In Lakatamia Shipping Co Ltd v Su (2014), the Court of Appeal considered whether a freezing injunction had the effect of freezing the assets of three non-defendant companies of which the appellant (the Defendant) was the 100% shareholder.

Background

Lakatamia had obtained a worldwide freezing injunction in support of its claim against ship-owner Mr Su ("S") and a number of other defendants. Paragraph 2 of the order stated that the Defendants were not permitted to "in any way dispose of, deal with or diminish the value of any of their assets" and this applied to all of the Defendants' assets whether in their names or owned indirectly.  Paragraph 3 defined what assets the order covered and included: "For the purpose of this Order, the Defendants' assets include any asset which they have the power, directly or indirectly, to dispose of or deal with as if it were their own". 

At first instance Burton J held that the assets owned by the non-defendant companies were directly affected by the order, distinguishingSalomon v Salomon (1897).  Burton J reasoned that the assets were brought under Paragraph 3 of the order as S indirectly controlled the assets as sole shareholder.  The Judge held that the assets also came under the order because an owner of a company can pass resolutions or otherwise act so as to direct the sale of a company's assets which can have the effect of diminishing the value of the owner's own asset - his shareholding in the company.

Court of Appeal decision

The Court of Appeal dismissed the appeal by S.  Tomlinson LJ, giving the leading judgment, did not agree with Burton J that the assets owned by the Defendants' companies were "plainly and intendedly" within the definition of assets in Paragraph 3 of the order and concluded that the assets were therefore not "directly affected" by the order.  However, he agreed with Burton J that these assets were "covered" by the injunction for the same reason that Burton J had given – i.e. the potential for there to be a diminution in value of the Defendants' shareholding, should the assets be diminished in value or disposed of.  He therefore followedJSC BTA Bank v Solodchenko (2010). 

Sir Bernard Rix agreed with Tomlinson LJ that the appeal should be dismissed and emphasised that the language in Paragraph 3 of the order extended only to assets in which the person had a beneficial interest. This did not include assets of a company that the person was a director of or shareholder in (even if a sole director or 100% shareholder) but instead was intended to cover trust-type situations where a third party held or controlled assets in accordance with a person's instructions.  However, he agreed with the other judges that under the order's wording a person could not act to diminish the value of assets held by his companies if doing so would diminish the value of his own shareholding and that therefore the assets were covered by the order.  It would be for the Defendant to demonstrate that any disposition of an asset was in the ordinary course of business, as this would not diminish the value of his shareholding and would not therefore breach the order.

Comment

This judgment represents an important reinforcement of the principle of the corporate veil.  Freezing orders are intended to prevent a defendant from disposing of or diminishing an asset which would, if judgment against it is obtained, be available to satisfy that judgment.  A company's assets do not belong to a person by reason of them being a sole director or 100% shareholder and therefore would not be directly affected by any freezing order against that person. Litigants should be aware, however, that such assets may be covered by the injunction for the reasons explained by the Court of Appeal.  If so, a non-defendant may be prevented from disposing of its assets in order to prevent a defendant subject to a freezing injunction from diminishing the value of his shareholding.