Third party debt orders: High Court considers the interaction of freezing orders and third party debt orders with funds held in solicitor’s client account (England & Wales)

Key Takeaways

1. An applicant who permits a respondent to a freezing order to sell a property on terms that they will pay the net proceeds into their solicitor’s client account, with a view to executing upon those monies by way of a third party debt order, carries the risk that the respondent’s solicitor will claim a lien and / or right of set off in respect of unpaid invoices which pre-exist the freezing order and might take priority over any third party debt order – thereby frustrating the enforcement plan.
2. A solicitor’s lien can be displaced by a subsequent freezing order if the purpose for which funds are paid to the solicitor is inconsistent with the purpose for which the lien exists. By contrast, a solicitor’s right of set off is incapable of being displaced by a subsequent freezing order, including in respect of invoices relating to a pre-existing instruction but raised after the freezing order has been granted and notified.
3. Such issues are unlikely to arise when the freezing order is obtained at the ex parte stage, as the respondent is unlikely to have solicitors instructed at that point in time and so any claimed lien or right of set-off would post-date the freezing order. However, in cases where the freezing order is obtained at a later stage, i.e. after the respondent has had solicitors acting for some time, applicants wishing to pursue a similar enforcement plan as in this case should take care that the sale proceeds are paid into an account which is ‘clean’ of competing claims (e.g. an escrow account with a third party provider).
4. The decision is a reminder that third party debt orders only bite on the debt which the third party owes to the judgment debtor when the interim third party debt order is served on the third party. Should the third party become increasingly indebted to the judgment debtor after the interim third party debt order is served on them (e.g. if the third party is a bank which receives more money into an account in the judgment debtor’s name, giving rise to a corresponding indebtedness to them), that increased indebtedness cannot be executed upon via the final third party debt order. Timing of service of the interim third party debt order is, therefore, everything – albeit a judgment creditor often has little or none of the information needed to optimise that timing.

The Facts of the Case

After the trial of the claimants’ (the “Cs”) claims and while the parties were awaiting judgment, the first defendant (“D1”) informed the Cs that he intended to sell an overseas property
(the “Property”) in which he held a beneficial interest (the “Sale”). The Cs applied for a notification injunction in respect of the Sale. The parties compromised that application on the basis of undertakings from D1 (the “Undertakings”). The Undertakings provided, inter alia, that D1: (i) was permitted to receive the deposit monies from the Sale (the “Sale Deposit”) into the client account (the “Client Account”) of his solicitors (the “Solicitors”); but (ii) prohibited from completing the Sale. On 12 September 2023, the Sale Deposit was paid into the Client Account.

On 26 September 2023, Cs obtained a worldwide freezing order against D1 (the “WFO”) in anticipation of obtaining a judgment debt against him (the “Judgment Debt”). The WFO expressly permitted D1 to complete the Sale subject to: (i) D1’s share of the net proceeds
(the “Sale Balance”) being paid into the Client Account; and (ii) Cs’ solicitors being given seven days’ notice of those monies being paid out of the Client Account. On 27 September 2023, the Judgment Debt was entered against D1.

On 16 October 2023: (i) the Sale Balance was paid into the Client Account; and (ii) Cs applied for an interim third party debt order against the monies in the Client Account (the “ITPDO”). On 24 October 2023, Master Teverson granted the ITPDO. On 14 December 2023, after Cs had served the ITPDO on the Solicitors, a further sum was paid into the Client Account
(the “Additional Money”).

On 19 December 2023, Master Bowles heard Cs’ application to make the ITPDO into a final third party debt order (the “FTPDO”), taking into account: (i) Cs’ request to capture the Additional Money in the FTPDO; (ii) the Solicitors’ position that the bulk of the monies in the Client Account were subject to a common law lien (the “Lien”) and / or contractual or common law right of set off (the “Set Off Right”) in their favour in respect of debts owing by D1 on their unpaid invoices (the “Unpaid Invoices”) and therefore fell outside the ambit of any FTPDO; and (iii) the effect (if any) of the WFO on the Lien and / or Set Off Right (if found to exist).

The Decision

As regards the Additional Money, the Master applied the established law to the effect that the FTPDO could only attach to monies in the Client Account at the time when the ITPDO was served on the Solicitors. Therefore the Additional Money fell outside of the ambit of any FTPDO.

As regards the Sale Deposit, which was paid into the Client Account prior to the WFO was granted, the Master found that:

• Lien: The Sale Deposit was paid into the Client Account for the particular purpose of paying the Solicitors’ fees, the creation of the Lien was consistent with that purpose (this being the relevant legal test), and therefore the Lien existed over these sums as a matter of common law and was not displaced by the WFO; and
• Set Off Right: Such a right pre-existed the Sale Deposit as a matter of contract and common law, and was not displaced by the WFO, including in respect of the Unpaid Invoices raised by the Solicitors after Cs had obtained the WFO.

As regards the Sale Balance, which was paid into the Client Account after the WFO was granted, the Master found that:

• Lien: The Sale Balance was paid into the Client Account for the purpose of preventing D1 from unjustifiably dissipating assets pending enforcement of the Judgment Debt, the creation of the Lien was inconsistent with that purpose, and therefore the Lien did not exist over these sums as a matter of common law. Furthermore, the WFO’s exception which permitted D1 to spend a reasonable amount on legal advice and representation did not change that conclusion (as that exception only applied in respect of D1’s future costs and not past costs); and
• Set Off Right: Such a right pre-existed the Sale Balance as a matter of contract and common law, and was not displaced by the WFO, including in respect of Unpaid Invoices raised by the Solicitors after Cs had obtained the WFO.

The result was that FTPDO could not be executed upon the Sale Deposit and Sale Balance so far as the Solicitors could exercise the Set Off right against those monies in respect of the Unpaid Invoices. However, the FTPDO could be executed upon any of the Sale Deposit and Sale Balance left after such payment.