Supreme Court holds that a loan amounts to an "asset" within the meaning of a freezing order
This Supreme Court decision supersedes prior case-law by finding that the proceeds of a loan fall within the meaning of “asset” as described in the freezing order obtained by the claimant against the defendant in these proceedings. As a result, the defendant was prevented, by the terms of the freezing order, from disposing of or dealing with loan proceeds. The Supreme Court's decision will no doubt put a stop to parties who are subject to freezing orders, from borrowing large sums to pay out to third parties before defaulting on the loans. This practice led to lenders procuring judgment against the borrower’s assets before the claimant's claim could be adjudicated upon, in effect making the claimant "judgment proof". This decision means that, (should the courts wish to allow defendants to continue to borrow and deal with the loan proceeds despite the existence of a freezing order) the standard wording would have to be amended to specifically exclude loan proceeds.
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 borrowed and then used to pay legal costs and living expenses (in excess of the "reasonable" amount for legal expenses and in excess of the £10,000 per week for living expenses permitted by the freezing order). At first instance, the High Court 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 terms of the order had not made the right to borrow an asset. The Supreme Court allowed the appeal from that decision, holding (unanimously):
- 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 orders, 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 did agree with the Court of Appeal, though, that freezing orders should be construed strictly. It also found that the order should be construed in its context (including its historical context).
- 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 the earlier decisions, it did not think it appropriate to do so: "Clarity is important and so is certainty in the context of penal orders".
- 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.
- The Court of Appeal had been wrong to consider that the power to deal with the loan monies was subject to the lender's consent. The Supreme Court found that respondent could in fact 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 stating that: "The whole focus…of the paragraph is the respondent's power to deal with the lender's assets as if they were his own".