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Injunctive relief is available to prevent the dissipation of the assets of a company which is the subject of a pending unfair prejudice petition

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

30-11-2017

Palmer v Loveland, Starlight Diamond Setters, Hatton Garden Jewellers [2017] WL 04552554

Facts of the case

  • Ms Palmer (“A1”) and Mr Loveland (“R1”) were both 50 per cent shareholders in Starlight Diamond Setters (“R2”). Hatton Garden Jewellers (“R3”) was wholly owned by R1 who was also its sole director.
  • A1 discovered that R1 had made unauthorised payments from the accounts of R2 to himself, R3 and to other third parties including to some entities which were aliases of R1.
  • A1 petitioned for unfair prejudice pursuant to section 994 of the Companies Act 2006, seeking an order that R1 or R3 should purchase A1’s shares in R2 based on R2’s value before the unauthorised payments were made. A1 was also granted a freezing order to preserve R1’s assets to enable R1 to meet the purchase price of the shares. This was the return hearing for the freezing order.

The decision

  • There was a good arguable case for relief under section 994, and for a buyout of A1, by R1, based on the value of R2 before R1’s misconduct.
  • In such context, the court had jurisdiction to grant injunctive relief against R2 to ensure its assets were dealt with properly and prevent them being dissipated.
  • Injunctive relief was also available against R1 and the recipients of R2’s assets (R3 and other third parties), particularly in circumstances where R1 controlled such recipients and was in de facto control of R2.
  • The amount of any relief did not depend on what A1 would be paid for her shares since the purpose of the order was to prevent R2’s assets being dissipated pending resolution of the petition, or any alternative relief such as winding up which A1 might seek if the petition failed.
  • Rather than grant blanket freezing orders against the Rs, it was more proportionate in view of the perceived risk to order that notice be given of transactions and certain related dealings.

Analysis and practical advice

  • Warren J characterised this as an asset protection exercise, rather than a pure freezing order application. His decision might therefore properly be regarded as an example of the court’s general powers to grant injunctive relief to prevent wrong doing, as opposed to an exercise of the freezing order jurisdiction.
  • Freezing orders over bank accounts typicallynprovide for the continued use of such accounts in the ordinary course of business. In practice however, given the need for banks to take a cautious approach in view of the consequences of breaching the order, the effect of a freeze on the account is that it often leads to the respondent being unable to continue trading. At the return hearing, subject to the perceived risk of dissipation and hardship suffered as a result of the freezing order, there may therefore be scope for a respondent to argue that some form of notice requirement (either before or after a transaction) would be more proportionate. In such cases, a respondent might also consider requesting the inclusion of wording in the order that makes it clear to their bank that nothing in the order is to effect the operation of the account as between them and the bank.
  • Increasing use by the courts of notice orders rather than freezing orders will be welcomed by financial institutions given the onus of policing them rests on the respondents. The financial institution therefore does not have to grapple with the issue of permitted payments in the ordinary course of business.

 

 

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