THE CONTINUING IMPORTANCE OF FULL AND FRANK DISCLOSURE IN APPLICATIONS FOR FREEZING ORDERS IN SUPPORT OF ARBITRATION

In Fimbank Plc v Discover Investment Corp [2020] EWHC 254 (Comm), available here, the English High Court discharged a freezing order obtained ex parte in support of arbitration on the basis that the claimant had no good arguable case on the merits. The Court heavily criticised the claimant’s failure to offer full and frank disclosure of facts relevant to the claimant’s intended substantive claim and to the risk of asset dissipation.

Background

The defendant, Discover Investment Corp (Discover), transported a cargo of wheat from Ukraine to Egypt in a vessel, the “Nika”, under bills of lading  The ultimate buyer was AOS Trading DMCC (“AOS Dubai”), but AOS Trading and Shipping (“AOS Egypt”) was named as the notify party on the bills of lading. The claimant, Fimbank Plc (Fimbank), a Maltese bank, entered into a financing arrangement with AOS Dubai to finance the purchase of the cargo. The original bills of lading were held by a bank in Egypt on behalf of the claimant, only to be released on payment for the cargo by AOS Dubai.

The cargo was discharged by the defendants in Alexandria to AOS Egypt. The cargo was then consigned to a bonded warehouse for onward delivery to AOS Dubai. In late April-early May 2018 the cargo was released into unknown hands against forged bills of lading. The original bills of lading remained with the bank in Egypt and no payment was made to Fimbank.

Following a period of delay and subsequent investigation by Fimbank, the loss of the cargo from the warehouse was notified to the police in November 2018. In February 2019, Fimbank notified Discover of a possible claim under the bills of lading for misdelivery of the cargo, maintaining that the cargo should not have been discharged without the production of the original bills of lading. Correspondence ensued, and in March 2019 the parties negotiated a standstill agreement under which the defendant promised not to sell or otherwise transfer title to the vessel and the claimant promised not to arrest or otherwise interfere with the use or trading of the vessel. The standstill period was to last until 21 June 2019. On 23 May 2019, the defendant requested an extension of the standstill which was refused by the claimant.

On 24 June 2019 the defendants sold their sole asset, the vessel, Nikia, for E5.8 million, apparently to a connected entity within the same shipowning group. On 26 June 2019 Fimbank commenced arbitration in London under the bills of lading. The defendant was notified of the arbitration on or about 1 July 2019. The claimant learned of the sale of the vessel on 4 July 2019 and sought an explanation for the sale from the defendant’s solicitor in mid-July. No explanation was forthcoming.

On 7 August 2019, the claimant applied for an ex parte freezing order against the defendant. Its initial application was not successful, resulting in a second application on 22 August 2019. In this latter application for an ex parte freezing order, Fimbank argued that they knew of no other possible defence the defendant could take apart from challenging the authenticity of the bills held by the claimant. Fimbank also informed the Court that the defendant had recently sold its only asset. Considering the timing and other features of the sale, and finding it likely not to have been an independent, arm’s-length transaction, the Court ruled that there was a real risk of dissipation of assets and ordered a freezing order.

The inter-partes hearing regarding the freezing order

On 28 January 2020, the Court heard both parties, considering the claimant’s application for the continuation of the freezing order and the defendant’s cross-application for the freezing order to be discharged.

A good arguable case?

When considering whether a freezing injunction should be granted, there must be a good arguable case on the merits of the claimant’s intended substantive claim.

The Court questioned whether there was indeed a good arguable case. On hearing both parties, it became apparent that the factual position was significantly fuller and materially different from that presented ex parte when seeking the freezing injunction. Alongside the finance agreement between Fimbank and AOS Dubai was a stock management agreement (SMA) between Fimbank, AOS Dubai and an additional party, Vallis Commodities, which set out the details for the delivery and warehousing of the cargo. Fimbank did not reveal to the Court the fact that under the SMA, the bills of lading were to be used to unlock the cargo at the warehouse and not to discharge the cargo at the port. Under the SMA, AOS Dubai was required to take delivery and store the goods until was finally sold. Both of these tasks were performed by AOS Egypt and even though the exact relationship between the two remained elusive to the Court, the Court opined that either AOS Egypt was a branch/separate trading name for AOS Dubai or it was AOS Dubai’s agent. In either case, AOS Egypt was entitled to take delivery of the cargo.  The Court therefore found considerable difficulties in causation with any claim since the SMA arrangements were successfully accomplished, up to the point only that the warehouse later released cargo against forged documents. The Court considered that the cause of loss was not the defendant’s discharge of the cargo but rather the claimant becoming victim of a fraud that did not involve the defendant.

The Court questioned and criticised the claimant’s evidence and submissions on an ex parte basis regarding the strength of its claim. The SMA had not been referred to or produced to the Court. The full factual picture was not accurately described and the merits of any possible claim against the defendant could not have sensibly been addressed without considering in full the terms of the financing agreement. The Court found no good arguable case on the merits of the underlying substantive case and significant shortcomings in the claimant’s duties of full and frank disclosure. As a consequence, the freezing order fell to be discharged.

Risk of dissipation of assets

The Court moved on to consider whether, when the freezing order was granted there was, and whether there continued to be, a real risk of dissipation of assets. The Court considered that by the time the application for the freezing injunction was made, the dissipation of assets had already occurred as the vessel had been sold. However, it was not clear what had happened to the proceeds of sale and the defendant was disinclined to provide any information about those proceeds of sale. The defendant’s conduct throughout demonstrated that if it remained in possession of valuable assets, there was a risk that those assets would be dissipated.

However, while the defendant’s non-disclosure was substantial, so too was the claimant’s. The Court had not been informed at any time during the ex parte hearing that the only reason for the claimant’s exposure to such dissipation risk was because it had refused to extend the standstill agreement in the face of the defendant’s request to do so. There was no basis to suggest that, if the standstill agreement had been extended as proposed, the defendant would then have sold the vessel in breach of the standstill obligations. While it did not explain or defend the defendant’s subsequent actions to rid itself of assets, the Court considered that the claimant had brought upon itself the risk of dissipation of assets due to its unreasonable refusal to extend the standstill agreement. The Court also questioned the claimant’s decision to delay applying for the freezing injunction until August 2019, when it knew of the sale of the vessel at the beginning of July.

The Court concluded that, while there was, and remained, a real risk of dissipation, there was no satisfactory reason for the lack of disclosure by the claimant regarding the standstill agreement. This non-disclosure was sufficiently serious to justify the discharge of the freezing order, notwithstanding the defendant’s behaviour.

Comment

In this case the Court severely criticised the claimant party for its failure to make full and frank disclosure of all of the relevant facts and circumstances relating to the merits of its underlying claim and its arguments on the risk of dissipation. Indeed, the Court considered the claimant’s failure to provide an accurate and full picture on the standstill agreement to be so significant that the freezing order would have fallen to be discharged even if the merits of the substantive claim had disclosed a good arguable case.

As a consequence, the judgment offers a number of valuable lessons for parties who are applying for a freezing order in support of an arbitration or who are seeking to discharge such a freezing order. It is very apparent that the Court takes the obligation to provide full and frank disclosure of all relevant facts and circumstances in the context of an ex parte application extremely seriously. Failure to comply with this obligation will likely undermine an application for a freezing injunction in all but the most compelling of substantive claims. The case also raises a note of caution for parties who terminate contractual arrangements which might otherwise have protected them from dissipation risk. The claimant’s unreasonable decision to continue the standstill arrangement weighed heavily in the Court’s decision not to continue the freezing order, despite considerable non-disclosure from the defendant and an acknowledged continuing risk of dissipation.

For more information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.