Third-party assets controlled (de facto or de jure) by the respondent are ordinarily outside the scope of a freezing injunction unless exceptional circumstances can be established.

In the recent case of FM Capital Partners Ltd v Frédéric Marino, Aurélien Bessot, Yoshiki Ohmura, and Marit Sjovaag [2018] EWHC 2889 (Comm), the English High Court held that if a company wholly owned or controlled by the respondent is a non-trading company without an active business, and the respondent deals with or disposes of that company’s assets outside the ordinary course of business, that conduct may be enjoined by the terms of a freezing injunction. These are exceptional circumstances that brought the third party’s assets within the scope of the order. In all other circumstances, the proper course of conduct is for an application to be made to join the third party as a respondent to the order itself.

Facts

A Worldwide Freezing Order (WFO) was granted in July 2018 following the High Court’s judgment against Mr Ohmura (the Respondent) for his dishonest assistance in acts of bribery and breaches of fiduciary duty by Mr Marino (the First Defendant). The terms of the WFO, as issued, prohibited the Respondent from disposing of, diminishing in value, or otherwise dealing with his assets up to a value of US$11,250,000.

The restrictions set out in the WFO were ordered to apply “to all the Respondent’s assets whether or not they are in his own name and whether or not they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise”. (The emphasized words refer to what is known as the “extended definition” of assets.) The court continued: “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 (which shall include a body corporate) holds or controls the asset in accordance with his direct or indirect instructions”.

The order included specific prohibitions on dealings by the Respondent with: (i) assets in his own bank account; (ii) assets in the bank accounts of (and the Respondent’s shareholdings in) Conquest Financial Partners AG (Conquest), Rubicon Financial Holding Ltd (Rubicon), and Squadra Corse Ltd (Squadra); (iii) the Respondent’s shareholding in StileF Service Srl. (StileF); and (iv) a Swiss property and various motor cars. Subject to a notice requirement triggered by a threshold of transactions exceeding £10,000 in value, the WFO contained an exception that did not prohibit the Respondent “or any company whose assets are frozen pursuant to [the WFO]” from “dealing with or disposing of any of his/its assets in the ordinary and proper course of business”.

At the return hearing held on 9 October 2018, the court rejected the Respondent’s application to discharge the WFO. The Respondent therefore sought (inter alia) to change the terms of the WFO to remove the references to: (i) the words “whether the Respondent is interested in them legally, beneficially or otherwise” (the “extended definition”) and “body corporate”; and (ii) the assets of Conquest, Rubicon, Squadra, and StileF (each being companies wholly owned by the Respondent).

Judgment

In his judgment dated 31 October 2018, Mr Peter MacDonald Eggers QC (sitting as a Deputy High Court Judge) agreed with the reasoning of Mr Justice Hildyard in Group Seven Ltd v Allied Investment Corporation Ltd [2013] EWHC 1509 (Ch); [2014] 1 WLR 735 that the assets of a company wholly owned by a respondent to a freezing order are not the assets of the respondent due to the separate legal personality enjoyed by that company. Indeed, “the mere fact that a director/shareholder is entitled to exercise control over the company’s affairs does not mean that the director/shareholder is entitled to the company’s assets” (at [21]). Although it is possible to extend the scope of a freezing order to the assets of a company in which the respondent is the sole shareholder and director, “such an extension should be permitted only in exceptional circumstances” (Mr MacDonald Eggers QC at [23]), namely where the respondent retains assets “in a non-trading body corporate which he wholly owns and controls, which do not have any active business, and which are in truth no more than pockets or wallets of that respondent” (Justice Hildyard, para 80 of [2013] EWHC 1509 (Ch)).

Further, Mr MacDonald Eggers QC agreed with the reasoning of Lord Justice Tomlinson in Lakatamia Shipping Co Ltd v Su [2014] EWCA Civ 636 that “the extended definition of a respondent’s assets was not intended to include the assets of another person, even where that person is a company controlled by the defendant” (at [30]). The company must itself be made a co-respondent to the order unless the respondent has a beneficial entitlement or interest in the assets concerned.

In summary, Mr MacDonald Eggers QC held (at [32]) that Group Seven and Lakatamia established the following five principles:

  1. Even if a company is wholly owned and controlled by the respondent to a freezing order, the extended definition does not encumber the assets of a third party per se.
  2. The respondent must have a beneficial entitlement or interest in order for the extended definition to apply to the third-party asset in question.
  3. When the respondent (acting as director/shareholder) deals with or disposes of company assets, that person prima facie does so as an organ or agent of the company (and not in any individual capacity). Conduct of the company cannot be attributed to its directors/shareholders.
  4. When the respondent (as sole shareholder) exercises control over a company in such a manner as to diminish the value of the respondent’s shareholding in that company, that conduct may be captured by the freezing order if the behavior is not carried out in the ordinary course of the business of the company.
  5. A freezing order can be expressed to apply to the assets of a company wholly owned or controlled by the respondent (without that company being a respondent itself), but only in exceptional circumstances. Such circumstances were identified by Justice Hildyard in Group Seven as applying to non-trading companies that have no active business and “which are in truth no more than pockets or wallets of that respondent”.

The Deputy High Court Judge found that whilst principles 3, 4, and 5 remain good law, principles 1 and 2 were affected by an inconsistency between the decision of the Court of Appeal in Lakatamia and the more recent decision of the Supreme Court in JSC BTA Bank v Ablyazov [2015] UKSC 64; [2015] 1 WLR 4754. Whilst the Supreme Court did not find that Ablyazov overruled Lakatamia, it held that Ablyazov must be applied in respect of any inconsistency between the two decisions. In that case, the Supreme Court held that the ordinary meaning of “assets” was to be construed widely as capturing those assets not owned legally or beneficially by the respondent, but in respect of which the respondent has control and the power to deal with or dispose of as though they were so legally or beneficially owned. As such, Mr MacDonald Eggers QC held that, insofar as any inconsistency exists, “the extended definition does apply to assets over which the respondent has control but which the respondent does not legally or beneficially own” (at [52]).

In light of the above, the court altered the WFO to remove:

  1. The extended definition— the court found no suggestion that the Respondent was holding any assets on trust for a third party which in fact belonged to him. Indeed, “there is no evidence that Mr Ohmura owns any assets as a trustee or nominee or indeed on any basis other than as the owner of the legal and beneficial interest” (at [56]).
  2. The reference to a “body corporate” — the court held that these words did not alter the meaning of the extended definition. There was therefore no reason for their inclusion in the WFO.
  3. The reference to the assets of Conquest, Rubicon, Squadra, and StileF — as sole shareholder and director of Conquest, Rubicon, and Squadra, the Respondent was not exercising control in a personal capacity but rather “as an organ or agent of the companies” (at [55(2)]). Further, the court held on the facts that there was “no evidence to suggest that these companies are not active trading companies. Accordingly, there is no evidence to suggest that these companies are ‘no more than pockets or wallets’ of Mr Ohmura” (at [55(2)(a)]). Nor was there sufficient evidence to suggest that the Respondent was legally or beneficially interested in or entitled to the assets of the companies in question. As for StileF, it was found that the Respondent held only a minority (indirect) shareholding and exercised no control over its day-to-day activities.

Notwithstanding the variations described above, Mr MacDonald Eggers QC held that in light of the unsatisfied judgment entered against the Respondent, and the possibility that dealings with or disposals of the assets of Conquest, Rubicon, or Squadra could affect the value of the Respondent’s shareholdings in the same, “there is a sound reason for requiring Mr Ohmura to give notice of any intention to deal with or dispose of the assets belonging to Rubicon, Conquest or Squadra” (at [62]). The notification threshold was left unamended at £10,000.

Comment

In addition to providing a clear summary of the guiding principles laid down in Group Seven and Lakatamia, the judgment in this case confirms that if the respondent is the sole shareholder in and director of (or otherwise controls) a company, the assets of that company (being a third party) are ordinarily outside the scope of the extended definition of assets subject to the terms of a freezing injunction. Furthermore, this judgment confirmed that third-party assets will remain outside the scope of such a freezing injunction unless: (i) the respondent can be held to have a legal/beneficial interest in the assets (or sufficient control: Ablyazov) and (ii) exceptional circumstances can be established (i.e., that the third-party corporate vehicles are non-trading entities used as “pockets” of the respondent), or (iii) the third party in question is named as a co-respondent to the freezing injunction.