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High Court rules that money paid to solicitors to meet their fees can be frozen, but only where the Chabra criteria are met

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

01-05-2017

Phoenix Group Foundation v Cochrane & Another [2017] EWHC 418 (Comm)

Facts of the case

– the Claimant (“C”) obtained a freezing order in relation to a sum of £2 million which was received by the second Defendant (“D2”), a firm of solicitors, into its general client account

– D2 claimed that the money represented part payment for its fees in relation to a property transaction. It said it would be transferring the funds into its office account imminently as (i) the funds belonged to it beneficially from the moment of receipt (i.e. it was “office money”) and (ii) such money, where paid into a general client account, must be transferred into an office account within 14 days pursuant to the Solicitors Account Rules. D2 applied to discharge the freezing order

The decision

– The High Court held that the Chabra jurisdiction (derived from the decision in TSB v Chabra [1992] 1WLR 231) was relevant to whether the assets should remain frozen. This requires a good reason to suppose (equivalent to a good arguable case) that such assets will be, or can be, made available to satisfy a judgment which the claimant may obtain against the defendant against whom he is advancing his substantive cause of action

– unless the Chabra criteria are fulfilled, the court does not have jurisdiction to freeze non-proprietary assets transferred to an innocent third party, even if the transfer was in breach of a freezing order. Instead, the property is that of the innocent third party who is able to do with it as he sees fit

– the court found that the circumstances in which the money came to be paid to D2 were opaque. There was therefore at least a good arguable case that the £2 million never belonged to the transferor. The court also found that the money would be amenable to execution of a judgment should C’s substantive claim succeed

– the court stated that the correct approach to this kind of application is to consider the position in respect of the claimant in isolation. However, it nevertheless went on to consider the balance of convenience and risk of dissipation, although it noted that in this particular case continuation of the freezing order would be unlikely to cause any prejudice to D2

– on the facts of the case, C was therefore able to invoke the Chabra jurisdiction and the court declined to discharge the freezing order

Analysis and practical advice

– the case is a reminder that a freezing order creates no proprietary interest in the defendant’s assets, and confers on the claimant no preferential rights as a creditor. Even if the defendant were to breach the order by transferring assets away, this would not of itself confer rights on the claimant, either over the assets or against the recipient

– if the recipient of assets in breach of a freezing order is an innocent third party, the Chabra jurisdiction provides the only basis on which non-proprietary assets may be frozen. However, the Chabra jurisdiction is exceptional and will be exercised by the court with caution so as to ensure that it does not operate oppressively in relation to innocent third parties who are neither substantive defendants nor have acted to frustrate the administration of justice

– although not found on the facts of this case, the court also noted that where the recipient has knowledge of the freezing order and it is complicit in its breach, there may be a cause of action against him in unlawful means conspiracy and this may form the basis for freezing relief (see also JSC BTA Bank v (1) Khrapunov and (2) Ablyazov [2017] EWCA Civ 40 on page 8)

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