12 February 2007
In a recent case of HM Revenue & Customs v Clayton Egleton, Trade Eazy Limited, Shaheed Vali, Frakhameed Raman  EWHC 2313, English High Court judgment has considered the jurisdiction of courts to grant freezing orders, also known as Mareva injunctions, in circumstances where the applicant has no direct cause of action against the respondent.
The background of this case is straightforward, HM Revenue and Customs ("Customs") sought the compulsory winding up of C&E Enterprises UK Limited ("C&E") on the basis of C&E's VAT liability of over GBP35m, a liability which arose in consequence of its participation in a large scale VAT missing trader and/or carousel fraud.
Customs alleged that Mr Egleton, the sole director and person in control of C&E at the time, acted in breach of trust and/or fiduciary duty to C&E and was dishonestly assisted by another company Trade Easy Limited and its directors and shareholders (the "Third Parties") which acted in concert with C&E. Customs maintained each of the respondents was aware of and participated in the fraud on Customs.
In anticipation of the hearing of the petition, Customs sought and obtained, on a without notice application, freezing orders against the Third Parties. Customs' case was that as a result of the fraud C&E had substantial claims against the Third Parties which would likely be pursued by a liquidator of C&E if it was ordered to be wound up.
The judge reminded the parties that the purpose of a freezing order is to allow the court to ensure the effective enforcement of its orders, and that whilst in the majority of cases freezing orders are sought against the very defendants from whom the claimant seeks payment, it is well established that such orders may also be obtained against third parties who are holding or are in control of assets beneficially owned by the defendant. The judge rejected the argument made on behalf of the Third Parties to the effect the court had no jurisdiction to grant freezing orders against them. The judge remarked that in recognising this extended jurisdiction there was a danger of opening a "Pandora's box" of satellite litigation.
The granting of freezing orders was, however, still subject to the exercise by the court of its discretion. It was noted that the ordinary course of action adopted in similar cases would be to seek the appointment of a provisional liquidator and for him to apply for freezing orders against the relevant third parties prior to the advertisement of the petition. Customs submitted that they had not done so in this case because the first respondent had disappeared together (so it was anticipated) with any surviving books or records of C&E which, in their opinion, made the appointment of a provisional liquidator a waste of time and costs because he would be deprived of the usual advantages of inspecting the company's books and interviewing its officers.
The judge considered there were powerful reasons why it should be a provisional liquidator rather than a petitioning creditor who seeks and obtains a freezing order. Obtaining such an order necessitates a commitment not merely to freeze the assets of a potential wrongdoer but also to proceed diligently with a claim against him. In this type of case the person with the duty and the power to pursue litigation against potential judgment debtors of a company would be the officeholder to be appointed rather than the petitioning creditor since the officeholder, as guardian of the interests of all the company's stakeholders, is best placed to make an independent judgment as to whether to bring proceedings against third parties and as to the appropriateness of obtaining interim measures such as freezing orders.
Where an application is made by a petitioning creditor for a freezing order in advance of the hearing of a winding up petition the court should require cogent reasons why that course is to be preferred to the ordinary course of seeking the appointment of a provisional liquidator. The judge did not consider the incurral of an extra layer of costs as a cogent reason and considered that no freezing orders should have been granted and ought to be discharged rather than continued. However, given that there was less than a week before the winding up petition was due to be heard the judge acknowledged that no useful purpose would have been achieved by the respondents in securing the discharge of the present orders (other than perhaps in relation to costs) and for that reason alone considered he should exercise his discretion in favour of the short term continuation of the freezing orders.
The judge made it clear that petitioning creditors should not expect to be able to obtain freezing orders against potential judgment debtors of a company in the context of winding up proceedings, save in exceptional circumstances where the ordinary appointment of a provisional liquidator with the duty and power to make those decisions on behalf of the company and all its stakeholders is either impossible or impractical.
The judgment in this case and the recognition of the extended jurisdiction has the potential to significantly extend the circumstances in which claimants may be able to obtain freezing orders against third parties even though they may have no direct cause of action against those third parties. It will be interesting to see whether this is followed in Hong Kong.For further information, please contact:
Name: John M. Hickin
Phone: +852 2843 2576
Fax: +852 2103 5169