his net asset position, and which had been cited in practitioner texts, including the White Book, for a number of years.
The Supreme Court therefore concluded that Mr Ablyazov's right to draw down under the Loans was not an "asset" within the meaning of the freezing order, if it is construed without reference to the "extended definition" of assets in paragraph 5.
The Court did, however, find that the right to direct a lender to pay funds could be an "asset" within the "extended definition", since Mr Ablyazov had the contractual power "directly or indirectly, to dispose of, or deal with" those funds as if they were his own, by telling the lender how the loan funds should be applied. The Court specifically rejected the suggestion of the Court of Appeal that the "extended definition" was intended to catch assets held on trust for the respondent; conversely, the whole purpose of the "extended definition" is to capture assets which the respondent does not own (beneficially or otherwise) but which he has a power to control as if he did.
This decision confirms once and for all that a defendant cannot try to evade the checks and restrictions of the standard form freezing order by using third-party lending to fund the proceedings. It also has potentially wider significance; whereas it was previously thought that a respondent is free to continue to use a credit card, that is now unlikely to be the case (outside whatever exceptions for living or other expenses the particular order may contain).
While the provisions of the Loans in this case were relatively straightforward, and Mr Ablyazov's power to direct the payment of the proceeds was reasonably clear, more nuanced wording, for instance around lender consent, could complicate the question of whether a respondent can deal with the proceeds "as if they are his own".
This is an important decision for those seeking to police and enforce a freezing order, and illustrates the Court's continuing willingness to take a robust approach to defending the effectiveness of these important orders. It also calls for careful consideration by third parties served with freezing orders, particularly lenders or those providing banking facilities to lenders, who may now have to consider the terms on which a borrower-respondent can control the application of the loan proceeds