Court orders update Cases, analysis and practical advice
Zantra Ltd v BASF plc  EWHC 3578 (Ch) 4 Brainbox Digital Limited v Backboard Media GmbH & Anr  EWHC 2465 (QB) 6 Albert John Martin Abela & Ors v Ahmed Baadarani  EWHC 269 (Ch) 8 R (on the application of River East Supplies Ltd) v Crown Court at Nottingham  EWHC 1942 (Admin) 10 Palmer v Loveland, Starlight Diamond Setters, Hatton Garden Jewellers  WL 04552554 12 JSC Mezhdunarodniy Promyshlenniy Bank & Anr v Pugachev & Ors  EWHC 1847 (Ch) 14 Hong Kong, Grasberg Capital Asia Limited v Bank of Communications Limited HCA 2016/784 16
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Welcome The purpose of this bulletin from Eversheds Sutherland’s banking litigation team is to provide a quarterly update and analysis of the latest cases relating to court orders, with a focus on the practical implications arising from them for third parties and, in particular, financial institutions.
The bulletin will concentrate on those orders more commonly encountered by financial institutions (such as freezing orders, Norwich Pharmacal/Bankers Trust orders, third party debt orders and search orders) with the cases selected on the basis of their relevance to clients and practitioners in England and Wales. If any of the cases are of particular relevance to you or your institution, we would be delighted to discuss them further with you. Please contact either the relevant contributor whose details can be found at the bottom of the update or senior members of the banking litigation team whose details are set out at the end of the bulletin. 2 Court orders update Contents Cases, analysis and practical advice
November 2017 update
The 18th century English poet William Cowper once fretted that “God forbid that judges upon their oath should make resolutions to enlarge jurisdiction”. However, when it comes to interim court orders 21st century English High Court judges do not appear to share Mr Cowper’s concerns. The varied collection of judgments covered in this quarter’s update show the continuing trend of the English courts in assuming an ever-widening jurisdiction as to what can be ordered by means of interim relief (mostly in support of purportedly wronged claimants). Zantra Ltd v BASF plc  EWHC 3578 (Ch) (page 6) sees the first use of Norwich Pharmacal relief in the context of a competition case. In Brainbox Digital Limited v Backboard Media GmbH & Anr  EWHC 2465 (QB) (page 8) the court confirmed that it could require a third party to fortify a freezing order applicant’s cross undertaking in damages on an unlimited basis (although chose not to do so on the particular facts). Albert John Martin Abela & Ors v Ahmed Baadarani  EWHC 269 (Ch) (page 10) saw the court decide, unsurprisingly, that a search order can be granted post-judgment against a third party as proceedings do not necessarily end with judgment. Whilst the scope of remedies available to claimants/applicants continues to widen, the fortunes of the defendant/ respondent do not appear to be improving at the same rate with the Administrative Court recently finding (in R (on the application of River East Supplies Ltd) v Crown Court at Nottingham  EWHC 1942 (Admin) – see page 12) that a respondent to a production order granted in support of a Letter of Request from a foreign criminal investigating body did not have an automatic right to disclosure of the underlying Letter of Request in support of which the production order had been made (although there might be circumstances where disclosure – possibly in redacted form – might be ordered). 3 Court orders update Cases, analysis and practical advice
There have not been many interim order judgments impacting directly on financial institutions this quarter, but in JSC Mezhdunarodniy Promyshlenniy Bank & Anr v Pugachev & Ors  EWHC 1847 (Ch) (page 16) the Court ordered that certain conditions be imposed on the Defendant’s challenge to jurisdiction, including disclosure of his source of legal funding in accordance with the terms of a prior freezing order. Also, the Court’s apparent willingness to opt for orders requiring notice of transactions to be given rather than granting blanket freezing orders (see Palmer v Loveland, Starlight Diamond Setters, Hatton Garden Jewellers  WL 04552554 page 14) is to be welcomed. If this trend continues it will lessen the burden on financial institutions in having to police the operation of freezing orders (and, in particular, the “permitted in the ordinary course of business” exception to the operation of a frozen account). Separately we also cover in this edition a decision from the courts in Hong Kong, Grasberg Capital Asia Limited v Bank of Communications Limited HCA 2016/784 (see page 18) which confirms that banks put on notice of a freezing injunction do not owe a duty of care to the applicant who obtained the order. This confirms for the first time that the law of Hong Kong is the same as English law on this point. Contents 4 Court exercise of the jurisdiction.
5 Court orders update Cases, analysis and practical advice Contents Facts of the case –– BASF PLC (“D”) had five existing distributors of its crop protection products (the “Existing Distributors”). The Existing Distributors accounted for 80-90 per cent of the market. ––D subsequently also appointed Zantra Ltd (“C”) as a distributor only for it shortly afterwards to reverse its decision citing adverse market reaction to the news. ––C wished to bring a claim for breach of competition law against the Existing Distributors which it believed had colluded to force D to reverse its appointment. ––C applied for an NPO seeking the following to determine which of the Existing Distributors were involved: (i) disclosure by D of its discussions with the Existing Distributors and (ii) a witness statement from D setting out the content of those discussions. ––D opposed the NPO application on the grounds that the evidence relied upon by C did not establish a sufficiently arguable case.
The decision –– Barling J granted the NPO, finding that all of the criteria for the exercise of the jurisdiction (as set out in Mitsui & Co Limited v Nexen Petroleum UK Limited  EWHC 625 (Ch)) were satisfied on the basis that: –– there was an arguable case that a wrong had occurred given (i) D had acknowledged in correspondence that the majority of the Existing Distributors had applied commercial pressure on it to persuade it to un-appoint C and (ii) there appeared to be reasonable grounds to infer there had been some collusion between the Existing Distributors, or at least D acknowledged that there could have been ––without the NPO order, it was difficult to see how C would make any progress with its claim ––D was mixed up in the wrong doing or facilitated it by bowing to the commercial pressure applied by the Existing Distributors. Analysis and practical advice –– This case is a paradigm example of the use of the NPO jurisdiction and it is believed to be the first instance of such an order being made in a competition case. –– In addition to the threshold criteria set out in Mitsui, the judgment also provides a reminder of some of the factors which the court will have regard to when exercising its discretion. These include: –– the strength of the possible cause of action identified by the applicant; –– the strength of the public interest in allowing the applicant to vindicate its legal rights; ––whether making the order will deter similar wrong in the future; ––whether the information could be obtained from another source; ––whether the respondent was aware or ought to have known that he was facilitating arguable wrong doing; –– the degree to which the material sought is confidential and, where it is, whether it could be protected by a confidentiality club or redaction; and ––whether the order would constitute an inappropriate fishing exercise. A copy of this judgment is currently only available on subscription services. 6 Court orders update Contents Cases, analysis and practical advice be re damages on an unlimited basis.
7 Court orders update Cases, analysis and practical advice Contents Facts of the case –– An applicant for a freezing order must usually undertake to compensate the respondent for any loss caused by the order (the “crossundertaking in damages”). ––Where there is insufficient evidence of an applicant’s ability to pay a cross-undertaking in damages, the respondent can apply for the undertaking to be fortified. This fortification can be in the form of, for example, the payment of money into court or an undertaking from a better resourced third party. The onus is on the respondent to demonstrate that there is a good arguable case for fortification, which requires it to show that there is sufficient risk that an estimated loss has been, or will be, caused by the effects of the applicant’s injunction which the applicant’s current cross-undertaking in damages may not cover. –– In this case, the Respondent (“R“) was subject to a freezing and proprietary injunction, in circumstances where the Applicant (“A“) was no longer a viable business and was being wound down. A had previously paid £125,000 into its solicitors’ client account pending a further court order. R now sought fortification of A’s cross-undertaking in damages, in the form of an unlimited undertaking from a third party with the resources to support it.
The decision –– The Court could require as a condition for granting or continuing an injunction that a third party fortify an applicant’s cross-undertaking in damages, including on an unlimited basis. –– The principles of fortification require an “informed and realistic estimate” to be made of the likely loss that a respondent might suffer. In this regard, there is “a significant difference in principle between difficulty in the quantification of a loss that can be seen to be likely to occur and the absence of evidence of the likelihood of a significant loss on the other hand.” –– Accordingly, while R had a good arguable case that it had lost revenue as a result of A’s injunction, it did not have a good arguable case that any loss or damage suffered would exceed £125,000. As a result, A’s current crossundertaking in damages was sufficient and no further fortification was required. Analysis and practical advice –– This case highlights the court’s wide discretion as to the conditions on which it may grant or continue an injunction. Thus, while the default position is that an applicant for an interim injunction is required to give an unlimited cross-undertaking in damages, there are circumstances in which no such undertaking may be required (eg where a law enforcement body is taking action in the public interest) as well as circumstances in which the extent of the cross-undertaking may be limited (eg in the case of a liquidator of an insolvent company). Equally, the need for any fortification of the cross-undertaking and the extent of such fortification is a matter for the discretion of the judge who grants the order. –– The case is also a reminder that the principles which apply to fortification are different from those that apply to the cross-undertaking. The failure to establish a sufficient risk of loss is no reason for not extracting a cross-undertaking. This is not just because the cross-undertaking may be required and given at a without notice hearing before the defendant has had the opportunity to give evidence about loss. It is as Levison LJ stated in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev  EWCA Civ 139,  1 WLR 160 “fairness rather than the likelihood of loss that leads to the requirement of a cross-undertaking” and “the cross-undertaking is regarded as the price that must be paid for the interim interference with the defendant’s freedom”. Click here for a copy of the full judgment. 8 Court orders update
Contents Cases, analysis and practical advice Albeh order can
9 Court orders update Cases, analysis and practical advice Contents Facts of the case –– Section 7 of the Civil Procedure Act 1997 (“CPA 1997”) put on a statutory footing what had been the practice of the court in relation to Anton Pillar (search) orders. It states: –– “(1) The court may make an order under this section for the purposes of securing, in the case of any existing or proposed proceedings in the court: (a) the preservation of evidence which is or may be relevant; or (b) the preservation of property which is or may be the subject matter of the proceedings or as to which any question arises or may arise in the proceedings”. –– The Claimants (“Cs”) made several attempts to obtain information about the assets of the Defendant (“D”) following default judgment and various cost orders in their favour. These included obtaining a third party disclosure order against the Respondents (“Rs”). ––Cs had doubts about the extent to which the Rs had complied with the disclosure order and successfully applied without notice for a search order. This was wider in scope than the original disclosure order. ––On the return date, the Rs sought to have the search order set aside on the following grounds: –– the reference in section 7(1) of the CPA 1997 to “existing or proposed proceedings” meant that the court did not have jurisdiction to grant a search order post-judgment; and –– section 7(1) did not permit a search order to be granted against a third party, except “tethered to some substantive rights against the party”. Accordingly, where this substantive right was a disclosure order, the search order would need to track its scope.
The decision Nugee J dismissed the application, finding that: –– for the purposes of section 7(1) of the CPA 1997, “proceedings” includes post-judgment steps taken against a judgment debtor since “proceedings” do not necessarily come to an end with judgment; –– a search order may be granted against persons who are not defendants and against whom no cause of action lies; and –– section 7(1) gives the requisite jurisdiction to grant a search order whether or not a third party disclosure order has already been made or, if it has, whether its terms are more limited than the search order sought. Analysis and practical advice ––Once a party has obtained judgment, it will often have to take further steps against a judgment debtor in order to enforce it. This case is therefore welcome confirmation that not only are search orders available to assist with the obtaining of evidence for that purpose, but are a free-standing interim remedy available against both judgment debtors and third parties alike. While the judgment debtor will often be the main source of documentary evidence, third parties may also be in possession of relevant material and the jurisdiction to grant search orders against them is consistent with the jurisdiction to seek evidence from them by witness summons, Norwich Pharmacal order or non-party disclosure. ––However, given its intrusive nature, a search order will never be granted as a matter of routine. An applicant will need to satisfy the court, inter alia, that the evidence sought is or may be relevant to the proceedings, and that there is a real risk of its destruction or concealment. Click here for a copy of the full judgment. 10 Court orders update Contents Cases, analysis and practical advice R (on the application of River East Supplies Ltd) v independently of a compulsory discovery process.
11 Court orders update Cases, analysis and practical advice Contents Facts of the case –– Following a request for legal assistance from the US Department of Justice, Nottinghamshire Police (“NP”) applied (on behalf of the UK Home Office) to the Crown Court at Nottingham for a production order in respect of River East Supplies (“River East”). –– The application ran to 14 pages. It set out the background to the US criminal investigation, and annexed a 46 page superseding indictment, detailing the allegations being made against River East and the reasons for them. ––NP did not disclose the letter of request (“LoR”) for mutual legal assistance. HH Judge Spencer QC held that there was no obligation to do so, either in full or redacted form, and granted the production order. –– River East applied for judicial review. The judicial review raised the following issues: (i) whether on application for a production order pursuant to a LoR, the applicant is obliged to disclose (if necessary in redacted form) the LoR to the respondent to the proposed production order and (ii) whether an order should be made where producing the document may violate the respondent’s privilege against self-incrimination.
The decision –– The Administrative Court of the High Court held that: –– LoRs are confidential and therefore there is no right to require sight of a LoR in a normal case –– the common law privilege against selfincrimination does not extend to material that is “independent”, ie material which has not arisen by virtue only of an investigation of suspected or possible wrong doing (applying C Plc v P  EWCA Civ 493,  Ch I). Analysis and practical advice –– The concern to preserve the confidentiality of LoRs arises primarily from the potential risk of otherwise prejudicing ongoing investigations or trials. Absent agreement from the requesting state, the starting point is therefore that LoRs are not disclosable. However, they may be disclosable (although potentially only in redacted form) where: –– the interests of justice or fairness require the provision of information as to the nature of the investigation (eg where documents or information are available to the court, but not the respondent) –– the nature of the application means the court requires additional information (eg to confirm that there is a jurisdictional basis for the particular order sought). ––Neither of these were applicable in this case, not least because of the detailed nature of the application which appended the superseding indictment. –– The case is also a reminder of the limits of privilege against self-incrimination as a basis for withholding material when faced with a production order. This is because the material sought will often be pre-existing and therefore have come into being independent of the compulsory discovery process, eg historic business records such as emails, hard copy files or telephone tapes. This contrasts with statements made pursuant to a compelled interview. –– There is, however, a tension between the finding in this case and C Plc on which it is based, and the finding of the majority in R (Bright) v Central Criminal Court  EWHC 560 (QB),  1 WLR 662. In Bright, the majority found that Parliament had excluded privilege against self-incrimination in the context of section 9 and schedule 1 of the Police and Criminal Evidence Act 1984. This is a point which will need to be resolved in due course as, for the purposes of these proceedings, the Court found that the decision in C Plc was binding on it. Click here for a copy of the full judgment. 12 Court orders update Contents Cases, analysis and practical advice Palmer v Loveland, Starlight Diamond Setters, Hatton Garden Jewellers  WL 04552554 Injunctive relief is available to prevent the dissipation of the assets of a company which is the subject of a pending unfair prejudice petition.
13 Court orders update Cases, analysis and practical advice Contents Facts of the case ––Ms Palmer (“A1”) and Mr Loveland (“R1”) were both 50 per cent shareholders in Starlight Diamond Setters (“R2”). Hatton Garden Jewellers (“R3”) was wholly owned by R1 who was also its sole director. –– A1 discovered that R1 had made unauthorised payments from the accounts of R2 to himself, R3 and to other third parties including to some entities which were aliases of R1. –– A1 petitioned for unfair prejudice pursuant to section 994 of the Companies Act 2006, seeking an order that R1 or R3 should purchase A1’s shares in R2 based on R2’s value before the unauthorised payments were made. A1 was also granted a freezing order to preserve R1’s assets to enable R1 to meet the purchase price of the shares. This was the return hearing for the freezing order.
The decision –– There was a good arguable case for relief under section 994, and for a buyout of A1, by R1, based on the value of R2 before R1’s misconduct. –– In such context, the court had jurisdiction to grant injunctive relief against R2 to ensure its assets were dealt with properly and prevent them being dissipated. –– Injunctive relief was also available against R1 and the recipients of R2’s assets (R3 and other third parties), particularly in circumstances where R1 controlled such recipients and was in de facto control of R2. –– The amount of any relief did not depend on what A1 would be paid for her shares since the purpose of the order was to prevent R2’s assets being dissipated pending resolution of the petition, or any alternative relief such as winding up which A1 might seek if the petition failed. –– Rather than grant blanket freezing orders against the Rs, it was more proportionate in view of the perceived risk to order that notice be given of transactions and certain related dealings. Analysis and practical advice ––Warren J characterised this as an asset protection exercise, rather than a pure freezing order application. His decision might therefore properly be regarded as an example of the court’s general powers to grant injunctive relief to prevent wrong doing, as opposed to an exercise of the freezing order jurisdiction. –– Freezing orders over bank accounts typically provide for the continued use of such accounts in the ordinary course of business. In practice however, given the need for banks to take a cautious approach in view of the consequences of breaching the order, the effect of a freeze on the account is that it often leads to the respondent being unable to continue trading. At the return hearing, subject to the perceived risk of dissipation and hardship suffered as a result of the freezing order, there may therefore be scope for a respondent to argue that some form of notice requirement (either before or after a transaction) would be more proportionate. In such cases, a respondent might also consider requesting the inclusion of wording in the order that makes it clear to their bank that nothing in the order is to effect the operation of the account as between them and the bank. –– Increasing use by the courts of notice orders rather than freezing orders will be welcomed by financial institutions given the onus of policing them rests on the respondents. The financial institution therefore does not have to grapple with the issue of permitted payments in the ordinary course of business. A copy of this judgment is currently only available on subscription services. 14 Court orders update Contents Cases, analysis and practical advice ition to allowing the respondent to challenge jurisdiction in related proceedings. Oliver Shipway Senior Associate T: +44 20 7919 4889 [email protected] eversheds-sutherland.com 15 Court orders update Cases, analysis and practical advice Contents Facts of the case ––Mr Sergei Pugachev (“SP”) was the former owner of the largest private bank in Russia. The bank went into liquidation and proceedings were brought against SP by the bank and a Russian state agency dealing with the liquidation for the alleged misappropriation of large sums of money. Following a judgment in Russia, SP was ordered to pay around £1 billion. –– SP relocated from Russia to England, where enforcement proceedings were subsequently brought by the Claimants (“Cs“), who also obtained a worldwide freezing order against SP. The freezing order contained standard wording to the effect that SP was permitted to use a reasonable amount of the frozen funds to pay for legal expenses but, before spending the money, should inform the Cs’ lawyers of the source of funds (as reflected in the terms of the standard freezing order contained in CPR PD 25A). –– SP moved from the UK to France and was convicted of contempt of court for breaching a number of English court orders. He was sentenced to two years in prison, which he did not serve. In addition default judgment was obtained against SP in the enforcement proceedings. The Cs continued legal action against a number of trusts allegedly connected with SP. In the middle of trial, SP, who had made no appearance, applied to contest the jurisdiction of the English court, alleging that he had hitherto not been aware of the proceedings (which the English court considered was, prima facie, untrue). –– By reference to the court’s management powers in CPR 3.1(2) and (3), the Cs submitted that the court should impose conditions on SP’s application to challenge the jurisdiction, including a requirement to file and serve an affidavit setting out the source of monies used to fund legal expenses in accordance with the terms of the freezing order.
The decision ––Mr Justice Birss made an order requiring SP to file and serve an affidavit in the terms sought. He found that there was a “properly arguable case” that the money being used to fund his application came from frozen funds and confirmation should be provided of their source. Although counsel for SP stated that the funds came from a French law firm, the judge held that it was “fanciful” that the French lawyers would fund SP’s litigation costs “out of the goodness of their heart”. –– The judge also held that it was appropriate to make SP’s application to challenge the English jurisdiction conditional on compliance with the disclosure order, noting that no other case had been cited in which such a condition had been imposed. In doing so, the judge bore in mind the previous breaches of court orders, the unpurged contempt of court and considered that providing the information could not be said to prejudice or stifle SP’s application. Analysis and practical advice –– The decision is consistent with the comments of Mr Peter Smith in his unreported decision in JSC BTA Bank v Solodchenko on 17 January 2011 to the effect that disclosure of the source of funds was intended to prevent a respondent funding a third-party nominee to pay the legal fees and thereby side-step a freezing order. –– This appears to be the first case in which a respondent to a freezing has been ordered to disclose their source of legal funding as a condition to an application to challenge jurisdiction and illustrates the readiness of the court to use its case management powers in novel ways in appropriate cases (albeit the respondent’s egregious conduct was clearly a significant factor in the court’s decision). Click here for a copy of the full judgment. 16 Court orders update Contents Cases, analysis and practical advice Grasberg Capital Asia Limited v Bank of Communications Limited (HCA 2016/784) Hong Kong courts confirm that banks served with a freezing injunction owe no civil duty of care to the order’s applicant.
17 Court orders update Cases, analysis and practical advice Contents Facts of the case –– In April 2013, a shareholder obtained a freezing injunction on behalf of the Claimant (“C”) in a derivative action against a number of parties to restrict the disposal of various assets in Hong Kong. –– C alleged that following service of the freezing order the defendant bank (“D”) failed to observe its terms by allowing transactions on three accounts which were operated by companies controlled or owned by one of the named respondents to the freezing order (although these companies were not named in the freezing order). –– C alleged that D, upon acknowledging receipt of the freezing order, owed a duty to C to exercise reasonable care and skill when dealing with assets which were within the order’s ambit and in allowing the transactions to proceed breached that duty and should be liable for C’s loss.
The decision –– The main issue before the Court was whether a duty of care was owed by a bank to an applicant who has obtained a freezing order once the bank is on notice of the order. ––D argued that the existence of such duty has been rejected, as a matter of English law, by the UK House of Lords in Customs and Excise Commissioners v Barclays Bank plc  1 AC 181 on the basis that (i) a bank could not be taken to have voluntarily assumed responsibility so as to give rise to such a duty of care; (ii) freezing injunctions are enforceable by contempt of court only and the notified party’s duty is only to the court; and (iii) it would not be fair, just and reasonable to recognize a duty of care in such circumstances. –– The Hong Kong Court agreed and, following the UK decision, found in the Defendant bank’s favour striking out the plaintiff’s claim on the basis that no duty of care was owed. Analysis and practical advice –– This is the first written judgment by a Hong Kong court on the issue of whether a bank owes a duty of care to the applicant of a freezing injunction served upon it. The decision aligns Hong Kong law with the well-established position under English law. –– This is a favourable decision for financial institutions, especially international financial institutions with branches in Hong Kong, which regularly receive freezing orders issued by the Hong Kong courts. –– Whilst there is no civil liability in negligence, it remains the position that third parties who knowingly assist in or permit a breach of a freezing injunction order could be liable for contempt of court (as is the position under English law). Banks and financial institutions in receipt of such orders must still carefully consider the scope of the order and put in place appropriate procedures to ensure compliance. A copy of this judgment is currently only available on subscription services. 18