The Court of Appeal has clarified the definition of “assets” for the purpose of the standard form freezing injunction, confirming that assets belonging beneficially to a wholly owned company are not directly caught by an injunction against that company’s sole shareholder: Lakatamia Shipping Company Limited v Nobu Su & Ors  EWCA Civ 636. In doing so, it has disapproved the first instance judge’s reasoning to the contrary, bringing the analysis on the point into line with that of Hildyard J in the unrelated case of Group Seven Ltd v Allied Investment Corporation Ltd  EWHC 1509 (Ch) (whose reserved judgment was, by coincidence, handed down on the very same day).
The appeal was, however, dismissed on other grounds; the Court agreed with the judge’s alternative reasoning that the injunction in any event prohibited the shareholder from procuring any disposition by any of his companies likely to result in a diminution in the value of his own assets – his shareholdings.
The first appellant, Mr Su, was one of a number of defendants to proceedings initiated by the claimant. He was the direct or indirect 100% shareholder and a director of three non-defendant companies (or NDs).
The claimant obtained a worldwide freezing injunction in support of its claim. The injunction included the following terms:
- Paragraph 2 restrained the defendants from disposing, dealing with or diminishing the value of their assets up to the value of US$48.8 million.
- Paragraph 3 stated that the defendants’ assets included any asset which they had the “power, directly or indirectly, to dispose of or deal with as if it were their own” and that this would include where “a third party holds or controls the asset in accordance with their direct or indirect instructions.”
The wording of paragraphs 2 and 3 was, in essence, identical to that of paragraphs 5 and 6 respectively of the standard form freezing injunction set out in Appendix 5 to the Commercial Court Guide (and the Annex to CPR 25APD).
At first instance, Burton J held that the assets of the NDs fell within paragraph 3 of the freezing injunction and were therefore directly caught by it. He denied that this conclusion was incompatible with the principles of corporate identity, enshrined in Salomon v A Salomon and Co Limited  AC 22 (and since reaffirmed in Prest v Petrodel Resources Limited  UK SC 34), reasoning that “it depends upon a perfectly traditional analysis of company law provisions, where the owner of a company can … access and direct the fate of the assets of the companies which he thus owns or controls.”
He reasoned alternatively that, if Mr Su, being subject to a freezing injunction, allowed a company he controlled to dispose of its assets, that would have the effect of impermissibly diminishing the value of his own assets; namely, the value of his shareholdings in the NDs. Burton J accordingly imposed a requirement prohibiting the disposal of the NDs’ assets without prior notice to the claimant. Mr Su appealed.
The Court of Appeal dismissed the appeal, though it rejected Burton J’s primary basis for his conclusion; the Court reached its decision based on the alternative reasoning alone.
Giving the leading judgment of the Court of Appeal, Tomlinson LJ disagreed with Burton J’s finding that the assets of the NDs were “plainly and intendedly within the definition of assets in paragraph 3 of the [injunction],” preferring the contrary interpretation adopted by Hildyard J inGroup Seven. In their supporting judgments, Sir Bernard Rix and Rimer LJ were likewise keen to emphasise the incompatibility of Burton J’s primary reasoning with the principles of corporate identity set down in Salomon and Prest. Sir Bernard Rix in particular provided the following illuminating explanation (at paragraph 41):
“The [injunction] as a whole is directed to a defendant’s assets, that is to say to the assets in which a defendant is beneficially interested. Although the language of the second sentence [of paragraph 3] may look as if it extends much more widely, because of the expression ‘as if it were their own’ … it does not extend to a company’s assets just because of the powers which a director or shareholder may be able to exercise over them as such. The language ‘holds or controls the asset in accordance with their direct or indirect instructions’ does not well fit the relationship of a company director or shareholder, even a sole director or 100% shareholder, to a company’s assets.”
However, the Court of Appeal did agree with Burton J’s alternative reasoning. All three members of the Court recognised that the assets of the NDs remained at least indirectly “covered by” the injunction since Mr Su’s control of those companies could enable him to procure dispositions of their assets likely to cause a diminution in the value of his shareholdings (following JSC BTA Bank v Solodchenko and Others  EWCA Civ 1436). The Court accordingly dismissed the appeal on this basis, Rimer LJ commenting that Burton J’s notice requirement represented a “justifiable fortification” of the order restraining Mr Su from diminishing the value of his own shareholdings (at paragraph 53).
The Court of Appeal’s decision resolves the uncertainty surrounding the interpretation of paragraph 6 of the standard form freezing order occasioned by the inconsistencies between the judgment at first instance and that of Hildyard J in Group Seven.
It is trite law that assets belonging beneficially to a company do not belong beneficially to its shareholders. Principles of corporate identity dictate that, whilst the owner of a company may be able to control the destiny of that company’s assets, that does not make them his assets (see Rimer LJ at paragraphs 50-51). To that end, the Court’s rejection of Burton J’s reasoning on this issue is perhaps unsurprising. Absent additional wording, a company’s assets are not taken to fall within the wording of a standard form freezing injunction to which its shareholders might be subject.
That said, this judgment illustrates the courts’ eagerness to ensure an effective marshalling of freezing orders with a view to safeguarding against circumstances which may undermine their precautionary effects. As the Court of Appeal points out, where a company owner is subject to an injunction restraining any diminution in the value of his shareholding, for practical purposes the only dispositions of company assets likely to be permitted are those made in the ordinary course of business. That is not because the company is obliged to bring itself within the “ordinary and proper course of business” exception to the standard order, to which it is not subject. It is simply because transactions in the ordinary course of business of a company do not ordinarily result in a diminution in the value of shareholdings in that company (see Tomlinson LJ at paragraph 23 and Sir Bernard Rix at paragraph 43).
The Court also appeared to endorse the view expressed by Hildyard J in Group Seven that there may be circumstances in which the standard form freezing order should be varied so as to restrain dealings in the assets of a company wholly owned and controlled by the defendant – in essence, where there is strong evidence that the company has no active business and is in truth the “wallet” of the individual shareholder that is subject to the injunction.