This article was first published in ThoughtLeaders4 Disputes Magazine.
Following a first-of-its-kind decision in the High Court, there is now clarity that asset freezing orders can apply to third-party assets which are not directly legally or beneficially owned by a respondent, where it can be shown that the respondent has control over the assets and intends to dissipate them in order to frustrate a future judgment.
Freezing order and third party corporate assets
A domestic freezing order will only apply to a respondent’s assets held within the jurisdiction.
In respect of third-party corporate assets, even when the respondent is a shareholder, it is difficult to advance that the respondent is the owner of such assets for the purposes of Mareva relief.
Indeed, it was described by Hildyard J in Group Seven Limited v Allied Investment Corporation Limited and Others [2013] EWHC 1509 (Ch) as contradictory to “settled principles of company law”. This default position is undeniably derived from the Salomon principle – that the company is a separate legal entity from its shareholders. This is complicated further where the individual in question does not own the shares or control the interested company solely.
Background to Mold v Holloway (1), Jacques (2) (as yet unreported)
The Claimant company brought a claim against of its two former directors (the Defendants) for breaching their statutory and fiduciary duties. Prior to issuing the claim, the Claimant successfully obtained a freezing order in August 2023 against the Defendants (the Freezing Order).
The Defendants’ held shares in a number of other companies (the Third Party Companies). However, their shareholdings in the Third Party Companies did not exceed more than 50%, save for one exception. As a result, and in light of the principles set out above, the assets of the Third Party Companies were assumed to be sufficiently separate from the Defendants to fall outside of the scope of the Freezing Order.
As this is the typical approach to third party assets, the Claimant accepted this proposition in August 2023, and a number of variations were agreed by consent so as to allow the Third Party Companies (and their bank accounts) to operate without restriction.
In January 2024, however, the Claimant received anonymous text messages and phone calls threatening to denude the Third Party Companies of their assets. The Claimant was always of the view that these communications were from the Defendants. The Claimant contended that the Defendants carrying out such threats would devalue the Third Party Companies, and therefore the Defendants’ shares in them, with the purpose of frustrating any future judgment in the Claimant’s claim against them. The Claimant believed that the communications showed the Defendants in fact exercised control over the Third Party Companies’ assets.
The application to vary the Freezing Order
The Claimant therefore promptly applied to the High Court requesting an order vary the Freezing Order under section 37 of the Senior Courts Act 1981. The order sought would extend the Freezing Order to include the assets of the Third Party Companies, despite the companies being owned by the Defendants jointly with other shareholders.
It was submitted by the Claimant that there had been a material change of circumstances since the Freezing Order was granted in August 2023. When the order was first granted, the Claimant had not apprehended the Defendants’ willingness and ability to deal with the assets of the Third Party Companies in such a way as to: (i) negatively affect the value of their shares in the Third Party Companies; and/or (ii) defraud their creditors by dissipating assets for the purposes of section 423 of the Insolvency Act 1986.
The application was not made pursuant to the Chabra jurisdiction (TSB Private Bank International SA v Chabra [1992] 2 All ER 245).
The application was instead predicated on the Claimant’s proposition that the form of order should not depend on whether the Defendants legally or beneficially owned the company assets, but rather on whether the Defendants exercised control over the companies and their assets.
In support of this proposition, the Claimant pointed to the following authorities:
- Motorola v Hytera [2020] EWHC 980(Comm)1: the court noted that an injunction may be granted over corporate assets so as to preserve the value of the shareholding against which a future judgment could be enforced. This is despite the company itself remaining a third party to the proceedings and retaining separate legal personality to the respondent.
- Group Seven Ltd v Allied Investment Corp [2014] 1 WLR 7352: the court held that an injunction may be appropriate to preserve assets for later enforcement of a judgment debt, so long as the corporate is wholly owned and controlled by the respondent, and is deemed a ‘pocket or wallet’ of the respondent.
- JSC BTA Bank v Ablyazov [2015] UKSC 643: the Supreme Court determined that the extended definition of assets in paragraph 6 of the Commercial Court’s standard form freezing order applies to assets over which the respondent has control, regardless of these assets being owned legally or beneficially by the respondents. Lord Clarke noted that “the whole point” of the extended definition is to catch assets which otherwise would not be caught. The extended definition of ‘asset’ in paragraph 6 reads as follows:
Paragraph 5 applies to all the Respondent’s assets whether or not they are in his own name and whether they are solely or jointly owned. For the purpose of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions.
However, further application of Ablyazov in respect of third party corporate assets did indicate an alignment with the view of the Court of Appeal in Group Seven, with the expectation that such corporate assets are wholly owned by the respondent. In FM Capital Partners Ltd v Marino [2018] EWHC 2889 (Comm)4, the Commercial Court observed that the freezing order could be applied to assets of a third-party corporate entity, provided that: (i) the company is wholly owned or controlled by the respondent; and (ii) the company assets are in essence the respondent’s assets. In the present case, the Defendants were neither the sole director(s) nor the sole shareholder(s) of the Third Party Companies.
The decision
In Mold the High Court was willing to extend the freezing order to encompass the assets of the Third Party Companies, notwithstanding that they were not wholly owned by the Defendants. This therefore indicates a departure from the restrictive interpretation of Ablyazov put forward in FM Capital Partners.
The test for extending freezing orders to third-party assets, including corporate assets, continues to be one of control. The judge put it simply as “whether there is good reason to suppose that the assets are, in fact, owned by the respondent.” However, contrary to FM Capital Partners, the Defendants in the proceedings were deemed capable of exhibiting control over the company and the company assets, despite not being the sole shareholder or the sole director of the companies, and despite there being no evidence of beneficial ownership.
In respect of the authority cited by the Claimant, it was said that although asset freezing orders will generally be reserved for assets over which a respondent has a legal or beneficial interest, the judge noted that freezing orders can also extend to assets owned by corporate entities where such entities are effectively “no more than a pocket or a wallet for the defendant.”
The unique factor in the present case related to the evidence obtained by the Claimant indicating that the Defendants would denude assets in the companies without regard to their obligations to those companies.
In so acting the Defendants would be acting on their own behalf – not as agents of their respective companies – and so would be exercising direct personal control over the corporate assets. On that basis the assets of the Companies fell within the extended definition in paragraph 6 and satisfy the requisite control for the purposes of Ablyazov. The Court was further satisfied that there had been a material change of circumstances warranting an amendment to the previous Freezing Order, as the Claimant had not anticipated the Defendants’ willingness to breach their fiduciary duties or to defraud creditors by dissipating assets at the time the Freezing Order or its subsequent variations were granted.
This decision marks a significant shift from FM Capital Partners and allows applicants a more flexible tool against individuals who exhibit control over company assets, which on paper do not appear as their own, but thereafter intend to dissipate those assets to circumvent any award in the applicant’s favour.
For more information on this, please contact Mark Whelan and Felix Parker.