In this case, a secured creditor applied to amend the terms of a freezing order, so that it would be free to enforce its rights against assets subject to the order. In view of the true purpose and effect of freezing orders, the court considered whether variations were generally necessary for a third party to be able to enforce their security, and whether it was appropriate in the present case.
The claimant (Mr Taylor) claimed that all four defendants were jointly and severally liable on a bridging loan for a considerable sum of money. On 2 August 2016 judgment was entered against the defendants for a sum of over US$2.5 million with subsequent judgments awarding further amounts of €1.3 million against the first defendant and US$400,000 against all four defendants jointly and severally.
The freezing order
On 21 June 2016 a freezing order was made against all four defendants and it was continued by Norris J on 7 July 2016. The order, which was in typical form, restrained the defendants from dealing with certain physical assets, dealings with shares in the first defendant and also contained a further general restraint on dealing with the assets of any of the defendants.
The freezing order gave rise to considerable satellite litigation involving complaints of non-disclosure, ultimately resulting in committal orders. In the course of the satellite litigation, the defendants asserted that certain assets which were thought to have been owned by the second defendant were in fact owned by an entity called Rhino, which was said in turn to be owned by a third party. Mr Taylor sought to establish the true position as to ownership of the assets by way of disclosure orders and committal applications.
The intervener application
The present application was made by TCA Global Credit Master Fund LP (TCA), as an intervener / third party to the proceedings.
The interest of TCA in the matter arose via a debenture given by the second defendant on 4 November 2014 in order to secure a facility of US$2.5 million or up to US$7.5 million. The debenture contained a fixed and floating charge over the second defendant’s assets. The fixed charge caught certain specified property including ‘all the intellectual property’ of the second defendant.
TCA made various arrangements to enforce its security against the second defendant pursuant to the debenture to recover amounts owed to it. However, to avoid any potential problems, TCA asked Mr Taylor (being the person with the benefit of the freezing order) to consent to it being able to enforce the debenture, notwithstanding the freezing order. Mr Taylor did not consent and therefore, in order to clear its path, TCA made the present application for an amendment to the freezing order to the effect that nothing in the order should restrict it from enforcing its rights as a secured creditor pursuant to the debenture.
Mr Taylor submitted that the circumstances surrounding the ownership of the assets in question (the intellectual property) mean that a variation should not be granted until that uncertainty is sorted out. Mr Taylor made the following arguments:
- The intellectual property (trademarks) may not be owned by the second defendant, but could be owned by Rhino. Until the ownership of the trademarks and indeed, the ownership of Rhino itself, had been determined TCA should not have its variation. If the second defendant did not own the assets, then TCA would have no right over the assets.
- The court should, as a matter of discretion, let the freezing order ‘hold the ring’ until ownership of the trademarks is determined.
- There was a danger that a court-permitted variation of the order would be seen as validation of TCA’s title.
Relevant legal principles
Mann J stated that, in the absence of authority, principle does not stand in the way of a secured creditor enforcing its security over charged assets caught by a freezing order. The whole point of a freezing order, as is well-established, is to prevent a defendant from dissipating its assets improperly in the face of a claim by the claimant. Freezing orders do not operate so as to give security to the creditor; and it does not operate so as to affect the genuine right of third parties over those assets.
The freezing order operates to prevent the defendants from dissipating or disposing of their respective assets. It does not in terms bar anyone else, who might have their own rights over the assets, from disposing of them. However, if a third party’s acts fell to be treated as acts of the defendants then the third party may be caught by the order. Accordingly, in Mann J’s view, a third party (for example, a mortgagee) with security over property which is frozen by the freezing order would not need to obtain permission in order to exercise that security because the exercise of disposal rights under that security would not be an act prohibited by the order. It follows that strictly speaking a chargee or mortgagee, in a normal case, would not need to obtain a release or variation of the freezing order.
Following an analysis of the case law, Mann J drew a distinction between a creditor taking steps to enforce their own rights on the one hand, and a party who does something which falls to be viewed as a disposal by the defendant on the other. The latter is prohibited by the freezing order.
Mann J concluded that he preferred the principled approach which determines that, in a normal security enforcement situation which does not involve anything which could properly be classed as a disposal by the defendant, which is not collusive and which does not amount to aiding and abetting a breach of the order, a secured creditor does not need a variation of a freezing order. It may be that in some complex cases, a creditor may wish to take a safety-first approach of seeking a variation, but Mann J did not consider this to be generally necessary in a standard case.
Application to the present case
In response to Mr Taylor’s arguments, Mann J concluded:
- There is no reason that a dispute as to ownership of the frozen assets should mean that TCA is prohibited by the order from enforcing its rights. If it turns out that the second defendant has no title to the assets, then TCA commits a wrong as against the second defendant. That is TCA’s risk to bear and it is not the purpose of the freezing order to protect the second defendant from that.
- Freezing orders are capable of ‘holding the ring’ as between the relevant parties but there is no ring to be held so far as the secured creditors are concerned.
- The fear of a perception of some form of court approval or sanction resulting from a variation is easily dealt with. If there is a risk then it can be dealt with by a ‘for the avoidance of doubt’ provision in the variation order.
Mann J concluded that TCA was entitled to the relief it sought. He noted that TCA may not need the variation, but the court should be sympathetic to a third party that wishes to have clarity.
In a normal security enforcement situation, a secured creditor does not need a variation of a freezing order if the enforcement does not involve anything which could properly be classed as a disposal by the defendant, is not collusive and does not amount to aiding and abetting a breach of the order. The judgment is a reminder that the purpose of a freezing order is to prevent a defendant from dissipating its assets improperly, not something which should operate to affect the genuine rights of third parties over those assets.