April 24 2012
The recent High Court case of Templeton Insurance v Motorcare Warranties(1) has confirmed that directors and other third parties are susceptible to contempt proceedings where a company breaches a freezing injunction. In some cases this may not require knowledge that the acts in question constitute a breach. The case also demonstrates the limitations of freezing injunctions in preventing the dissipation of intangible assets.
Motorcare's business was the sale of mechanical breakdown insurance policies, which were sold through a network of appointed representatives (mainly car dealers). The business had been founded by Anthony Thomas and was run by his son-in-law, Harbinder Panesar. Motorcare acted as agent for Templeton, the insurance company which underwrote the breakdown policies.
In late 2007 the relationship between Motorcare and Templeton began to break down. Templeton believed that Motorcare was supplying it with false financial information, and as a result eventually began court proceedings against Motorcare. As part of those proceedings Templeton applied for and obtained a freezing injunction against Motorcare.
The freezing injunction ordered Motorcare not to "remove from England and Wales or in any way dispose of, deal with or diminish the value of, other than by payment to [Templeton], any of its assets in England and Wales". The freezing injunction contained the following notice: "It is a contempt of court for any person notified of this order knowingly to assist in or permit a breach of this order. Any person doing so may be sent to prison, fined or have his assets seized."
In the trial of the main action, Motorcare was found to have underpaid Templeton by over £2.3 million, and Panesar and Thomas were found to be liable to Templeton in deceit. Shortly after the trial, Motorcare went into liquidation. Templeton sought an order for committal against Thomas and Panesar on the basis that those individuals were in contempt of court for breaching the freezing injunction.
Templeton alleged that within a week of the freezing injunction, another company - Motorcare Elite 2008 Ltd - was registered by Thomas and Panesar (among others), and that thereafter Motorcare effectively transferred its entire business to Motorcare Elite. There is no suggestion that moneys or other tangible assets were disposed of. However, Templeton alleged that Motorcare Elite took over Motorcare's network of sales agents, its office premises, staff, telephone number, website addresses and product documentation. Furthermore, it was allowed to hold itself out as the business known as "Motorcare".
Templeton argued that this was a breach of the freezing injunction since it constituted "disposal of" or "dealing with" Motorcare's assets, principally its goodwill, and that this took place with the knowledge and involvement of Thomas and Panesar. For their part, Thomas and Panesar contended that although they were aware of the injunction, they were unaware that their acts constituted a breach.
The relevant freezing injunction was made against Motorcare, rather than Thomas or Panesar. Therefore, the key issue was to determine the test which applied where committal proceedings were brought against third parties such as Thomas and Panesar. In particular, it was necessary to determine whether third parties needed to be aware that their acts constituted a breach of the injunction.
The judge noted that where an individual is personally bound by an order, it is unnecessary for the purposes of an action for contempt to show that the individual knew that he or she was breaching the order.(2) However, where a party is not personally bound by the order, the position is different. Here, it must be shown that the individual's act constituted a "wilful interference with the administration of justice".(3) Although it is not expressly stated in the judgment, this effectively amounts to a requirement for the individual to act in the knowledge that he or she is breaching the court order. The judge held that the warning in the freezing injunction in this case correctly summarised the law when it said that it would be a contempt of court to breach the order "knowingly". As contempt of court is a criminal offence, it will be necessary for the judge to be satisfied to the criminal standard of proof.
Templeton had tried to argue that Panesar stood in a different position because he was a director of Motorcare and therefore stood in exactly the same position as Motorcare by virtue of his office and his knowledge that the order had been made. Therefore, Templeton argued, it was unnecessary to show that Panesar had breached the order knowingly. However, Panesar argued that his position as director put him in no special position; instead, his position was no different to that of any other party not personally bound by the order.
The judge rejected both parties' arguments and held that the correct position fell somewhere between the two. The judge cited Attorney General of Tuvalu v Philatelic Distribution Corp Ltd,(4) in which it was held:
"Where a company is ordered not to do certain acts… and a director of that company is aware of the order… he is under a duty to take reasonable steps to ensure that the order or undertaking is obeyed, and if he wilfully fails to take those steps and the order… is breached he can be punished for contempt." (Emphasis added.)
In other words, in order for a director to be punished for contempt in this situation, he or she must wilfully fail to take reasonable steps to ensure compliance with the order.
This "wilful failure" test for directors requires a higher degree of personal awareness than the test for someone who is directly subject to the order (where it is unnecessary to show that the individual knew that he or she was breaching the order). However, it requires a lesser degree of personal awareness than someone who is not a director and not subject to the order (where knowing breach is required).
Applying these principles to the facts of the case, the judge held that both Thomas and Panesar were in contempt of court. They had carried out acts contrary to the freezing injunction "with the intention to interfere with or impede the administration of justice". The judge added:
"Further, insofar as it may be necessary, it is also my conclusion that Mr Panesar in is capacity as director of Motorcare is also in contempt of court in wilfully failing to take reasonable steps to ensure that the freezing injunction was obeyed."
The judge adjourned sentencing to a later date, but expressly referred to the possibility of custodial sentences.
This case is of interest in setting out the legal tests which apply to individuals or companies where they are either subject to freezing orders themselves or involved with those who are subject to such orders. In particular, it is important for directors to be aware of their duties when their company is subject to a freezing order. A director must take reasonable steps to ensure compliance with a freezing order. If a director fails to do so through accident or incompetence, he or she cannot be found to be in contempt; whereas if such failure is wilful, he or she can be found to be in contempt.
However, the case is perhaps of more interest in demonstrating the limitations of freezing injunctions. Such injunctions often involve third parties (eg, a bank freezing funds in a defendant's account, or the Land Registry registering a restriction on the transfer of a property). In such cases they are generally extremely effective. In other cases, in general, effectiveness relies on the subject or subjects being influenced by the threat of contempt proceedings if they breach the order. This threat may be of little concern to dishonest defendants (as in the present case). Once the defendant has disregarded that threat and dissipated the assets, the claimant is left with few options. It may seek to claim damages, although in this type of situation it is unlikely that the defendants will be good for the money. Otherwise, there is little commercial rationale for the claimant to spend further money on legal fees in bringing committal proceedings. The fact that the wrongdoers may be sent to prison may give a sense of satisfaction, but it does not of itself provide the claimant with a recovery.
This case also demonstrates that in some situations, freezing injunctions have limited effectiveness in protecting intangible assets. A defendant may consider it more likely that he or she can get away with dissipating intangible assets rather than tangible assets. Although the transfer of goodwill in this case was flagrant, it may be easy for the owner of a business steadily to extract the goodwill of the business in a manner which is difficult for a claimant to uncover - a few customers poached here; a few employees poached there; contact lists being copied and used in other businesses; and so on. There is no doubt that the courts take compliance with freezing orders seriously. In this case, the judge stated:
"The freezing injunction has become an important and crucial part of modern litigation. A claimant's success on the substantive claim is generally worthless if there are no assets to meet that claim… In my view, the jurisdiction [in relation to freezing injunctions] should be jealously guarded and, in appropriate circumstances, rigorously enforced."
However, when contemplating freezing injunctions, parties should bear in mind the limits of the court's powers. Consideration should always be given to the practical obstacles that can be created to prevent dissipation, and if there are none, the risk of the defendants disobeying the court order.
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