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16 March 2010
In The matter of an Application by Anglo Irish Bank plc: Louis Dowley v Breifne O'Brien(1), the High Court has clarified the position under Irish law of the entitlement of banks to seek variations to Mareva injunctions where their interests may be affected by them.
On December 15 2008 the High Court granted Mareva-type injunctions restraining Breifne O'Brien (the defendant) from reducing his assets under the level of €20 million. The court subsequently granted judgment in favour of the Dowleys (the plaintiffs) for €3,065,350. In this action, Anglo Irish Bank plc, which had provided the defendant with various loan facilities in respect of which Anglo asserted that the defendant had defaulted, sought to vary the terms of the injunctions granted.
In essence, the basis for such an application was that Anglo wished to exercise various rights over the defendant's assets after he defaulted on his loan facilities. Anglo had a right of set-off over the loans given to the defendant and held security over a variety of his assets, including properties, shares, moneys held in an account with Anglo and a share portfolio arranged by a department within Anglo. The plaintiffs, who were effectively third parties to the relationship between the defendant and Anglo, objected to Anglo's application on the basis that a variation in the injunction was neither necessary nor appropriate.
High Court Decision
In considering Anglo's application and deciding whether it was necessary or appropriate to vary the order, Justice Clarke considered the position of third parties in respect of Mareva injunctions. The court clarified that where a third party feels that its legitimate interests are affected by an injunction granted in proceedings to which it is not a party, it should be allowed to apply to court as a matter of procedural fairness.
Clarke stated that the nature of a Mareva injunction is that it prevents the affected party from placing assets beyond the reach of the court in the event of a successful action against the affected party. He noted that a Mareva injunction will not ordinarily prevent the affected party from continuing its lawful business and that, as such, it is usually allowed to pay its ordinary business debts. A third party that, knowing the terms of a Mareva injunction, wilfully assists in its breach is liable for contempt of court.
However, Clarke noted that a third party, such as a bank, may have a legitimate right to deal with an asset covered by a Mareva injunction. Clarke referred to a number of English authorities on the question of third-party rights. He noted that since Oceanica Castleana Armadora SA v Mineralimportexport(2), the standard form Mareva injunction in England and Wales now specifically exempts set-off by banks from the effect of the injunction and there is therefore no need for a bank to apply to court to exercise its right of set-off. In that case it was stated that, in the context of a bank's right of set-off:
"It is now firmly established that a defendant who is subject to a Mareva injunction can apply to the court to vary the injunction, so as to enable him to pay his ordinary debts as they fall due. If the defendant can thus, in a suitable case, drawn his bank account to pay his ordinary creditors, notwithstanding a Mareva injunction, why should he not be free to pay his bank? Why should the bank be in a worse position than other creditors, just because it is the bank which holds the funds in question."
Notably, however, in England and Wales it has also been held that there is no similar right for a bank to realize a tangible asset over which it had a charge prior to the notification of the injunction. In Gangway Ltd v Caledonian Park Investment (Jersey) Ltd(3) it was held that, as a non-party to the injunction, the bank must apply to the court to obtain an order varying the injunction to permit disposal.
In summarizing the position at English law, Clarke identified that it reflects that a third party need not apply to court to have an order varied so as to exercise rights to set-off, as this is provided for in the standard form Mareva injunction. Clarke also noted that there was some debate at English law as to the position with regard to realizing a charged asset potentially covered by a Mareva injunction. Finally, he noted that the duty of a third party realizing assets is not higher than that of acting in good faith in the ordinary course of business.
Turning to the position at Irish law, the High Court identified that the relevant English case law had not been followed in Ireland and Clarke further noted that there is no standard form Mareva injunction in operation in Ireland. In Ireland, unlike in England, guidelines are not typically attached to a Mareva injunction. He also stressed that the distinction in English law between a bank's right to set-off and its right to enforce a security has no application in Ireland and reiterated that, in Ireland, a Mareva injunction does not prevent a party from paying its lawful debts provided that payments are made in good faith. Ultimately, a Mareva injunction is not a device for removing relevant assets from the jurisdiction of the court.
Clarke held that, strictly speaking, the only party bound directly by a Mareva injunction is the defendant – a third party is affected only insofar as it aids or abets the breach or frustration of the order. Clarke also recognized that the obtaining of a Mareva injunction does not give the plaintiff in the proceedings any particular interest or charge over specific property of the defendant. Indeed, a plaintiff that successfully obtains a Mareva injunction and, ultimately, goes on to secure judgment has no greater entitlement than any other party to the assets which may have been affected by the Mareva order.
Clarke recognized that in recent years, financial institutions had acted conservatively in dealing with the accounts of customers whose assets were subject to a Mareva injunction. While the court appreciated their caution, the judge stressed that such practice does not take away from the limits of a Mareva injunction. Therefore, where a bank has a right of set-off or security in place prior to being notified of a Mareva injunction, the injunction can have no effect on the validity of the right to set-off or on the security concerned. The only qualification is that the right of the bank be exercised in good faith.
In conclusion, Clarke held that there was no need to vary the Mareva-type injunctions awarded in order that Anglo be entitled, in relation to the defendant, to exercise any rights which it might have and wish to exercise in good faith. Interestingly, Anglo had put its asserted contractual rights before the court in considerable detail, and although Clarke made no comment on the precise entitlements which Anglo had asserted, he did state that it was not the court's function to give a form of 'pre-clearance' to the actions of financial institutions.
The High Court has clarified that Irish law applies no distinction between a bank's right of set-off or security in place prior to being notified of a Mareva injunction. In such circumstances, provided that the bank acts in good faith in seeking to exercise its rights, the injunction has no effect on the right to set-off or on the security concerned.
For further information on this topic please contact Gearoid Carey at Matheson Ormsby Prentice by telephone (+353 1 232 2000), fax (+353 1 232 3333) or email (email@example.com).
(1)  IEHC 566.
(2)  1 WLR 1294.
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