Omniway Properties Ltd v Fairlamb & Ors

In this action the claimant alleges that the first defendant, one of its directors, and the second defendant, one of its senior employees, extracted funds from it in breach of duty. On the information available, the third defendant received some only of the sums and is not sought to be made liable for more than part of the total claim of £6 million. The first and second respondents, who are first and second defendants in the action, are directors of the third defendant, who is the third respondent. Since the papers were filed, a Mr Keaney has been served with the proceedings. He is not, I think, a party to this appeal; no wrongdoing is suggested against him.

Permission to appeal is sought in this way. The learned judge, Floyd J, on 11 January 2008, made freezing orders against the first to third respondents, preventing them from disposing of their assets if that would cause them to fall below £6.8 million. The order was in the standard form, except that paragraph 10.1(d) contained a provision in relation to expenses for legal advice that the third respondent was authorised to pay the legal expenses of the first and second respondents in addition to its own legal expenses, subject to an indemnity from the first and second respondents to pay one third each of those costs respectively to the third defendant.

The evidence is that the first defendant’s assets include a house which is unencumbered and various personal chattels, including a gun collection said to be worth £25,000 cash, and vehicles. The second defendant has assets of about £64,000. The third respondent is potentially insolvent in the light of the claims made by the claimant. It has free assets of, it is said, some £790,000 against a claim of £1.5 million. There is a proprietary claim for £590,000, and I have left out of account its assets to that extent.

Mr Jones, QC for the appellant, submits that the effect of the judge’s order is that the third defendant will make a quasi-loan to the first and second defendants in the amount needed to pay their costs, so far as is not applicable to its own costs. Mr Jones submits that there is no authority in the court’s jurisprudence on freezing orders which empowers the court to give an authority for this purpose. I should say that I have read the authorisation as only giving authority for the purpose of a freezing injunction, and it has not been suggested that it would affect any question, for instance, whether there was a payment by the third respondents that would amount to a breach of duty by the first and second respondents.

The matter came before Lloyd LJ on paper. He did not have the benefit of all the submissions that I have; and he refused permission, taking the view that, in the circumstances in which the three respondents are jointly liable to their solicitors for costs, and in which there is arguably a substantial overlap in the issues affecting the three of them, it seemed to him that the order which the judge made was well within the judge’s discretion and that there was no prospect of the Court of Appeal overturning the order.

The focal point of the submissions to this court orally has been that there are substantial claims which may not be made against the third respondent but which are made against the first and second respondents. In those circumstances, and in deference to my colleague Lloyd LJ, it is, as I see it, reasonably arguable that the judge assumed that one third would always be a fair proportion for the directors to pay, without providing any means for verifying or monitoring this. There is no provision in the judge’s order for a review of the proportion and, in the light of what has been argued, it is arguably inadequate and, if it is inadequate, then there would be a gift to the directors of the proportion of their costs, for which there was express provision for recoupement by the third respondents. In addition, there is a lack of clarity about the terms of the indemnity. There is no answer to the question: when will the amounts be repaid, or are they to be adequately secured in the meantime? And there is a further issue which is appropriate for the court to consider, namely: is there a role for the court in this sphere or is it a matter which should be left to the defendants in this situation, where serious wrongdoing is alleged? In my judgment, it is appropriate for the court to consider these questions.

I have left on one side the question of whether there would be a quasi-loan because that, as Mr Jones fairly accepts, may be a point of no impact; likewise I have left on one side the question whether section 232 of the Companies Act 2006 would have any application.

In those circumstances, I propose to give leave to appeal and leave to amend the grounds of appeal in terms of the draft shown to me this morning. I will further make it clear that, if the parties are able to agree on any variation to the judge’s order, nothing in the grant of permission would prevent them from returning to the judge, though, of course, they should bring that matter to the attention of this court in case it has any effect on the grant of permission to appeal. But if the parties can, between them, find a way of resolving this question, they are much to be encouraged in that direction to avoid the delay that is inevitably involved in the grant of permission to appeal, even though it is an interim appeal.

So far as a stay is concerned, I give leave to amend the grounds of appeal to seek a stay and I grant a stay on that paragraph -- paragraph 10.1(d) of the judge’s order -- on terms that the stay will not prevent the payment of any sum authorised by a judge of the Chancery Division, or which the parties are agreed should be paid. As this is an interim matter, I envisage that it will come into the list quite soon, but I will make it clear that in my judgment this is a matter which ought to be heard as soon as reasonably possible.