Legal Briefing

Absence of assets: no bar to worldwide freezing order jurisdiction

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Dispute resolution | 01 February 2013

In Royal Bank of Scotland plc v FAL Oil Company Ltd & ors [2012], Mrs Justice Gloster held that the English court had jurisdiction to grant a worldwide freezing injunction and worldwide disclosure orders despite the defendants not having any assets in the jurisdiction and the substantive claims being pursued in 
the UAE.

Mrs Justice Gloster concluded that it was appropriate and expedient to make the orders as there was ‘a real link or connection’ with the English jurisdiction predominantly on the basis that:

  • the defendants had credit facilities and (overdrawn) bank accounts with Royal Bank of Scotland in England; and
  • the relevant loan agreements and guarantees underlying those facilities were subject to English law and English court exclusive jurisdiction clauses.

FACTS

In 2006 and 2009, the claimant, Royal Bank of Scotland plc (RBS) lent sums totalling $36m to the third and fourth defendants, Gulf Success International Shipping Inc (Gulf Success) and Sea Victory International Shipping Inc (Sea Victory) to assist in the purchase of two ships. The first and second defendants, FAL Oil Company Ltd (FAL Oil) and FAL Shipping Company Ltd (FAL Shipping) guaranteed the loans.

The defendants, which are UAE and 
Liberian companies, are part of the FAL Group. All companies in the FAL Group have the same (or very similar) shareholders and directors, predominantly and ultimately members of the Al Sari family. Two 
non-defendant companies in the FAL Group are companies incorporated in the UK and the FAL Group has marketing offices 
in London.

The facility agreements setting out the terms of the loans required Gulf Success and Sea Victory not only to pay the earnings of the ships purchased into operating accounts with RBS in England, but also to maintain minimum cash credit balances in the accounts.

The facility agreements and guarantees were subject to English governing law and exclusive jurisdiction provisions, save that RBS could elect to bring proceedings in the courts of any other country. Notice and service provisions provided for service of all documents in England.

By the guarantees, FAL Oil and FAL 
Shipping waived any objection to any court specified in the guarantees and irrevocably agreed to be bound by a judgment of such court. They further consented generally to the giving of relief and the issue of any process, including the grant of any judgment or order and its enforcement against any asset.

In early 2012, Gulf Success and Sea Victory stopped making scheduled instalment payments and paying interest due in respect of the loans. Additionally, they stopped paying the earnings from the ships into the English accounts and the cash balances fell below the required minimum. Repeated requests by RBS for information as to the whereabouts of the ships were answered inadequately.

In July 2012, RBS issued notices of demand to the defendants for payment of sums outstanding and information as to the ships’ whereabouts. The demands remained unsatisfied and RBS issued proceedings against the defendants and the ships in the Sharjah Court of First Instance. There RBS obtained an order for a preservatory arrest and precautionary attachment of the ships and a precautionary attachment of monies held in the bank accounts of FAL Oil and FAL Shipping in the UAE.

On 10 September 2012, RBS issued a substantive claim against the defendants and the ships in the Sharjah Court.

There is no procedure for the execution of a UAE attachment order outside the UAE and only domestic freezing orders can be sought from the UAE courts. Notwithstanding this, RBS had decided to issue the substantive claim in the UAE rather than in England because of difficulties arising under UAE law and procedure relating to the enforcement of an English judgment in the UAE.

Following a without notice application, Field J granted domestic and worldwide freezing orders against the defendants on 
26 September 2012.

RBS subsequently applied for the freezing orders to be continued to final judgment, in an increased sum. It also applied for orders requiring the defendants to provide information as to the nature and location of their assets. In response, the defendants applied to set aside all orders. The applications came before Mrs Justice Gloster on 16 October 2012.

APPLICABLE LAW

Under s25 Civil Jurisdiction and Judgments Act 1982 (as extended by 
the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997) (the CJJA 1982), the English court has the power to grant interim relief, including worldwide freezing and disclosure orders, in aid of substantive foreign proceedings. Under s25(2) CJJA 1982:
‘… the court may refuse to grant that relief if, in the opinion of the court, the fact that the court has no jurisdiction apart from this section in relation to the subject-matter of the proceedings in question makes it inexpedient for the court to grant it’.

As Neuberger J (as he then was), commented in Ryan v Friction Dynamics [2001], s25 CJJA 1982 confers ‘a statutory jurisdiction which on its face appears to be intended to give a wide and flexible discretion’ to the court. However, the authorities show that certain principles govern (and limit) the exercise of that discretion.

In Refco Inc v Eastern Trading Co [1999], the Court of Appeal provided the following guidance as to the general approach to be adopted by the English courts to an application for interim relief under s25 
CJJA 1982:

  1. First, the court should consider if the facts would warrant the relief sought if the substantive proceedings had been brought in England; in particular, whether the claimant has shown a good arguable case and a real risk of dissipation.
  2. Second, and assuming the answer to the question above is yes, the court should consider whether the fact that the court has no jurisdiction apart from s25(2) makes it ‘inexpedient’ to grant the relief.

The key authorities on whether it will be inexpedient to make a freezing order are Motorola Credit Corporation v Uzan & ors [2003] and Credit Suisse Fides Trust v Cuoghi [1998]. Mrs Justice Gloster reviewed these and other relevant cases and extracted the following eight principles:

  1. The court should not be deterred by its ancillary role but should be in general willing to grant interim relief to support substantive proceedings abroad, unless the circumstances of the case make this inexpedient.
  2. Where a defendant and their assets are outside the jurisdiction of the court seized of the substantive proceedings, any interim orders should be granted by those courts best able to make the orders effective. Where orders have direct effect against assets, this usually means the courts of the jurisdiction where the assets are located. Where orders have direct effect against individuals (in personam), this usually means the courts of the jurisdiction where those individuals reside.
  3. The court must be extremely cautious 
in the exercise of its discretion to grant a worldwide freezing order and disclosure order.
  4. It is a ‘strong thing’ to make an order restraining a defendant from disposing of their assets on a worldwide basis where that defendant is not resident in England and Wales and has no close ties to the jurisdiction.
  5. The court should give very careful consideration as to whether there is any real connecting link between the subject matter of the relief sought and the jurisdiction of the English court.
  6. Where there is every reason to suppose that an order made against a foreign defendant with tenuous links to the jurisdiction will be disobeyed (and, if that should occur, no real sanction would exist to enforce compliance), then it is likely to be inexpedient to make far-reaching worldwide freezing and disclosure orders against such a defendant.
  7. The fact that the court hearing the substantive proceedings has no jurisdiction or power to make a worldwide freezing order or disclosure order does not mean that it is inexpedient for the court to do so (and in Cuoghi it was held that this was not a reason for the English court to decline to grant relief).
  8. The five questions identified by the Court of Appeal in Motorola v Uzan:
    • Will the making of the order interfere with the management of the case in the primary court eg where the order is inconsistent with an order in the primary court or overlaps with it?
    • Is it the policy in the primary jurisdiction not itself to make worldwide freezing/disclosure orders?
    • Is there a danger that the orders made will give rise to disharmony or confusion and/or risk conflicting, inconsistent or overlapping orders in other jurisdictions, in particular the courts of the state where the person enjoined resides or where the assets affected are located? If so, then respect for the territorial jurisdiction of that state should discourage the English court from using its unusually wide powers against a foreign defendant.
    • At the time the order is sought is there likely to be a potential conflict as to jurisdiction rendering it inappropriate and inexpedient to make a worldwide order?
    • In a case where jurisdiction is resisted and disobedience to be expected, will the court be making an order which it cannot enforce?

DECISION

Applying the dual approach set out by 
the Court of Appeal in Refco, Mrs Justice Gloster first considered whether or not 
RBS had established that it had a good arguable case and that there was a real 
risk of dissipation of assets. Mrs Justice Gloster concluded that she had ‘little doubt that the facts would have warranted the worldwide freezing orders and disclosure orders sought by [RBS]’ in substantive proceedings in England. In her judgment, the evidence suggested strongly that the defendants had no defence to the claims under the facility agreements or the guarantees and it was conceded by the defendants that RBS had a good arguable case. Further, the defendants’ behaviour (for example, the fact that responders had been turned off to avoid arrest of the ships and the failure to pay funds into the English accounts) demonstrated a real risk of dissipation.

Mrs Justice Gloster then went on to consider whether it was ‘inexpedient’ to grant the relief requested by RBS. She 
held that orders requiring the 
defendants to identify their worldwide assets and a worldwide asset-freezing injunction would aid rather than interfere with the Sharjah proceedings and, given the absence of any jurisdiction under the laws or procedural rules of the UAE to make such orders, there was little danger of ‘disharmony or confusion or conflicting decisions’.

The remainder of Mrs Justice Gloster’s judgment focused primarily on whether there was a sufficient link between the jurisdiction of the English courts and the defendants and whether, if a freezing order was made, the court would be able to enforce it.

THE LINKS BETWEEN THE 
DEFENDANTS AND THE JURISDICTION 
OF THE ENGLISH COURT

The defendants argued that their connections with England were 
non-existent or tenuous at the very best. They were foreign companies and their directors were neither resident nor domiciled in England. While there was a FAL Group office in London, this belonged to a different (English) company within the FAL Group. Furthermore, the defendants did not have any assets in England: the RBS bank accounts could not, they argued, be regarded as assets since they had been overdrawn since early 2012 and there was no realistic prospect that money would be paid into the accounts in the future.

Notwithstanding these submissions, Mrs Justice Gloster found that the necessary links with the English jurisdiction were established on the evidence before the court for the following reasons:

  1. the credit facilities that were the subject matter of the loan agreements and guarantees was finance raised from a UK bank, in London, subject to English law and with English court exclusive jurisdiction clauses;
  2. the proper law, jurisdiction and consent clauses suggested a recognition on the part of the defendants that they would be subject to the enforcement powers and procedures of the English courts;
  3. the agreements were signed in London and the defendants agreed to accept service of process and all notices in London;
  4. while it was difficult, in the absence 
of any funds in the English bank accounts, to characterise those accounts as ‘assets’, they did demonstrate a real link or connection to the English jurisdiction, particularly given the obligation to pay the ships’ earnings into the accounts; and
  5. the first and second defendants held themselves out as having an operational presence in England, which again emphasised the real connection between the defendants and England.

ENFORCING THE FREEZING ORDER

Although the directors of the defendants had regularly visited England in the 
past, they said that there was no 
necessity for them to do so and they 
would not do so if they would be exposed 
to enforcement measures in England. 
The defendants argued that there was therefore no effective way of policing 
any freezing injunction made against 
them and that making any such order 
would be futile.

Perhaps unsurprisingly, Mrs Justice Gloster was not persuaded by this ‘self-serving assertion’. She said that there was no explanation, convincing or otherwise, before the Court as to why it had been necessary for the defendants to visit England in the past, but would cease to be so in the future. Furthermore, in her judgment, the defendants would not wish to be seen as being in breach of English court orders or run the risk or depriving themselves, or the FAL Group, of access to the London capital markets. Against that background, the court was entitled to assume that its orders would be complied with.

Mrs Justice Gloster concluded that:
‘… it is clearly expedient and appropriate for the English court to grant a worldwide asset freezing injunction and worldwide disclosure orders against the defendants in aid of the Sharjah proceedings under s25, notwithstanding the absence of assets within the jurisdiction… It is not inexpedient to grant the relief sought’.

COMMENT

While this decision neither represents a significant extension to the English court’s freezing injunction jurisdiction nor a clear departure from existing authorities, it does serve as an important reminder of:

  • the key principles taken into account by the English court when deciding whether or not to grant a worldwide freezing injunction; and
  • the significant reach of the English court’s freezing order jurisdiction.

Critical to the decision to continue the worldwide freezing injunction in this case was the existence of the defendants’ English credit facilities and bank accounts, which operated pursuant to loan agreements and guarantees governed by English law and English court exclusive jurisdiction clauses. These, in the Court’s judgment, established the requisite ‘real link or connection’ with the English jurisdiction.

While the headline to this case concerns the absence of assets in the jurisdiction, it should not be forgotten that this was because the defendants, in clear breach of the English law agreements, failed to pay funds into English bank accounts. But for those breaches, the defendants would have had assets in the jurisdiction. Mrs Justice Gloster made plain in her judgment that ‘it is not open to the defendants, when it suits their purposes to do so, to deny that they have any relevant connection or link with this jurisdiction’.

This judgment certainly confirms that the absence of assets from the jurisdiction does not act as an automatic bar to a worldwide freezing injunction being granted: other factors can, on the particular facts of a case, create the necessary connection to the jurisdiction. However, this case does not represent the opening of the gates to a flood of successful applications from parties to foreign litigation looking to borrow one of the English court’s ‘nuclear weapons’ to aid a dispute where there is 
no ‘real link or connection’ to the 
jurisdiction.