High Court finds companies' assets not subject to freezing order against shareholder

The High Court has varied a worldwide freezing order by removing language in the order which would have frozen the assets of companies owned by the respondent (directly or indirectly). The variation was granted on the grounds that the relevant assets belonged to, and were in the control of, those companies rather than the respondent: FM Capital Partners Ltd v Frederic Marino & Others [2018] EWHC 2889.

In doing so, the court clarified the extent to which the Supreme Court's decision in JSC BTA Bank v Ablyazov [2015] UKSC 64 (considered here) impliedly overturned the decision of the Court of Appeal in Lakatamia Shipping Co Ltd v Nobu Su [2014] EWCA Civ 636 (considered here) in relation to the interpretation of the extended definition of assets in the standard form of freezing order – that is, to cover any asset which the respondent "has the power, directly or indirectly, to dispose of or deal with as if it were his own", including where "a third party holds or controls the asset in accordance with his direct or indirect instructions".

The court has sought to resolve the tension between Ablyazov and Lakatamia by holding that, if a respondent is the sole shareholder or director of a company, it does not automatically mean that the company's assets are also subject to the freezing order. However, if the respondent also has such a degree of control over the company's assets that the company is in truth the "wallet" of the respondent then, in an order which contains the extended definition, those assets will be subject to the order. In light of this decision, it seems likely that there will be an increased focus on what level of control a respondent does, in practice, have over the companies he owns and their assets.

Gareth Keillor and Kevin Kilgour, an Of Counsel and Senior Associate in our disputes team, consider the decision further below.

Background

A worldwide freezing order was made against the respondent, Mr Ohmura, in respect of his alleged liability for dishonestly assisting breaches of fiduciary duty and bribery by a Mr Marino. The freezing order stated that it included:

"any asset which [Mr Ohmura] 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 (which shall include a body corporate) holds or controls the asset in accordance with his direct or indirect instructions".

This wording reflects the extended definition of assets in the standard form of freezing order, save for the addition of the words "which shall include a body corporate".

The freezing order went on to list specific assets which were frozen. These included bank accounts and motor vehicles of four companies (the "Companies") which were wholly or partly owned by Mr Ohmura, either directly or through one of the other Companies. Mr Ohmura was also a director of a number of the Companies.

Various applications to vary the freezing injunction were made, one of which was an application by Mr Ohmura to remove reference to the assets of the Companies from the order on the basis that these assets belong to and are in the control of third parties (ie the Companies) and are not his assets.

Lakatamia and Ablyazov

In Lakatamia the Court of Appeal ruled that assets belonging beneficially to a company are not directly caught by a freezing order against that company's shareholder, even if that person is the sole owner of that company: they are assets of the company.

Moreover, where a respondent, acting in his or her capacity as a director or shareholder of the company, exercises control to dispose of or deal with a company's assets, he or she is doing so as agent of the company, not as an individual in their own right. However, where the respondent exercises control over the assets of a company of which he or she is the principal shareholder, and uses that control to procure dispositions of assets of the company which cause a diminution in the value of the shareholding, there will be a breach of the order, unless the disposition is made in the ordinary course of business.

Where there is evidence that a company, wholly owned and controlled by a respondent, has no active business and is in truth the "wallet" of the respondent, the standard form freezing order can be varied to restrain the dealings of the company.

Subsequent to the Court of Appeal decision in Lakatamia, the Supreme Court decided in Ablyazov that the right to draw down under loan agreements is caught by the expanded definition of assets contained in the freezing order. The Supreme Court held that "an instruction to a lender to pay the lender's money… to a third party is dealing with the lenders assets as if they are his own." Therefore, the right to give instructions under the loan agreement was caught by the loan agreement.

In doing so, the Supreme Court held that the extended definition was designed to widen the scope of the freezing order, to catch further rights, such as assets which the respondent does not own but which he has power to dispose of as if he did. Lord Clarke in the Supreme Court stated that the extended definition is "designed to catch assets which are not owned legally or beneficially, but over which the defendant (here the respondent) has control." Lord Clarke went on to say "the whole point of the extended definition of “assets” is to catch rights which would not otherwise have been caught and, in particular, the “respondents’ assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own”".

A number of commentators had suggested that the wider interpretation of the extended definition of assets given by Supreme Court in Ablyazov had impliedly overruled the Court of Appeal in Lakatamia. The claimant in the present case relied on this argument to support its position that the Companies' assets were caught by the order. Mr Ohmura argued that Ablyazov had not affected the decision in Lakatamia and therefore the assets of the Companies were not included.

Decision

The High Court (Peter MacDonald Eggars QC sitting as a deputy judge) held that the Supreme Court in Ablyazov did not overturn the strict ratio in Lakatamia. However, he went on to identify what he saw as an inconsistency between the two decisions.  In particular, the Supreme Court had held that the extended definition could include assets not beneficially or legally owned by the respondent, if the respondent had control or the power to dispose of them as if they were his own, whereas the Court of Appeal in Lakatamia had held that the extended definition could not include assets which were not owned by another person, even if controlled by the respondent. The judge indicated that he considered that Lakatamia was overruled to the extent of that inconsistency.

However, the judge confirmed that:

"the mere fact that the respondent was the sole shareholder and director of a company did not mean that the respondent had 'control' over the company's assets for the purposes of the extended definition, because any decision taken by the respondent as to the disposition of or dealing with the company's assets was not taken by the respondent in his or her own right, but was taken in his or her capacity as an organ or agent of the company."

The judge then went on to apply the principles to the case. He held that the extended definition of assets did not apply to the assets of the Companies simply because Mr Ohura had a direct or indirect shareholding in those companies. He held that there was no evidence that these companies were "no more than pockets or wallets" of Mr Ohmura, or that he was exercising control over those companies in his own right (as opposed to as agent of the Companies). The order was therefore varied to remove references to the assets of the Companies.