Freezing Injunctions- Is it a tort to leave a claimant out in the cold?

Marex Financial Ltd v Carlos Sevilleja Garcia [2017] EWHC 918 (Comm)

In a recent hearing concerning a challenge to the English Court's jurisdiction, the Commercial Court has suggested that deliberately stripping a company's assets to deprive a successful claimant of enforcing a judgment can amount to a tort.

Freezing Injunctions

Freezing injunctions are orders made by the courts which prevent a defendant from dealing with its assets up to stated figure. A party disposing of its assets in breach of a freezing injunction can be held in contempt of court, as can any third party which assists in the disposition. As such these injunctions can prove a useful tool to ensure that a defendant retains sufficient assets for a claimant to enforce a judgment in their favour.

A defendant company may, however, anticipate that a freezing injunction is being sought and seek to transfer its assets to other group companies or to its beneficial owners before the order is made.

The courts have previously been reluctant to provide further remedies in this situation. For example, in Law Debenture Trust Corporation v Ural Caspian Oil Corporation Ltd (1995), Sir Thomas Bingham MR said "the defendant violates no legal right of the plaintiff if he makes himself judgment-proof by dissipating his assets before he is enjoined from doing so." To date the only real remedy open to a claimant in this situation would be to rely on the asset-stripping transactions being undone by the defendant company's liquidators. However, this brings further complications, uncertainty and expense, especially in cross-border disputes.

Background

The above situation was all too familiar for Marex Ltd (Marex), a foreign exchange broker which had made contractual claims against two companies registered in the British Virgin Islands (the Companies). Marex's pre-litigation due diligence had revealed that the Companies held substantial assets which would satisfy any judgment obtained.

On 29 July 2013 Marex was awarded $5 million by the Commercial Court. Anticipating that the Companies might attempt to dispose of their assets before this judgment could be enforced, Marex applied for a freezing injunction, which was made on 14 August 2013. Marex alleged that in the meantime, the Companies had transferred $9 million in assets to their beneficial owner and controlling mind, Mr Carlos Sevilleja Garcia (Mr Garcia). After the freezing injunction had been made, the Companies disclosed that they held only $4,392.48 of assets.

The Claim

Marex claimed against Mr Garcia for the torts of:

  1. Knowingly inducing and procuring a judgment debtor to act in wrongful violation of a judgment creditor's rights under the judgment (the Judgment Tort); and
  2. Intentionally causing loss by unlawful means or unlawful interference with economic interests (the Economic Torts).

Mr Garcia was resident outside England and Wales but Marex was granted permission to serve proceedings outside the jurisdiction on the basis that the claims were made in tort under CPR PD 6B para 3.1.

Mr Garcia challenged the English court's jurisdiction on the basis that the claims were not made in tort. He claimed that the Judgment Tort was not recognised in English law and that although the Economic Torts were well established, they could not apply to the present situation.

The Judgment

As the hearing was in relation to jurisdiction the Court was only required to decide whether the jurisdictional gateway in CPR r.6.36 applied. It therefore did not need to consider whether Marex's claims actually amounted to torts, but simply whether it had established completed causes of action in tort to the requisite standard.

The Court found that Marex had the better argument in relation to both points and that the jurisdictional gateway was satisfied. Importantly, there was a good arguable case that there existed a tort of knowingly inducing or procuring the wrongful violation of a judgment debt, by causing the assets of the judgment debtor to be dissipated after the judgment had been released but before any freezing order had been granted.

In finding that Marex had the better argument for the existence of the Judgment Tort, the Court relied on the principle that non-payment of a debt due under a judgment made by a court of competent jurisdiction was an actionable wrong and that defendants were under an obligation to pay such debts. The Court distinguished Law Debenture Trust Corporation on the basis that in that case judgment had not been obtained before the disposition of assets, whereas in the present case the alleged asset-stripping had occurred after judgment.

In addition, the Court found that there was a good arguable case that Mr Garcia had caused loss by unlawful means, in that he had, following the circulation of the draft judgment to the parties, removed funds belonging to the Companies in breach of his fiduciary duties and the requirements of the BVI Business Companies Act 2004.

Comments

Whilst this case is not conclusive, in that the Court was only required to consider whether Marex had a good arguable case and  an appeal to the Court of Appeal is currently outstanding it is nonetheless significant that the Commercial Court is willing to consider that asset-stripping activity of this nature can be tortious.

The fact that the Court approved of the argument in favour of the existence of the Judgment Tort on principles which apply to any court of competent jurisdiction also suggests that claims could be made under the "Judgment Tort" in England, in relation to judgments made by foreign courts.  

The case also serves as a word of warning for directors and shareholders who seek to strip the assets of their companies in anticipation of a freezing order, as Marex v Garcia opens up the possibility of such individuals becoming personally liable for the company's judgment debts, if, after judgment, they have knowingly procured or induced the Company to transfer assets in order to frustrate the judgment debtor.

For more information please contact Rob Bailey, Trainee Solicitor.