The court has extended a freezing order against partners of a partnership which had been placed into provisional liquidation, despite the winding up petition which gave rise to the appointment of a provisional liquidator being dismissed. Further, the court held that the provisional liquidator should not be required to give an unlimited cross undertaking in damages.
Mr Patel and Mr Ubhi ran Black Capital (a partnership) as an investment business. Investors became concerned that the business was a Ponzi scheme and sought to withdraw their funds. After they were unable to do so, the partnership’s creditors presented a winding up petition and also made without notice applications for the appointment of Mr Hunt as provisional liquidator and for a freezing order against Mr Patel and Mr Ubhi.
The above applications were granted, and shortly afterwards the provisional liquidator applied to extend the freezing orders. However, before the return date from the freezing orders, the winding up petition was dismissed. Consequently, one of the partners:
The court considered the following issues.
First, should the freezing order be extended notwithstanding the dismissal of the winding up petition? This would involve an assessment of two further sub-issues. Namely, (a) whether there had been a failure to give full and frank disclosure and (b) whether the freezing order was justified.
Second, the court considered whether the cross undertaking in damages should remain limited at the value of the net realisable assets or whether it should be removed entirely.
Had there been full and frank disclosure?
The judge summarised the relevant principles. Full and frank disclosure must be accompanied by fair presentation. This means that, as a whole, the application must not be misleading or unfairly one sided. To meet this requirement, the applicant should (1) identify the principal facts and cause of action; (2) make proper enquiries before making the application; and (3) not mislead the court in any way.
The partners had raised a number of issues with the way in which the case had been presented at the without notice hearing. The judge considered these each in turn. Whilst there had been some shortcomings, these were not sufficient to amount to a breach of the duty of fair presentation. Interestingly, in respect of the usual requirement to identify the cause of action, the judge was not concerned by the fact the relevant principles were not fully stated citing the experience of the judge at that hearing and the fact that the principles were well known.
Cause of action
The judge therefore found that the freezing order should be continued, notwithstanding the dismissal of the winding up petition.
The Respondent’s argument was that the dismissal of the winding up petition resulted in there being no cause of action to further justify the granting of a freezing injunction. The judge however found that the winding up petition did not form the basis of the relevant cause of action because the application for a freezing order was made by the provisional liquidator, rather than the petitioners.
Limit on cross undertaking in damages
The judge rejected the argument that the court should replace the limited undertaking in damages given at the without notice hearing with an unlimited one.
When considering the arguments in relation to the limit on the cross undertaking in damages, the judge did accept that the starting point is usually for the cross undertaking to be unlimited. However, it was accepted by all parties that usual practice where a liquidator seeks a freezing order for any cross-undertaking in damages to be limited to the liquidation estate. The rationale for this is that the office holder brings the claim in that capacity and there is no reason why they ought to be required to expose their own assets to risk.
It was argued that there had been a failure in bringing the judge’s attention to the above principles in the initial without notice application in breach of the Applicants’ duty of fair presentation. Although, the judge did not agree (also finding in any event that the partners were obliged to contribute to partnership assets in the event of a shortfall), the judge did indicate that the position might have been different if the application had been funded by a major creditor or a third party funder (the same policy concerns being inapplicable in these circumstances).
This case sets out some of the relevant principles when bringing a without notice application and serves as a useful example of the approach the court will take when considering the requirement of fair presentation as part of the duty of full and frank disclosure. In relation to the identification of the legal principles as part of the requirement of fair presentation at without notice hearings, where the principle relied upon is more obscure, great care should be taken to draw the relevant material to the court’s attention.
In addition, the case highlights the approach taken in respect of the cross undertaking in damages. Usually the court will limit this in respect of office holders. The obiter comments highlight the rationale behind this – namely that office holders should not have to put their own assets at risk. In cases where third part funding has been obtained, office holders should be alive to the possibility that their cross undertaking may not be limited in the usual way given the fact that the same policy concerns will not be at play.