Most reading this will know that freezing orders are granted to prohibit defendants from disposing of or dissipating their assets in a way that will prevent the claimant from enforcing any judgment he obtains. If the defendant disobeys, he is at risk of contempt. But the primary purpose of contempt is to punish the defendant. Many claimants will simply be concerned to ensure that the defendant’s money is frozen. One way of assisting in the location and securing of the assets in question may be for the claimant to apply to court for the appointment of a receiver over the defendant’s assets.
The court has always had the ability to appoint a receiver over assets that are subject to rival claims as to their ownership (proprietary claims). However, as Section 37(1) of the Supreme Court Act 1981 also gave it the authority to appoint a receiver (in the same way as it can grant a freezing injunction) in cases where it appears the court to be “just and convenient” to do so.1
In JSC BTA Bank v A2, the Court of Appeal described the appointment of a receiver as “…a very intrusive remedy”. It clearly is. Even when there is a proprietary claim, few defendants will want the stigma of a receiver controlling the assets that they hold. Fewer still will like the receiver communicating with third parties about their dealings without them knowing. None will like the prospect of the threat of contempt of court if they interfere with the receiver carrying out either of these tasks.
Appointment of a receiver pursuant to a freezing order
Potential advantages for the claimant
- May assist in the retrieval of assets.
- Often useful with assets that require sale, to ensure that the process is dealt with at arm’s length.
- Can assist with overseas assets in jurisdictions where the receiver’s title will be recognised.
Potential disadvantages for the claimant
- Can be more expensive than the claimant would wish.
- Can remove the claimant from the driving seat regarding asset disclosure and seizure.
- The receiver may prove more cautious than the claimant would like.
- JSC BTA Bank v A
What are the circumstances that might lead to the appointment of a receiver under s37(1)? The decision in JSC BTA Bank v A gives some pointers.
The defendant, Mr A, is a wealthy businessman from Kazakhstan who is said to own or control assets worth in excess of US$ 1 billion through a complex scheme of offshore holding companies. The claimant bank commenced proceedings against Mr A in August 2009 alleging that Mr A had misappropriated funds while he was chairman of the bank. A freezing order was issued against him together with an order restraining him from leaving the jurisdiction. Mr A denied all claims and alleged that they were part of a politically motivated action to take control of his assets, directed by the President of Kazakhstan, due to his status as a leading figure in Kazakhstan’s democratic opposition.
The bank alleged that Mr A had not complied with the freezing order inasmuch as he had been reluctant to disclose his assets and had broken the terms of the order by disposing of some of his assets. In making a receivership order, Teare J found that although Mr A had not actually broken the terms of the freezing order, he had made “seriously inadequate” disclosure and there were grounds to believe (given his conduct) that he may use the complex structure by which he held his assets to deal with them in breach of the freezing order. Mr A appealed the decision on the grounds that the judge:
- applied the wrong test for making a receivership order and should have held that such an invasive remedy should only be made if the judge was actually sure that Mr A would breach the freezing order;
- was wrong to attach weight to admittedly inadequate initial disclosure; and
- was wrong in respect of one finding of non‑disclosure, on the basis of evidence unearthed after the draft judgment was distributed.
The Court of Appeal dismissed the appeal and upheld the receivership order. The Court confirmed that while more will be needed than simply the evidence required to obtain a freezing order, it was not essential that the Court see evidence that the defendant has breached or was about to breach the terms of the freezing order.
The Court of Appeal accepted the statement in National Australia Bank Limited v Bond Brewing Holdings Limited3 by Robert Walker J (as he then was) to the effect that the appointment of a receiver was “an extraordinary and drastic remedy to be exercised with utmost care and caution and only when the court is satisfied that there is imminent danger of loss if not exercised”, provided that “imminent” means only “in the near future”.
Several factors influenced the court’s decision to grant a receiver in JSC BTA v A. First there was the court’s perception that the defendant was not willing to co-operate with regard to disclosure orders. Following the making of the freezing order, Mr A’s disclosure of assets was defective to the extent that Teare J found it necessary to order that Mr A be cross-examined. Teare J gave as an example of the defective disclosure the fact that Mr A had concealed his interest in the Eurasia Tower – a substantial structure in Moscow similar to Canary Wharf. The Court of Appeal noted that “an asset the size of Canary Wharf can hardly have slipped Mr A’s mind”.
Secondly, the opaque nature of the corporate structures in which the defendant’s assets were held (which Mr A said was explicable by the need to protect his assets from “unlawful depredations by the President of Kazakhstan”) and thirdly, the “measurable risk” that the structure might be used to deal with assets in breach of the receiving order. As the Court of Appeal put it:
“..if, therefore, a Freezing Order does not in itself provide adequate protection to a claimant because there is a measurable risk that a defendant may use the structure by which he holds his assets to deal with those assets in breach of the Freezing Order, then a receivership order will normally be justified.”
It may seem surprising that the court might appoint a receiver because there is a risk that a defendant may use a complicated corporate structure to breach a freezing order. It might be thought that there is a “measurable risk” of this in every case where a defendant has a complicated corporate structure. However, it is clear that a complex corporate structure will not be enough, on its own, to justify the making of a receivership order. This statement by the court has to be seen against the background of the defendant’s conduct after the freezing order had been made. Teare J, and the Court of Appeal, plainly felt that the evidence gave no grounds for confidence that the defendant would cooperate.
It is, of course, simplistic to suggest that simply because the appointment of a receiver is harmful to the defendant it is an advantage to the claimant. In our experience, it may be disadvantageous to both parties. Sometimes it is helpful when other jurisdictions are willing to recognise the receiver’s powers and title and to transfer assets to him. In other situations, it can cause more problems than it solves. The cost to the claimant (he will usually have to indemnify the receiver for his own services and for the costs of his independent legal advice) is often considerable.
Further, once the receiver is appointed, questions will usually arise as to the extent which the claimant is himself entitled to information regarding the defendant’s assets in order to police the injunction. The point will be made that policing the injunction is the receiver’s job and not his.
Finally, the receiver may not proceed at a pace which the claimant – often desperate to get his money back – will approve of. From the receiver’s perspective, he is being inserted into hostile litigation and he will be concerned to ensure that he takes no steps that he may subsequently regret. From the claimant’s perspective, the paramount and often only concern is simply getting his money back.
The receiver is a masterstroke in some cases and a massive self-inflicted injury in others. The trick is to decide whether it is the right move for the case at hand.