In State Bank of India v Mallya the High Court provided helpful guidance as to which factors may be relevant when determining whether a freezing order should be discharged. These factors include the risk of dissipation of assets, delay in applying for the freezing order and questions of material non-disclosure.
While the court declined to discharge the injunction in this case, the judgment highlights the need to exercise extreme care when applying for a freezing order. Failure to do so can lead to it being set aside, which will often carry significant consequences, including adverse costs.
Underlying action The first defendant, Vijay Mallya, was a well-known Indian businessman who launched Kingfisher Airlines Limited in 2003. Following the impact of the 2008 global financial crisis, Kingfisher Airlines was required to obtain a loan from the State Bank of India. In an attempt to ensure Kingfisher Airlines' future, the existing creditors (the subsequent claimants in the action) combined to negotiate a master debt recast agreement which subsumed all of Kingfisher Airlines' outstanding loan obligations. Kingfisher Airlines' obligations under the agreement were secured by – among other things – a personal guarantee from Mallya.
In 2012 the State Bank of India declared Kingfisher Airlines a non-performing asset. The Civil Aviation Authority subsequently suspended its operating licence and certain of its creditors commenced winding-up proceedings. In March 2013 Mallya and others commenced proceedings in the Bombay High Court challenging the validity of his personal guarantee under the master debt recast agreement on the basis that it did not comply with Indian banking rules and alleged coercion. In April 2013 the claimants called in their loans under the master debt recast agreement, and in June 2013 the claimants commenced debt recovery proceedings against Mallya under the personal guarantee before the debt recovery tribunal in India. In January 2017 the claimants obtained judgment in their favour.
The claimants registered the judgment of the debt recovery tribunal in England – where Mallya was living – and at the same time obtained an ex parte worldwide freezing order against Mallya's assets. The worldwide freezing order was obtained on the grounds that there was a real risk that, without it, the judgment of the debt recovery tribunal would go unsatisfied as Mallya would dissipate his assets or deal with them in a manner that made enforcement of the judgment more difficult.
Mallya is also subject to separate criminal proceedings in India, where the government is seeking his extradition to face criminal charges in relation to alleged fraud and money laundering.
Application to set aside worldwide freezing order Mallya applied to the High Court to set aside the worldwide freezing order on the basis that:
- there was no risk that he would dissipate his assets;
- the claimants had delayed in making the application; and
- there had been material non-disclosure.
Starting point The judge dismissed the application to set aside the worldwide freezing order.
As a starting point, the judge, citing R v Home Secretary ex p Muboyayi ( QB 244), noted that the purpose of a freezing order is to ensure that a defendant cannot take any action which is "designed to ensure" that an existing or future judgment becomes less effective than it would otherwise have been.
Risk of dissipation of assets In deciding whether there is a risk of dissipation of assets, the court will take into account a wide variety of factors, including:
- the nature of the assets to be frozen;
- the nature and standing of the defendant's business;
- how long the defendant has been in business;
- the defendant's domicile or residence;
- the machinery for enforcement in the country of the defendant's business;
- the defendant's credit record;
- any intention expressed by the defendant about future dealings with his assets;
- connections between a defendant and other companies which have defaulted on arbitration awards or judgments; and
- the defendant's behaviour in respect of the claims.
In this case, the judge concluded that there was "solid evidence of a real risk of dissipation of assets", which justified the continuation of the worldwide freezing order.
First, the court rejected Mallya's argument that his attempts to settle the claims before the debt recovery tribunal and pay off the judgment debt indicated that he had, contrary to the claimants' assertions, made attempts to meet the judgment debt against him. The court disagreed, noting that Mallya's offers of settlement were:
- significantly lower than the amounts owed to the claimants;
- not in cash; and
- often contingent on the outcome of litigation or other matters.
According to the judge, these factors were indicative of "a wholly unmeritorious attempt to avoid liability".
Second, the court placed "significant weight" on findings of contempt against Mallya made in the Indian Supreme Court and the High Court of Karnataka, particularly as these contempt proceedings had found that Mallya had failed to disclose full particulars of his assets. The judge further noted that the courts would be reluctant to reconsider findings of contempt which had already been established by a foreign court, particularly where the decision appears to be reasonable given the evidence before it.
Third, the court drew on Mallya's decision to leave India in March 2016, which coincided with the proceedings before the debt recovery tribunal. The court noted that before this, Mallya had travelled "fairly regularly" between India and England, with most of his business interests being in or closely connected with India. However, Mallya had not returned to India since leaving in March 2016 and was fighting extradition proceedings in relation to the financial misconduct charges. This led the judge to conclude that there were "grounds for regarding Dr Mallya as a fugitive from justice".
Fourth, noting that Mallya was facing criminal prosecution, the judge held that although these proceedings had not concluded, they could be taken into account as evidence; they involved an extensive document review and more than 70 witnesses and multiple court hearings, and were sufficient to justify a conclusion that there was a risk of dissipation of assets.
Finally, the court cited Holyoake v Candy ( EWHC 970 (Ch);  3 WLR 357), in which it was held that although the fact of a defendant's assets being held in complex, opaque and offshore structures is not enough to give rise to an inference of a risk of dissipation, it may contribute to the risk of dissipation alongside other material. However, in this case, the judge was unwilling to take into account unverified internet sources which linked Mallya to assets owned via offshore companies and trusts.
Delay Citing Madoff Securities International Ltd v Raven ( EWHC 3102 (Comm)), the court confirmed that the claimants' delay in making their application was not a bar to obtaining a freezing order.
Instead, it was a discretionary factor, and one of the many to be taken into account when assessing:
- the credibility and weight of the applicant's evidence;
- whether the respondent had dissipated assets during the delay; and
- whether the delay had caused any prejudice to the respondent.
The claimants' reason for the delay was that they did not realise that they could apply for the freezing order before obtaining a judgment from the debt recovery tribunal. The judge was satisfied that the claimants had provided a sufficient explanation for the delay and that their reasoning did not undermine the belief of a risk of dissipation.
Material non-disclosure Mallya argued that the worldwide freezing order should be set aside on the grounds of non-material disclosure by the claimants, since the court was not informed that they had applied to the debt recovery tribunal for various forms of relief against Mallya, including the removal of his passport, his arrest and an asset restraining order.
An application made without notice must give full and frank disclosure. This requirement has been described as giving rise to a "heavy duty of candour and care" (Brink's Mat v Elcombe ( 1 WLR 1350)). Whether a matter is material is objective. In cases where full and frank disclosure has not been given, the general rule is that the injunction must be discharged. However, as noted in Millhouse Capital UK Ltd v Sibir Energy plc ( BCC 475) the court has discretion in cases of culpable non-material disclosure and must consider the prejudice which will occur if the injunction is not renewed.
While the judge criticised the claimants for failing to direct the court's attention to existing attachment orders granted by the debt recovery tribunal, he held that, ultimately, this failure was not material and would have been unlikely to assist Mallya in resisting the application. Consequently, the non-disclosure was not deemed "sufficiently culpable" to merit the discharge of the worldwide freezing order.
Freezing orders are a valuable weapon in the arsenal of parties seeking enforcement in England and Wales. However, they come with a heavy responsibility on the part of the applicant. If one gets it wrong, a great deal of time, effort, costs and tactical initiative are likely to be lost.
The case provides a helpful overview of the various factors that the court will take into account when considering whether to continue or discharge a freezing order.
While the principal factor considered by the court was the risk of dissipation of assets, this case should serve as a reminder that there are other factors which must not be ignored, including any delay in seeking the order and material non-disclosure at the time of the application. Further, while certain factors before the court were, on their own, sufficient to show that there was no risk of dissipation of assets, it was necessary to examine all of the facts before the court in the round.
For further information on this topic please contact Victoria Rogers or Jonathan Cary at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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