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17 March 2020
In Kea Investments Ltd v Eric John Watson, the High Court considered to what extent a defendant should be permitted to use funds subject to a freezing injunction to fund its legal expenses where the claimant advances a quasi-proprietary claim over those funds.
In July 2018 – following a three-month trial of claims of fraud, deceit and breach of fiduciary duty – Kea Investments Ltd obtained a significant judgment against Mr Watson; Watson was liable to pay Kea more than £40 million. While Kea could identify and compel payment from various assets and thus obtained comparatively small sums towards the judgment debt, it was still owed the vast majority. This was particularly frustrating for Kea as Watson had formerly allowed himself to be represented as one of New Zealand's wealthiest men, but now claimed to be impecunious.
However, Kea identified that Mr Gibson – who was, by his own account, Watson's right-hand man and had previously worked for Watson – seemingly had access to valuable assets, including a Hong Kong trust which held a British Virgin Islands company (Ivory Castle), which in turn held valuable assets and interests.
Kea obtained an injunction to restrain the payment to Ivory Castle of certain sums due to it (the Aegean monies). The terms of the injunction also required Ivory Castle to notify Kea of dealings with any other of its assets. Kea obtained the injunction on the basis that assets held by Ivory Castle were in truth held by it for Watson as bare trustee or nominee, or on terms that they could be made available to him or were otherwise amenable to execution of Kea's judgment debt against him. Kea later obtained a notification injunction against Gibson personally. Each of the injunctions included the usual provisions for Ivory Castle and Gibson to spend money on legal advice.
Ivory Castle made an application to vary the injunction to allow the Aegean monies to be paid out to fund its own and Gibson's legal costs. This raised the issue of whether Ivory Castle and Gibson had to use Gibson's own assets to fund their legal costs before resorting to those of Ivory Castle.
Kea argued that Gibson should be required to spend his own money before spending assets in the name of Ivory Castle, or in his own name, which Kea claimed were held as nominee for Watson and so should remain available to Kea to execute against.
It is well established that the ordinary rule in a standard (ie, non-proprietary) freezing injunction generally entitles the defendant to use frozen assets in order to finance a defence, subject to demonstrating that they do not have other assets with which to do so, as the injunction concerns only their assets.
In proprietary injunctions, the position is different as the basis of a proprietary claim is that the particular asset in question is said to belong to the claimant. Accordingly, there is no presumption in favour of the defendant being entitled to use such assets to finance its defence.
The parties did not dispute that where a proprietary injunction is obtained, the relevant principles to be applied to the question of legal costs were:
The question in this case was whether Kea's injunctions should be considered as proprietary and if so whether Ivory Castle and Gibson had to satisfy the more onerous test for use of proprietary assets before being able to access the Aegean monies.
The court considered two previous conflicting decisions on this issue.
On the one hand, in Begum(2) the High Court found that there was a clear and principled distinction between freezing injunctions made in respect of proprietary and non-proprietary claims. Therefore, it rejected the idea that there could be a sub-category of quasi-proprietary claims in considering the scope of exceptions which should be made for the payment of legal costs.
By contrast, in Ablayzov(3) the High Court found that a claimant could have a claim that is not a proprietary claim but analogous to one, such that the defendant must then satisfy the more onerous four stage test (discussed above) before being able to use the disputed funds to meet legal costs.
In deciding which approach to follow, the court considered the nature of Kea's substantive action, in which it not only brought a claim designed to resolve the ownership of the disputed fund, but also claimed for the appointment of a receiver by way of equitable execution over the fund. Accordingly, if Kea's claim was successful, it would not just obtain relief in the form of a simple money judgment but would also obtain actual possession of the fund (through the medium of the receiver).
The court also considered that the frozen assets were not the undisputed property of the ostensible owner (in this case, Ivory Castle) but were assets of which the beneficial ownership was actively disputed. Therefore, if Kea were to win the substantive action, it would become apparent that the assets were not Ivory Castle's and that it had no right to spend them on legal expenses or anything else.
In this case, the court preferred the approach in Ablayzov and found that a quasi-proprietary claim could exist (distinguishing this case from the approach in Begum) and that, in those circumstances, it was appropriate to apply the approach used in proprietary freezing injunctions. While Kea did not strictly advance a proprietary claim, it was close to one as "the very gist of the action is to assert a right to possession of the disputed fund".
Applying the principles set out above, the court concluded that:
The fourth question – whether the injustice of permitting the use of the funds held by the defendant was outweighed by the possible injustice to the defendant if it was denied the opportunity of advancing what may turn out to be a successful defence – was the most complex because this was a matter for the court's discretion and required a "careful and anxious judgment".(4)
On this fourth question, it was material that Ivory Castle's and Gibson's positions in the litigation were aligned. Kea asserted that Ivory Castle was a nominee for Watson, and Ivory Castle and Gibson asserted, as did Watson, that Ivory Castle was the owner of the assets. Therefore, the real dispute in economic terms was between Kea and Gibson. The fact that Ivory Castle was technically a corporate body held by a trust for Gibson's benefit was an insignificant difference. Where the rights to the entirety of Ivory Castle's assets were disputed, the court found that it was "plainly more just" that the interests of the defendants should be defended at the cost of Gibson rather than at the cost of the monies in dispute, which was the very subject matter of the proceedings.
The court considered the value and nature of Gibson's assets, which were said to be substantial but not readily realisable and not replaceable if he was successful (eg, works of art and jewellery). It was suggested that forcing Gibson to realise such items would be unjust. The court accepted that there would likely be practical difficulties in Gibson raising funds from the non-cash assets (although he could ask a family trust to draw down on a loan facility or raise sums against properties owned by the same trust). Separately, the court was also satisfied that Gibson's investment in a family member's start-up was unlikely to be easy to realise.
The court suggested (but did not order) that the parties agree an arrangement whereby Gibson or Ivory Castle could access the Aegean monies, but only once Gibson undertook a personal liability direct to Kea to pay an equivalent sum, together with interest, if Kea's claims regarding the disputed assets were successful (to be fortified by adequate security over his or his family trust's assets). That would allow Gibson access to funds to defend himself, but on terms that if he lost, the costs of his defence would fall on his assets rather than on the disputed monies. The court adjourned to allow the parties to discuss this proposal.
While it is the practice of the court in a standard freezing injunction not to cap or limit the amount that the defendant can spend on legal costs, in a quasi-proprietary claim, the defendant is not asking to spend what is accepted to be its own money. Accordingly, the court indicated that it would expect the defendants to exercise a measure of control over the quantum of costs that could be spent and that those costs should be reasonable and proportionate.
This decision provides helpful guidance on the analysis of quasi-proprietary claims and the circumstances in which claimants can insist that defendants meet a more onerous test before using disputed monies over which the claimant asserts ownership to fund their defence.
Balancing the respective rights of the parties in these circumstances raised somewhat difficult issues. However, the court's suggested solution provides pragmatic guidance as to how that balance might be struck.
For further information on this topic please contact Alan Williams or Laura Martin at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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