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Journal of Business Law2004

Pre-emptive orders against evasive dealings: an assessment ofrecent trendsPeterDevonshire

Subject: Company law. Other related subjects: Civil procedureKeywords: Corporate liability; Evasion; Interim injunctions; Interim remedies; Transfer ofassetsLegislation: Senior Courts Act 1981 s.51Civil Procedure Rules 1998 (SI 1998 3132) Part 6 r.6Civil Procedure Rules 1998 (SI 1998 3132) Part 19 r.19Insolvency Act 1986 s.214Cases: Lister & Co v Stubbs (1890) L.R. 45 Ch. D. 1 (CA)Tonghae Sonbank Co Ltd v MIT Metal Ltd (Unreported, March 17, 2000) (QBD)McDonnell Associates Ltd v Silverstreet Plc (Unreported, September 5, 2001) (QBD)Mareva Compania Naviera SA v International Bulk Carriers SA (The Mareva) [1980] 1 AllE.R. 213 (CA (Civ Div))Norwich Pharmacal Co v Customs and Excise Commissioners [1974] A.C. 133 (HL)*J.B.L. 357 When a company is subject to legal proceedings, its controller may cause thecompany to divest assets in order to thwart an adverse judgment. If an individual hasoperational control of a network of companies, assets may be transferred to an entity that isimmune from the proceedings. Such conduct is an abuse of the court's process andprejudicial to the interests of the claimant in particular, and creditors in general. Historically,interlocutory injunctions and ancillary orders have had limited success in combating theseinitiatives. However, recent decisions reveal that measures can be taken against companycontrollers and third parties in the early stages of litigation to unravel evasivedealings andimpose appropriate sanctions. In this regard freezing orders are being employed withincreasing vigour against controllers, defendant companies and third party transferees.This reflects a flexible and purposive approach towards interim relief which is also evident inrelation to orders for costs and disclosure. Cumulatively these developments represent a

significant response to a particularly vexing aspect of pre-judgment evasion.IntroductionModern litigation poses some unique challenges to the court's authority. The outcome ofinterlocutory proceedings may have a profound bearing on the future course of an action,yet orders can be readily thwarted by the manner in which the defendant arranges hisaffairs. This is particularly evident when individuals exercise operational control of a networkof companies and have the ability to direct the transfer of assets between these entities.Such persons may act in a formal capacity as directors, or indirectly through others. For theunscrupulous there is the obvious temptation of divesting a company's assets if it is subjectto legal proceedings.*J.B.L. 358 In the main, injunctions and ancillary orders have had limited success incombating these initiatives. Existing remedies and procedures are equal to the task but it is

apparent that they are not always deployed to best advantage. This is exacerbated by thefact that in the absence of personal liability, company controllers may have only aperipheral role in the proceedings.It will be argued that various measures can be invoked as part of a broad strategy tounravel a company's dealings and expose its controller to a degree of personalaccountability. With regard to the latter, it is beyond the scope of this article to explore thelimited circumstances where a cause of action against a company can be imputed to itscontrolling mind.1 Instead, inquiry is directed to whether the controller can be renderedaccountable for the economic consequences of frustrating the court's process and


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prejudicing the interests of creditors.2 Attention will also focus on procedural initiatives aswell as substantive claims that can be advanced against such persons in the early stages oflitigation. The final section will specifically address the expanding role of interlocutoryinjunctions in restraining assets held by third parties.3 Particular emphasis will be placed onrecent decisions and the guidance they offer.

The nature of the problemUntil recent times there was clear judicial resistance to the pre-trial restraint of assets.Consequently a claimant was usually powerless to prevent the dissipation of assets4 or theirremoval from the jurisdiction of the court.5 This state of affairs was entrenched in Lister &Co v Stubbs,6 where a unanimous Court of Appeal *J.B.L. 359 denounced attempts torestrain an alleged debtor from parting with property before the claim against him hadbeen established by judgment.7 Ultimately Lister v Stubbs cast a long and enduring shadowon legal thinking,8 inhibiting the dispensation of relief in situations where property could,and probably would, be spirited away from the grasp of a meritorious claimant.Today there is a pronounced focus on protecting the integrity of the justice system as wellas the rights of individual litigants. This finds expression in a more purposive and flexibleapproach to interim relief. Nowhere is this more evident than in the robust response offreezing injunctions9 to pre-judgment evasion. Initially the Mareva jurisdiction focused on

foreign defendants because the case for restraining assets was seen as particularly pressingin respect of parties with limited ties to the jurisdiction.10However it was soon recognisedthat the desire to prevent a claimant from obtaining satisfaction of a judgment was notconfined to any particular class of defendant.11 Parties resident within the jurisdiction wereequally capable of transferring assets beyond the territorial reach of the court or dissipatingproperty within the jurisdiction. In fact, in the 25 or so years since the adventofMareva relief, the emphasis has shifted from foreign12 to domestic defendants.The most pressing challenge is posed by individuals who use a company, or notuncommonly, a network of companies, as a vehicle for their operations. This may be alegitimate commercial undertaking in respect of which certain individuals have structuredtheir affairs so as to avoid personal liability and minimise tax obligations. Conversely theentities may have been formed as a front for the growth industry of banking and investorfraud. Experience suggests that a network of companies subject to the operational control of

an individual, or related individuals, is an ideal arrangement for dissembling the nature,value and *J.B.L. 360 location of assets. Moreover the relationship between theentities inter se and their further relationship to a common controller may be obscure,particularly if the latter is acting through nominees, or serving as a shadow director. Iflitigation arises against one or more of the companies it is often the case that theircontrolling mind is immune from personal liability. Despite playing a pivotal role in thecompanies' affairs the individual in question is usually classed as a non-party to theproceedings.13If a particular individual can be identified as the controlling mind of both the transferor andtransferee, or if it can be demonstrated that a company has been operated as a sham forthe purposes of fraud,14the court may be invited to pierce the corporate veil15 and treatreceipt by the transferee as receipt by the individual who controls it.16 Moreover, where anindividual instigates an unauthorised transfer of property from one company she controls toanother, her knowledge can be imputed to the transferee, exposing the latter to liability forknowing receipt.17 However such relief is only exceptionally granted and requires persuasiveevidence at a stage in the proceedings when supporting evidence is often unavailable.In this setting a claimant who seeks to freeze a company's assets may face profoundpractical problems, particularly where a company and collusive non-parties have arrangedtheir affairs so as to stultify this process. The resultant arrangements may be sophisticatedand cloaked with apparent legitimacy. For example, litigation may trigger the transfer ofassets from a defendant company to an entity that is not implicated in the proceedings.


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Ostensibly the disposition may have been made in satisfaction of inter-company debts. Inreality it may be nothing more than disguised asset-stripping. At an interlocutory stage theclaimant may be hard pressed to dispute the validity of such transactions.18The nature ofthe prior obligation between transferor and transferee and the consideration -- or moreelusively, the true consideration -- may require time consuming investigation. In themeantime it may be unclear whether the *J.B.L. 361 disposition can be classed as an

exercise in dissipation. This is aptly illustrated in Hurrell v Fitness Holdings EuropeLtd.19 The defendant company sought to discharge a freezing order notwithstanding theimminent sale of its business. The defendant was a wholly owned subsidiary of a non-UnitedKingdom parent company. The latter had lent money to the defendant and it was likely thatthe defendant would repay the loan from the proceeds of sale. In this event there was theprospect that the funds would be removed from the jurisdiction. Cooke J. emphasised thatfreezingorders were not intended to prevent a defendant from carrying out its ordinarybusiness activities and paying its debts as they fall due. In this regard his Lordshipdischarged the injunction having formed the view that the defendant's indebtedness to itsparent company was a legitimate financing arrangement.There is another facet to the problem. The standard freezing order is prohibitory in form. Itis therefore ineffective in respect of assets that have already been divested. In exceptionalcases the court may order parties, including the director of a defendant company,20 to take

positive steps to recover property.21 However, the transferee may in turn have alienatedassets to an independent third party, for example, by payment into an overdrawn bankaccount. It would no longer be possible for the director of the original transferor (or theimmediate transferee) to restore the funds and he would therefore be in breach of theinjunction. There must be serious concerns as to the propriety of an order which imputesthe substantive defendant's liability to a non-party and renders the latter personally liablefor default.22These difficulties are compounded when, as is not uncommon, company controllers aredomiciled abroad. While a detailed discussion of the jurisdictional implications is beyond thescope of this article, it should be noted that there have been a number of recentdevelopments in respect of proceedings ex juris. In England the service of process is thefoundation of the court's in personam jurisdiction. Hence the rules as to service define the

scope of the court's jurisdiction.23

The relevant provisions governing service out of thejurisdiction are now covered by CPR r.6.1924 (where permission of the court is not required)and r.6.2025 (where permission is required).26 Where proceedings arebrought against persons domiciled in a Member State of the EuropeanCommunity,27 Regulation *J.B.L. 362 44/2001 (the Judgments Regulation)28 providesthat provisional, including protective measures, can be granted by a Member State in aid ofproceedings before the court of another Member State.29 However, there may beuncertainty as to the outcome of such applications because each State recognises andapplies different protective remedies.30 Furthermore, it must be established that the reliefclaimed falls within the scope of the Judgments Regulation and that there is sufficientterritorial connection between the measures sought and the jurisdiction of the assistingcourt.31 More general concerns arise where claims are pursued outside the EuropeanCommunity. Here particular regard must be had to the likely attitude of the foreign court to

the proceedings,32 and English courts are generally cautious in allowing process to be servedon foreign persons out of the jurisdiction.33 The English court must also be satisfied thatEngland is the forum conveniens.34 In this regard the burden lies on the claimant toestablish that service should be permitted on a foreign defendant.35

Interlocutory orders against company controllersWith the above considerations in mind, attention will now focus on measures which can betakenagainst parties who are in a position to direct the transfer of assets from onecompany to another.


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Norwich Pharmacal orderIf non-parties have been instrumental in mobilising assets as part of a scheme of evasion, itis appropriate that the court should elicit information from them directly. To this end,a Norwich Pharmacal36 order can be utilised to gain *J.B.L. 363 immediate disclosure ofinter-company dealings.37 ANorwich Pharmacalorder is directed to persons who havebecome embroiled in the defendant's affairs and acquired knowledge of its

wrongdoing.38 Significantly, a Norwich Pharmacalapplication can be directed to innocentthird parties39against whom there is no cause of action.40 When the order is granted, thirdparties come under an immediate obligation to assist the court regardless of their status inthe proceedings.41 The order usually requires the respondent to identify persons who haveinfringed the claimant's rights, although it has been used for wider purposes42 in furtheringthe claimant's case.43This evolving jurisdiction was recently noted by *J.B.L. 364 theHouse of Lords in Ashworth SecurityHospital v MGN Ltd.44 Lord Woolf C.J. observed thatwhile such orders are an exceptional form of relief which should be granted with caution:The limits which applied to its use in its infancy should not be allowed to stultify its usenow that it has become a valuable and mature remedy.45Clearly the order is emerging as a useful adjunct to the claimant's procedural armoury whenit is necessary to identify the recipients of company assets and the circumstances under

which they were transferred.

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Strictly, the latter could be considered to be collateral tothe Norwich Pharmacalinquiry. However, disclosure may be directed even though it isrelevant for other purposes. The nature of the information that will be revealed is merely afactor for the court to consider in deciding whether the order should be made, and if so,whether the applicant should be precluded from using disclosed material for otherpurposes.47In addition there are important costs implications to Norwich Pharmacalapplications. Therespondent may object to disclosing the requested information. Indeed there may be validreasons for doing so, for example, where a duty of confidentiality is owed to the affectedparties. Ultimately the matter may have to be resolved by legal proceedings. The generalrule is that the respondent is entitled to recover the costs of such proceedings from theclaimant.48 This was recently reiterated by the Court of Appeal in Totalise plc v The MotleyFool Ltd.49 In this case the claimant sought to establish the identity of individuals who had

posted allegedly defamatory statements on the discussion board of a website operatedby *J.B.L. 365 Interactive Investor Ltd (Interactive). Interactive declined to identify theauthors of this material, citing inter alia, confidentiality provisions in its standard contractand restrictions imposed by the Data Protection Act 1998. In the absence of a court order,Interactive was concerned that it may incur liability for voluntarily breaching its legalobligations. Owen J. directed Interactive to furnish the requested information and awardedcosts against them. Interactive appealed the order for costs.The Court of Appeal held that Interactive had legitimate grounds for resisting the claimant'sapplication until the status of its demand was determined by the court. Therefore theclaimant was liable to Interactive for the costs of the application and disclosure. While thisreflected the general approach to costs in Norwich Pharmacalproceedings, their Lordshipscautioned:That does not mean that a party who supports or is implicated in a crime or tort or seeksto obstruct justice being done should believe that the court will do other than require thatparty to bear its costs and, if appropriate, pay the other party's costs.50If a Norwich Pharmacalorder is sought against the controller of a defendant company, itcan be anticipated that the controller will oppose the order if he instigated the dissipation orconcealment of company assets. In such situations courts should be mindful of the sanctionof a costs order againstthe respondent, as countenanced by the Court of Appeal in Totalise.

Examination on disclosure affidavit


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It has been noted that a freezing order in standard form is ineffective if, prior to the order,the defendant's assets have been transferred to a third party. However, the injunction canbe a stepping stone to further relief. Commonly a Mareva defendant is required to discloseon affidavit the location and value of its assets.51 Where the defendant is intent onconcealing its financial affairs the information is often deficient. The claimant is not withoutredress. The court has the power to grant ancillary orders to ensure that an injunction is

effective.52

In this regard, the defendant can be subject to cross-examination on hisaffidavit.53 Where a company's only effective officer has caused the dissipation or removal ofassets, it is appropriate that this person should be examined in respect of perceiveddeficiencies in his disclosure affidavit.54*J.B.L. 366 Moreover, the deponent may have played a pivotal role in the company'sconduct in respect of the substantive proceedings. An examination on the controller'saffidavit presents an opportunity to elicit information about her personal actions and thoseof the company. It is considered undesirable that Mareva proceedings should be utilised toextract material upon which to build the claimant's case in the main action. Nevertheless ithas been conceded that whilst the court must be astute to guard against abuse ofthe Mareva process, as where the controller of a company is required to submit to cross-examination, there may be circumstances where the inquiry may trespass on substantiveissues in the interests of justice.55

Joinder to proceedingsIn the absence of personal liability, a director or a de facto controller must be classed as anon-party in proceedings against a company. However that does not preclude the joinderof such persons, albeit as a nominal defendant.56 The court has wide powers to add partiesto the proceedings. CPR r.19.1 (2) provides:The court may order a person to be added as a new party if --(a) it is desirable to add the new party so that the court can resolve all the matters indispute in the proceedings; or(b) there is an issue involving the new party and an existing party which is connected to thematters in dispute in the proceedings, and it is desirable to add the new party so that thecourt can resolve that issue.In practice non-parties are usually added if their participation may assist the court or

facilitate the enforcement of its orders. This includes on the one hand, innocent non-partieswho are entirely disinterested in the outcome of the proceedings, such as banks,57 and onthe other, potentially collusive parties such as the spouse of a personal defendant.58In the context of the claimant's attempts to unravel a course ofdealings between variouscompanies, there are clear advantages to joining a common controller to the proceedings sothat he may be subject to the usual interlocutory processes including disclosure andinterrogatories. In the case of joinder of parties domiciled outside England and Wales, theclaimant will have to satisfy CPR r.6.20(3)(b).59 Whilst this is expressed in broadly similarlanguage to CPR r.19, *J.B.L. 367 there is the additional requirement that the party to beserved must be a necessary or proper party to the proceedings. The scope of thisprovision was addressed in United Film Distribution Ltd v Chhabria60 where the Court ofAppeal suggested that the power to permit service under CPR r.6.20(3) is not less widethan the court's wide power to add or substitute a party under rule 19.1(2).61 Neverthelessit must be acknowledged that proceedings against an overseas director pose additionalchallenges to the claimant. The court in its discretion must be satisfied that England is theappropriate forum for the action.62 Moreover a person out of the jurisdiction is not a properparty within CPR r.6.20(3) unless there is a good arguable case for liability against him.63

Costs orderIf a third party has caused the transfer of assets from an entity that is subject to legalproceedings, with intent to render the transferor judgment-proof, this must surely beperceived as an abuse of the court's authority. This warrants a response that is proportional


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to the gravity of the conduct and reflects the nature of its impact on the proceedings. In thisregard s.51 of the Supreme Court Act 1981 confers broad discretion to award costs,64 interms which do not preclude an order for costs againstnon-parties.65 While guidelines havebeen suggested,66 the categories of case in which orders for costs can bemade against non-parties is neither rigid nor closed.67Costs ordersagainst non-parties are only granted in exceptional cases,68 where in all the

circumstances it is just to exercise the statutory power.69

There is added *J.B.L.368 caution in respect of company directors. In most cases a controlling director will not bepersonally liable for instigating or defending proceedings where the company is unable tomeet the opposing party's costs. This would otherwise undermine the separate legal statusof a company and its distinct liability in proceedings.70 This approach has recently beenaffirmed by the Court of Appeal in Floods ofQueensferry Ltd v Shand ConstructionLtd.71 Writing the leading judgment Buxton L.J. emphasised that the court will usually onlyintervene where there are doubts as to the bona fides of pursuing an action, and theconduct of a non-party is so exceptional that it is just and reasonable for a costs order to bemade against him.72It is submitted that there is an important distinction between litigating with knowledge thata company will be unable to meet its obligations, and deliberately creating that state ofaffairs. While ordersagainst non-parties are only granted in exceptional cases,73 their

expanded application would surely be an apposite response to conduct that is calculated tothwart a freezing order and frustrate the ultimate judgment of the court. This form of orderalso redresses the claimant's vulnerability in respect of the company's liability for costs ifthe claimant obtains judgment.The utility of a s.51 order was illustrated in Blugilt Peterlee Ltd v SLS EngineeringLtd.74 Proceedings were brought by the claimant company, Blugilt Ltd, for payment under acontract for the supply of storage tanks. The defendant counterclaimed for damages formanufacturing defects. Subsequently, in October 2000, the directors of Blugilt Ltd causedthe company to cease trading and disposed of its assets. The company neverthelesscontinued with the litigation, receiving the necessary funding from Blugilt Holdings Ltd andrelated entities. The following year, when the defendant became aware of thesedevelopments, it applied for an order that the relevant directors and Blugilt Holdings pay its

costs from October 2000. It was held that these circumstances were sufficiently compellingto warrant a s.51 costs order against Blugilt Holdings Ltd and the directors. The latter haddecided to pursue the action when they knew that Blugilt Ltd did not have any assets tomeet a potential judgment or costs.75If a director is domiciled outside England and Wales a s.51 costs order can be enforcedoutside the court's jurisdiction. In National Justice Compania Naviera*J.B.L. 369 SA vPrudentialAssurance Co Ltd (No.2),76 C, a sole shareholder, caused his company to litigatea fraudulent insurance claim in England. C was a non-party to the proceedings anddomiciled in a contracting state to the Brussels Convention. The defendant sought torecover costs from C who unsuccessfully argued that he could only be sued in the state ofhis domicile as provided by Art.2 of the Brussels Convention.77 The Court of Appeal held thata costs application did not constitute suing a party in the sense of pursuing a substantivecause of action as contemplated by that provision.78 This reasoning79 raises the prospect

that other ancillaryorders would similarly be upheld.80 In any event the status ofcosts orders in relation to service out of the jurisdiction has now been placed beyond doubtby an amendment to the Civil Procedure Rules.81

Reversing benefit of transaction defrauding creditorsA claimant may pursue a direct claim against third parties who have benefited from atransaction defrauding creditors. For the purpose of s.423 of the Insolvency Act 1986,liability arises in respect of transactions at an undervalue. That is, transactions entered intofor the purpose of putting assets beyond the reach of persons who may make a


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claim against the transferor, or transactions which may otherwise prejudice the interests ofsuch persons.82 When this occurs, the court may make an order protecting the interests ofpersons who are victims of the transaction.83 A claimant in civil proceedings would fall withinthe statutory definition of a victim84 and could therefore avail himself of the broadremedial provisions of the Act. These include the power to require payment in such sum asthe court directs in respect of benefits received from the debtor85 and the power to order

that transferred property be vested in a designated person.86

Such orders are not confined to transferees of the defendant's property87 and can extend tothe controller of a corporate defendant who causes the transfer of*J.B.L. 370 assets toanother entity.88While liability and the amount of compensation will usually be determinedat trial, a freezing order may be granted to preserve the claim.89

Liability to contribute to company's assetsA director (including a shadow director)90 can incur personal liability for trading a companywhen it cannot meet its debts. This will include situations where a company continues totrade after it has been stripped of its assets. If the company is wound up, s.214 of theInsolvency Act 1986 comes into play.91The section provides in part:[I]f in the course of the winding up of a company it appears that subsection (2) of thissection applies in relation to a person who is or has been a director of the company, the

court, on the application of the liquidator, may declare that that person is to be liable tomake such contribution (if any) to the company's assets as the court thinks proper.Subsection (2) defines the essential elements of wrongful trading:(a) the company has gone into insolvent liquidation,(b) at some time before the commencement of the winding up of the company, that personknew or ought to have concluded that there was no reasonable prospect that the companywould avoid going into insolvent liquidation, and(c) that person was a director of the company at that time.There are several advantages to proceedings under s.214. First, the cause ofaction against the defendant company does not have to be imputed to the director. Thismay often prove to be a difficult, if not insurmountable, hurdle because the director maywell have been assiduous in avoiding personal liability. Instead, the claimant merely has toallege that the director was responsible for wrongful trading.

*J.B.L. 371 Secondly, s.214 proceedings are not dependent on piercing the corporate veil.The controller's status as a director draws him within the ambit of the section and this is soeven if he acted as a shadow director.92Thirdly, this provision potentially gives recourse to a director's personal assets. It should beclarified at the outset that liability to contribute to a company's assets under s.214 isdistinct from proceedings to reverse a transfer of assets under the Insolvency Act. The latterarises in respect of transactions at an undervalue, transactions entered into by way ofpreference and transactions defrauding creditors.93Here, property wrongfully alienated mayrevest in the company as transferor. In contrast, s.214 proceedings do not impugn priordispositions, and the liquidator has no direct recourse to the director's personal assets.Nevertheless, such assets may ultimately be applied in satisfaction of the director's liabilityfor wrongful trading. By extension, as an interim measure, the assets may be subject to afreezing order. This argument has been advanced in two recent High Court cases.The first, Tonghae Sonbank Co Ltd v MIT Metal Ltd,94 was a without notice applicationbefore Longmore J. in proceedings by a ship owner against a charterer. A freezing orderhad previously been granted against two corporate defendants and the claimant moved toextend the order to the personal assets of Mr and Mrs Mann. The Manns were directors witheffective control of one of the defendants (MIT Metal Ltd). The application was made on thebasis of a future claim against the Manns by the liquidator of MIT under s.214 of theInsolvency Act 1986. At the time of the application a statutory demand had been served onMIT and the claimant was proposing to present a winding-up petition. Thus these


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proceedings were being entertained prior to a cause of action accruing against the Manns,and indeed, prior to the appointment of a liquidator to assert that cause ofaction.95 Anticipatory relief in this form represents a bold pre-emptive strike against parties exercising operational control of a company.In a brief oral judgment, Longmore J. accepted that there was a good arguable case thatthe affairs of the defendant company and the Manns were intertwined and that the latter

effectively controlled the assets of the former. His Lordship directed that Mr and Mrs Mannbe joined to the proceedings and that the freezing injunction should be extended to theirassets.A year and a half later in McDonnellAssociates Ltd v Silverstreet plc96 a similar applicationwas heard in inter partes proceedings. Like many cases of this kind it demonstrates theinterplay between different corporate entities subject to common control, the absence of adirect cause of action against their controllers and the resultant problems confronted bycreditors. In brief, the claimant, a firm of architects and project managers, was retained bySilverstreet plc in relation to a residential development in London. It was subsequentlydiscovered that a *J.B.L. 372 subsidiary, Silverstreet (Shad Thames) Ltd owned the landwhich was being developed. The claimant was not paid for work on the project. In theprocess of seeking a freezing order against Silverstreet plc it became apparent that thiscompany did not have any assets, although its subsidiary did. An order was

granted against the latter on the basis that the corporate division was a sham. In addition,the claimant sought to extend the injunction to cover the assets of two directors ofSilverstreet plc. Reliance was placed, inter alia,on Tonghae, and again an extendedargument was advanced: the company was subject to winding-up proceedings and thereforea liquidator would be appointed. There was evidence of wrongful trading and there was agood arguable case that the liquidator would have a cause of action against the directorsunder s.214. Goldring J. acceded to this submission and enlarged the freezing order tocover two individuals who controlled Silverstreet plc, both in law and in fact.97At this stage it is difficult to predict whether the initiatives takenin Tonghae and McDonnellwill gain widespread acceptance. Certainly the factsofMcDonnellwere extreme. There was cogent and detailed evidence that althoughSilverstreet plc had few assets and no income stream, it had incurred substantial debts

while continuing to trade. Effectively the company was financed by creditors. Indeed thedefendants did not dispute that there was a prima facie case of wrongful trading. Theoverall financial picture no doubt induced confidence that a liquidator would initiateproceedings against the directors for a contribution to the company's assets.98 It issubmitted that in similar cases where the evidence is sufficiently compelling, there is alegitimate role for direct proceedings against a company's guiding mind to ensure that suchpersons do not in turn frustrate the ends of justice by rendering themselves judgment-proof.Tonghae and McDonnellintroduce the role of interlocutory injunctions against parties whoare privy to a scheme of evasion or otherwise implicated in the defendant's wrongdoing. Theelements of this relief and its more general application will be elaborated in the nextsection.

Enjoining third party assetsThere have been significant developments in the use of injunctions against third partyassets. These developments are particularly relevant to the present discussion because notuncommonly the assets of a corporate defendant are transferred to an entity or individualwho is a stranger to the proceedings. Although the transferees have independent legalstatus, the circumstances of the disposition or the relationship between transferor andtransferee may provide grounds for *J.B.L. 373 challenging the transaction. This in turnmay provide a basis for enjoining the assets of a third party.

The underlying rationale


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If property is not beneficially the defendant's, by definition it is not an asset of thedefendant. AsFederalBank of the Middle East Ltd vHadkinson99 reminds us, such propertycannot, on ordinary principles, be the subject matter of a freezing order against thedefendant. This is the case whether the assets are held by the defendant100 or a third party.Yet recent jurisprudence has remorselessly eroded this principle. The process began with aseries of judgments where assets held by third parties were enjoined in aid of a

claim against the defendant. One rationalisation was that a third party such as a closerelative may be prone to follow the defendant's interests or directions. Effectively suchpersons may be holding property as a nominee. This was borne out in cases like CharteredBank v Daklouche,101SCF Finance Co Ltd v Masri,102TSB Private Bank International SA vChabra103 andMercantile Group (Europe) AG vAiyela,104 where property was owned orcontrolled by family members. Alternatively, assets have been enjoined on the basis thattheir disposition could potentially be reversed in the transferor's insolvency.105 In bothsituations an injunction against a non-party was rationalised on the ground that it wasancillary and incidental to a pre-existing cause of action against the substantive defendant.This was recently affirmed by the Court of Appeal in Yukong Line Ltd v RendsburgInvestments Corp106 where Potter L.J. accepted that it is now settled law that the court haspower to grant an injunction against a person against whom there is no direct cause ofaction provided that the order is ancillary and incidental to the claimant's cause of

action against a defendant.107The juristic basis for enjoining third party assets was reviewed by the High Court ofAustralia in Cardile v LED Builders Pty Ltd.108 In this case the Court approved the grantingof a Mareva injunction againstthird parties who exercised operational control of aninsolvent company. On the facts the decision did not break new ground. It was emphasisedthat there was an important distinction between enforcement of the court'sprocess against parties to an action, and orders extending to the property of strangers tothe proceedings. In respect of the latter an injunction may be appropriate in twocircumstances: (a) where a third party *J.B.L. 374 holds, or controls assets of thedefendant as potential judgment debtor, or (b) where a third party may be required todivest assets at the instance of a liquidator, trustee in bankruptcy or receiver, inproceedings to enforce a judgment against the defendant.109More significantly Mareva relief

was defined as one of equity's techniques for protecting the integrity of the court'sprocesses. Essentially such orders serve as an aid to the administration of justice. It maybe suggested that the breadth of this formulation hints at wider applications than the citedexamples suggest.The expansive -- and in some senses, creative -- definitions of the role of freezing orders inboth England and Australia have attenuated some of the traditional constraints on grantinginterlocutory injunctions. Nowhere is this more evident than in relation tothe Siskina principle.

Accrued cause of actionIn Siskina (Owners of cargo lately laden on board) v Distos Compania Naviera SA110 theHouse of Lords propounded the fundamental principle that an injunction must be foundedupon a pre-existing cause of action against the party enjoined.111 Understandably this hada pronounced effect in barring Marevarelief where a cause of action has yet to accrue. In AvB112 Saville J. (as he then was) made a spirited attempt to modify this position bygranting a form of anticipatory Mareva injunction. In this case the claimants had enteredinto a contract to buy a vessel from the defendants. It was alleged that when delivered thevessel would not be in conformity with the contract. At the time of application the plaintiffshad no cause of action against the defendants but Saville J. was prepared to grant aconditional Mareva injunction to take effect at a future date when the cause of actionaccrued.


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*J.B.L. 375 Although A vB was subsequently denounced by the Court of Appeal,113 itproved a harbinger of change.114 An important inroad was made in proceedings (or futureproceedings) under the Insolvency Act 1986. Cases such as Cardile and Aiglon Ltd v GauShan Co Ltd115 have accepted that a transferee's assets can be restrained if the defendant'sdisposition may potentially be reversed under the avoidance provisions of insolvencylegislation. Often an injunction is issued at a stage of the proceedings where the defendant's

insolvency has not been formally determined116

and prior to the appointment of a liquidator,administrator or trustee in bankruptcy. It follows that the decision to challenge certaindispositions lies in the future. Nevertheless it is apparent that the prospective nature ofthese proceedings is not a deterrent to injunctive relief. Moreover an injunction granted inthese circumstances is not dependent upon a cause of action being asserted by the plaintiff.The order is issued in favour of those who will assume conduct of the defendant's affairs, onthe basis of their potential right to avoid a transaction.117Again, it was seen in Tonghae and McDonnellthat the personal assets of a company directorcan be enjoined in respect of future proceedings for wrongful trading. And similarly, theclaimants had no direct cause of action against these individuals. Standing back from thesituation it is apparent that a claimant's case is contingent on a number of future events,some lying beyond his direct control. In s.214 proceedings, for example, the claimant maystill have to obtain final judgment. Thereafter the defendant's insolvency must be

established. To that end a statutory demand must be served and in the absence of aresponse the claimant may then present a winding-up petition. Significantly, at that pointthe claimant's involvement ceases and it rests with a liquidator to pursueproceedings against a director if he is satisfied there is an arguable case for compensation.

Injunctions in aid of a defendant's non-proprietary claimsCases such as McDonnelldisclose a further expansion of the role of injunctive relief. Thereare indications that courts are prepared to restrain assets in wider *J.B.L. 376 contextsthan the clawback provisions of the Insolvency Act. As McDonnellillustrates, it may sufficethat the order is in aid of general relief by the defendant or its liquidator against thirdparties for damages or compensation. And, as C Inc plc v L118 demonstrates, to that list canbe added a right of indemnity.In brief, the claimant obtained a freezing order in aid of execution in respect of debts

incurred by the defendant as an underwriter. The defendant's personal assets wereinsufficient to satisfy the judgment and the defendant deposed that she had been actingthroughout as trustee or agent for her husband, L. The claimant then obtained a freezingorder against L who applied to set the injunction aside on the grounds that there was nocause of action against him and that the assets were not held on behalf of his wife, thejudgment debtor. L's connection to the proceedings was tenuous. Indeed, Aikens J.accepted that L's assets were not beneficially owned by the defendant. Nevertheless, hisLordship upheld the injunction on the basis that the defendant may have a right ofindemnity against her husband as beneficiary or principal in respect of liabilities incurred ashis trustee or agent. There was jurisdiction under s.37(1) of the Supreme Court Act 1981 toappoint a receiver in aid of equitable execution, and this included cases where a judgmentdebtor had a right of indemnity against a third party. The judgment debtor was required topreserve that claim and could therefore be restrained by injunction pending theappointment of a receiver. By extension, third party assets that could be applied to satisfythe indemnity could also be enjoined.McDonnellcontinues the trajectory of this thinking. If a liquidator elects to pursue a claimfor wrongful trading against third parties, any proceeds would be an accretion to thecompany's assets. The obvious hurdle is that liability is faultbased and therefore the causeof action is purely speculative. The court's willingness to enjoin third party assets ispredicated upon a potential -- and uncertain -- liability to the defendant.119 Thus the basis


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of the injunction in McDonnellwas even more ambitious than in C Inc, where relief wasfounded upon a right of indemnity for quantified losses.

ConclusionRecent decisions indicate that a more flexible and purposive approach to interim relief isbeing adopted. This is particularly evident when courts are confronted with the cynicalmanipulation of companies and their assets to frustrate the viability of civil proceedings.

Predictably, freezing orders play a pivotal role when *J.B.L. 377 assets are on the move.The traditional constraints that fettered this relief are now being marginalised. In the retreatfrom formalism there is less preoccupation with a party's relationship to the substantiveproceedings. As a result third parties are increasingly being exposed to the court'sinjunctive powers. Similarly, there is greater receptiveness to proceduralinitiatives against individuals who have instigated the dissipation or concealment of assets.In this regard a more vigorous approach is being taken in directing disclosure by non-parties and imposing sanctions such as costs orders. These developments are to beencouraged, for it is surely preferable that a controller's role in proceedings should bedefined by the court instead of being ordained by his own conduct.This article is based on a paper presented at the Society of Public Teachers of Law AnnualConference held at De Montfort University, Leicester, September 2002. I am grateful to Guy

Higginson of Jackson Parton, Solicitors, for his helpful advice and for providing transcriptsofTonghae Sonbank Co Ltd v MIT Metal Ltdand McDonnellAssociates Ltd v Silverstreetplc. I am also grateful to Professor Robert Merkin for his helpful comments on a previousdraft of this article.J.B.L. 2004, May, 357-377

1.For recent discussion of this subject see S. Watson, Who Hides Behind the Corporate Veil? Finding a Way out of

The Legal Quagmire (2002) 20 Company and Securities Law Journal198. e.g. where property is vested in thedefendant as trustee or nominee. This would be the defendant's asset in the limited sense that she is the legal (but

not equitable) proprietor.2.

A delinquent director is personally liable to a company for the misappropriation of assets. Directors can also beliable in negligence for their conduct of a company's affairs. In addition, equitable remedies and procedures can be

invoked by a company, a liquidator or receiver, to trace property and impose ordersagainst third parties in casesof knowing receipt or dishonest assistance. These matters are usually determined in the substantive proceedings

and fall outside the scope of this article.[1980] 1 All E.R. 205.3.

The terms non-party and third party will be used interchangeably to denote strangers to theproceedings.[1985] 1 W.L.R. 876.

4.Mills vNorthern Railway ofBuenos Ayres Co (1870) L.R. 5 Ch.App. 621; Robinson v Pickering (1881) 16 Ch.D.

660; Newton vNewton (1885) 6 P.D. 11; Burmester vBurmester[1913] P.76.[1992] 1 W.L.R. 231.5.

There was however a personal process of arresting the defendant at the commencement of an action and detaininghim until he produced security for the plaintiff's claim. See Supreme Court Practice 1998, para.29/1/20.[1994]

Q.B. 366.6.

(1890) 45 Ch.D. 1. As Jones notes: You cannot get an injunction to restrain a man who is alleged to be a debtorfrom parting with his property. These words of Cotton L.J. in Lister v Stubbs were, until recently thought to state

for English lawyers a principle of general application. (G. Jones, The Rise of the Mareva Injunction (1980)11 University ofQueensland Law Journal133). Indeed, in Mareva Compania Naviera SA v InternationalBulkcarriers

SA [1975] 2 Lloyd's Rep. 509, Donaldson J. at first instance considered that on the authority ofLister v Stubbs he

lacked jurisdiction to protect a creditor by way of injunction before judgment (at 510). Aiglon Ltd v Gau Shan CoLtd[1993] 1 Lloyd's Rep. 164.

7.ibid. at 13perCotton L.J.[2001] 2 Lloyd's Rep. 113.

8.See, e.g. Powell & Thomas v Evan Jones & Co [1905] 1 K.B. 11; Att-Gen's Reference (No.1 of 1985) [1986] Q.B.

491; Police v Leaming [1975] 1 N.Z.L.R. 471. ibid. at 121.9.


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Formerly called a Mareva injunction. The term freezing injunction (or order) was introduced by the Civil

Procedure Rules 1998.(1999) 198 C.L.R. 380.10.

The shipping industry was particularly impacted by the downturn in the commodities and futures markets in themid 1970s. Foreign shipping companies incurred liabilities for repairs or stores in England and then found

themselves unable to meet these obligations. Similarly, disputes arose between owners and charterers when thelatter defaulted on their commitments under the charterparty hire. Some of these companies had little connection

with the domestic jurisdiction and operated under the flag of convenience of a remote jurisdiction that was

relatively immune from legal process. Coinciding with these developments, the abolition of exchange controlregulations in the UK liberalised the global transfer of funds into and out of the jurisdiction. ibid. at 405-406permajority reasons of Gaudron, McHugh, Gummow and Callinan JJ. In Yukong Line the Court of Appeal

stated that it was not necessary to identify the defendant's assets in the third party's hands ([2001] 2 Lloyd's Rep.113 at 123).

11.In early Mareva cases there was some doubt as to whether the order applied to domestic defendants (Rasu

Maritima SA v Pertambangan Minyak Dan Gas BumiNegara (Pertamina) [1978] 1 Q.B. 644 at 659). For sometime the question hung in the balance, but in Barclay-Johnson vYuill[1980] 3 All E.R. 190 Megarry V.-C. refused

to accept that the place of residence provided any Mareva touchstone. Two months later this case was expresslyapproved by the Court of Appeal in Rahman (Prince Abdul) vAbu-Taha [1980] 1 W.L.R. 1268 at 1272. This has

since been given statutory force by s37(3) of the Supreme Court Act 1981. See similarly New Zealand High CourtRule 236B.[1979] A.C. 210.

12.Typified in the 1970s by the one-ship Panamanian company.See Lord Diplock at 256, ibid. See further Mercedes

BenzAG v Leiduck[1996] 1 A.C. 284. In this context it was contemplated that the cause of action was justiciablein England. Therefore the English court was not competent to grant interim relief in aid of foreign proceedings. This

has been abrogated by the Civil Jurisdiction and Judgments Act 1982 (as amended by the Civil Jurisdiction andJudgments Act 1991) which confers statutory jurisdiction for the English court to grant interim relief in aid of

proceedings before a Convention state (see now Judgments Regulation, Art.31). This has been further enlarged bythe Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 (SI 1997/302) which empowers the High

Court to grant interimorders in relation to proceedings commenced anywhere in the world (see above fordiscussion of the procedural considerations under CPR r.6.20). In general English courts take a cautious approach

to granting relief. See Credit Suisse Fides Trust SA v Cuoghi[1998] Q.B. 818; Indosuez International Finance BV vNational Reserve Bank[2002] EWHC 774 (Comm).

13.Nevertheless the prospect of personal liability hangs over company directors by virtue of their fiduciary relationship

to a company. If funds or property are transferred between companies that are subject to common control, adirector may be in breach of his duties to the transferor. The same principle applies where a director causes a

company to incur a liability for the benefit of a related company which he controls. See further Re Pantone 485 LtdvBain [2002] 1 B.C.L.C. 266.[1989] 2 Lloyd's Rep. 423.

14.See Snook v London & West Riding Investments Ltd[1967] 1 All E.R. 518 at 528-529 where the elements of a

sham are discussed. Veracruz Transportation Inc vVC Shipping Co Inc[1992] 1 Lloyd's Rep. 353; Zucker vTyndallHoldings plc[1992] 1 W.L.R. 1127. See also Euro-National Corp Ltd vNZIBank(1991) 4 P.R.N.Z. 365; Re

Premier Electronics (GB) Ltd, The Times, February 27, 2001.15.

Adams v Cape Industries plc[1990] 1 Ch. 433; Ord vBelhaven Pubs Ltd[1998] B.C.C. 607.See Rowland v Gulfpac

Ltd[1999] Lloyd's Rep. Bank. 86, where Rix J. (as he then was) accepted that although in law there was no right toa freezing order without a pre-existing cause of action, in some circumstances equity will grant quia timetrelief

before a loss has actually occurred. Cf. Papamichael vNational WestminsterBank plc[2002] 2 All E.R. (Comm) 60.16.

Re H [1996] 2 All E.R. 391; GencorACP Ltd v Dalby[2000] 2 B.C.L.C. 734; TrustorAB v Smallbone (No.2) [2001]1 W.L.R. 1177.[1993] 1 Lloyd's Rep. 164.

17.TrustorAB v Smallbone (No.2), ibid. Usually this is not established until the claimant obtains judgment and

demands payment.

18.It does not necessarily follow that any payment by a defendant is to be regarded as an attempt to frustrate afreezing injunction. The standard order contemplates that a defendant may pay ordinary and proper business

expenses. See further Iraqi Ministry ofDefence vArcepey Shipping Co SA [1981] Q.B. 65; Polly Peck Internationalplc vNadir (No.2) [1992] 4 All E.R. 769. However, the party enjoined may have to show he has no other free

assets with which to make the relevant payments: A v C (No.2) [1981] Q.B. 961.As noted, there are troublingaspects to enjoining third party assets in these circumstances. The order is granted in support ofin futuro rights, at

the behest of a claimant who has no direct claim against the third party. These objections disappear if theclaimant is in a position to impugn the transaction as an attempt to defraud creditors under s.423 of the Insolvency

Act. The Act confers a direct cause of action against the defendant by the victim of a transaction entered into atan undervalue, regardless of whether the claimant has obtained judgment or the defendant is insolvent. Moreover,


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s.425 permits a direct claimagainst third parties who have benefited from the transaction. Corporate transferees

as well as the controller of a defendant company would fall in this category.19.

March 15, 2002, Q.B.D., Lawtel Doc.No.C0103279.[2001] 2 Lloyd's Rep. 459.20.

Yukong Lines Ltd ofKorea v Rendsburg Investments Corp [1998] 1 Lloyd's Rep 322. However, on the facts, theCourt of Appeal expressed reservations as to this form of order ([1998] EWCA Civ 911 and [1998] EWCA Civ

1075).Liability only arises if it can be established that before the winding-up of the company, a director knew or

ought to have concluded that there was no reasonable prospect that the company would avoid going into insolventliquidation (s.214(2)(b)). This is subject to the statutory defence that once this state of affairs was known, orought to have been known, the director took appropriate steps to minimise potential loss to the company's

creditors (s.214(3)). The Insolvency Act 1986 further specifies the relevant degree of knowledge for a director inthese circumstances (s.214(4)).

21.Derby & Co Ltd v Weldon (No.6) [1990] 1 W.L.R. 1139.

22.See further P. Devonshire, Freezing Orders, Disappearing Assets and the Problem of Enjoining Non-Parties

(2002) 118 L.Q.R. 124.23.

Dicey & Morris on the Conflict of Laws (13th ed., Sweet & Maxwell, London, 2000), para.11-003.24.

Where the defendant is domiciled in a Convention territory or Regulation State.25.

In any proceedings to which r.6.19 does not apply.26.

See CPR r.6.21 which specifies conditions for an application under r.6.20.27.

Except Denmark.28.

[2001] O.J. L12/1. The Judgments Regulation came into force on March 1, 2002 and largely supersedes theBrussels Convention.

29.Judgments Regulation, Art.31.

30.See R. Aird, Interim Protective Measures which Provide Security: Towards a Common Security Measure (2002) 21

C.J.Q. 271. See further Civil Procedure 2002 (Sweet & Maxwell, London, 2002), para.6.19.3: The object of theRegulation and the Conventions is not to unify the rules of substantive law and of procedure of different Regulation

and Convention States, but to determine which courts have jurisdiction in disputes relating to civil and commercialmatters.

31.Van Uden Maritime BV v Kommanditgesellschaft in Firma Deco-Line [1999] Q.B. 1225 at 1257.

32.Although this is also relevant to proceedings within the European Community. See Civil Procedure

2002, para.6.21.3.33.

Dicey & Morris on the Conflict of Laws (2nd supplement to the 13th ed., 2002), S11-123.

34.CPR r.6.21(2A). For the relevant principles see Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] 1 A.C.

50;Spiliada Maritime Corp v Cansulex Ltd[1987] 1 A.C. 460.35.

Amin Rasheed Shipping Corp v Kuwait Insurance Co, ibid. at 72.36.

Norwich Pharmacal Co v Customs & Excise Commissioners [1974] A.C. 133.37.

Where disclosure of documents against non-parties is required, the claimant can seek an order under s.34 of the

Supreme Court Act 1981 and CPR r.31.17. The claimant must be in a position to adduce evidence that thedocuments are likely to support the claimant's case or adversely affect the case of another party to theproceedings. It must also be established that disclosure is necessary to dispose fairly of the case or to save costs.

This jurisdiction is exercised with caution: Re Howglen Ltd[2001] 1 All E.R. 376. Civil Procedure2002, para.31.18.3 notes a further limitation, namely that an order for disclosure does not lie against a party who

is not a wrongdoer and has no connection to the alleged wrongdoing. In some cases it may be possible to obtainpre-action disclosure under s.33(2) of the Supreme Court Act 1981 and CPR r.31.16. However this does not

necessarily fit the present discussion which assesses measures that can be taken after proceedings have beencommenced. Further, pre-action disclosure is directed to those who are likely to be a party to proceedings. At a

pre-action stage it may be difficult to establish that a controller will be personally implicated in the proceedings. For


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discussion of the jurisdictional and discretionary considerations see Bermuda International Securities Ltd v

KPMG [2001] EWCA Civ 269, [2001] C.P.Rep. 73; Black v Sumitomo Corp [2002] 1 W.L.R. 1562.38.

The House of Lords has recently affirmed the Norwich Pharmacaljurisdiction in Ashworth SecurityHospital v MGNLtd[2002] UKHL 29, [2002] 1 W.L.R. 2033. Writing the leading judgment, Lord Woolf C.J. emphasised that the

involvement or participation of the person from whom discovery is sought is a threshold requirement (at [34]-[36]).

39.

As in the Norwich Pharmacalcase itself where the third parties were the Customs and Excise Commissioners. Seefurther Ashworth SecurityHospital v MGN Ltd, ibid. at [1], [26], [27] and [30].40.

By the same token, a Norwich Pharmacalapplication for discovering the identity of wrongdoers can be directed topersons against whom the claimant has a cause of action: Norwich Pharmacal Co v Customs & Excise

Commissioners[1974] A.C. 133 at 174; P v T Ltd[1997] 1 W.L.R. 1309 at 1316-1319; Ashworth SecurityHospitalv MGN Ltd, ibid. at [27], [28], [33], [34] and [44].

41.If an order for disclosure of documents is granted against non-parties, the procedure is governed by CPR r.31.17.

However this does not limit any other power which the court may have to order disclosure against non-parties(r.31.18).

42.In Aoot Kalmneft v Denton Wilde Sapte [2002] 1 Lloyd's Rep. 417 it was asserted that [t]he [Norwich Pharmaca l]

principle is not simply that the wrongdoer be identified but extends in my view to his identification as a wrongdoer I see no reason why the principle is limited to disclosure of the identity of an unknown wrongdoer and does not

extend to information showing that he has committed a wrong (at 423perJudge McGonigal).43.

e.g. to trace the proceeds of fraud (Bankers Trust Co v Shapira [1980] 1 W.L.R. 1274), to acquire informationabout a party's financial affairs (Mercantile Group (Europe) AG vAiyala [1994] Q.B. 366), to obtain disclosure of

bank records (A v C[1981] Q.B. 956; Omar v Omar[1995] 1 W.L.R. 1428), to reveal the names and addresses ofpersons who received letters commercially harmful to the claimant, and the contents thereof (CHC Software Care

Ltd vHopkins & Wood[1993] F.S.R. 241), to identify the recipients of confidential information (Computershare Ltdv Perpetual Registrars Ltd[2000] 1 V.R. 626) and to ascertain the destination of funds diverted from the claimant

(Aoot Kalmneft v Denton Wilde Sapte [2002] 1 Lloyd's Rep. 417).44.

[2002] UKHL 29, [2002] 1 W.L.R. 2033.45.

ibid. at [57].46.

There are also opportunities to examine non-parties under the Insolvency Act 1986. Section 236 provides that thecourt may, on the application of an office holder, summon any person, including any officer of a company and

any other person who may be capable of giving information concerning inter alia, the business dealings, affairs orproperty of a company (s.236(2)). This extends to requiring an affidavit or the production of any books, papers or

records pertaining to the company. However this may be of limited relevance to the present discussion.Unlike Norwich Pharmacalapplications, proceedings under s.236 are unlikely to arise in the early stages of

litigation because the application is brought by the party responsible for getting in the company's property in thecase of insolvency or liquidation. In addition, the court's discretion to order examination pursuant to s.236 is

generally exercised with caution. See British & Commonwealth Holdings plc v Spicer and Oppenheim [1993] A.C.

426; Re Westmead Consultants Ltd v Evans [2002] 1 B.C.L.C. 384.47.

Aoot Kalmneft v Denton Wilde Sapte [2002] 1 Lloyd's Rep. 417 at 421.48.

It is submitted that this approach is entirely defensible. Disclosure is sought by the claimant to establish oradvance his case. The claimant should therefore meet the costs of compliance including the costs of legal

proceedings where it is reasonable for the respondent to oppose the order or seek directions from the court.Moreover the respondent should not have to await the outcome of the trial to obtain costs directly from the

defendant. The wait may even be futile because if the claimant is unsuccessful the defendant will usually not be

liable for any costs.49.[2002] 1 W.L.R. 1233.

50.ibid. at 1241perAldous L.J. delivering the judgment of the Court.

51.It has long been recognised that ancillary orders can be granted in support ofMareva injunctions. See A v

C[1981] Q.B. 956; BallabilHoldings Pty Ltd vHospital Products Ltd(1985) 1 N.S.W.L.R. 155;Jackson v SterlingIndustries Ltd(1987) 162 C.L.R. 612; Caboche v Southern Equities Corp Ltd[2001] S.A.S.C. 55.

52.A.J. Bekhor & Co Ltd vBilton [1981] Q.B. 923 at 949perGriffiths L.J.


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53.

House ofSpring Gardens Ltd v Waite [1985] F.S.R. 173; A.J. Bekhor & Co Ltd vBilton, ibid. ; Yukong Line Ltd ofKorea v Rendsburg Investments Corp [1996] EWCA Civ 759.

54.Where a defendant seeks to set aside a freezing order, the requirement of disclosure will not necessarily be stayed

pending that hearing: Motorola Credit Corp vUzan [2002] EWCA Civ 989.55.

Yukong Line Ltd ofKorea v Rendsburg Investments Corp [1996] EWCA Civ 759 at 9perPhillips L.J.

56.In the sense that if a cause of action is not asserted against such persons it follows that no liability arises unless aseparate claim is brought directly against them. Non-parties may have a persuasive claim to indemnity costs

where their sole role is to assist the claimant's case.57.

Frischke v RoyalBank ofCanada (1977) 17 O.R. (2d) 388; Bankers Trust Co v Shapira [1980] 1 W.L.R. 1274.58.

SCF Finance Co Ltd v Masri[1985] 1 W.L.R. 876; TSB Private Bank International SA v Chabra [1992] 1 W.L.R. 231.59.

See J. Harris, Joinder of Parties Located Overseas (2001) 20 C.J.Q. 290 for discussion of recent decisions.60.

[2001] EWCA Civ 416, [2001] 2 All E.R. (Comm) 865.61.

perBlackburne J. at [38].62.

CPR r.6.21(2A) states: The court will not give permission unless satisfied that England and Wales is the properplace in which to bring the claim.

63.Civil Procedure 2002, para.6.21.29, citing Unilever plc v Chefaro Proprietaries Ltd[1994] F.S.R. 135.

64.s.51 states in part: (1) [T]he costs of and incidental to all proceedings shall be in the discretion of the court

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid. This mustbe read in conjunction with CPR r.44.3.

65.Aiden Shipping Co Ltd v Interbulk Ltd[1986] 1 A.C. 965.

66.

Symphony Group plc vHodgson [1994] Q.B. 179 at 191-194; Murphy vYoung & Co's Brewery[1997] 1 W.L.R.

1591 at 1601-1602.67.

Taylor v Pace Developments Ltd[1991] B.C.C. 406 at 408perLloyd L.J.; Symphony Group plc vHodgson, ibid. at192perBalcombe L.J. See further Palmeira Square vVan Hoogstraten, March 28, 2001, Q.B.D., Lawtel

Doc.No.C0101952; Murphy vYoung & Co's Brewery, ibid. In the latter case Phillips L.J. commented that while theexercise of a wide statutory discretion should be defined by appropriate principles, such principles are guidelines

rather than fetters (at 1595).68.

Symphony Group plc vHodgson, ibid. at 192-193; Murphy vYoung & Co's Brewery, ibid. at 1604. See also TGAChapman Ltd v Christopher[1998] Lloyd's Rep. I.R. 1; Globe Equities Ltd v Globe Legal Services Ltd[1999] B.L.R.

232; Cormack v Excess Insurance Co Ltd[2002] Lloyd's Rep. I.R. 398.

69.Globe Equities Ltd v Globe Legal Services Ltd, ibid. at 240; Hamilton vAl Fayed[2002] EWCA Civ 665, [2003] Q.B.

1175 at [22] and [23].70.

Taylor v Pace Developments Ltd[1991] B.C.C. 406 at 409; Metalloy Supplies Ltd v MA (UK) Ltd[1997] 1 W.L.R.1613 at 1619-1620.

71.[2002] EWCA Civ 918, [2003] Lloyd's Rep. I.R. 181.

72.

ibid. at [18].73.CPR r.48.2(1) provides that where a court is considering whether to exercise its power under s.51 of the Supreme

Court Act 1981 to make a costs order against a non-party, that person must be added as a party to theproceedings for that purpose, and must be given a reasonable opportunity to attend a hearing in respect of the

application.74.

March 18, 2002, Q.B.D. (T&CC), Lawtel Doc.No.C0102975.75.


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See also Palmeira Square vVan Hoogstraten, March 28, 2001, Q.B.D., Lawtel Doc.No.C0101952, where costs were

awarded against a non-party who had organised the funding of litigation for his own benefit without any realisticintention of pursuing the action to trial.

76.[2000] 1 W.L.R. 603.

77.See now Judgments Regulation, Art.2.

78.

The Court of Appeal held in the alternative that the defendant could be sued on the basis that these were thirdparty proceedings within Art.6(2) of the Brussels Convention (Judgments Regulation, Art.6(2)).79.

The Court of Appeal also held that the English court had jurisdiction in relation to proceedings against persons whoare not domiciled in a Convention state.

80.But see discussion above, regarding uncertainty as to recognition of certain orders by foreign courts.

81.CPR r.6.20(17). This is not an absolute right and permission of the court is required.

82.s.423(3)(a) and (b).

83.s.423(2)(b).

84.s.423(5).

85.s.425(1)(d).

86.s.425(1)(a).

87.s.425(2) states: An order under section 423 may affect the property of, or impose any obligation on, any person

whether or not he is the person with whom the debtor entered into the transaction.88.

S. Gee, Mareva Injunctions andAnton Piller Relief (4th ed., Sweet & Maxwell, London,1998), pp.218-219.89.

See Aiglon Ltd v Gau Shan Co Ltd[1993] 1 Lloyd's Rep. 164 where Hirst J. granteda Mareva injunction against parties involved in asset stripping the defendant company for the purpose of defeating

the claims of creditors within the meaning of s.423.90.

As defined in s.251 of the Insolvency Act 1986.91.

Depending on the circumstances, other provisions of the Insolvency Act may become relevant. S.212 enablesproceedings against, inter alia, an officer of a company or a person who has taken part in its promotion, formation

or management, where such person has retained or become accountable for property of the company, orcommitted acts of misfeasance or breach of fiduciary duty. S.213 imposes liability in respect of any persons who

were knowingly parties to carrying on the business with intent to defraud creditors, or for any fraudulent purposes.In Re Bank of Credit and Commerce International SA v Morris [2001] 1 B.C.L.C. 263, Neuberger J. ruled on a

preliminary point that s.213 was not limited to persons who performed a managerial or controlling role within the

company, but extended to third parties who were not employed by the company at all. In contrast, s.214 applies toa director or shadow director.

92.Insolvency Act 1986, s.214 (7).

93.ss.238, 239 and 423 respectively.

94.Unreported, March 17, 2000, Q.B.D.

95.

This aspect is discussed further below.96.Unreported, September 5, 2001, Q.B.D.

97.ibidp.21, transcript.

98.Goldring J. acknowledged that there was always the possibility that the liquidator might not bring proceedings for

wrongful trading. Nevertheless this did not preclude the granting of a freezing order, where, as here, there was agood arguable case and a risk of dissipation. His Lordship stated that the order should be kept under constant

review with liberty to the defendants to apply to set it aside if the circumstances warranted.99.


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[2000] 1 W.L.R. 1695.

100.For recent discussion of this subject see S. Watson, Who Hides Behind the Corporate Veil? Finding a Way out of

The Legal Quagmire (2002) 20 Company and Securities Law Journal198. e.g. where property is vested in thedefendant as trustee or nominee. This would be the defendant's asset in the limited sense that she is the legal (but

not equitable) proprietor.101.

A delinquent director is personally liable to a company for the misappropriation of assets. Directors can also be

liable in negligence for their conduct of a company's affairs. In addition, equitable remedies and procedures can beinvoked by a company, a liquidator or receiver, to trace property and impose ordersagainst third parties in casesof knowing receipt or dishonest assistance. These matters are usually determined in the substantive proceedings

and fall outside the scope of this article.[1980] 1 All E.R. 205.102.

The terms non-party and third party will be used interchangeably to denote strangers to theproceedings.[1985] 1 W.L.R. 876.

103.Mills vNorthern Railway ofBuenos Ayres Co (1870) L.R. 5 Ch.App. 621; Robinson v Pickering (1881) 16 Ch.D.

660; Newton vNewton (1885) 6 P.D. 11; Burmester vBurmester[1913] P.76.[1992] 1 W.L.R. 231.104.

There was however a personal process of arresting the defendant at the commencement of an action and detaininghim until he produced security for the plaintiff's claim. See Supreme Court Practice 1998, para.29/1/20.[1994]

Q.B. 366.105.

(1890) 45 Ch.D. 1. As Jones notes: You cannot get an injunction to restrain a man who is alleged to be a debtorfrom parting with his property. These words of Cotton L.J. in Lister v Stubbs were, until recently thought to state

for English lawyers a principle of general application. (G. Jones, The Rise of the Mareva Injunction (1980)11 University ofQueensland Law Journal133). Indeed, in Mareva Compania Naviera SA v InternationalBulkcarriers

SA [1975] 2 Lloyd's Rep. 509, Donaldson J. at first instance considered that on the authority ofLister v Stubbs helacked jurisdiction to protect a creditor by way of injunction before judgment (at 510). Aiglon Ltd v Gau Shan Co

Ltd[1993] 1 Lloyd's Rep. 164.106.

ibid. at 13perCotton L.J.[2001] 2 Lloyd's Rep. 113.107.

See, e.g. Powell & Thomas v Evan Jones & Co [1905] 1 K.B. 11; Att-Gen's Reference (No.1 of 1985) [1986] Q.B.491; Police v Leaming [1975] 1 N.Z.L.R. 471. ibid. at 121.

108.Formerly called a Mareva injunction. The term freezing injunction (or order) was introduced by the Civil

Procedure Rules 1998.(1999) 198 C.L.R. 380.109.

The shipping industry was particularly impacted by the downturn in the commodities and futures markets in themid 1970s. Foreign shipping companies incurred liabilities for repairs or stores in England and then found

themselves unable to meet these obligations. Similarly, disputes arose between owners and charterers when thelatter defaulted on their commitments under the charterparty hire. Some of these companies had little connection

with the domestic jurisdiction and operated under the flag of convenience of a remote jurisdiction that wasrelatively immune from legal process. Coinciding with these developments, the abolition of exchange control

regulations in the UK liberalised the global transfer of funds into and out of the jurisdiction. ibid. at 405-

406permajority reasons of Gaudron, McHugh, Gummow and Callinan JJ. In Yukong Line the Court of Appealstated that it was not necessary to identify the defendant's assets in the third party's hands ([2001] 2 Lloyd's Rep.

113 at 123).110.

In early Mareva cases there was some doubt as to whether the order applied to domestic defendants (RasuMaritima SA v Pertambangan Minyak Dan Gas BumiNegara (Pertamina) [1978] 1 Q.B. 644 at 659). For some

time the question hung in the balance, but in Barclay-Johnson vYuill[1980] 3 All E.R. 190 Megarry V.-C. refusedto accept that the place of residence provided any Mareva touchstone. Two months later this case was expressly

approved by the Court of Appeal in Rahman (Prince Abdul) vAbu-Taha [1980] 1 W.L.R. 1268 at 1272. This has

since been given statutory force by s37(3) of the Supreme Court Act 1981. See similarly New Zealand High CourtRule 236B.[1979] A.C. 210.111.

Typified in the 1970s by the one-ship Panamanian company.See Lord Diplock at 256, ibid. See further MercedesBenzAG v Leiduck[1996] 1 A.C. 284. In this context it was contemplated that the cause of action was justiciable

in England. Therefore the English court was not competent to grant interim relief in aid of foreign proceedings. Thishas been abrogated by the Civil Jurisdiction and Judgments Act 1982 (as amended by the Civil Jurisdiction and

Judgments Act 1991) which confers statutory jurisdiction for the English court to grant interim relief in aid ofproceedings before a Convention state (see now Judgments Regulation, Art.31). This has been further enlarged by

the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 (SI 1997/302) which empowers the HighCourt to grant interimorders in relation to proceedings commenced anywhere in the world (see above for


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discussion of the procedural considerations under CPR r.6.20). In general English courts take a cautious approach

to granting relief. See Credit Suisse Fides Trust SA v Cuoghi[1998] Q.B. 818; Indosuez International Finance BV vNational Reserve Bank[2002] EWHC 774 (Comm).

112.Nevertheless the prospect of personal liability hangs over company directors by virtue of their fiduciary relationship

to a company. If funds or property are transferred between companies that are subject to common control, adirector may be in breach of his duties to the transferor. The same principle applies where a director causes a

company to incur a liability for the benefit of a related company which he controls. See further Re Pantone 485 Ltd

vBain [2002] 1 B.C.L.C. 266.[1989] 2 Lloyd's Rep. 423.113.See Snook v London & West Riding Investments Ltd[1967] 1 All E.R. 518 at 528-529 where the elements of a

sham are discussed. Veracruz Transportation Inc vVC Shipping Co Inc[1992] 1 Lloyd's Rep. 353; Zucker vTyndallHoldings plc[1992] 1 W.L.R. 1127. See also Euro-National Corp Ltd vNZIBank(1991) 4 P.R.N.Z. 365; Re

Premier Electronics (GB) Ltd, The Times, February 27, 2001.114.

Adams v Cape Industries plc[1990] 1 Ch. 433; Ord vBelhaven Pubs Ltd[1998] B.C.C. 607.See Rowland v GulfpacLtd[1999] Lloyd's Rep. Bank. 86, where Rix J. (as he then was) accepted that although in law there was no right to

a freezing order without a pre-existing cause of action, in some circumstances equity will grant quia timetreliefbefore a loss has actually occurred. Cf. Papamichael vNational WestminsterBank plc[2002] 2 All E.R. (Comm) 60.

115.Re H [1996] 2 All E.R. 391; GencorACP Ltd v Dalby[2000] 2 B.C.L.C. 734; TrustorAB v Smallbone (No.2) [2001]

1 W.L.R. 1177.[1993] 1 Lloyd's Rep. 164.116.

TrustorAB v Smallbone (No.2), ibid. Usually this is not established until the claimant obtains judgment anddemands payment.

117.It does not necessarily follow that any payment by a defendant is to be regarded as an attempt to frustrate a

freezing injunction. The standard order contemplates that a defendant may pay ordinary and proper businessexpenses. See further Iraqi Ministry ofDefence vArcepey Shipping Co SA [1981] Q.B. 65; Polly Peck International

plc vNadir (No.2) [1992] 4 All E.R. 769. However, the party enjoined may have to show he has no other freeassets with which to make the relevant payments: A v C (No.2) [1981] Q.B. 961.As noted, there are troubling

aspects to enjoining third party assets in these circumstances. The order is granted in support ofin futuro rights, atthe behest of a claimant who has no direct claim against the third party. These objections disappear if the

claimant is in a position to impugn the transaction as an attempt to defraud creditors under s.423 of the InsolvencyAct. The Act confers a direct cause of action against the defendant by the victim of a transaction entered into at

an undervalue, regardless of whether the claimant has obtained judgment or the defendant is insolvent. Moreover,s.425 permits a direct claimagainst third parties who have benefited from the transaction. Corporate transferees

as well as the controller of a defendant company would fall in this category.118.

March 15, 2002, Q.B.D., Lawtel Doc.No.C0103279.[2001] 2 Lloyd's Rep. 459.119.

Yukong Lines Ltd ofKorea v Rendsburg Investments Corp [1998] 1 Lloyd's Rep 322. However, on the facts, theCourt of Appeal expressed reservations as to this form of order ([1998] EWCA Civ 911 and [1998] EWCA Civ

1075).Liability only arises if it can be established that before the winding-up of the company, a director knew orought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent

liquidation (s.214(2)(b)). This is subject to the statutory defence that once this state of affairs was known, or

ought to have been known, the director took appropriate steps to minimise potential loss to the company'screditors (s.214(3)). The Insolvency Act 1986 further specifies the relevant degree of knowledge for a director in

these circumstances (s.214(4)).

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