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Rethinking freezing injunctions: Convoy Collateral Ltd v Cho Kwai Chee (British Virgin Islands) [2021] UKPC 24

Rethinking freezing injunctions: Convoy Collateral Ltd v Cho Kwai Chee (British Virgin Islands) [2021] UKPC 24

Overview

Convoy Collateral, a Hong Kong company, brought proceedings in Hong Kong against Dr Cho, a Hong Kong resident, for various breaches of fiduciary duties.

In support of these proceedings, Convoy Collateral applied to the British Virgin Islands (BVI) Courts for a freezing injunction against Dr Cho and a third-party BVI company, Broad Idea, of which Dr Cho was a majority shareholder.

The freezing injunction against Dr Cho and Broad Idea was granted at first instance, but later overturned by the BVI Court of Appeal. Convoy Collateral appealed the Court of Appeal's decision.

The issues stemming from the appeal to the Privy Council (the Board) were as follows:

  • Whether a freezing injunction required a collateral underlying cause of action to be granted.

  • Whether the Court can assist the enforcement of a prospective or existing foreign judgment where it has personal jurisdiction over a party.

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Legal backdrop

The leading judgment in this area of law, the shipping case The Siskina[1], was decided at a time when freezing injunctions were in their infancy. In 1970s London, the ability to recover money from a shipowner or charterer was dependent on finding and freezing assets against which a judgment could be enforced. This was against a backdrop of shipowners typically being 'one ship' companies with their ship being their only asset, resulting in what Kerr J dubbed as 'asset hunting[2]' where aggrieved parties attempted to grasp for assets for security whilst the other parties sought to evade them. This was the case in The Siskina where the shipowners' only ship had sunk, and they had no intention of carrying on any further business. The claim for damages against them lay in a foreign court – something which was uncommon in 1977. The House of Lords ultimately took the approach that English courts did not have the power to grant a freezing order unless it was linked to a pre-existing cause of action that came under the jurisdiction of the court.

Questions about the territorial reach of the power to grant freezing injunctions arose again in Mercedes Benz[3]. The majority of the Board in that case followed the decision in The Siskina, however Lord Nicholls' dissenting judgment illuminated the nature and purpose of a freezing injunction:

"The court is looking ahead to that stage, and taking steps designed to ensure that the defendant cannot defeat the purpose of the judgment by thwarting in advance the efficacy of the process by which the court will enforce compliance[4]."

In essence, Lord Nicholls took the view that once it is understood that the purpose of a freezing injunction is to facilitate the enforcement of a judgment or other order to pay a sum of money, there is no reason in principle to link it to an underlying cause of action.

The decision

The majority in Convoy Collateral shared Lord Nicholls' dissenting view in Mercedes Benz and went against the tide of The Siskina.

Lord Leggatt set out the following test[5]:

A court with equitable and / or statutory jurisdiction to grant injunctions where it is just and convenient to do so has power – and it accords with principle and good practice – to grant a freezing injunction against a party (the respondent) over whom the court has personal jurisdiction provided that:

(i) the applicant has already been granted or has a good arguable case for being granted a judgment or order for the payment of a sum of money that is or will be enforceable through the process of the court;

(ii) the respondent holds assets (or is liable to take steps other than in the ordinary course of business which will reduce the value of assets) against which such a judgment could be enforced; and

(iii) there is a real risk that, unless the injunction is granted, the respondent will deal with such assets (or take steps which make them less valuable) other than in the ordinary course of business with the result that the availability or value of the assets is impaired and the judgment is left unsatisfied.

Furthermore, Lord Leggatt explained that:

(i) There is no requirement that the judgment should be a judgment of the domestic court - the principle applies equally to a foreign judgment or other award capable of enforcement in the same way as a judgment of the domestic court using the court’s enforcement powers.

(ii) Although it is the usual situation, there is no requirement that the judgment should be a judgment against the respondent.

(iii) There is no requirement that proceedings in which the judgment is sought should yet have been commenced nor that a right to bring such proceedings should yet have arisen: it is enough that the court can be satisfied with a sufficient degree of certainty that a right to bring proceedings will arise and that proceedings will be brought (whether in the domestic court or before another court or tribunal).

The Board concluded that in circumstances where there were substantive proceedings against Dr Cho in Hong Kong and the BVI court had undoubted jurisdiction over Broad Idea (due to the company being incorporated in the BVI), it had the power to grant a freezing injunction against Broad Idea if it was required to protect Convoy Collateral's ability to enforce a future judgment against Dr Cho in the BVI. However, on the facts, it was decided that the BVI court had no personal jurisdiction over Dr Cho. The Court of Appeal had therefore been justified in setting aside the freezing injunction against Broad Idea as there was no reasonable basis for asserting that Dr Cho had any direct beneficial interest in any of the assets held by Broad Idea[6].

Implications

Whilst both appeals were dismissed by the BVI Courts, Lord Leggatt's judgment has brought the law of freezing and interlocutory injunctions into the present and submerged The Siskina, which was referred to as 'not merely undesirable in modern day international commerce but legally unsound[7].'

Lord Leggatt's judgment recognises that at the core of freezing injunctions is the feature of pre-empting future dealings in assets which could frustrate the enforcement of often prospective and potentially foreign judgements. This shift away from The Siskina provides a level of flexibility that has moved with the changing times. The ease and speed with which financial assets can be moved around the world, the growth in the use of offshore companies and the consequent development of international litigation and arbitration are interwoven into the fabric of this decision.

Although this judgment is not binding on the English Courts, it is likely to be very persuasive as a useful basis for future freezing injunction applications. Convoy Collateral dispenses with the need for a freezing injunction to be linked to a pre-existing cause of action and sets out that where a court has personal jurisdiction over a respondent, it can assist with the enforcement of a prospective or existing judgment against that respondent. In circumstances where a good arguable case can be established that an individual has a direct beneficial interest in shares owned by a company, provided that the company is incorporated in a particular jurisdiction, it is likely that an injunction can be served against that company in that jurisdiction in order to enforce a judgement or prospective judgment against the individual. Personal jurisdiction plays a powerful role here as the treatment of 'money box' companies as extensions of the individuals who control them is wielded to assist with the enforceability of judgements against those individuals.

The threshold outlined by Lord Leggatt is that a freezing order can be granted when a court is satisfied with a sufficient degree of certainty that a right to bring proceedings will arise and that proceedings will be brought. This potentially casts a wider net which can be relied on by those seeking freezing relief to aid enforcement of claims, although it remains to be seen what practical difference this will make in circumstances where there has not been any additional guidance as to what will suffice as 'a sufficient degree of certainty' for the purposes of commencing proceedings. It could well be the case that an undertaking to serve a claim form in the relevant jurisdiction is still required to meet that threshold.

 

 

This article was co-authored by Dispute Resolution Senior Associate, Tom Rotherham, and Dispute Resolution Paralegal, Stephanie Baptist.

FOOTNOTES

[1] Owners of Cargo Lately Laden on Board the Siskina v Distos Compania Naviera SA [1979] A.C. 210

[2] Owners of Cargo Lately Laden on Board the Siskina v Distos Compania Naviera SA [1977] 1 Lloyd's Rep 404, paragraph 216

[3] Mercedes-Benz AG v Leiduck [1996] A.C. 284

[4] Mercedes-Benz, paragraph 306

[5] Convoy Collateral paragraphs 101-102

[6] Convoy Collateral, paragraph 108

[7] Convoy Collateral, paragraph 120

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