In the recent case of Kevin Taylor v Van Dutch Marine Holding Ltd and others, the UK High Court decided that the exercise of existing rights by a secured creditor should not be regarded as a disposal by a defendant, and as a result, enforcement by a secured creditor is not an infringement of a freezing order. The High Court also clarified that it is not necessary for a secured creditor to bring an application for variation of the freezing order.
The Claimant claimed that the four Defendants in the case were jointly and severally liable on a bridging loan. The Claimant applied for a freezing order, and judgment was entered against the four Defendants in August 2016. The Claimant had charges over certain boats, hulls and shares caught by the freezing order. There was also further litigation concerning, amongst other things, disputes over disclosure and the ownership of some of the second Defendant’s assets.
The application for a variation of the freezing order was brought by TCA, an intervening third party. TCA was a secured creditor of the second Defendant, who had given a debenture to TCA in November 2014 to secure a facility. The debenture included a fixed and floating charge (which covered the assets that were part of the ownership dispute), and TCA’s enforcement rights included the right to appoint a receiver. There was no dispute about the validity of the charge.
Mann J held that, in the absence of authority, “principle does not stand in the way of a secured creditor enforcing its security over charged assets caught by a freezing order“. The Judge noted that a freezing order is intended to operate personally against defendants and that its purpose is to prevent defendants from disposing of assets. The freezing order does not affect the genuine rights of third parties. The Judge observed that enforcing security is not a form of dissipation because “the secured debt already exists and the secured property is already encumbered with it“. He noted that “strictly speaking a chargee or a mortgagee, in a normal case, would not need to obtain a release or variation of the freezing order“. In this case, the injunction was “in familiar form“.
In Gangway Ltd v Caledonian Park Investments (Jersey) Limited (2001), the High Court suggested that a secured creditor is “under some sort of duty to apply for permission to exercise its security“. Mann J considered that this was not the correct interpretation of existing case law. He held that, where Lord Denning says that a bank “must not dispose of [the assets] itself, nor allow the defendant or anyone else to do so – except by the authority of the court” (Z Ltd v A-Z and AA-LL (1982)), this did not cover situations where the bank has its own rights and where the bank is not facilitating the dissipation of assets by the defendant. Mann J also considered that it would not be practical to require a secured creditor to make an application each time it wanted to enforce security caught by a freezing order as this would result in unnecessary costs since, in almost all cases, a claimant would not be able to object to the application.
The Claimant also argued that, since there was a dispute about the ownership of some of the assets caught by TCA’s charge, the application should wait until ownership was determined. In addition, the Claimant noted that it might be decided that some of the other Defendants were the ultimate owners of those assets and so allowing enforcement might permit dissipation of those Defendants’ assets. Mann J did not find these arguments compelling. He noted that, in this particular case, resolution of the disputed ownership was not certain. In any case, if the second Defendant did not have title to those assets, TCA would commit a wrong against the true owner and would have to account for the proceeds. However, enforcement would not be an infringement of the freezing order since the purpose of a freezing order is not to protect the rights of the true owner of the assets.
Mann J also dismissed the argument that the application should be delayed since there was no urgency to hear it now. He noted that, if there was something that needed to be decided as between the Claimant and TCA, this would be significant enough to delay the application until the issue was resolved, but that this was not the case here. In addition, any concern that the approval of the variation could be perceived as the Court’s approval of the second Defendant’s title could be addressed by adding a “for the avoidance of doubt” provision to the order.
In the event that it was incorrect to find that the application by TCA was not necessary, Mann J held that, on the facts, the variation was justified and should be granted. He noted that “the court should be sympathetic to a third party that wishes to have clarity“.
This decision clarifies the position for secured creditors wishing to enforce security that is caught by a freezing order. In a normal case, a secured creditor does not have to make an application, however, where the facts are more complex, a secured creditor may want to take a cautious approach and apply for a variation. This case highlights that a secured creditor wishing to enforce should consider the following things before enforcing without an application:
- Whether the charge is valid;
- Whether the freezing order is in familiar form;
- Whether there is any issue or dispute between the secured creditor and the beneficiary of the freezing order; and
- Whether enforcement could be seen as collusion or might be in bad faith.
A claimant applying for a freezing order should assess whether any of the assets within the scope of the injunction have been given as security and whether that security is likely to be enforced. Where enforcement arises in a typical freezing order case, claimants who benefit from a freezing order should be aware that they will find it difficult to challenge enforcement. Claimants should consider whether there are any circumstances that might bring the factual scenario outside the standard case, such as any questions over priority of charges.