On 21 May 2010, Justice Floyd handed down his judgment in Bloomsbury International Ltd (in administration) v Mark Alan Holyoake.1 The case sheds light on the circumstances in which it is appropriate for a cross-undertaking provided by administrators on behalf of an insolvent company to be fortifi ed by a bank guarantee.
The claimants were companies engaged in the seafood trade. They were placed in administration on 19 February 2010. The administrators claimed to have uncovered a signifi cant fraud on the claimants by two of the directors and commenced proceedings against the directors (and numerous companies that were said to be involved). In short, the claimants alleged that one of the directors had misappropriated signifi cant sums from the company, leaving it with a signifi cant excess of liabilities.
On 16 March 2010, the judge granted a worldwide freezing order against the fi rst 11 defendants, freezing assets up to the value of £210m. He granted further worldwide freezing orders on March 23 and 29 against a further eight defendants.
The original cross-undertaking was limited to sums held within the claimants’ administration estates. The administrators later confi rmed that the claimants’ liabilities were estimated at £273.6m, whereas their assets amounted to only £16m.
The defendants submitted that the cross-undertaking was effectively worthless and applied for its fortifi cation by the provision of a bond for a sum that the court considered appropriate. The defendants suggested that this sum should be £10m.
Fortification of cross-undertakings
A cross-undertaking in damages is the normal price that a litigant pays for obtaining a freezing order before the merits of the case have been determined. Its purpose is to compensate the respondent if (i) it is subsequently determined that the applicant was not entitled to the injunctive relief, and (ii) the respondent has suffered loss. It thus ensures that the court is in a position to do justice at the end of the case.
However, there is no rule that an injunction will never be granted or continued if the cross-undertaking is of no real value. In Allen v Jambo Holdings the Court of Appeal held that the fact that a crossundertaking is of no value is merely a factor to take into account in assessing “the course to be taken… which would involve the least risk of ultimate injustice”.2
Liquidators or administrators of insolvent companies are not required to give open-ended cross-undertakings. In DPR Futures Limited3 it was held that:
- in cases where the company itself brings the claim, it may (and often will) be right to require the undertaking to be fortifi ed in some amount, either by a personal undertaking from the administrators or by other means
- administrators should not normally be ordered to give open-ended undertakings, but it may be right that they should give a limited undertaking
- in cases involving many small creditors, it is impractical for the administrators to obtain an indemnity from the creditors for whose benefit they are bringing the claim.
The judge considered that the case could be distinguished from DPR Futures Limited, as the creditors were banks - that is, substantial undertakings. The natural inference from the fi nding in respect of small creditors in DPR Futures Limited is that the position may be different where large creditors exist. The judge noted that the claimants’ counsel had “movingly suggested that the [banks] had suffered enough at the hands of Holyoake and should not even be approached to fortify the cross-undertaking”; however, he stated that this was an inadequate response.
Therefore, the judge had no hesitation in fortifying a crossundertaking in the amount of £4m on the basis that it was the course least likely to lead to an injustice; to refuse to do so would potentially leave the defendants uncompensated for a substantial claim in circumstances where it appeared easy to prevent such an injustice.
The case confirms that the overriding consideration in applying for fortifi cation of cross-undertakings is the balance of justice. Where a defendant is at risk of signifi cant harm if a freezing order proves to have been wrongly granted, it is material to enquire whether the claimant would suffer corresponding harm if a fortifi cation were ordered and to consider which course is least likely to lead to an ultimate injustice.