Fourie v Allan Le Roux & Ors

Mr Allan Le Roux was and is the controlling shareholder of Herlan Edmunds Investment Ltd (“HEI”), a company incorporated in the Republic of South Africa and Fintrade Investments Ltd (“Fintrade”), a company incorporated in England. HEI was and is the holding company of Herlan Edmunds Engineering (Pty) Ltd (“HEE”) which was also incorporated in the Republic of South Africa. In March 2001 HEE acquired the business and assets of Smith’s Wheels (Pty) Ltd, now called Guestro Wheels (Pty) Ltd (“Guestro”). In addition it took a sub-lease from that company of factory premises at Germiston, South Africa, from which to carry it on.

The business so acquired was the manufacture of alloy wheels. A practice developed whereby alloy wheels supplied to buyers from overseas were invoiced to Fintrade and, at a higher price, by Fintrade to the overseas buyer. There is an issue whether this practice was regulated by a distribution agreement made in April 2001 but that is not directly relevant to these appeals. HEE obtained finance for the purposes of its business on terms which I shall describe later from three sources, namely Wesbank (a division of First Rand Bank Ltd), Cutfin and Bankfin (parts of ABSA Bank Ltd). In May 2002 HEE was put into provisional liquidation on the application of Guestro. The provisional liquidation was discharged in September 2002 on the ground that the debts of HEE had been paid in full, in the case of Wesbank, Cutfin and Bankfin by Mr Le Roux or a company associated with him.

But the business of HEE did not survive for long. In July 2003 it abandoned the factory premises at Germiston. In October 2003 Guestro and its parent company Dorbyl Ltd (“Dorbyl”) commenced arbitration proceedings against HEE for the recovery of rent due under the sublease of the factory at Germiston which gave rise to an award made on 1st June 2004 for R19m. On 3rd and 4th November 2003 Mr Le Roux and Fintrade commenced proceedings against HEE in the Germiston Magistrates Court and obtained, on 7th November 2003, orders authorising them to seize the plant and machinery of HEE.

On 15th June 2004 Preller J sitting in the Transvaal Division of the High Court of South Africa made an order on the application of Guestro and Dorbyl based on the arbitration award for the compulsory winding up of HEE and HEI. He appointed Mr John Fourie to be the provisional liquidator. Mr Fourie considered that the assets of HEE had been illicitly ‘stripped out’ by Mr Le Roux, Fintrade and others. On 2nd July 2004 he obtained from Preller J various further orders including authority to institute proceedings in England for the recovery of property of HEE and HEI and interim orders with immediate effect authorising him to attach certain plant and equipment of HEE and setting aside the order of the Germiston Magistrates. In addition Preller J directed the issue of a letter of request to the appropriate division of the High Court in England to act in aid of the Transvaal Division of the High Court of South Africa.

Fortified by the order of Preller J, Mr Fourie applied ex parte to Park J on 9th July 2004 for freezing orders against, inter alia, Mr Le Roux and Fintrade. Park J granted the relief sought (“the First Order”) until 23rd July or further order, but limited to assets to the value of £3.4m, on the undertaking of Mr Fourie to issue and serve an originating application seeking such relief pursuant to s.426 Insolvency Act 1986. Such an application was duly issued on 12th July 2004. The First Order was continued until 1st December 2004 or further order by HH Judge Norris QC sitting as a deputy judge of the High Court on 26th July 2004. An application to discharge the First Order for want of jurisdiction made by Mr Le Roux and Fintrade on 28th July 2004 came before Mr John Jarvis QC, sitting as a deputy judge of the Chancery Division on 28th and 29th September 2004. By his order made on the morning of 30th September 2004 he discharged the First Order and ordered Mr Fourie to pay the costs of the respondents, including Mr Le Roux and Fintrade, to be assessed on an indemnity basis. The first appeal with which this Court is concerned is brought by Mr Fourie with the permission of Jacob LJ. He seeks an order setting aside the order of Mr Jarvis QC.

In the afternoon of 30th September 2004 Mr Fourie and the two additional joint provisional liquidators who had by then been appointed (“the Joint Liquidators”) issued a claim form seeking relief (a) under South African law pursuant to s.31 South African Insolvency Act and s.424 South African Companies Act, and (b) under English law for misappropriation of assets belonging to HEE and breach of contract. They applied to Mr John Jarvis QC on the same evidence as before for freezing orders in the same terms as the First Order. After hearing further argument Mr Jarvis QC granted such relief (“the Second Order”) against Mr Le Roux and Fintrade, but limited to assets to a value of £1m, on their undertaking to serve particulars of claim within 7 days.

The application to continue the Second Order until trial or further order came before Blackburne J on 19th to 21st, 25th and 26th October 2004. He allowed the joinder of HEE as an additional claimant. On 12th November 2004 he handed down judgment. He concluded that the Letter of Request dated 2nd July 2004 was inadequate to engage the provisions of s.426(5) Insolvency Act 1986 so as to provide a jurisdictional basis for the relief sought under the two provisions of the law of South Africa to which I have referred. After further argument on 25th November 2004 he granted to HEE alone freezing orders (“the Third Order”) in the same form as the Second Order but subject to a limit of £750,000, the giving by HEE of the usual cross-undertaking in damages and the undertakings of the Joint Liquidators to be responsible for costs and any damages under HEE’s cross-undertaking. The effect, as Blackburne J recognised, was that the Second Order was superseded and expired. The second appeal with which this Court is concerned is brought, with the permission of Blackburne J, by Mr Le Roux and Fintrade. They contend that in setting the limit of £750,000 the judge failed to take account of certain cross-claims arising from the Wesbank, Cutfin and Bankfin transactions which would have extinguished or so reduced the limit as to make the grant of any freezing order inappropriate. In addition HEE has applied for permission to appeal from the order of Blackburne J seeking to increase the limit from £750,000 to £1,574,000.

Accordingly the issues are:

As his order shows the application before Park J on 9th July 2004 was supported by affidavits sworn on that day by Mr J.D.K Reitz, Mr F.W.Weideman and Mr H.E.Wainer, a draft Originating Application under s.426 Insolvency Act 1986 and a skeleton argument of Counsel for Mr Fourie. Exhibited to Mr Reitz’s affidavit is the affidavit of Mr Fourie sworn on 2nd July 2004 in support of his application to Preller J, the order of Preller J and the Letter of Request issued by order of Preller J. It is convenient to start with the latter documents.

The respondents to the application to Preller J were Mr Le Roux, Mr Vermaak, Mr Van Der Grijp and Smith Wheels Sales & Marketing (Pty) Ltd. Mr Fourie described the history of HEE and HEI and the involvement of the respondents. In paragraph 8 Mr Fourie stated that

In paragraph 9 Mr Fourie summarised the collusive conduct on which he relied. It included

Mr Fourie then set out the names of various companies incorporated in England of which he alleged that Mr Le Roux was a director. He averred that they operated bank accounts in England. After summarising the orders which he sought from Preller J Mr Fourie described the purpose of that application to be (1) to set aside the order made by the Germiston Magistrates Court on 4th November 2003, (2) to permit him to enter certain premises of Guestro and to take possession of specific plant and equipment which he alleged belonged to HEE and (3) to obtain letters of request “so that I may be placed in a position to obtain access to assets of [HEE and HEI] (or funds derived from the sale or other disposal of such assets) situated in the United Kingdom”. Mr Fourie then set out at some length the previous history of HEE and HEI, most of which and so far as necessary, I have already summarised.

Preller J acceded to Mr Fourie’s application. He directed the issue of the letter of request to which I refer in paragraph 14 below. By his order made on 2nd July 2004 he authorised Mr Fourie to issue and pursue to final determination in England such proceedings as might be necessary (a) to secure recognition of his appointment as liquidator of HEE and HEI, (b) to recover all movable property and funds in Bank Accounts situated in England which is or was the property of HEE and HEI, (c) to achieve the proper and effective winding up of HEE and HEI and (d) to obtain injunctive relief and/or disclosure against any party, specifically the banks at which any of the companies named in Mr Fourie’s affidavit maintained accounts. In paragraph 7 of his order Preller J directed Mr Le Roux and the other respondents to appear and show cause why a final order should not be made (1) authorising the sheriff to attach the plant and equipment at Smith Wheel Sales & Marketing (Pty) Ltd’s premises identified by Mr Fourie in his affidavit and (2) setting aside the order of the Germiston Magistrates Court made on 4th November 2003 and the notice of execution issued thereunder. In paragraph 8 Preller J directed that the rule nisi contained in paragraph 7 should operate as an interim order with immediate effect.

By the letter of request issued pursuant to the order of Preller J the High Court of England was asked to act in aid of and to assist the High Court of South Africa by (1) recognising the winding up of HEE and HEI, (2) recognising the right, power and title of the liquidators to institute such legal proceedings in England as might be necessary and (3) making such order as it considers just and appropriate in assisting the High Court in South Africa in achieving the most effective administration of the winding up of HEE and HEI for the benefit of its creditors.

In his affidavit sworn on 9th July 2004 in support of the application for freezing orders against all eleven respondents Mr Reitz described the parties and their history. He stated that the purpose of proceeding in England was to secure the assets (or the proceeds of sale thereof) of HEE and HEI after they had been removed by Mr Le Roux and others. He stated that “I believe that the property and assets (or the proceeds of sale) have then either remained in their personal possession or been placed with any or all of the remaining respondents”. He stated that South African courts have no jurisdiction over companies incorporated in England which have no assets in South Africa so that the only way of freezing the assets of, inter alia, Fintrade was by bringing an action in the United Kingdom. He then set out the history of the matter by summarising the facts as averred in the affidavits of Mr Fourie, Mr Weideman and Mr Wainer.

In paragraph 45 of his affidavit Mr Reitz summarised the position in the following terms:

Mr Weideman had been the managing director of HEE from 1st April 2001 to September 2002. In his affidavit sworn on 9th July 2004 he gave a first hand account of the business and practices of HEE, HEI and Mr Le Roux on which Mr Fourie relied. Mr Wainer is a chartered accountant. In his affidavit sworn on 9th July 2004 he explained what is shown in such of the books and papers of HEE and HEI as Mr Fourie had obtained. It is his opinion, as expressed in paragraph 22, that:

The draft Originating Application placed before Park J, which Mr Fourie undertook to issue and serve as soon as practicable, states that the application is made pursuant to s.426 Insolvency Act 1986 and pursuant to a request from the High Court of South Africa. It states that it is made on the grounds set out in the affidavits sworn by Mr Reitz, Mr Weideman and Mr Wainer. The skeleton argument of counsel put before Park J stated that the proceedings were “ancillary to and in aid of proceedings commenced without notice in South Africa resulting in the issuance of letters of request to the English Court for assistance in particular to enable the applicant to recover funds of HEE/HEI believed to be held unlawfully by the defendant English companies controlled by [Mr Le Roux].”. Later the skeleton argument stated that the South African courts have no jurisdiction over companies incorporated elsewhere with no assets in South Africa and continued “Accordingly, the only way the liquidator could achieve the freezing of the 3rd to 11th Respondents’ assets was by bringing an action in the UK under UK law.” Reference is then made to s.426 Insolvency Act 1986 and to a dictum of mine as to the effect of that provision in Hughes v Hannover[1997] 1 BCLC 497, 518g.

It is clear from the note of the hearing before Park J made by the solicitors for Mr Fourie (and is confirmed by the transcript of the hearing with which we were later supplied) that the application to Park J was made pursuant to s.426 Insolvency Act 1986 alone. Though s.25 Civil Jurisdiction and Judgments Act 1982 was mentioned en passant there was no suggestion that the Germiston proceedings could be or were the foreign proceedings relied on if interim relief were to be granted under that section. Park J read the documents put before him with care and asked a number of searching questions of counsel for Mr Fourie. He wanted to know what would happen at the end of the period during which the assets were frozen. He was told by counsel that there would be formal proceedings related to final relief which would be either a Part 7 claim in the UK or an originating application in accordance with s.426 Insolvency Act 1986. Park J stated that by the return date Mr Fourie must have identified what was described as ‘an exit route’, by which was meant the process within which the interim freezing order might be made. He suggested that the relationship with the South African proceedings needed to be thought through. The terms of the order of Park J were finalised on 12th July 2004.

The order of Park J stated that it was made at a hearing without notice to the respondents and in response to a letter of request dated 2nd July 2004 from the High Court of South Africa. The freezing order was in normal form. It stated that each of the eleven named respondents must not remove from England and Wales or in any way dispose of, deal with or diminish the value of any of his assets which are in England and Wales up to the value of £3.4m. Each respondent must, subject to the usual exceptions, provide information as to his assets. In addition to the undertaking to issue and serve the proceedings to which I have referred it gave leave to serve Mr Le Roux out of the jurisdiction in South Africa.

The application to continue the order of Park J came before HH Judge Norris QC on 23rd and 26th July 2004. The skeleton argument of counsel for Mr Fourie informed him that the proceedings were ancillary to and in aid of proceedings commenced without notice in South Africa to enable the recovery of funds of HEE and HEI. It informed the judge that there had been a further order made in that jurisdiction directing a Commission of Enquiry into the affairs of HEE and HEI to be conducted by Friedman J and another letter of request. Counsel for Mr Fourie indicated that he understood that an application was to be made by counsel for Mr Le Roux to discharge the injunction granted by Park J but asked for it to be continued with modifications. There was no indication that the warnings given by Park J regarding the identification of an exit route or consideration of the relationship with the proceedings in South Africa had been heeded. Judge Norris QC noted that he had been informed of an argument that there was no jurisdiction to make the freezing order but as it had not been advanced before him he could take no account of it. In the event he continued the injunction until 1st December 2004 or further order.

The application to discharge it was issued by all the respondents on 28th July 2004. The grounds for the application included the allegation that there was no jurisdiction to grant it. The respondents also applied for a hearing in the long vacation. This came before Lloyd J on 30th July 2004. The skeleton argument put before him by Counsel for Mr Fourie pointed out that the order made by Park J was consequent on the letter of request issued on 2nd July 2004 and the courts in South Africa had no jurisdiction over companies incorporated abroad with no assets in South Africa. Counsel asserted that “The only way, therefore, the provisional liquidator, Mr Fourie, could achieve the freezing of the 3rd to 11th Respondents’ assets was to apply for such relief here: see s.426 IA 1986.” In relation to the Respondents’ complaint that they faced multiple proceedings here and in South Africa counsel asserted that “The substantive proceedings are in South Africa. The relief obtained in this jurisdiction is ancillary to that.” This was recorded by Lloyd J in paragraph 7 of his judgment:

Finally I should note that on 6th and 7th September 2004 the application to make absolute the rule nisi made by Preller J on 2nd July 2004 came before Bosielo J. He made the rule absolute observing that the Germiston Magistrates had been hoodwinked by a shameless sham committed by Mr Le Roux and Fintrade. An appeal has been lodged against the order of Bosielo J which has the effect of staying it.

The application to discharge the injunction came before Mr Jarvis QC on 28th September 2004. At that stage Mr Fourie abandoned his claims against the 4th to 11th Respondents. (He has since done so in relation to Mr. Vermaak, formerly the 2^nd Respondent) Counsel for Mr Fourie initially contended that the jurisdiction to make the order made originally by Park J arose under (1) S.25 Civil Jurisdiction and Judgments Act 1982, and/or (2) S.426 Insolvency Act 1986. Mr Jarvis rejected the second contention. A similar submission made by the Joint Liquidators in the later hearing before Blackburne J was likewise rejected. There is no appeal against either conclusion. In the course of the hearing before Mr Jarvis QC counsel for Mr Fourie modified his stance to suggest, by reference to a schedule of claims which could be brought in South Africa, that such claims might be brought in England.

S.25 Civil Jurisdiction and Judgments Act 1982 provides

Before Mr Jarvis QC counsel for Mr Fourie contended that the insolvency proceedings in South Africa constituted by the order for the compulsory winding up of HEE and HEI, with or without the application and issue of the letter of request, would constitute “proceedings” for the purposes of s.25(1). This argument was dealt with by Mr Jarvis in paragraphs 39 to 43 of his judgment. In paragraphs 41 to 43 he said

In paragraphs 44 to 46 of his judgment Mr Jarvis QC dealt with an alternative submission of counsel for Mr Fourie. The nature of the submission and the reasons for rejecting it appear clearly from those paragraphs:

At a later stage of his judgment Mr Jarvis QC referred to the passage in the judgment of Mummery LJ in Memory Corporation v Sidu (No 2)[2000] 1 WLR 1443, 1459H-1460B where he warned

Counsel for Mr Fourie contends that the deputy judge was wrong. In his oral argument before us he relied on what he described as the Germiston Proceedings, defined in his written argument as the proceedings arising from the rule nisi contained in paragraph 7 of the order of Preller J made on 2nd July 2004, as the proceedings for the purposes of s.25(1) as amended which had been or were to be commenced in South Africa. He disputed the deputy judge’s conclusion (para 42) that there must be some correspondence between the foreign proceedings and the interim relief sought in England. He contended that, in any event, such correspondence exists in that the Germiston proceedings raised the key issue of the right of Mr Le Roux and Fintrade to possession of the goods seized from HEE. He suggested that the order sought in England was necessary to ensure that any order obtained in the Germiston proceedings was fruitful. He disputed the relevance of the absence of Fintrade from the Germiston proceedings given that it was a company wholly owned by Mr Le Roux. He claimed that his contentions were supported by a passage in Smart on Cross Border Insolvency (1998) 396-399.

Counsel for Mr Le Roux points out that before Park J Counsel for Mr Fourie did not rely on either s.25 or the Germiston Proceedings. He supports the judge’s conclusion and his reasons for it.

I prefer the submissions of counsel for Mr Le Roux. It is quite clear from all the documents before Park J, to which I have referred, and from the course of the application before him that the jurisdiction on which counsel for Mr Fourie relied was s.426 Insolvency Act 1986 and the associated letter of request and on that alone. As decided by both Mr Jarvis QC and Blackburne J, from which there are no appeals, that section and the relevant letter of request do not give rise to any jurisdiction to make the order Park J was persuaded to make. Bearing in mind the duties to which Mummery LJ referred and the warnings given by Park J himself the absence of any jurisdiction as claimed is fatal to the injunction granted by Park J and continued by Judge Norris QC.

In any event I agree with the judge in concluding that the Germiston Proceedings could not found jurisdiction under s.25 Civil Jurisdiction and Judgments Act 1982 to make the order Park J made. The meaning of the word “proceedings” in the context of s.25 has not been considered in any reported case to which we were referred. However wide a meaning it is given it cannot, in my view, comprehend foreign proceedings to set aside a foreign court order of the sort made by the Germiston Magistrates and to which, in the case of Fintrade the defendant to the application in England is not a party and by which it was not bound. It is not, as it seems to me, that the foreign claim must be for one or other of the remedies mentioned by Mr Jarvis in paragraph 45 of his judgment. Rather, the foreign claim must be such that the relief sought in England can be identified as interim relief in relation to the final order sought abroad in the proceedings relied on. In my view there is no such connection between the Germiston proceedings and the freezing orders made by Park J.

In paragraphs 52 to 60 Mr Jarvis also rejected the late contention of counsel for Mr Fourie by reference to the schedule of proceedings which might be brought in South Africa “that it was always the intention of the applicant to bring claims in England”. He pointed out (para 53) that any such intention was completely unformulated on 9th July and that plainly the applicant had not then decided the method by which he would proceed. The deputy judge pointed out (para 54) that to obtain relief in England there must be a pre-existing cause of action. He said

In paragraph 55 of his judgment Mr Jarvis QC said

In paragraphs 60 and 61 the deputy judge added:

Counsel for Mr Fourie criticises these statements on the grounds that so long as causes of action exist at the time the freezing order is granted it matters not that substantive proceedings for their enforcement have not been formulated. He submits that the existence of substantive proceedings or the intention to commence them is irrelevant to the existence of the jurisdiction. He points out that the necessary causes of action did exist because Mr Jarvis himself granted freezing orders in relation to them later on 30th September. He contends that there is no ground for thinking that such causes of action came into existence after 9th July 2004 when Park J made the First Order.

Counsel for Mr Le Roux disputes these propositions. He points out that causes of action under English Law were not relied on before Park J, were disclaimed before Lloyd J and were not in terms advanced before the deputy judge because the claims referred to were claims under South African law. He points out that jurisdiction to make an interim order depends on its activation by the commencement of substantive proceedings or an undertaking so to do.

Once again I prefer the submissions of Counsel for Mr Le Roux. I would repeat mutatis mutandis what I have said in paragraph 31 in relation s.25 Civil Jurisdiction and Judgments Act 1982. There was no suggestion of substantive claims being made in England before Park J or, indeed, at any time before the further application was made to Mr Jarvis on the afternoon of 30th September. There had been no activation of the jurisdiction whether by the issue of substantive proceedings in England or an undertaking to do so. Without either, the jurisdiction to grant any form of interim relief in support of the relevant cause of action under English law simply does not exist. In any event the relevant party, namely, HEE was not before the Court. In my view the deputy judge was right.

For all these reasons I would dismiss the appeal of Mr Fourie against the order of Mr Jarvis QC discharging the First Order as made without jurisdiction.

Mr Jarvis QC heard argument on the order for costs he should make immediately after he had handed down his judgment. Counsel for Mr Le Roux and Fintrade asked for an order for his clients’ costs to be assessed on the indemnity basis and paid by Mr Fourie. Counsel for Mr Fourie did not contest that his client should pay them but opposed an assessment on the indemnity basis.

The conclusion of Mr Jarvis is succinctly expressed in paragraph 4 of the transcript. He said:

Counsel for Mr Fourie contends that the deputy judge erred in principle in that he failed to take account of the fact that there is no authority on what constitutes proceedings for the purpose of s.25 Civil Jurisdiction and Judgments Act 1982. He also relies on the facts that it had not been suggested that the claim form had not been promptly issued, it was not contended that Mr Fourie was in breach of any undertaking, the proceedings had been conducted openly by Mr Fourie at all stages and that there had been no appeal from the order of HH Judge Norris QC.

As counsel for Mr Le Roux pointed out the court has a wide discretion whether to order the assessment of costs on an indemnity basis (Civil Procedure para 44.4.2) and this court will rarely disturb the judge’s order as to costs (Voice and Script International v Algafar[2003] EWCA Civ. 736 para 29). He contended that there was ample material to justify the exercise of the discretion in the way Mr Jarvis did and no ground on which this court could be entitled to interfere.

I agree with counsel for Mr Le Roux. The question is not whether I would have made the same order as Mr Jarvis did, but whether he erred in principle in the exercise of his discretion. I see no error in principle. The judge plainly had all material facts in mind and those facts justified the conclusions he reached.

For these reasons I would dismiss the appeal against that part of the order of Mr Jarvis as directed the costs of the Respondents to be assessed on the indemnity basis. There is no appeal against the further direction that they be assessed and paid forthwith. The stay on that part of his order should, therefore, be lifted.

The point here is that the deputy judge ordered Mr Fourie to pay all the costs of the proceedings, not just the costs of the application to discharge, notwithstanding that some of them were incurred in respect of matters, such as the affidavit evidence, which were subsequently used and used successfully in obtaining the Second Order and the Third Order. Counsel for Mr Fourie submits that such an outcome is unjust. He submits that the deputy judge should have revisited his order for costs in the light of the fact that the application for the second order was made on the basis of the same material. He submits that this court should now do so. Counsel for Mr Le Roux submits the later order of Blackburne J took account of this factor. It is not apparent to me that that is so.

There is, in my view, merit in the contention of counsel for Mr Fourie. It seems to me that justice would be done by a direction to the costs judge to apportion between the parties as indicated in the previous paragraph the total costs of the application for and discharge of the First Order and the costs of the further application made to Mr Jarvis on the afternoon of 30th September 2004.

The application for the Second Order was made to Mr Jarvis QC by the Joint Liquidators on informal notice to Mr Le Roux and Fintrade in the afternoon of 30th September 2004. The Joint Liquidators had issued (or had undertaken to issue) a claim form seeking relief under South African law pursuant to s.31 South African Insolvency Act and s.424 South African Companies Act and undertook within 7 days to serve their particulars of claim. By then the evidence consisted of twelve affidavits sworn on behalf of the Joint Liquidators and twelve on behalf of Mr Le Roux and Fintrade. Mr Jarvis granted the Second Order until 12th October 2004 or further order against both Mr Le Roux and Fintrade in the same form as before but limited to assets up to a value of £1m.

The particulars of claim were served on 8th October 2004. The claimants were the Joint Liquidators. The defendants were Mr Le Roux, Mr Vermaak and Fintrade. The history of the matter and the relevant factual averments are set out in paragraphs 1 to 56. In paragraphs 57 to 78 breach of s.424 South African Companies Act is alleged. In paragraphs 59 to 62 the Joint Liquidators contend that in breach of contract Fintrade failed to pay for wheels sold and delivered by HEE in the period April 2001 to May 2002. In paragraphs 63 and 64 the Joint Liquidators allege misappropriation of the assets of HEE by Mr Le Roux and Fintrade. Paragraphs 65 contains allegations of the falsification of documents and paragraphs 66 to 70 contain allegations of fact relating to the Germiston proceedings. The allegations relating to the claim under s.31 South African Insolvency Act are contained in paragraphs 79 to 89. Paragraphs 90 to 93 raise claims under English law for breach of fiduciary duty and conspiracy to defraud and injure HEE and seek remedies in damages and equitable compensation.

On 21st October 2004 the Joint Liquidators applied for an order continuing the Second Order but with an increase in the limit from £1m to £3.4m. This is the application which was heard by Blackburne J on 19th to 22nd and 25th and 26th October 2004. On 21st October 2004 he struck out Mr Vermaak as the second defendant and gave permission to the Joint Liquidators to join HEE as the fourth claimant.

Blackburne J handed down his judgment on 12th November 2004. He held (paras 46 to 60) that the letter of request issued by the High Court of South Africa on 2nd July 2004 was insufficiently specific to engage the provisions of s.426(5) Insolvency Act 1986 with the consequence that the High Court in England had no jurisdiction to grant relief under either s.424 South African Companies Act or s.31 South African Insolvency Act. In the case of the claims based on conspiracy and breach of fiduciary duty he held (paras 61 and 62) that the causes of action were vested in HEE not the Joint Liquidators but that HEE and its creditors should not be prejudiced by the failure of the Joint Liquidators to sue in the name of HEE. Blackburne J then held that he had jurisdiction to grant freezing orders at the suit of HEE (para 68).

In paragraphs 92 and 97 Blackburne J concluded that there was a strongly arguable case that (1) Fintrade was substantially indebted to HEE at the time HEE went into liquidation in June 2004 and that (2) plant and equipment of HEE was taken by Mr Le Roux and Fintrade without any right to do so. In paragraph 105 he concluded that the strong impression left by the evidence is that Mr Le Roux and through him Fintrade are willing to resort to underhand methods to defeat the just claims of others and are willing to do so notwithstanding the existence of proceedings (both in and out of court) to make good those claims. There is no appeal against any of the conclusions I have so far mentioned.

In paragraphs 106 to 113 the judge considered what limit to put on the freezing orders. The existing limit was £1m but HEE through the Joint Liquidators sought an increase to £3.4m. He analysed (para 107) the quantum of the claims into two elements: the value of the underpayment claim and of the misappropriated plant and equipment. In relation to the former, erring on the side of caution, he assessed (para 108) the value of the underpayment claim on the evidence as it then stood at £400,000.

With regard to the value of the plant and equipment he took the figure from what was described as the Klopper valuation. Mr Klopper had been the provisional liquidator of HEE in the summer 2002 and had obtained a forced sale valuation as at 30th July 2002. Converted from Rand to Sterling the value came to £490,000. From that Blackburne J deducted the sum of £140,000 representing the value of the Wesbank assets (see para 59 below) to produce the net sum of £350,000. In doing that calculation he refused to make any addition for the value of certain intellectual property rights.

The limit of £750,000 placed on the freezing order was thus made up of £400,000 for the underpayment claim and £350,000 for the misappropriation of assets claim. Blackburne J gave Mr Le Roux and Fintrade permission to appeal limited to the issues of quantum raised in paragraphs 9(2) and 9(3) of their skeleton argument dated 24th November 2004 and the further question whether if wholly or partially successful on those issues as a matter of general discretion the Third Order ought to be discharged. In giving that permission Blackburne J recognised that he might have exaggerated the quantum of the claim against Mr Le Roux and Fintrade.

Counsel for Mr Le Roux and Fintrade contends that the judge did indeed exaggerate the size of the claims made against them. Their contentions are, in summary, that (1) the judge was wrong to attribute any amount relating to the underpayment claim to Mr Le Roux as the claim lies in contract and Mr Le Roux was not a party and (2) the judge failed to take into account cross-claims available to Mr Le Roux and/or Fintrade relating to (a) the Wesbank Agreement, (b) the Cutfin Agreement and (c) the Bankfin Agreement.

In my view there is nothing in the first objection even if, which it does not, it came within the permission to appeal granted by Blackburne J. It is quite true that the underpayment claim against Fintrade is made in contract. It is also true that there is no evidence that Mr Le Roux was a party to any of the contracts relied on. But the submission overlooks the fact that equivalent claims are made against Mr Le Roux in tort. Thus in paragraph 59 it is asserted that

At one stage counsel for Mr Le Roux and Fintrade sought to counter this argument by asserting that Mr Le Roux could not be personally liable as alleged. He relied on the decision in Said v Butt[1920] 2KB 497. The response of Counsel for HEE was to assert that Mr Le Roux did more than merely exercise constitutional control. He relied on MCA Records Inc v Charly Records Ltd[2003] 1 BCLC 93, paras 48-50. In my view, it is not possible in advance of the trial to determine this issue and no assumptions should be made in favour of Mr Le Roux.

I turn then to the three agreements on which Mr Le Roux and Fintrade rely. The Wesbank Agreement was described by Blackburne J in paragraph 17 of his judgment. In summary there was an agreement between HEE and Wesbank, a division of First Rand Bank Ltd, under which Wesbank had provided funding for the purchase of certain equipment by HEE. The agreement reserved to Wesbank the ownership of the equipment until all amounts due under the agreement had been paid off. It gave to Wesbank the right to take possession of the equipment in the event of non-payment of any amount due. In September 2002, by which time HEE had become indebted to Wesbank in the sum of R3,823,776, Mr Le Roux purchased Wesbank’s rights under the agreement for which, according to two paid cheques in evidence, he paid R3,823,776. Thus Mr Le Roux became entitled to the equipment in succession to Wesbank. It is that equipment for which Blackburne J deducted £140,000 when computing the value of the misappropriated assets. But he made no deduction for the balance of the debt.

The Cutfin Agreement was entered into by HEE before its provisional liquidation in 2002. It was a factoring agreement with Cutfin Ltd, part of the ABSA Bank Ltd. By August 2003 HEE owed Cutfin at least R4.2m. On or about 8th August 2003 Cutfin agreed to sell to Mr Le Roux its right title and interest in all claims it had against HEE for R4.2m. The evidence includes copies of the cheque drawn on the account of Mr Le Roux by which he paid R4.2m to Cutfin. Blackburne J made no deduction from the quantum of the claims on account of any cross-claim arising from the payment of R4.2m to Cutfin.

Bankfin is another part of ABSA Bank Ltd. Sometime before the provisional liquidation of HEE in 2002 Bankfin agreed with HEE to finance the purchase of paint plant. By 10th September 2002 HEE owed Bankfin the aggregate sum of R1.4m. By two cheques dated 10th and 13th September 2002 drawn on the account of Mr Le Roux the debt due by HEE to Bankfin was repaid in full. As in the case of Cutfin, Blackburne J made no deduction on account of any cross-claim based on the payment of R1.4m. HEE points out that Blackburne J did not give permission to appeal in relation to the Bankfin Agreement but gives no good reason why such permission should be refused. Accordingly I would grant permission to appeal in respect of the Bankfin Agreement so that it may be considered with the other two similar transactions.

The primary case for Mr Le Roux and Fintrade is that each of them, because the judge did not consider it appropriate to differentiate between them, should have received credit for the cross-claims arising from payment of the Wesbank, Cutfin and Bankfin debts due by HEE. At the rate of exchange used by the judge (R11.58 = £1) the value of the cross-claims is Wesbank £280,000, Cutfin £362,700 and Bankfin £120,900, making a total of £763,600. If this submission is well founded then the credit would exceed the limit on the freezing order. Even if the cross-claims had to be appropriated to one or other of them they would so reduce the limit as to make any freezing order of minimal utility.

These contentions are resisted by Counsel for HEE on a number of grounds. First, he asserts, in the absence of any evidence that there is a set-off in the liquidation of a company incorporated in South Africa for mutual dealings comparable to Insolvency Rule 4.90 there is no reason why the limit on the freezing order should be reduced on account of any cross-claim. Second, though not expressly stated the judge had considered these cross-claims and decided that the picture was not clear enough to warrant any reduction in quantum.

Counsel for Mr Le Roux submits that the limit to be placed on the freezing order is a matter for the discretion of the judge in doing overall justice between the parties so that whether or not there is a mutual dealings set-off under South African law is immaterial. He does not assert any set-off under South African law and suggests that the limit to be attached to a freezing order is a matter of procedure to be dealt with in accordance with English law. He draws an analogy to CPR Rule 40.13.

I do not doubt that, ultimately, the limit to be placed on a freezing order is a matter for the discretion of the judge making the order. Commonly cross-claims will be netted off. But if under the relevant system of law a set-off is not permissible then there does not appear to be any good reason to reduce the face value of the claim to be protected by the freezing order. In this case there would be no equitable set-off as the there is no close or other relationship between these dealings and the alleged liability. Cf Hanak v Green [1958] 2 QB 9, 24. Similarly there is no doubt that whether or not a set-off for mutual dealings would be permitted in the liquidation of HEE is a matter of South African law. South African law cannot be presumed to be the same as Insolvency Rule 4.90. Shaker v Al Bedrawi[2002] EWCA Civ 1452; [2003] Ch 350 paragraph 64 – 67. Moreover The Principles of International Insolvency [1995] by Philip R.Wood para 1-25 strongly suggests that there is no such provision. In my view this is sufficient reason not to disturb the judge’s order in fixing a limit of £750,000.

Counsel for HEE accepted that he could not challenge the judge’s conclusion (para 110) that Mr Le Roux’s claim to the Wesbank assets and debt was unimpeachable. But he pointed out that there was very considerable doubt in the case of Cutfin and Bankfin. He relied on the affidavit of Mr Le Roux sworn on 25th July 2002 in relation to the provisional liquidation of HEE. In paragraph 18 Mr Le Roux indicated that the Cutfin debt would be paid by HEI as the shareholder in HEE and the resulting credit balance used to pay up a further issue of share capital. As the statutory books and accounts of HEE have been lost or destroyed it is not possible to be sure at this stage that such intention was not carried out. Both the Cutfin and Bankfin debts were items in the loan account of Fintrade which was much debated before the judge. The judge’s conclusion on these issues (para 86) was that it was impossible to resolve these matters on a hearing such as that before him.

For all these reasons I conclude that the judge’s order should not be varied by any reduction in the limit applicable to the freezing order granted against either or both of Mr Le Roux and Fintrade.

Although no permission had been granted we invited both parties to address us on the merits on the assumption that it had been. If in the light of the arguments we were satisfied that HEE is right then it would be appropriate to grant permission and to allow the cross-appeal. If we were not then the application for permission would be refused.

HEE claims that the limit on the freezing order should be increased from £750,000 to £1,574,000 and some provision for costs. The grounds for this contention are that (a) the judge undervalued the assets misappropriated by wrongly adopting the Klopper valuation, (b) the judge should have valued the intellectual property rights at the sum of £194,000 put on them by Mr Le Roux himself and (c) the judge was wrong not to include any amount on account of the costs of the proceedings.

The reasons why Blackburne J adopted the Klopper valuation of the plant and equipment appears from paragraph 109 of his judgment. He said

HEE points out that there were before the judge three valuations of the plant and equipment, namely, the Klopper valuation at R5.65m as at 30th July 2002, the price paid by HEE of R13m in June 2001 and Mr Le Roux’s own valuation at R20m in July 2002. Counsel for HEE contends that the judge’s conclusion was against the weight of the evidence. He contends that the appropriate value for the plant and equipment is R13m.

I do not agree. The judge had already pointed out the unreliability of Mr Le Roux (para 105) and the unsatisfactory nature of the valuation evidence (para 107). The Klopper valuation was both detailed and later in point of time. In my view the judge was fully entitled to take the Klopper valuation as his starting point, not least because in the skeleton argument of counsel for HEE that is the figure he was invited to adopt.

The value, if any, of the intellectual property was dealt with by Blackburne J in paragraph 111 of his judgment. He said

Counsel for HEE asks why should the judge ignore Mr Le Roux’s own assertion? But the property to which Mr Le Roux attributed a value of £194,000 was “Smiths’ trade name etc inc. Mould tools and Intelligent Property”. Thus the item was a mixture of plant and equipment and intellectual property without any indication of what value could be attributed to the one rather than the other. By contrast, in his affidavit sworn on 3rd August 2004 Mr Le Roux said that he did not expect the intellectual property owned by Fintrade to have any significant realisable value. If the judge was to give any credence at all to the evidence of Mr Le Roux there is no reason why he should prefer the first statement to the second.

Blackburne J made no addition on account of the costs of the action. In paragraph 113 of his judgment he said

Counsel for HEE submits that this was a departure from the normal practice, as indicated in Gee on Commercial Injunctions [2004] para 12.004, without any good reason. It is said that the reason given by the judge was inconsistent with his earlier findings that HEE and the Joint Liquidators had a strongly arguable case.

Counsel for Mr Le Roux and Fintrade dispute the alleged practice in relation to a pre-judgment freezing order. They point out that such a practice can be oppressive and lead to a claimant obtaining some security for his costs through the back door. In any event they contend that a judge is always entitled to depart from a practice if the facts of the case warrant it. They contend that the facts of this case do because it cannot be assumed that HEE will succeed at trial.

I agree with the submissions of counsel for HEE. The reasons for making a freezing order in this case were the existence of a strongly arguable case in HEE’s favour and an established risk of dissipation of assets by Mr Le Roux and Fintrade. These factors justified the grant to HEE of a measure of protection in respect of any final judgment to which it may eventually prove entitled. By the same measure, these factors take the situation out of the usual rule that a claimant cannot obtain security for possible costs orders in its favour. Prejudice to the pursuit and enforcement of a claim exists not only where the amount of the claim is irrecoverable, but also where the costs incurred in its pursuit are irrecoverable. Where this prejudice arises from an established risk of deliberate dissipation of assets, the court is justified in taking steps to avoid or limit it. The risk that the claim may not succeed is a consideration, but it is not a bar to the inclusion in a freezing order of an amount to cover the claimant’s legal costs any more than it is to the making of a freezing order in the amount of the claim itself. The prospect that the claim may not go to trial is another consideration, but the present litigation is hard-fought and it is clear that very large costs are likely to be incurred. A defendant should normally also be allowed to use his assets to incur reasonable costs to defend himself, but that is provided in the standard forms of freezing order. While it is a matter of discretion in what sum to order a freezing order and whether to include an amount for legal costs, a judge must exercise that discretion judicially.

Here the judge refused to “make any provision for the costs of this action” on the basis of “what I know of the action”. If he meant (as Mr Le Roux and Fintrade contend) that the claim would not necessarily succeed or would not necessarily overtop any cross-claim, that was, as I have said, no sufficient reason by itself for refusing to make any such provision, once it was decided that a freezing order was appropriate in respect of the claim itself. The judge’s reference to it not being appropriate to provide for costs “at this stage” can hardly have meant that he thought that the action might now come to an end without further costs being incurred by HEE. No other circumstances have been identified which could make it inappropriate to order some protection in respect of legal costs. The case was one where on the face of it one would expect any freezing order to cover some sum for costs, and I consider that the judge was wrong to make no such provision. HEE have suggested that their costs could amount to £500,000 and that an order should at this stage be made for £250,000. Both sums seem to me excessive, at least at this stage. I would make provision at this stage for costs of £150,000, and so increase the total amount of the freezing order to £900,000. To that limited extent, therefore, I would grant permission to appeal and allow the appeal in respect of the cross-appeal. In all other respects, I would refuse permission to cross-appeal.

In summary therefore I would