Notification injunctions and whether an insurance policy is adequate fortification for a cross-undertaking
The claimants obtained an injunction against the defendants which prevented the defendants dealing with assets in excess of £1 million "without giving seven days advance notice in writing to the [claimants'] solicitors" (the "notification injunction"). The notification injunction differed from a "conventional" freezing order because it allowed the defendants to carry out a transaction in respect of which there had been proper notification (as opposed to preventing any dealing at all with the assets).
The Court of Appeal has now held that the test for dissipation of assets is the same for a notification injunction as for a conventional freezing injunction. Notification injunctions are "in effect a modified version of a conventional freezing order, rather than a distinct type of injunction". The Court of Appeal warned, though, that "The conclusion that all variants of freezing order must satisfy the same threshold in relation to risk of dissipation should not be taken to suggest that parties need only contemplate the most onerous form of a freezing order, under what would be a misapprehension that the intrusiveness of relief is immaterial. On the contrary, the intrusiveness of relief will be a highly relevant factor when considering the overall justice and convenience of granting the proposed injunction. Hence, even if there is solid evidence of a real risk of unjustifiable dissipation, an applicant should consider what form of relief a court is likely to accept as just and convenient in all the circumstances, including the scope of exceptions to the prohibition on dispositions".
Accordingly, the applicant had to show a real risk of dissipation, supported by solid evidence. The Court of Appeal held that the evidence presented here was not sufficient. For example, in line with earlier decisions, the Court of Appeal held that the complex corporate structure of the defendants' companies did not, without more, equate to a risk of dissipation: "An applicant must show a risk of dissipation as opposed to it merely being possible (without more) that the respondent could dissipate".
A separate issue considered by the Court of Appeal was whether an insurance policy taken out by the claimants was satisfactory fortification for their cross-undertaking in damages given in relation to the notification injunction.
The policy provided that the insurer would "not exercise any right to avoid …on any grounds whatsoever" and that if the insurer has to pay where the insured had breached "any principle of law" (including loss arising out of or in relation to a fraudulent act of an insured), the insurer reserved the right to recoup its payment from the insured. It also provided that the insurer had not excluded or limited its remedies in respect of any fraudulent or dishonest statements prior to the start of the policy. The Court of Appeal held as follows:
(1) There is no element of subjectivity when deciding whether the policy was adequate fortification: it did not matter whether the policy was acceptable to the defendants.
(2) There was at least a real risk that the insurer could properly argue that it would not have to pay out if the insured had made a fraudulent misrepresentation or non-disclosure when placing the policy. Clause 4.9 did not exclude that remedy and clause 4.18 made it clear that the remedy had been retained. Accordingly, the policy was not adequate fortification.
(3) Furthermore, the defendants had alleged fraud against the claimants. The Court of Appeal said that, although it did not need to decide the point: "For present purposes it is sufficient merely to say that there is at least a real prospect that (on the hypothesis that the respondents lose the action and are found to have been dishonest) the insurer could properly argue that there is a rule of public policy which would entitle it to avoid on the grounds of the insured's fraud, regardless of the policy terms. This gives rise to an objectively reasonable appreciation of risk such as to render the policy an unsatisfactory form of fortification". However, the Court of Appeal left open the possibility that it would be able to rely on an insurance policy as fortification even if fraud has been alleged against the insured: "For example, it might be thought that a policy which in clear and specific terms waived the duty of disclosure altogether, coupled with an equally clear term and representation by the insurer that it would not avoid for fraud of the insured in presentation of the risk (or any other ground), would be good fortification, notwithstanding any principle of so-called public policy".
COMMENT: The last quote above appears to confuse the duty to make a fair presentation with the public policy principle that an insured should not benefit from his own fraudulent misconduct. However, in practice, this will often amount to the same thing: if an insured has been fraudulent, it will most likely be a fraudulent non-disclosure to fail to disclose this to the insurer when placing the policy.
The case also confirms that clear language is needed to exclude a remedy for fraud. That is noteworthy given the pressure which is being put on some insurers to waive the duty of fair presentation and/or agree that information which they have been given complies with the duty. In the absence of clear express wording, insurers would still be able to claim a remedy for fraudulent misrepresentation of non-disclosure (although a high burden of proof will have to be met).