In the March issue of this Bulletin, we examined the conflicting decisions in Group Seven Ltd v Allied Investment Corporation Ltd & Ors (Group Seven) and Lakatamia Shipping Company v Notu Su & Ors (Lakatamia) as to whether assets held by companies wholly owned and controlled by a defendant are subject to the standard form of freezing order. The release of the Lakatamiaappeal judgment on 14 May 2014 has provided much-needed clarification.

Background

Paragraph 6 of the standard form of freezing order (Paragraph 6) provides:

“[The restriction on dealing] applies to all the Respondent’s assets whether or not they are in his own name and whether they are solely or jointly owned. For the purpose of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions.”

In Group Seven, the defendant was subject to a standard form freezing order and listed as one of his assets a debt owed to a company of which he was sole shareholder and sole director. The company eventually settled with the debtor for a much reduced sum. The claimant argued the defendant had breached the order by procuring the disposal of one of his “assets” within the meaning of Paragraph 6.

Hildyard J held that when the defendant as sole director signed the agreement settling the debt, he was merely the means by which the company acted. Paragraph 6 was not engaged and the freezing order was not breached.

In Lakatamia, the defendant was also subject to a standard form freezing order. He sought a declaration that assets held by companies owned and controlled by him were not subject to the restrictions in the order. Burton J rejected the request, concluding that Paragraph 6 did apply to assets held by companies under the defendant’s control because, among other matters, the owner of a company could by resolution or otherwise “access and direct the fate of” the company’s assets. The defendant appealed.

Lakatamia appeal

The Court of Appeal endorsed Burton J’s decision, but criticised his reasoning. It held that:

  1. The effect of Paragraph 6 was that assets beneficially owned by the defendant would be subject to a freezing order, whether held legally by him or another. However, assets held legally by the defendant for the benefit of another would not.
  2. There was no basis to say that Paragraph 6 was intended to or did have the effect of bringing within the definition of the defendant’s assets the assets of a company which he controls.
  3. However, a standard form freezing order will prevent an individual from diminishing the value of his shareholding in a company he owns or controls. That will not usually prevent the company from dealing with its assets in the ordinary course of business since that will not usually diminish the value of the defendant’s shareholding. 

Analysis

For many practitioners and their clients, the judgment brings a refreshing clarity to the scope of the standard form of freezing order. The purpose of freezing orders is to restrain the defendant from dealings with assets which will be available to satisfy any judgment obtained. Assets targeted by a standard form freezing order are therefore those that belong beneficially to the defendant.

A defendant faced with a freezing order will not be permitted to diminish the assets of his companies (and thereby his own assets in the form of his shareholdings) unless he can show that such disposals lie within the exception for dealings in the ordinary course of business. Where, for example, a company is a special purpose vehicle, disposal of its primary asset would likely fall foul of Paragraph 6.

The Court of Appeal emphasised that a defendant’s ability to control the assets of his company does not mean that they are his assets within the meaning of Paragraph 6. This reflects the courts’ return to a stricter view of separate corporate personality in the recent cases of Prest v Petrodel and VTB v Nutritek and probably represents the last nail in the coffin of the idea of ‘control as ownership’. 

In order directly to freeze assets of a non-defendant company, a claimant must either make a sufficient case that the company is “just the moneybox of the defendant” and holds its assets for his benefit, or it must make the company itself a defendant under the Chabra jurisdiction (outlined in our March article). 

The judgment does present challenges for those on the attack. For claimants previously stung by duplicitous defendants, the idea that their opponent is ‘indirectly’ prevented from dealing with corporate assets for fear of reducing the value of his shareholding may be of little comfort. 

It may be that, for more ‘respectable’ defendants, the prospect of a rigorous disclosure regime put in place to police the value of their shareholding is itself an effective threat. The Court’s attitude seemed to be that in cases of fraud, misappropriation of funds or some other dishonesty, claimants should be able to seek a wider order than the standard form, either directly to freeze corporate assets and/or to make the relevant companies defendants themselves. It will be interesting to see how the courts respond if and when an application for an order on these wider terms is made.