Court of Appeal clarifies test for establishing existence of assets for freezing injunctions

The Court of Appeal has held that, to obtain a freezing injunction, an applicant must establish either a "good arguable case" or "grounds for belief" that assets exist. It rejected the higher threshold of a "likelihood" that assets exist, but held that it is not enough for the applicant to assert that the respondent is apparently wealthy and must have assets somewhere: Ras Al Khaimah Investment Authority & Ors v Bestfort Development LLP & Ors [2017] EWCA Civ 1014.

This decision provides greater clarity as to the test for the existence of assets, though it is not helpful that the Court of Appeal referred to either a "good arguable case" or "grounds for belief". Although Longmore LJ indicated a preference for "grounds for belief", and commented that "there is, no doubt, not much difference between the two", introducing two potentially different thresholds risks creating uncertainty.

The decision also suggests that the courts may be willing to be more lenient than had previously been thought in relation to delays in applying for a freezing injunction. However, an applicant would be wise to treat this with extreme caution and always to apply as soon as possible. Not only does delay risk allowing the respondent actually to dissipate the assets before an injunction has been obtained, but (notwithstanding the comments in this case) on different facts a lengthy delay may well be a basis for refusing an injunction.

Background

Freezing injunctions are one of the most powerful weapons in the armoury of a litigator. However, the English courts will not grant such an order lightly; it must be satisfied as to a number of points, including that:

• the applicant has a good arguable case;
• the respondent has assets; and
• there is a real risk that the respondent's assets will be dissipated if the injunction is not granted.

While there have been several recent decisions regarding the risk of dissipation (see, for example, our previous blog post on Candy & Ors v Holyoake & Anor [2017] EWCA Civ 92), and what assets are covered by a freezing injunction (see blog post on JSC BTA Bank v Ablyazov [2015] UKSC 64), there has been little recent consideration of the standard of proof required in respect of whether assets in fact exist. The reason for this aspect of the test is because the court does not wish to act for no reason, so will not grant an order if there are no assets upon which the injunction could bite.

In the present case, the applicants for the freezing injunction were six entities related to the sovereign wealth fund for the emirate of Ras Al Khaimah ("the RAK companies"). The RAK companies had pursued investment opportunities in Georgia through Mr Mikadze, a Georgian businessman, and Dr Massaad, an Emirati national. It was alleged that Mr Mikadze and Dr Massaad had diverted monies intended for investments into their personal accounts. The RAK companies brought substantive proceedings in Georgia and the UAE, and applied for a freezing injunction in England in support of those foreign proceedings pursuant to section 25 of the Civil Jurisdiction and Judgments Act 1982.

The respondents to the application were fourteen English registered LLPs ("the LLPs"), all of whom were allegedly connected to Mr Mikadze.

At first instance, the judge (Rose J) refused to grant the freezing injunctions sought as there was, in her view insufficient evidence of assets held by the LLPs. The judge also held that any risk of dissipation had been negated by countervailing factors. The applicants appealed.

Decision

The Court of Appeal allowed the appeal. Longmore LJ gave the leading judgment, with which Henderson LJ and Sir Patrick Elias agreed.

Test for the Existence of Assets

Longmore LJ set out the question before the Court of Appeal as being:

"whether an applicant for a worldwide freezing order has to show that (1) it is likely that a defendant has assets that will be caught by the order or (2) a good arguable case that a defendant has such assets or (3) grounds for believing that a defendant has (or is likely to have) such assets or (4) merely that the defendant is wealthy and must therefore have assets somewhere."

These were set out by Longmore LJ in order from the highest burden for an applicant (likelihood) to the lowest (an inference based upon apparent wealth of the defendant).

After considering the authorities, the Court of Appeal held that it would not be enough for an applicant simply to assert that a defendant is a "wealthy person who must have assets somewhere". Equally, however, a test of "likelihood" would not be appropriate. The right test must be either a "good arguable case" or "grounds for belief" that assets were held by the respondent. Longmore LJ expressed his preference for the "grounds for belief" formulation, although acknowledging that there was not much difference between the two terms. He added:

"Since a claimant cannot invariably be expected to know of the existence of assets of a defendant, it should be sufficient that he can satisfy a court that there are grounds for so believing. That is not an excessive burden but if an order is sought against numerous companies or LLPs and those companies and LLPs can show that there is no money in their accounts and the claimant cannot show that the account has been recently active, it may well be right to refuse relief."

On the facts, for three of the LLPs (referred to as Labbey, Worldfound and Luxtron), the Court of Appeal held that there were grounds for believing that these respondents held, or recently had held, assets, and therefore there was no convincing evidence to suggest that any freezing order would be futile. In particular:

• For Labbey and Worldfound, it had been shown that sums of approximately $500,000 and $200,000 had been paid into their respective accounts in June 2015. There was no satisfactory evidence before the court as to the subsequent location of these sums.
• For Luxtron and Worldfound, the applicant pointed to project management services agreements, pursuant to which both respondents were obliged to pay construction costs from hotel projects to Mr Mikadze. This would suggest that Luxtron and Worldfound must have had sufficient assets to pay such fees to Mr Mikadze.

Therefore, the Court of Appeal held (overturning the trial judge) that there were "grounds for belief" that Labbey, Luxtron and Worldfound held assets against which the RAK companies might be able to enforce.

For two of the LLPs, Bestfort and Bellcrown, the Court of Appeal held that the trial judge was entitled to find that there was insufficient evidence of assets to show "grounds for belief" that assets were held. For Bestfort, the only payments pleaded had been made in 2012, and the account had been closed by October 2014, several months prior to the application for an injunction. For Bellcrown, there was only evidence of a payment of £31,500 in December 2014.

For the other nine LLPs, the Court of Appeal agreed with the first instance decision that there was no evidence of any substantial assets against which an order could be enforced.

The applicants argued that a broad brush approach should be taken, and that if the court was minded to grant an application against one of the LLPs, then the order should be made against all the LLPs. This was rejected. Such an approach would be inappropriate where the alleged "puppetmaster", Mr Mikadze, was not a party to the proceedings, and failed to take into account the separate legal personality of each LLP. It will not be sufficient for an applicant to assert that, simply because the defendant has many asset holding vehicles, his assets must be in some of them: an applicant will need to show that there are grounds for believing that the specific respondent against whom it is seeking the injunction holds assets.

Risk of dissipation

On the separate issue of risk of dissipation, the Court of Appeal agreed with the trial judge's finding that there was a risk of dissipation (something that will be fact sensitive), but disagreed with her conclusion that the risk had been excluded by countervailing factors. In so doing, the Court of Appeal made some useful clarifications.

First, Longmore LJ held that compliance with court orders in respect of interim costs will not preclude a risk of dissipation: "a failure to comply with court orders may invite adverse inferences to be made; it does not follow that compliance with a court order will negative a risk of dissipation if that risk has already been found to exist".

Second, although there was a delay of several months between the applicant effectively becoming aware of the claim and the application for the injunction, the Court of Appeal held that there had not been such delay on the part of the applicant which would necessitate a court denying injunctive relief. Longmore LJ accepted that relief is often denied to an applicant who pursues his rights in a "dilatory fashion" – such as in Anglo-Financial SA v Goldberg [2014] EWHC 3192 (Ch) where there was a delay of several years. Here, however, Longmore LJ pointed out the delay was nothing like so long as in Anglo-Financial, particularly as the matters relied on by the applicant would have taken time to discover, investigate and assess. Accordingly, he did not think the risk of dissipation could be said to be negatived by such delay as there had been.