Court of Appeal sanctions use of assets to pursue a fledging business by a defendant subject to a WFO, even though there was a “real risk” the business might fail

• United Kingdom

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

27-08-2020

Organic Grape Spirit Limited -v- Nueva IQT, S.L. [2020] EWCA Civ 999

Facts of the Case

• The appellant (“OGSL”) was a start-up company subject to a worldwide freezing order (“WFO”) in favour of the respondent (“Nueva”).
• The WFO contained the usual caveat for transactions in the “ordinary and proper course of business”, as well a specific prohibition on OGSL using its assets to “develop any new business or enterprise”.
• The main issues for the Court of Appeal were whether:-
  • OGSL’s use of assets in pursuit of a proposed enterprise could be in the “ordinary and proper course of business” given that enterprise was a start-up with no established pattern of trading; and
  • if not, whether the judge at first instance, Morgan J, should nonetheless have sanctioned dealings and disposals in pursuit of that enterprise.

The Decision

“Ordinary and proper course of business”

• The Court of Appeal found that, although OGSL could be described as having “commenced business”, insofar as it had already bought equipment to start pursuing the proposed enterprise, that business had not progressed to the point of sales or manufacture.
• Accordingly: (i) there was not an established pattern of trading against which the Court might determine whether the proposed expenditure fell within the “ordinary … course of business”, and (ii) it would be necessary for OGSL to seek specific consent for it to pursue its fledging business.

Sanctioned dealings and disposals in pursuit of the intended business

• Morgan J’s prohibition on OGSL using its assets to “develop any new business or enterprise” was principally based on the “real risk” of OGSL’s “speculative” proposed enterprise failing and any judgment in favour of Nueva therefore going unsatisfied.
• The Court of Appeal found that approach inconsistent with the principles behind a freezing order, which include that what must be threatened by a defendant is unjustified dissipation.
• Morgan J did not suggest that OGSL was acting in bad faith or seeking to pursue its venture with the object of putting assets beyond the reach of Nueva. In fact, Nueva had not claimed that there was anything improper as regards OSGL’s proposed use of assets.
• The Court of Appeal therefore removed from the WFO the restriction against OGSL using its assets to “develop any new business or enterprise”.

Analysis and Practical Advice

• The decision is a reminder that the purpose of a freezing order is not to restrain all conduct which could prejudice a defendant’s ability to satisfy a judgment. Instead, absent a proprietary claim, a defendant’s assets belong to him, and a freezing order is not intended to give a claimant security for what he alleges is due to him, even if the effect of the defendant’s dealings would be to render the injunction of no practical value.
• A pre-judgment freezing order against a trading company will, therefore, normally include the standard exception stating that it does not prohibit the company dealing with or disposing of assets in the ordinary and proper course of business. Further:
  • it will be insufficient for a claimant to argue that a transaction or business should fall outside of that exception and be prohibited merely because it involves a degree, even a substantial degree, of risk or speculation;
  • it is not for the Court to consider whether a business venture is reasonable (save where a business could be said to have no reasonable prospect of success); and
  • it is not the task of the Court to try to balance the risk of harm to the claimant if no freezing order is granted, against that to the defendant if an order is made.