Supreme Court Clarifies that Loans are to be Considered Part of the Defendant’s Assets for the Purposes of a Standard Form Freezing Order

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[co-author: Mihail Krepchev]

Case: JSC BTA Bank v Ablyazov [2015] UKSC 64

Introduction

A freezing order is an interim injunction that prevents a party to litigation from dealing with their assets until judgment (and on occasion, after judgment). Its purpose is to prevent a losing party from dissipating their assets and frustrating enforcement.

However, the standard form freezing order does not make specific provision to prevent respondents from borrowing money. Freezing orders generally entitle a respondent to access certain funds for ordinary living purposes and to pay their legal fees. Consequently,  a potential loophole existed where respondents could borrow money and default on the loans after paying the proceeds to third parties. If the lender then obtained a judgment against the respondent, this would create a competing claim and frustrate the purpose of the freezing order by reducing the assets available to the original claimant. Alternatively, a respondent might have entered into a loan with an affiliated lender, which would then act to protect its claim in concert with the respondent in priority to the genuine claimant. This could also have the effect of frustrating the freezing order.

The Standard Form Freezing Order

In JSC BTA Bank v Ablyazov the Supreme Court closed this loophole by holding that funds drawn down by a respondent under a loan agreement constitute “assets” within the meaning of the standard Commercial Court form of freezing order (the “Standard Freezing Order”). This decision ends a long running controversy over the breadth of freezing orders and also means that a respondent can no longer enter into loans to frustrate a freezing order and the claim which the freezing order seeks to protect.

The Standard Freezing Order applies to:

            “[…] all the Respondent’s assets whether or not they are in his own name, whether they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise. For the purpose of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions.”

Firstly, this wording covers all assets of the respondent, whether or not the respondent is interested in them “legally, beneficially or otherwise”, and has been held to include assets that the respondent holds on trust for others (JSC BTA Bank v Solodchenko [2010] EWCA Civ 1436).

Secondly, “the respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were its own”. This applies to assets which the respondent does not own at all. The Standard Freezing Order can cover assets belonging to third parties, so long as the respondent has the requisite degree of control over them. The Supreme Court decision focused on this second feature of the Standard Freezing Order and found that the scope of this provision is broader than had previously been thought.

The Decision in JSC BTA Bank v Ablyazov

The present case is part of a series of proceedings between JSC BTA Bank (the “Bank”) and its former chairman, Mukhtar Ablyazov. The Bank’s central claim is that Mr Ablyazov presided over the misappropriation of US$10 billion of the Bank’s funds over a period of four years. The Bank has to date obtained judgments against Mr Ablyazov of circa US$4.4 billion. The proceedings before the Supreme Court dealt with a freezing order made against Mr Ablyazov in 2009, which prohibited him from using his “assets”, except to pay for reasonable legal expenses and a living allowance of £10,000 per week. The freezing order was almost identical to the Standard Freezing Order.

After the freezing order was made, Mr Ablyazov entered into four separate loan agreements for an aggregate amount of US$40 million. He drew down the full amount under these loans and used the proceeds for his legal and living expenses. The Bank’s contention in this case was that both the rights to draw down under the loan agreements and the proceeds of those draw downs were to be considered “assets” within the meaning of the freezing order.

Both the High Court and the Court of Appeal had previously held that Mr Ablyazov’s rights to draw down funds under the agreements were not “assets” within the meaning of the freezing order. They reached this conclusion on the basis that the loan agreements were not assets against which the Bank could enforce its judgments. The purpose of a freezing order was to protect assets that could be enforced against and consequently nothing Mr Ablyazov did with his rights under the loan agreements could be considered a breach of the freezing order.

The conceptually separate point of whether the proceeds of the agreements were “assets” was not considered at length by the High Court or the Court of Appeal.[1] The three issues referred to the Supreme Court were i) whether Mr Ablyazov’s right to draw down under the loan agreements was an “asset” under the order; ii) whether directing the lenders to pay sums to third parties constituted “disposing of” or “dealing with” or “diminishing the value” of that “asset” contrary to the terms of the order; and iii) whether the proceeds of the loan agreements were “assets” within the meaning of the order.

The Supreme Court agreed with the lower courts’ decisions on the first two points, but on the third issue held that the proceeds of the loan agreements were “assets” that fell within the scope of the freezing order.  This conclusion rested on wording of the freezing order (this wording is identical to that of the Standard Freezing Order) that states: “For the purposes of this Order the respondents’ assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own. The respondents are to be regarded as having such power if a third party holds or controls the assets in accordance with their direct or indirect instructions.” The Supreme Court noted that the respondent does not need to own an asset, legally or beneficially, before it is caught by the freezing order. All that is required is that the respondent exercises a degree of control over the asset such that he can decide how the asset is dealt with. The Supreme Court examined the terms of the loan agreements and found that, even though the lenders had powers to cancel the loans, until they exercised them, Mr Ablyazov had the requisite control over the proceeds of the draw downs. In particular, he had “unfettered discretion to use the proceeds as he wished”, including the ability to direct the lenders to pay the proceeds to third parties. The Supreme Court recognised that a freezing order does not prohibit a respondent from incurring liabilities (for example by taking out a loan) but held that the disposal of the proceeds of such liabilities can be prohibited by a freezing order.

The justices were aware that their decision would constitute important guidance on the breadth of the Standard Freezing Order. Although each freezing order must be interpreted on its own terms, this decision demonstrates that the Standard Freezing Order has in theory a very broad application and that the courts will seek to prevent respondents from evading the reach of such an order.

[1]              The issue was only considered in passing by the High Court and Court of Appeal. The High Court held that before any money was paid under the agreement, there was no identifiable “asset” to which the freezing order could apply as the lender could procure the money from a variety of sources. The Court of Appeal simply stated that before a draw down was made, the money was not Mr Ablyazov’s but the lenders’ and that Mr Ablyazov could not deal with the money as if it were his own.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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