Freezing orders: applicants (including liquidators) face high hurdle to justify cap on cross-undertaking in damages

The Court of Appeal has set aside a freezing order obtained by a provisional liquidator within winding up proceedings, on the basis that the cross-undertaking in damages given by him was inadequate because it was limited to the amount recovered for the estate. The liquidator had not discharged the burden of showing good reason to depart from the "default position" that a cross-undertaking should be unlimited in amount: Hunt v Ubhi [2023] EWCA Civ 417.

A cross-undertaking in damages is a commitment given to the court by a party seeking an order, confirming that they will pay any amount the court might later consider appropriate to compensate for loss or detriment resulting from the order. It is effectively the price for being allowed to interfere with a defendant’s freedom before they have been found liable for anything.

The decision provides useful Court of Appeal guidance as to the matters that any applicant for a freezing order who proposes a limited cross-undertaking should be prepared to address, supported by evidence to the extent possible. They include: whether there are other interested entities (such as creditors in an insolvency) who have a sufficient stake in the proceedings and the financial means to support an unlimited cross-undertaking; any other potential source of funding; the possibility of insurance; and the practical value of the proposed undertaking in the particular circumstances.

The decision is also of particular interest for the confirmation that the default position described above applies equally in an insolvency context, and the fact that an insolvency office holder is seeking the freezing order for the benefit of others will not on its own justify a cap on their cross-undertaking.

The Court of Appeal also identified a number of more fundamental issues (beyond the scope of this post) as to the operation of insolvency legislation in this context. In particular, it queried whether a provisional liquidator does in fact have the power to seek a freezing injunction within winding up proceedings, aimed at preventing an individual from frustrating a prospective statutory call to contribute to the debts of a partnership – as opposed to preserving identified assets of the partnership or safeguarding its ability to enforce a damages claim that constitutes a partnership asset. Those questions did not need to be decided in this case but were flagged by the court as needing careful consideration in a future case.

Background

The issue arose in the context of a petition to wind up an allegedly insolvent partnership, Black Capital, said to have been operating as a Ponzi scheme. The petition was brought by a number of related investors and was presented on the basis that Black Capital was a partnership between Mr Ubhi and another individual.

On a without notice application made to Mr Justice Mellor, a provisional liquidator was appointed to Black Capital and the liquidator immediately obtained a freezing order against the two individuals, preventing them from dissipating their personal assets up to £19 million. In support of the freezing order, the liquidator gave an undertaking in damages in a restricted form, in essence limited to the net amount recovered in the liquidation.

At the hearing of the petitions, a deputy insolvency judge dismissed the winding up petitions, partly on the basis that there was a dispute on substantial grounds as to whether Mr Ubhi had ever been a partner in Black Capital, but the liquidator's appointment continued pending a hearing dealing with matters arising from the judgment.

Shortly after, Deputy Judge Mr Robin Vos continued the freezing order, on the basis that there was an arguable case that Mr Ubhi was a partner as alleged, and that the balance of convenience lay in continuing the order - despite the liquidator's cross-undertaking being "of limited value".

The petitioners subsequently obtained permission to appeal the dismissal of the petitions, and the liquidator's appointment continued.

Mr Ubhi appealed the decision of Mr Robin Vos to continue the freezing order, including on the grounds that:

• the limited cross-undertaking should not have been accepted; and
• the liquidator had breached his duty of full and frank disclosure in a number of respects when obtaining the without notice freezing order from Mellor J, including by representing that it was usual practice for the cross-undertaking of an insolvency office holder to be limited to the value of the estate assets.

Decision

The Court of Appeal (Newey, Males and Snowden LLJ) allowed the appeal and, exercising the discretion afresh, set aside the freezing order.

Giving the lead judgment, Newey LJ noted that the leading authority on the provision of cross-undertakings is the Court of Appeal's decision in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139 (considered here).

That decision made clear that, while the extent of a cross-undertaking is a matter of discretion for the judge hearing the application, the "default position" is that a person applying for an interim injunction must give an unlimited cross-undertaking in damages. The burden is on the applicant to demonstrate why that should not be required in a particular case.

The court in Pugachev acknowledged the possibility of exceptions to the default position, including potentially where the applicant has no personal interest in the litigation and is bringing the claim on behalf of others. However, the decision also clearly stated that the mere fact that litigation is being brought by a liquidator of an insolvent company does not compel the conclusion that the cross-undertaking should be capped. A liquidator must still demonstrate good reason for doing so and, in that context, it can be relevant to consider whether one or more creditors was providing funding, or could be expected to provide an indemnity for the cross-undertaking. The possibility of insurance could also be significant.

Should the limited cross-undertaking have been accepted?

In the present case, the court considered that the judge had lost sight of the above principles in deciding to continue the injunction. In particular:

• The key factor that led the judge to accept the limited cross-undertaking was his view that the liquidator was acting in the interests of all the creditors while the petitioners were likely to be "in the minority both in terms of the number of creditors and the amount owed". However, there was no evidence that the liquidator had even asked the petitioners to support the provision of a cross-undertaking, and every reason to think that they might be expected to do so to at least some extent. They apparently had significant financial means and also had a substantial stake in the winding up proceedings:  the combined amount of their claim (£18 million) did account for a substantial proportion of the estimated likely total value of claims by creditors (£35-50 million).
• The petitioners could themselves have sought freezing orders and, had they done so, they would inevitably have been required to give an unlimited cross-undertaking. Newey LJ considered that that fact "tends to confirm that they could be expected to furnish an indemnity for the purposes of [the liquidator's] application". In his supplementary comments, Males LJ highlighted this factor and thought that, in such circumstances, "strong reasons will be needed" to justify any cap on a cross-undertaking given by a provisional liquidator.
• The judge had dismissed the issue of possible funding by a third party on the basis that this had not been suggested by Mr Ubhi. However, (i) the burden was on the liquidator to show why he should not give an unlimited cross-undertaking, not on Mr Ubhi to demonstrate why he should, (ii) the liquidator's funding arrangements were within his knowledge, not Mr Ubhi's, (iii) there was no evidence that the liquidator was not in receipt of third party funding, and (iv) the liquidator had apparently received some funding from the petitioners, although that had been exhausted.
• The judge had dismissed the possibility of insurance on the basis that it would not be proportionate to require the liquidator to incur the costs of investigating that possibility given that the assets identified had been minimal and all the evidence suggested a significant shortfall. However, there was no evidence about investigation costs, and it was not obvious that they would have been significant. Further, there was no explanation why the petitioners could not bear those costs.
• To the extent that the judge had attached significance to the fact that Mr Ubhi had not identified any specific losses likely to result from the freezing order, the judge was mistaken in doing so. As noted in Pugachev, it is "fairness rather than likelihood of loss that leads to the requirement of a cross-undertaking". Newey LJ observed: "While probability of loss may strengthen the case for a cross-undertaking, absence of it cannot be a justification for dispensing with one".
• It was not apparent that the judge appreciated quite how worthless the liquidator's cross-undertaking was, in being limited to the assets taken into his control under the liquidation of Black Capital. The most obvious circumstance in which Mr Ubhi might wish to claim on the cross-undertaking would be where the petition to wind up Black Capital had failed because there was a substantial dispute as to whether it was a partnership at all - ie whether "Black Capital (in provisional liquidation)" existed. In that case, it may well be that none of the relevant assets would technically meet the description in the cross-undertaking.

Full and frank disclosure

The court also accepted that what had been said to Mellor J about the proposed cross-undertaking was not adequate and, in fact, was misleading. Given the clear authority in Pugachev regarding the position of liquidators, the liquidator's counsel had overstated the position by stating that it was "usual" for the undertaking required of a provisional liquidator to be limited to the assets in the estate.

While it may not have been essential that Mellor J be specifically referred to Pugachev, he needed to be told of the principles that emerge from it - including that it can be relevant to consider whether creditors were funding the liquidator or could be expected to provide him with an indemnity to support an unlimited cross-undertaking.

However, in all the circumstances, the court did not consider that that failure on its own would have justified the freezing order being discharged in this case (if it had not been set aside because of the inadequacy of the cross-undertaking).