Proprietary freezing orders: High Court considers release of monies subject to a proprietary freezing order and registration of pending claim against title to property (England & Wales)

Key Takeaways

1. The basis of a proprietary freezing order (“PFO”) is that the asset which has been frozen, whilst currently in a respondent’s hands, may turn out to be the applicant’s upon determination of their proprietary claim. Therefore, unlike a non-proprietary freezing order, a PFO typically does not allow a respondent to use the asset to fund their legal fees or ordinary living expenses.

2. Where the respondent seeks a variation of the PFO to use the asset for legal fees or ordinary living expenses, the Court will consider whether: (i) the applicant has an arguable claim to the property; (ii) the respondent has an arguable claim to the property; (iii) the respondent has no other funds available (which will require full disclosure by the respondent of their asset position and recourse to other funding); and (iv) where the balance of convenience lies as between permitting the respondent to use property which might belong to the applicant, versus refusing to allow the respondent to use property which might be its own (asking, for example, whether refusing to allow the asset to be used for legal fees would cause a greater injustice by preventing a potentially successful defence).

3. In exercising its discretion, the Court will also consider the parties’ conduct, including whether an applicant’s delay in seeking a PFO has prejudiced the respondent. In this case the applicant had delayed, but that had not prejudiced the respondent, and so the Court made the PFO. Paradoxically, the delay resulted in the Court refusing to permit the respondent to use the property to fund his legal fees, because he had already had legal services throughout the trial on credit, and therefore there was no risk of prejudice to his defence.

4. A pending proprietary claim should not be registered as a unilateral notice against real estate. However, a PFO (like a non-proprietary freezing order) or established proprietary claim after trial can be registered as a restriction.

Factual Background

The first claimant (“LCF”) issued minibonds to the public but went into administration. The administrators of LCF together with others (the “Cs”) brought, inter alia, equitable proprietary claims against LCF’s former directors and other parties whom it alleged had breached their fiduciary duties or assisted in those breaches. One aspect of the Cs’ case was that a property (the “Property”) owned by the fifth defendant (“D5”) was part of the traceable proceeds of money which came from LCF. The Cs therefore registered a unilateral notice over the title to the Property with a view to protecting their claimed proprietary interest in it pending determination of their claims (the “Unilateral Notice”).

Mr Justice Miles heard the Cs’ claims earlier this year and reserved judgment. Towards the end of the trial, D5 applied for the withdrawal of the Unilateral Notice in order to sell the Property. The Cs agreed on the condition that a PFO was granted. D5 did not object in principle to the grant of the PFO, but disputed what should happen to the estimated £2.175m net proceeds of sale from the Property (the “Net Proceeds”). The Cs wanted the Net Proceeds to be preserved pending judgment, while D5 wanted to use them to pay his legal fees and living expenses. D5’s legal debts after the trial were around £2.16m, such that almost all of the Net Proceeds would be consumed by them, with the small remaining amount soon to be consumed by his proposed ordinary living expenses of £8,500 per month.

D5 also argued that the Cs had delayed in applying for the PFO and had not been entitled to apply for the Unilateral Notice. He asked the Court to consider those issues when deciding whether to permit him to use the Net Proceeds for his legal fees and ordinary living expenses.

The Decision

Mr Justice Miles granted the PFO as requested by the Cs, i.e. without allowing D5 to use the Net Proceeds for his legal fees or ordinary living expenses. In reaching this decision, Mr Justice Miles operated on the agreed basis that the Cs had a proper claim in the sense that there was a serious issue to be tried, and D5 had an arguable defence to the claims, but otherwise did not make any provisional findings from the trial. Mr Justice Miles took the staged approach laid down in earlier cases regarding the release of property subject to a PFO, in particular finding that D5 had not proven that he had no other funds for legal expenses, as his asset disclosure was limited and qualified. 

These findings were enough to dispose of the application in the Cs’ favour. However, in case he was wrong on any of them, Mr Justice Miles went on to consider the exercise of his discretion. As to this, he found that:

• The Cs had delayed in applying for the PFO, but this had not caused D5 any prejudice as he still had the benefit of a full legal team during trial, and there was no risk that his defence would not be property presented as it had already happened; and

• Whilst the Cs were mistaken in law in applying for the Unilateral Notice (as the relevant statute (Land Registration Act 2002) is such that the Cs’ should not register as a notice their pending proprietary claim, but rather the Cs could register as a restriction the PFO or an established proprietary claim), they had clean hands and D5 had (again) suffered no prejudice as a result of the Cs’ conduct.

For those reasons, Mr Justice Miles found that he would not have exercised his discretion in D5’s favour. He recognised that, whilst this might be tough for D5’s legal team, the Court was not in the exercise of its discretion concerned with protecting D5’s unsecured creditors using the Property (or its Net Proceeds) which may turn out to belong to the Cs.