OBTAIN AN INJUNCTION: PAY TENS OF MILLIONS IN COMPENSATION: ANOTHER WARNING LESSON

This blog has looked several times at the dangers of obtaining injunctions. A particular danger is the undertaking in damages that has to be given when obtaining an injunction to freeze assets.  The judgment of Mr Justice Males in Fiona Trust & Holding Corporation -v- Yuri Privalov & others [2016] EWHC 2163 illustrates this point.

The potentially devastating consequences of a freezing order have often been recognised. It is only just that those who obtain such orders to which they are not entitled, a fortiori when they are guilty of serious failures to disclose material facts and have pursued claims described by the trial judge as “obviously unsustainable”, should be ordered to provide appropriate compensation for losses suffered.”

THE CASE

The claimant obtained a freezing injunction against the assets of a businessman. That injunction was discharged upon £205. million being paid into a designated account. The sums frozen were far in excess of the sums for which the claimant eventually obtained judgment.

THE INJUNCTIONS THEMSELVES HAD BEEN WRONGFULLY OBTAINED

The injunctions had been obtained wrongly.

  1. Moreover, when they applied for the orders, the claimants committed serious and culpable breaches of their duty of full and frank disclosure, both in 2005 and in 2007. In brief, they failed to disclose in 2005 that (1) many of the transactions of which they complained had been considered by and were carried out with the approval of the Executive Board of Sovcomflot and (2) Sovcomflot had had the wrongdoing of which it complained investigated by investigators who had, to Sovcomflot’s knowledge, used unlawful methods to obtain information. In 2007 the claimants misled the court regarding both these matters.
  2. In order to obtain the freezing orders the claimants were required to give the usual undertakings in damages, namely that “If the court later finds that this order has caused loss to the respondent, and decides that the respondent should be compensated for that loss, the applicants will comply with any order the court may make”. As this and other cases demonstrate, the giving of such an undertaking is not a mere formality. It may represent a significant liability for a claimant. Failure to honour the undertaking is a contempt of court.

THE DEFENDANT’S APPLICATION

The defendant sought damages for losses incurred as result of having assets frozen. He argued that he would have invested the sums.

THE JUDGMENT

The judge rejected the claimant’s argument that damages should not be paid because the defendant did not come to court “with clean hands”.   He found that the money that was frozen would be invested in a programme of new buildings. Damages would be awarded accordingly, giving credit for interest that had been earned on the money whilst it was frozen.
  1. As I began this judgment by observing, Mr Nikitin has been found to be dishonest in at least some of his business dealings and untruthful in his evidence in this court. It may therefore seem odd to be awarding damages for his benefit running into tens of millions of dollars. However, as Andrew Smith J pointed out at [32] of the enforcement judgment, even serious and well-founded criticisms of a defendant’s character do not mean that claimants can be less scrupulous in complying with their duties when applying for a freezing order. Nor do they provide a reason not to enforce an undertaking:
“It is an integral part of the court’s procedure to require undertakings when making such interim orders so that defendants can be compensated in appropriate cases, and it is no less important where the character of the defendant or the nature of the case apparently justifies a freezing order.”
  1. The potentially devastating consequences of a freezing order have often been recognised. It is only just that those who obtain such orders to which they are not entitled, a fortiori when they are guilty of serious failures to disclose material facts and have pursued claims described by the trial judge as “obviously unsustainable”, should be ordered to provide appropriate compensation for losses suffered.

RELATED POSTS

On without notice applications and the duty of candour

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