A recent Court of Appeal ("CoA") case, Organic Grape Spirit Ltd v Nueva IQT S.L. [2020] EWCA Civ 999, in which Howard Kennedy acted for the Claimant, has shed light on the extent to which a company which is made subject to a freezing order can spend money on setting up a new business, and clarified the court's approach to granting permission for other proposed transactions for which permission is sought.
The case was the subject of an expedited appeal to the CoA from a decision of Mr Justice Morgan in the Chancery Division.
This decision is a significant development on the scope of the "Ordinary and Proper Course of Business" ("OPCB") exception, which is included in standard freezing orders, particularly where a fledgling business is made subject to a freezing order. In particular, it establishes a low threshold for such business to be able to secure permission from the Court to make expenditure on establishing its business even where to do so does not fall within the OPCB exception.
Background facts
The Claimant is part of a large family-owned group of companies based in Italy which manufacture chemicals and foodstuffs, principally alcohols. A former director of the Claimant had arranged for €12,000,000, to be transferred out of the Claimant's accounts, to the accounts of a new company incorporated by his son (the "Defendant"). His son was the sole director and shareholder of the Defendant but the father had been a director of the Defendant until just before signing a loan agreement on behalf of the Claimant to lend the money to his son's company. The loan agreement was described by Morgan J in the High Court as a "soft loan", from father to son to set up a new business in the field of distilling alcohol for use in drinks. The father and former director of the Claimant also did not mention to the other board members of the Claimant that he had entered into the loan on behalf of the Claimant until the loan agreement was already signed and he had transferred the money.
The Claimant brought a claim in Spain to challenge the validity of the loan document and the director's power to make such a loan. In support of that claim, The Claimant applied in the Chancery Division under section 25 of the Civil Jurisdiction and Judgments Act 1982 which allows the English Courts to grant interim relief in support of claims which are under the jurisdiction of other courts.
Ex Parte Hearing
At the first, ex parte hearing, Mr Justice Nugee granted a worldwide freezing order over the Defendant's assets, on the basis that there was a risk of dissipation of the funds by the Defendant given the behaviour of the father and former director before and at the time of making the loan to the Defendant. As usual, the WFO contained an OPCB exception, but Nugee J indicated that he did not consider that that should prevent the Defendant from spending its assets (which consisted only of the money loaned by the Claimant) on developing the new business of distilling alcohol for use in drinks.
Inter Partes Hearing
Before Morgan J, the Defendant argued that there was no real risk of dissipation (or at least that the evidence in support of the risk was not "solid" enough to reach the required standard. However the Claimant argued that, even if that was the case, the Court should restrain spending on developing the business (contrary to Nugee J's indication) because it was not in the Defendant's OPCB – the Defendant did not have an OPCB and anything it had done had been using the wrongfully-obtained funds. The Claimant also argued that the business was highly speculative and that there was a high risk of failure and loss of funds.
Morgan J agreed with both points, and decided that spending the money on the business was in itself a form of dissipation which ought to be restrained. Nor was the Judge inclined to permit it in the exercise of his discretion (noting that a Court making a WFO may permit use of the Defendant's funds (i) on legal expenses, (ii) on living expenses where the Defendant is a natural person, (iii) in the OPCB, and (iv) in the Court's discretion where the proposed use does not fall into one of the other exceptions).
After the inter partes hearing
The Defendant, apparently determined to leave no avenue unexplored, challenged Morgan J's decision in two ways. First, it applied to set aside Morgan J's order in the Chancery Division, on the grounds that additional evidence amounted to a change in circumstance since Morgan J's order and that this indicated that the Court should permit the spending after all.
The Defendant also appealed to the CoA against Morgan J's decision to prohibit the Defendant from spending on establishing the business.
The Claimant cross-applied to the Chancery Division to maintain the freezing order on the basis of new evidence, and applied to adduce the new evidence before the CoA to show that there was in fact a risk of dissipation after all, and Morgan J's decision on that was wrong. The Claimant also applied to strike out the Defendant's Chancery Division applications on the basis that it was abusive to try to argue the points again which Morgan had decided (and which they were actively appealing against in the CoA).
The Defendant agreed that a WFO should remain in place in any event, and abandoned its applications to the Chancery Division. However the Defendant persisted in its appeal, limited to seeking the removal from the WFO of the restriction on it developing its business. The Defendant argued that the OPCB exception should allow the spending of the company's funds on setting up a new business or, if that was wrong, that the Court was wrong not to exercise its discretion to permit it to do so.
The Appeal
The CoA granted permission to appeal promptly and agreed to expedite the appeal. The Judges apparently felt that, if the Defendant was prevented from developing its business immediately, it might lose a whole season of revenue. The Defendant argued that the decision must be reconsidered rapidly to prevent the Defendant's business from being "strangled at birth".
The Appeal was therefore heard, before Newey LJ, Arnold LJ and David Richards LJ, only three months after the first instance hearing.
The arguments made to the Court focussed on the authorities which explain the meaning and scope of the OPCB exception. There were some conflicting indications in the authorities, which indicated that generally the OPCB exception covers activity of a kind that the Defendant has a history of doing (rather like the usual exception from WFO for individuals of ordinary living expenses, which will be guided by their lifestyle before the freezing order was made), but also indicated that a Defendant would not necessarily be prevented from pursuing a new line of business under the OPCB exception.
Decision
The CoA agreed with the Claimant's argument that the Defendant did not have an ordinary course of business at the time when the WFO was made. Even though the Defendant had spent a substantial amount of money towards establishing the business, it could not be said to have an ordinary course of business as it had no employees, had not produced or manufactured any goods, and its warehouse premises remained empty. The CoA relied upon the recent cases of JSC BTA Bank v Ablyazov (No 3), Fundo Soberano de Angola v dos Santos, and Koza Ltd v Akcil, in deciding that the Defendants history of activity is an important part of the assessment of whether the proposed future activity falls within the OPCB exception. The Defendant had no history of activity, or business; merely a short history of expenditure.
The CoA explained that “the protection afforded by a freezing order could be significantly eroded if the defendant could claim that transactions fell within the “ordinary and proper business” exception when there was no benchmark against which the activities could be assessed.”
Having found that Morgan J was correct to decide that the Defendant's proposed spending was not within the OPCB exception, the CoA went on to consider whether his refusal to grant permission to the Defendant in any event was correct. It is to be noted that the Court in granting a WFO always has discretion to permit a given transaction or transactions even if outside the OPCB exception. Previous authorities have shed little light on the test which the Court should apply in making such a decision.
The CoA noted that the Judge did not explicitly find that the Defendant was a business that has no reasonable prospect of success or that it was doomed to fail. Rather, the Judge indicated that he was not in a position to assess the Defendant's prospects of success in its new business. In addition, there was no finding by Morgan J, or assertion by the Claimant, that the Defendant was acting in bad faith in setting up the new business.
The CoA concluded that the Judge's concerns about the proposed business, expressed in terms of ‘Question marks’, ‘real risk’ and the fact that the business could be described as ‘speculative’ "do not provide adequate reasons for preventing trading”. Expenditure by the Defendant to set up its fledgling business should therefore have been permitted.
Discussion
The decision is interesting to commercial litigators because of how low the Court appeared to set the threshold test for permitting a Defendant who is subject to a WFO (and who has therefore been found to present a real risk of dissipation of its assets) to enter into transactions which do not fall within the OPCB exception.
The CoA said that the Judge was wrong to refuse permission because he had not found that there was any impropriety in setting up the business, or any assertion of bad faith. The Judge's assessment of the riskiness of the business venture, the CoA thought, was not enough to justify his preventing the transactions from proceeding, even though on balance he considered the business to be speculative and to present a real risk of failure (and therefore of loss of the funds and inability of the Claimant to enforce a judgment of the Spanish courts in due course).
The effect of the CoA’s decision seems to be that where a transaction is outside the “ordinary course of business”, the court should exercise its discretion to permit the transaction provided it is not “improper” because it is done in bad faith or so risky as to amount to misconduct. Put another way, the only transactions which the court should exercise its discretion to exclude are those which are done with some nefarious intent or involve risky transactions which the Judge concludes have no prospect of success at all or are improper and in breach of the obligations of a director. This is the case even if the venture which is permitted could result in the loss of the Defendant's assets and inability to enforce a judgment.
The decision therefore affects quite significantly the protection afforded by a freezing order. This case might be seen as establishing that, despite the long-established practice of including the OPCB exception in a WFO, a transaction may be permitted by the Court where it is not “ordinary”, provided it is “proper”.
The Future
It seems likely that this decision will give rise to further cases in which the Court considers the guidance given by the CoA, where a Defendant to a freezing order seeks permission to use its funds in ways outside the OPCB exception. It may well be that future cases mitigate the apparently dramatic effects of the CoA's decision in this particular matter.
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