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Frédéric Marino v FM Capital Partners Ltd [2016] EWCA Civ 1301

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management - Freezing Orders

04-05-2017

Court of Appeal clarifies test for when a defendant will be allowed to use assets subject to a proprietary freezing order for living and legal expenses.

Facts of the case

– in the context of a claim by FM Capital Partners Ltd (“C”) against Mr Marino (“D”) for alleged misappropriation of funds, the High Court granted both personal and proprietary freezing orders over assets held by D. The personal freezing order was subject to the usual proviso allowing D to use the assets covered (the “Non-Proprietary Assets”) for his reasonable living and legal expenses

– D claimed that he had exhausted the Non-Proprietary Assets save for shares (valued at US$18,000) and his share of his home (valued at £800,000). Reluctant to liquidate these assets, D therefore applied to vary the proprietary freezing order so as to be able to use the assets covered (the “Proprietary Assets”) for his reasonable living and legal expenses. The High Court rejected the application

The decision

– the Court of Appeal found that (i) D clearly had available Non-Proprietary Assets; and (ii) his offer to replenish the Proprietary Assets at a later date did not justify a departure from the usual approachAnalysis and practical advice– unlike personal freezing orders, proprietary freezing orders do not ordinarily contain a carve-out allowing a defendant to use frozen funds for reasonable living and legal expenses. This is because a dissipation of the frozen assets would defeat any valid underlying proprietary/tracing claim

– the Court of Appeal set out a four stage approach for considering whether to vary a proprietary freezing order for such purpose: (i) does the claimant have an arguable proprietary claim; (ii) does the defendant have an arguable defence; (iii) is the defendant unable to fund their living and legal expenses effectively without the assets subject to the proprietary freezing order; and (iv) if so, what is the balance of justice between permitting the use of funds and potentially denying the defendant the opportunity to advance a case which may ultimately be successful

– the third stage of the four stage test is likely to set a high bar since: (i) any loss to the defendant would be covered by the cross-undertaking in damages; and (ii) the defendant would also need to show that he could not utilise his non-proprietary assets, e.g. by selling them or borrowing against them

– if, however, there was a real risk that the claimant may not be able to satisfy its cross-undertaking in damages (e.g. to compensate the defendant for the cost of borrowing against its non-proprietary assets or selling them at a lower price in a fire sale), the court said that limbs three and four should be considered together to prevent injustice

– it was not necessary in this case for the court to consider question 4, but the bar is again likely to be a high one given: (i) the court’s observation that a defendant did not necessarily require representation to ensure they had a fair and effective opportunity to present their case since judges are familiar with dealing with litigants in person; and (ii) the court’s indication that it might be relevant to consider whether the defendant could undertake to replenish frozen funds later from non-proprietary assets that were currently unavailable or to offer the claimant preferential security over such assets