What has happened?

On 27 February 2013, the UK Supreme Court held that the FSA should not be required (as a matter of course) to provide an undertaking to compensate third parties for general losses suffered as a result of compliance with freezing injunctions obtained by the FSA using its powers under the Financial Services and Markets Act 2000 (“FSMA”).  

The Facts of the Case

In December 2010, the FSA commenced proceedings against the Defendants for the alleged fraudulent offer and sale of shares in Sinaloa Gold plc (“Sinaloa”) (contrary to sections 19, 21 and 85 FSMA). The FSA was granted a without notice freezing injunction which prohibited the sale of any shares in Sinaloa and prevented each of the Defendants from disposing of or dealing with their worldwide assets. The injunction contained undertakings given by the FSA to pay the reasonable costs of third parties, as well as compensation for any losses caused.

On 6 January 2011, the FSA applied to the High Court to vary the undertaking to remove the reference to compensating third parties for losses. Barclays Bank plc intervened in the proceedings to argue that the FSA should undertake to pay both the costs of compliance by third parties with the injunction and any losses incurred by third parties.

First Instance and Court of Appeal

The High Court refused the application to vary the undertaking. However, this was overturned by the Court of Appeal, thereby removing the undertaking to compensate for losses.

The Supreme Court (Leading Judgment: Lord Mance)

The Supreme Court unanimously upheld the decision of the Court of Appeal. It distinguished the position of a private applicant for an injunction (which has a choice whether to embark on proceedings for its own interests) and a public applicant (which has an obligation to act in accordance with its public duties).

Lord Mance approached the appeal “on the basis that there is no general rule that the FSA should be required to give a crossundertaking in respect of loss suffered either by the defendants or by third parties”. However, he added that there may be certain, “special” circumstances in which a third party could apply to court to obtain an undertaking from the FSA in respect of any potential losses - such circumstances were likely to be rare and were not present in this case.

The Courts therefore retain a discretion to require such an undertaking as to losses to be provided where necessary and in all fairness, having regard to the starting position that “no cross undertaking [as to losses] should be extracted as a matter of course”.

Why is the decision important?

The decision allows the FSA to continue to seek injunctive relief as a staple part of its enforcement functions without being constrained by the threat of claims for losses, save in exceptional circumstances.