Overview Of Liquidator Freezing Order Undertaking In Damages
Liquidator freezing order undertaking in damages was a matter that slid up to the Court of Appeal in an icy-looking encounter in the case of Hunt v Ubhi [2023] EWCA Civ 417 (“the Black Capital Case”) based on the lead judgment fleshed out by Lord Justice Newey.
The Provisional Liquidator gave an undertaking limited to the assets in the Provisional Liquidation of an entity referred to as Black Capital.
The appellant, Mr Ubhi, appealed against the continuation of the Liquidator’s freezing order. By paragraph 39 of the judgment the order had all but melted away.
The Provisional Liquidator, Mr Hunt, was concerned it seems that Black Capital may have operated a Ponzi Scheme with creditors in the potential region of the eye-watering telephonic sums of £35,000,000 to £50,000,000.
This post considers what the Court of Appeal referred to as Issue 1:
Was the Judge wrong to accept a limited cross-undertaking from Mr Hunt?
What Is An Undertaking In Damages
Ordinarily, a freezing injunction or freezing order application will require the applicant to provide an undertaking in damages.
The undertaking in damages is a promise by the applicant to the Court that if the freezing order causes losses to the defending party, who is required to freeze their assets and they suffer loss, the applicant is required to make good that position.
The basis of a freezing order is to safeguard the assets of a party against whom a claim is typically to be brought and to prevent the defendant from rendering themselves penniless through dissipation and distancing property to defeat creditors.
Unlimited Undertaking In Damages
The usual rule is that the undertaking in damages to be provided for an application for a freezing order is unlimited:
… the Court of Appeal in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139, [2016] 1 WLR 160 (“Pugachev”). The Judge noted that in Pugachev Lewison LJ had said that “[t]he default position is that an applicant for an interim injunction is required to give an unlimited cross-undertaking in damages“, that there is a possible exception “where the applicant has no personal interest in the litigation and is bringing the action on behalf of others” and that “the burden is on the applicant to show why they should not be required to give an unlimited cross-undertaking in damages”: see paragraphs 57-59 of the Judgment.
The undertaking in damages required is subject to the following considerations:
- The extent of the undertaking is a matter of judicial discretion.
- The Default Position is the undertaking is unlimited (“the Default Position”).
- The Default Position can conceivably be obviated from when the applicant has no personal interest ie. such as a Liquidator who in effect is bringing litigation for the benefit of others.
- Liquidator litigation does not mean the requirement for an unlimited undertaking is removed.
- Consideration can be given to the ability of creditors to indemnify the Liquidator.
- The ability to obtain insurance may be relevant.
- Defendant does not need to show the freezing order is probably likely to cause loss before an unlimited undertaking is required.
- The provision of security is separate from the extent of the undertaking to be provided.
Rationale For A Liquidator’s Limited Undertaking In Damages
In the case of an insolvent company such as one that goes into Provisional Liquidation where the Liquidator is a stranger to the affairs of the company / insolvent entity concerned having no direct personal interest other than to act as a person looking to safeguard the property; it is not uncommon for the Insolvency Practitioner to look to limit the undertaking in damages to the assets of the insolvent estate.
There is therefore a perfectly reasonable rationale for such a limited undertaking in damages when a freezing injunction is sought by a Liquidator.
In general terms if a company’s property has been dissipated, removed or distanced due to the conduct of a party such that there is nothing left then it is axiomatic that there will be nothing in the company available to discharge an undertaking in damages.
The test for obtaining a freezing order is a high one that necessitates full and frank disclosure from the applicant, real concern about assets being at risk of dissipation and a good claim against the party from whom the order is sought. To descend to brass tacks there appears to have been some properly suspected misconduct (inadvertent or otherwise) with assets at risk, all of which can be evidenced.
The thinking is it might go against the grain for a party to hoover up company assets improperly and for the Liquidator to be unable to obtain a freezing order to assist in the recovery of those assets because he or she cannot provide an unlimited undertaking in damages.
Why should a Liquidator jump into what is conceivably the unknown and volunteer their personal wealth as security for an undertaking in damages? They do not have a direct interest in the assets so should they not be afforded the cushion of a soft landing? Their interest is to pursue the real and honest purposes of the Liquidation in the interests of creditors as a whole. The assets in question are the property of the Insolvent Estate.
Even if creditors provide an indemnity; it is not the same thing as cash in the bank.
Further, a freezing order would not ordinarily be granted in the first place unless the Court has been provided with some good evidence that demonstrates the case the Insolvency Practitioner is concerned about.
Rationale For A Liquiator’s Unlimited Undertaking In Damages
However, for the very reason that a Liquidator’s undertaking perhaps should be limited to the assets in the Insolvent Estate the argument for a limited undertaking could be completely flattened when there are no assets.
Why? Because the undertaking is potentially utterly worthless when there are no assets.
Black Capital Liquidator Undertaking In Damages
In the Black Capital case, the undertaking offered by the Provisional Liquidator was set out as follows:
In his first witness statement, Mr Hunt simply confirmed that he was prepared to “undertake to meet any award of compensation that the Court may make save that this undertaking shall be limited to the amount of money and the net realised value of the unpledged assets in the estate of Black Capital less the costs, expenses or other disbursements of the liquidation“.
The Court of Appeal was concerned that the Default Position was not in the circumstances of the case one to depart from even though the Liquidator was acting in the interests of all creditors. That is a) part and parcel of Liquidator duties and b) certain of the creditors (the petitioners) had heavily invested in Black Capital whereby they might be owed more than £18 million.
It also appeared concerned about how conceivably worthless the undertaking in damages was.
In reality, it is likely in the case when a freezing order is sought in a Liquidation when there are claims arising from assets maneouvres prior to Liquidation then it is axiomatic that a limited undertaking could be worthless.
The Court of Appeal was concerned that the judge of first instance had also not considered the third-party funding and insurance position particularly. However, the Court of Appeal said it was for the Provisional Liquidator to show why the undertaking in damages should be limited, not for the defendant, Mr Ubhi, to demonstrate otherwise. The Default Position was a powerful motive it seems for the Court of Appeal to set aside the freezing order.
Oliver Elliot General Observations On A Liquidator’s Limited Undertaking In Damages
There is an important point in general terms about Liquidators providing undertakings in damages to support freezing orders when seeking to recover assets.
The Default Position is that a Liquidator (as indeed anyone else) is required to provide an unlimited undertaking in damages. This appears to be fundamental to an application for a freezing injunction.
However, there is no getting away from the fact that the freezing order is a tool in the asset recovery merchant’s toolbox that exists to provide a real as opposed to remote route to fetter asset distancing to defeat creditors. If this remedy is typically not readily available unless an unlimited undertaking is provided then Liquidators may be less inclined to apply for freezing injunctions and the consequences may be felt in the form of fewer creditor recoveries.
In general terms, it is very unlikely a Liquidator would seek a freezing order without good reason. It is an expensive procedure and the Court does not hand them out like Smarties in any event. It requires full and frank disclosure and will usually go through the evidence carefully. Remedies are still available to a defendant when one is sought improperly in any event.
One may wonder therefore if the insolvent Liquidations regime should enable complete equality for victims (creditors) who can suffer serious financial consequences with those who may have caused them avoidable losses. There are perhaps many who may say the creditors’ interests ought to dominate and that there is a conceivable conflict of views on how the limited liability company should be permitted to operate.
As a result, in general terms, the broader question this post might present is, if Liquidators will face an uphill struggle to obtain a freezing order without providing an unlimited undertaking in damages, how that could be fair to creditors? Particularly if it were to result in parties in an insolvency who held the steering wheel up to a few seconds before the crash, risk being able (perceived or otherwise) to reach for the ejector lever to avoid being caught up in the flames of insolvency and then unbuckle the parachute with one tap, fasten their suit jacket and stroll off into the night.
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