The Financial Services Authority v Sinaloa Gold Plc (t/a PH Capital Invest Glen & Ors

The Financial Services Authority (“the FSA”) is the regulator of financial services and markets and carries out this function in accordance with the powers and duties conferred upon it by the Financial Services and Markets Act 2000 (“the FSMA”). In December 2010 it commenced proceedings in the Chancery Division against the three named defendants, Sinaloa Gold PLC (“Sinaloa”), PH Capital Invest and Mr Glen Hoover, whom it alleged were involved in what is commonly referred to as a boiler-room fraud involving the sale of Sinaloa shares.

Sinaloa is a UK registered company. Mr Hoover is one of its directors and is said to control the company. In association with an individual or individuals (not as yet identified) trading as PH Capital Invest, he had arranged for shares in Sinaloa to be offered for sale to third party investors at prices ranging from 62 pence to 91.5 pence per share. The value of the company is based on various gold and mineral concessions which it claims to have with parties in Mexico and the United States.

The FSA’s case is that the share sale scheme is a fraud; that the concessions either do not exist or are worthless; and that the proceeds of sale obtained from the disposal of the shares have been dissipated to parties unconnected with the company. Sinaloa does not have an approved prospectus for the sale of its shares as required by s.85 of the FSMA and the offer of the shares for sale was therefore unlawful and a criminal offence. Mr Hoover and those behind PH Capital Invest are also alleged to have committed breaches of ss. 19 and 21 of the FSMA by inviting third parties to invest in the shares.

On 17^th December 2010 the FSA made a without notice application for a freezing order against the defendants. The form of order sought and granted by the judge (Mr Kevin Prosser QC) prohibited any further sales of Sinaloa shares and restrained all three defendants from disposing of or dealing with their assets worldwide up to a value of £858,266.97. Appendix B of the order stated in paragraph (1) that the FSA did not offer a cross-undertaking in damages but included in paragraph (5) the standard form of undertaking to third parties that:

“(5)

The Applicant will pay the reasonable costs of anyone other than the Respondents which have been incurred as a result of this order including the costs of finding out whether that person holds any of the Respondents’ assets and if the court later finds that this order has caused such person loss, and decides that such person should be compensated for that loss, the Applicant will comply with any order the court may make.”

The claim form was issued following the without notice hearing. The FSA seeks declaratory relief that the defendants have committed breaches of ss. 85, 19 and 21 of the FSMA; an injunction restraining them from committing any further such breaches and orders under ss. 380(2) and 382(2) for the repayment of the investors’ monies or the payment of a just sum to compensate them for their loss.

The return date for the continuation of the freezing order was 31^st December. At the hearing David Richards J drew attention to a possible inconsistency between paragraphs (1) and (5) of the order of 10^th December but decided to continue the injunction in substantially the same form until a return date in the New Year. The undertaking in favour of third parties is a standard form provision in the form of freezing order contained in the Commercial Court Guide and the judge expressed the view that it operated as a cross-undertaking in damages in favour of third parties who suffered loss as a result of the making of the order. It was not therefore limited simply to the expenses incurred in complying with the order.

Sinaloa maintained three bank accounts at the Churchill Place branch of Barclays Bank plc. Mr Hoover was the authorised signatory. Some of the monies raised from investors were channelled through these accounts to various individuals and entities such as Seagull Enterprises Inc, a Seychellois company with a bank account in Cyprus. As part of the original freezing order, Sinaloa and Mr Hoover were each ordered to provide information about these transfers including the identity of the recipients. Barclays were served with the order and would therefore have had the benefit of the undertaking contained in paragraph (5) of Appendix B.

Presumably as a result of the observations of David Richards J, the FSA considered its position in relation to the paragraph (5) undertaking and decided that it would not offer to continue the undertaking at the adjourned hearing of its freezing order application. It wrote to Barclays on 12^th January to put the bank on notice of this and on 13^th January Mr Jonathan Phelan, the head of the FSA’s Unauthorised Business Division, made an affidavit explaining the reason for the change. He said that it had always been the practice of the FSA not to offer a cross-undertaking in damages and that the undertaking in favour of third parties had been included in orders sought in order to cover the costs incurred (e.g. by banks) in complying with the order. If the wording of the undertaking extended beyond that to include other losses then the FSA would seek to vary the undertaking so as to limit it to the costs of compliance.

In his affidavit Mr Phelan lists a number of considerations which he relies upon as justifying the restricted undertaking which the FSA would be prepared to offer. These include the FSA’s potential exposure to large compensation awards which would deter it from seeking injunctive relief and so impair its ability to carry out its functions. I shall come to the detail of these arguments later. But the bedrock for much of the argument is the exemption from liability in damages contained in paragraph 19 of Schedule 1 to the FSMA. This provides that:

“19.—(1) Neither the Authority nor any person who is, or is acting as, a member, officer or member of staff of the Authority is to be liable in damages for anything done or omitted in the discharge, or purported discharge, of the Authority’s functions.

(2)

Neither the investigator appointed under paragraph 7 nor a person appointed to conduct an investigation on his behalf under paragraph 8(8) is to be liable in damages for anything done or omitted in the discharge, or purported discharge, of his functions in relation to the investigation of a complaint.

(3)

Neither sub-paragraph (1) nor sub-paragraph (2) applies—

(a)

if the act or omission is shown to have been in bad faith; or

(b)

so as to prevent an award of damages made in respect of an act or omission on the ground that the act or omission was unlawful as a result of section 6(1) of the Human Rights Act 1998.”

The position of the FSA is that it can only be liable in damages in the discharge of its functions as regulator in the very limited circumstances specified in paragraph 19(3). It is not therefore willing to expose itself to a voluntary liability in damages which Parliament by the FSMA has expressly exempted it from in order to facilitate the carrying out of its duties. The existence of the indemnity in paragraph 19(1) is sufficient to establish and underline the rule of public policy that public authorities acting in the public interest should not be exposed to the same liabilities as private individuals acting in their own commercial interests.

The effective hearing of the application to continue the freezing orders took place on 24^th January 2011 before HH Judge Hodge QC (sitting as a deputy judge of the Chancery Division). He rejected the arguments of Sinaloa and Mr Hoover about non-disclosure by the FSA and there being no risk of dissipation and continued the freezing orders against them in the form of the undertakings which they offered. The injunction and other orders against PH Capital Invest (who did not appear) were also continued. But Barclays intervened at the hearing and contended that the order should retain the cross-undertaking in favour of third parties in the standard form in which it had originally been framed rather than in the modified version proposed by Mr Phelan in his affidavit. The judge declined to vary the undertaking in the manner sought by the FSA but granted permission to appeal on this point.

The judge accepted that the usual practice of the court when dealing with an application for an injunction by the Crown or some other public authority in exercise of its statutory duties was not to insist upon a cross-undertaking in damages in favour of the defendants. He rejected the FSA’s submissions that there was no logical difference between the position of a defendant and that of a third party on the basis that, in order to obtain the injunction, the authority must have established at least a good arguable case of wrongdoing on the part of the defendants which of itself justified the intervention of the claimant. In the case of third parties there was no allegation of wrongdoing. The issue was whether they should be protected from any loss suffered in the event that the injunction turned out to have been wrongly granted.

The judge accepted that the exemption from liability in damages contained in paragraph 19 of Schedule 1 was a strong pointer towards dispensing with a cross-undertaking in damages but was not in itself conclusive. The balance of authority indicated, he said, that the court retained a discretion in the matter which required to be exercised by balancing the interests of the public in the efficient enforcement of the regulatory framework against those of the innocent third party who may suffer loss as a consequence of the orders made. The balance, he held, came down in favour of protecting third parties:

“65.

….. It seems to me that an important consideration, in evaluating the effect and consequences of the dispensation principle, is that before an injunction will issue at the instance of an enforcement authority, the court must have been satisfied that the enforcement authority has raised an arguable case of wrongdoing on the part of the respondent. That is of no concern to, and does not affect the position of, an innocent third party. The real issue seems to me to be whether the potential costs which may fall upon a third party of a statutory body exercising its law enforcement functions should, in the general run of cases, and admitting that there may be particular exceptions in individual cases, fall on a wholly innocent third party or whether they should fall on the public purse from which the enforcement authority receives its costs and resources. In other words, the real issue seems to me to be one of the allocation of costs and resources.

66.

In my judgment, the submissions of Miss Oppenheimer for the bank are to be preferred to those of the FSA. Whilst I acknowledge the force of certain of Mr Vineall's submissions, in my judgment they are not sufficient to override the considerations identified by Miss Oppenheimer. It does seem to me that when a law enforcement body is seeking, through the civil courts, to enforce the law by way of a freezing injunction, which may have adverse financial implications for third parties who are innocent, then, as a matter of course, the usual third party undertaking as to damages should be given. I can see no logical reason for distinguishing between third party expenses and third party loss and damage.”

It is common ground on this appeal that nothing turns on the particular facts of this case or the nature of the breaches of the FSMA which the defendants are alleged to have committed. The judge approached the issue of the cross-undertaking as a matter of general principle and the parties in their submissions have done the same. This appeal therefore provides an opportunity to consider whether third parties affected by injunction proceedings of this kind are, as a general rule, to be accorded the same protection as they would be in an action between private individuals. The arguments have, however, encompassed an issue which did not surface before the judge and was only raised on this appeal by the court in order to deal as comprehensively as possible with the questions of discretion which arise. This is whether the provisions of paragraph 19 do not merely indicate that the FSA should be free of any liability on a cross-undertaking in damages but in fact exclude the imposition of any such cross-undertaking by rendering it unenforceable. If that is right then Barclays accept that the court would never impose such an undertaking on the FSA as part of an order for an injunction. This argument centres on whether a cross-undertaking in damages, despite its name, in fact imposes a liability in damages within the meaning of the statutory provisions or at all.

Before coming to the treatment of injunction applications made by public authorities it is useful to say a little about the origins of the cross-undertakings which are in issue on this appeal. The requirement to give a cross-undertaking in damages in favour of the defendant on the grant of an interlocutory injunction seems to have become established practice in the Court of Chancery by the middle of the nineteenth century. Its origin is commonly attributed to Sir James Knight Bruce who was appointed Vice-Chancellor in 1841, although there are suggestions that the practice began earlier than that. The purpose of requiring a claimant to give such an undertaking was to provide the defendant with a measure of protection against loss should it turn out at trial that the claim could not be substantiated and the injunction should not therefore have been granted. It also had the benefit of allowing the court to grant injunctive relief short of a final determination at trial knowing that the successful applicant could have to compensate the defendant if he turned out to be wrong. In this way it enabled the court “in doing that which was its great object, viz. abstaining from expressing any opinion upon the merits of the case until the hearing”: see Wakefield v Duke of Buccleuch (1865) 12 LT 628 at 629).

This was taken to its logical conclusion by the House of Lords in American Cyanamid Co v Ethicon Ltd [1975] AC 396 where the need for the claimant to establish a strong prima facie case for an injunction was discarded in favour of a test based on the balance of convenience. The availability of the cross-undertaking in damages (assuming that the claimant could be expected to meet it) is now an even more significant consideration in the exercise of the court’s discretion whether to grant an injunction. A claimant cannot, of course, be compelled to give such an undertaking but his refusal to do so is likely in most cases to result in the court refusing to grant the injunction.

In requiring the claimant to provide a cross-undertaking in damages the focus of the court was on the position of the defendant. But this changed with the advent of the Mareva injunction which operated not as a prior restraint on arguable breaches of the claimant’s legal rights but as a means of preventing a defendant from dissipating his assets in order to avoid the execution of a possible judgment. Relief of this kind could be and became wide-ranging in its effect on third parties such as banks and other asset holders whose contractual obligations to their customers and clients were necessarily interfered with by the grant of the injunction. The courts were therefore required to concentrate not only on the possible harm to the defendant of freezing his assets but also on the costs and liabilities of innocent third parties who found themselves caught up in the dispute.

In Searose Ltd v Seatrain (UK) Ltd [1981] 1 WLR 894 at 896 Robert Goff J, applying what Lord Denning MR had said in Prince Abdul Rahman Bin Turki Al Sudairy v Abu-Taha [1980] 1 WLR 1268 at 1273, required the applicant for Mareva relief to undertake to meet the costs of a bank in identifying assets covered by the order:

“Every citizen of this country who receives notice of an injunction granted by the court will risk proceedings for contempt of court if he acts inconsistently with the injunction; and the bank, like any other citizen, must avoid any such action. But where the particular account is not identified the situation is somewhat different. I do not think it is right that the bank should incur expense in ascertaining whether the alleged account exists, without being reimbursed by the plaintiff for any reasonable costs incurred. Banks are not debt-collecting agencies: they are simply, in this context, citizens who are anxious not to contravene an order made by the court, an order which has been obtained on the application of, and for the benefit of, the plaintiff. Even where the particular branch of the bank is identified, some expense is likely to be incurred in ascertaining whether the defendant has an account at the branch. But where the branch is not identified the bank will be put in a very difficult position. It is, I think, well known that Barclays Bank has over 3,000 branches in this country, and Lloyds Bank has over 2,000 branches. Are they to circulate all their branches? If they did so, it would involve them in great expense; moreover such an exercise cannot, in ordinary circumstances, reasonably be expected of them.

It seems to me that this problem can be solved, in accordance with the guidance given by Lord Denning MR in Prince Abdul Rahman's case, by requiring the plaintiff to give an undertaking in the terms which I have indicated. The effect of this undertaking will be that a bank to whom notice of an injunction is given can, before taking steps to ascertain whether the defendant has an account at any particular branch, obtain an undertaking from the plaintiff's solicitors to pay their reasonable costs incurred in so doing. The bank will then be protected; moreover the plaintiff's solicitors will no doubt be encouraged to limit their inquiry to a particular branch, or to certain particular branches.”

The same principle was applied by the same judge in Clipper Maritime Co Ltd of Monrovia v Mineralimportexport [1981] 1 WLR 1262 where he granted an injunction restraining the defendant from removing cargo out of the jurisdiction from a vessel in the port of Barry on condition that the port authority was reimbursed its loss of income and administrative costs. The case is significant because the undertaking extended beyond the costs of compliance to include contractual losses caused by the grant of the injunction thus placing the third party on the same footing as the defendant.

This treatment of third parties was approved by the Court of Appeal in Z Ltd v A-Z [1982] 1 QB 558. Lord Denning MR (at page 575) said that the judge granting a Mareva injunction “may require the plaintiff to give an undertaking in such terms as to secure that the bank or other innocent third party does not suffer in any way by having to assist and support the course of justice prescribed by the injunction”. Kerr LJ (at page 586) said that:

“… the authority of a bank or other third party to give effect to the instructions of a defendant is revoked once it has notice of the injunction in the same way, by analogy, as in garnishee proceedings: see Rekstin v. Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 K.B. 47. In practice, however, the position of banks creates particular problems, both for the banks themselves and also for plaintiffs. The problems for banks are discussed below. The problems which the procedure may unwittingly create for plaintiffs are due to the fact that it is now accepted that plaintiffs should be obliged to undertake, as a term of the order, to indemnify any third party against any costs, expenses or fees reasonably incurred by the third party in seeking to comply with the order, as well as against all liabilities which may flow from such compliance. The former indemnity is illustrated by Searose Ltd. v. Seatrain U.K. Ltd. [1981] 1 W.L.R. 894 and Clipper Maritime Co. Ltd. of Monrovia v. Mineralimportexport [1981] 1 W.L.R. 1262. The need for the latter has been accepted by this court in the present case.”

The need to protect innocent third parties against losses suffered as a result of complying with a freezing order has been re-emphasised by the decision of the Court of Appeal in Banco Nacional de Comercia Exterior SNC v Empresa de Telecommunicationes de Cuba SA [2007] EWCA Civ 662 which confirmed that a cross-undertaking in damages in their favour was required as much after judgment as it was before.

The decision in Z Ltd v A-Z led to the formulation of a standard form draft undertaking in favour of third parties which encompassed both the costs of compliance and other consequential loss attributable to the grant of the injunction. This has been carried forward into the CPR and is now incorporated as a term of the standard form freezing order contained in the Commercial Court Guide and in the example of a freezing injunction referred to in CPR Practice Direction 25A. The cross-undertaking imposed by Judge Hodge was in the standard form and, as David Richards J pointed out, includes both the costs of compliance and other losses.

Paragraph 5.1A of that Practice Direction provides that:

“When the court makes an order for an injunction, it should consider whether to require an undertaking by the applicant to pay any damages sustained by a person other than the respondent, including another party to the proceedings or any other person who may suffer loss as a consequence of the order.”

Cross-undertakings in damages do not have retrospective effect and, absent the incorporation in the order of a cross-undertaking in his favour, neither a defendant nor a third party affected by the grant of the injunction will have any claim in restitution for the loss which he has suffered: see SmithKline Beecham plc and others v Apotex Europe Ltd [2006] EWCA Civ 658. The requirement in Practice Direction 25A for the court to consider the position of third parties when granting an injunction is not directed to freezing orders. They are dealt with in para 6.1 of the Practice Direction by reference to the standard form of freezing order containing the cross-undertakings in favour of third parties referred to above. In the case of other types of injunction, the Practice Direction draws a distinction between the cross-undertaking in favour of defendants which must feature in the order unless the court orders otherwise (see para 5.1(1)) and undertakings in favour of third parties which the court must simply consider whether to require. The difference in emphasis seems to reflect the approach taken by Neuberger J in Miller Brewing Company v Mersey Docks & Harbour Company [2003] EWHC 1606 (Ch) who refused an application for the retrospective extension of a cross-undertaking in damages to some shipping agents who were adversely affected by an injunction which prevented any dealing with some imported beer which infringed the claimant’s trade mark. Neuberger J expressed the view that it would be a strong thing (in non-freezing order cases) to require a claimant:

“… to sign not merely a blank cheque in favour of the defendant, if it turned out that he should not have been granted the injunction, but a series of blank cheques in favour of third parties of whose very existence and interest he may be unaware and for whose losses he may find himself liable even though he is entitled to his injunction.”

The current Practice Direction now requires the court to take into account the position of third parties in all cases but gives no indication that the imposition of a cross-undertaking in their favour should be regarded as the default position. The court has a general discretion to be exercised on consideration of the relevant circumstances in each particular case.

In the present case we are dealing with the effect of a freezing order on the position of a bank. To that extent Barclays start with the benefit of the decision of this court in Z Ltd v A-Z to the effect that innocent third parties should be compensated not only for their costs but also for any loss which they suffer as a result of the making of the freezing order. The question for us is whether the application of that usual practice must yield to the fact that this was an order obtained by the FSA acting as a statutory regulator to prevent a fraud on investors. If the nature of the application and the identity of the applicant should in principle operate to reverse what would otherwise be the standard practice in relation to cross-undertakings in the case of freezing orders it must follow that the same would apply to other forms of injunction obtained by the FSA.

The grant of any form of injunction is always a matter of discretion for the court. Section 37 of the Senior Courts Act 1981 provides that:

“(1)

The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.

(2)

Any such order may be made either unconditionally or on such terms and conditions as the court thinks just.”

But the FSA contends that where the application is made by the Crown or another public authority exercising statutory powers for the benefit of the public, a modified approach is called for and the court should ordinarily dispense with the need for cross-undertakings in favour of either the defendants or third parties both because the application for the injunction is a method of law enforcement and (in the case of the FSA) because it enjoys a statutory immunity in respect of damages which the imposition of the usual form of cross-undertakings would effectively cancel out.

Injunctions in aid of the enforcement of a criminal statute were originally the exclusive preserve of the Crown acting through the Attorney-General. A private individual had no locus to seek or obtain such relief except through the medium of a relator action: see Gouriet v Attorney-General [1978] AC 435. There are now a number of statutory exceptions to this rule. Local authorities were given power to seek such injunctions relating to matters within their area by s.222 of the Local Government Act 1972 and, in the present case, s.380 of the FSMA authorised the FSA to apply to the High Court for an injunction restraining the contravention of the requirements of the Act. Section 381 confers a similar authority to obtain injunctions in the case of market abuse.

Until the Crown Proceedings Act 1947 abolished the Crown’s general immunity from suit the general practice of the court was not to require a cross-undertaking in damages to be given by the Crown to the defendant on the grant of an injunction. In Hoffman-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 the Department of Trade and Industry refused to give a cross-undertaking in damages when seeking injunctions to prevent excessive charges by a drug company in breach of orders made under the Monopolies and Mergers Act 1965. The House of Lords accepted that, as a consequence of the 1947 Act, it was no longer possible to justify a general rule that the Crown should never be required to give a cross-undertaking in damages as a condition of obtaining injunctive relief. But the majority of the House accepted that in cases where the injunction was sought in order to enforce the law (as opposed to protect the private rights and property of the Crown) it would be for the defendant to show some good or special reason why a cross-undertaking should be required.

Both Lord Morris of Borth-y-Gest and Lord Diplock ascribed the former practice of the court to the Crown’s immunity from suit. Referring to the decision of the Court of Appeal in Attorney-General v Albany Hotel Co (1896) 2 Ch 696 where the Crown sued to enforce its proprietary rights over Crown land but was not required to give a cross-undertaking in damages, Lord Diplock (at page 362 B-H) said that:-

“Since the practice of requiring an undertaking as to damages in suits between subjects was itself of comparatively recent origin, the exemption of the Crown from this requirement cannot be accounted for as one of the ancient procedural privileges of the Crown when litigating in its own courts. It would appear likely, however, that both North J. and the Court of Appeal accepted the argument advanced by Sir Richard Webster A.-G. that, since the Crown was not liable for damages in the ordinary way and the only mode of obtaining relief against the Crown was by petition of right, to require from the Crown an undertaking as to damages would involve an encroachment upon its immunity from liability except in those limited categories of cases in which relief could be obtained by the special procedure of petition of right.

If this is the true rationale of the decision in Attorney-General v. Albany Hotel Co. - and it is difficult to think of any other - with the passing of the Crown Proceedings Act 1947 it ceased to justify the differentiation between what should be required of the Crown and what should be required of the subject upon the grant of an interim injunction. Subject to the specific exceptions provided for by the Act, the Crown is now "liable for damages in the ordinary way" and the special procedure by petition of right has been abolished. It is expressly provided by section 21 (1) of the Crown Proceedings Act 1947:

"In any civil proceedings by or against the Crown the court shall, subject to the provisions of this Act, have power to make all such orders as it has power to make in proceedings between subjects, and otherwise to give such appropriate relief as the case may require: ..."

While some of former privileges of the Crown in relation to litigation are expressly preserved either in their previous or a modified form as, for instance, in respect to venue and to discovery, there is no express preservation of the Crown's former right to obtain an interim injunction without giving any undertaking in damages.

I conclude, therefore, that the reason for the former practice in favour of the Crown in not requiring an undertaking as to damages as a condition of the grant of an interim injunction disappeared with the passing of the Crown Proceedings Act 1947, and that it is open to your Lordships to consider afresh, in the light of the changes brought about by that Act, the principles upon which the court ought now to exercise its discretion as to whether or not to do so.”

This analysis is relied upon by the FSA in relation to their own immunity from damages under the FSMA. But, more generally, the House accepted that (absent an immunity from suit) there could be no absolute rule dispensing with the need for a cross-undertaking. It is for the defendant to justify the condition but the court, in exercising its discretion, will have regard to all relevant factors. Where the issue is whether or not to require the undertaking a highly relevant consideration is bound to be the court’s assessment of the strength of the defence.

In Kirklees Metropolitan Borough Council v Wickes Building Supplies Ltd [1993] AC 227 a local authority sought and obtained an injunction to prevent the defendant company from opening its stores on Sundays in breach of s.47 of the Shops Act 1950. The local authority declined to give a cross-undertaking in damages and the injunction was granted without such a condition being imposed. The injunctions were discharged by the Court of Appeal but re-instated in the House of Lords. The Court of Appeal regarded the practice of dispensing with a cross-undertaking in damages in law enforcement cases as a privilege limited to the Crown and not to be extended to other public authorities. But Lord Goff of Chieveley rejected this:

“I do not, however, find this reasoning persuasive. My main difficulty is that it reduces the principle enunciated by this House in the Hoffmann-La Roche case to the status of an arbitrary rule - what Dillon L.J. called "a privilege of the Crown." Yet I do not read the speeches in the Hoffmann-La Roche case as conferring a privilege on the Crown in law enforcement proceedings. On the contrary, I read them as dismantling an old Crown privilege and substituting for it a principle upon which, in certain limited circumstances, the court has a discretion whether or not to require an undertaking in damages from the Crown as law enforcer. The principle appears to be related not to the Crown as such but to the Crown when performing a particular function. It is true that, in all the speeches in that case, attention was focused upon the position of the Crown, for the obvious reason that it was the position of the Crown which was in issue in that case. But the considerations which persuaded this House to hold that there was a discretion whether or not to require an undertaking in damages from the Crown in a law enforcement action are equally applicable to cases in which some other public authority is charged with the enforcement of the law: see e.g. Lord Reid, at p. 341g, Lord Morris of Borth-y-Gest, at p. 352c, and Lord Cross of Chelsea, at p. 371b-g. In the circumstances, I find it difficult to understand why the same principle should not, in similar circumstances, apply to other public authorities when exercising the function of law enforcer in the public interest.”

The next relevant case in point of time is the decision of Morritt J in Securities and Investments Board v Lloyd-Wright [1993] 4 All ER 210. In terms of subject-matter, this is much closer to the present case. It was an application by the Securities and Investments Board (whose functions were later taken over by the FSA) for injunctions including a worldwide Mareva injunction against defendants who were alleged to have carried on an unauthorised investment business in breach of the provisions of the Financial Services Act 1986. The defendants accepted that the Securities and Investments Board was entitled to the grant of Mareva relief but contended that it should be required to give a cross-undertaking in damages. Morritt J refused the application for a cross-undertaking.

The defendants accepted that the injunctions which were sought to prevent further unauthorised investment business were in the nature of law enforcement and that the Securities and Investments Board should not be required to give a cross-undertaking in damages in respect of them. The argument centred on the Mareva injunction which was said to be different. But the judge took the view that the Mareva order was to be regarded as law enforcement because it supported the claims made in the action under s.6 of the 1986 Act for recovery of the losses suffered by investors. This corresponds to the claims made in the present case for restitution orders under s.382 of the FSMA. The judge’s analysis was that:

“In each case, therefore, be it monetary or injunctive, the remedy is one provided by statute and is provided to the Secretary of State, not for his own benefit but for the benefit of the public at large or those who have suffered from the infringement of the 1986 Act. It seems to me that in each case they are as much law enforcement as the grant of an interlocutory injunction. The fact that a worldwide Mareva injunction is a draconian remedy does not prevent the grant of it being law enforcement, but merely reflects the fact that the activities of the defendants may be worldwide.

It seems to me, therefore, that the considerations which justify not requiring a cross-undertaking in damages in relation to paras 1, 2 and 3 of the order, likewise justify not requiring such an undertaking in relation to para 4 of the order.

In addition, there are the provisions of s 187(3) of the 1986 Act. These provide that neither the SIB, as a designated agency, nor any member, officer or servant of it, is to be liable in damages for anything done or omitted in the discharge, or purported discharge, of the functions exercisable by the agency by virtue of the delegation order; or, as the case may be, the functions exercisable by the body, by virtue of a transfer order, unless the act or omission is shown to have been in bad faith.

I do not think, contrary to the submissions of counsel for the SIB, that that subsection prevents the court from requiring a cross-undertaking in damages. Rather, it seems to me to be a clear pointer in the exercise of the discretion, which the court undoubtedly has, to indicate that no such cross-undertaking should be required where the designated agency is, in fact, seeking to discharge functions exercisable pursuant to a delegation under the 1986 Act. It seems to me that that is a matter which, in the exercise of my discretion, I should take into account in concluding that no cross-undertaking should be required.”

The decision in Securities and Investments Board v Lloyd-Wright was approved by the Court of Appeal in United States Securities and Exchange Commission v Masterfield [2009] EWCA Civ 27. This concerned an application by the Securities and Exchange Commission in England for a freezing order to assist in the enforcement of a US judgment requiring the defendant to repatriate to the United States monies which he was alleged to have obtained by defrauding investors there in a hedge fund. Much of the argument was concerned with whether the English proceedings amounted to the enforcement of a foreign penal law but the defendant also challenged the decision of the judge not to require the Securities and Exchange Commission to give a cross-undertaking in damages. The Court of Appeal approved the reasoning of Morritt J in relation to a Mareva injunction being part of the law enforcement process and held that the fact that the fraud took place in the United States and did not affect UK citizens was immaterial to the exercise of the judge’s discretion not to require a cross-undertaking.

I regard the decision of Morritt J in Securities and Investments Board v Lloyd-Wright as indistinguishable from the present case so far as it concerns the proper characterisation of Mareva relief in the context of a claim for a restitution order. For the same reason, I can see nothing in the facts of this case which should have justified the court in departing from its usual practice of not requiring a cross-undertaking in damages to be given to a defendant to proceedings brought by a public authority to secure the enforcement of the law. The issue therefore for us is whether the considerations which caused Morritt J to refuse the defendant’s application for the imposition of a cross-undertaking in damages apply with equal force to the position of the innocent third party such as Barclays who, on the authority of Z Ltd v A-Z, would ordinarily be entitled to the protection of the third party undertaking in its standard form.

It is convenient at this stage to consider the additional point as to whether the indemnity contained in paragraph 19 of Schedule 1 to the FSMA operates to exclude or render unenforceable any cross-undertaking in damages which the court might otherwise be minded to impose as a condition of the grant of the injunction. If it has this effect then any further consideration of how the court should exercise its discretion in relation to third parties becomes unnecessary.

For paragraph 19 to apply the FSA must, in carrying out its statutory functions, have become “liable in damages” for what it has done. In its context this must, I think, mean a legal liability sounding in damages to a person affected by the measures which the FSA has taken.

Although commonly referred to as a cross-undertaking in damages, the most recent standard form undertakings contained in freezing orders and other injunctions are not in terms undertakings to pay damages. They are undertakings to the court to comply with any order which it may subsequently make to compensate the defendant or third party for loss which that person has suffered as a result of the making of the injunction. The award of such compensation is not therefore automatic on the dismissal of the claim or discharge of the injunction but depends on the exercise of the court’s discretion in favour of the person for whose benefit the undertaking was given. For the same reason the undertaking is not enforceable by that person unless and until the court decides to make such an award.

If it ultimately transpires that the action is ill founded and the injunction is discharged, the remedy for a defendant or third party is to apply to the court for a determination that it should be compensated for any loss which it has suffered as a result of the order. If the court decides to enforce the undertaking it can either make a summary assessment of the losses claimed or order an inquiry. Subject to any issues of quantum or causation, the inquiry will produce a figure which the court can order the claimant to pay. At this point in the process there will be an order which the defendant or third party can enforce. The cross-undertaking will operate as an order by the court that the claimant should pay the amount of the compensation assessed. If it fails to pay, the defendant or third party can apply to commit the claimant for breach of the undertaking or seek a remedy of sequestration. But is that end result a liability in damages of the kind contemplated by paragraph 19?

The answer to that question depends not only on the correct interpretation of paragraph 19 but also on a consideration of the nature of the liability which a claimant undertakes when he gives a cross-undertaking in damages. In Cheltenham and Gloucester Building Society v Ricketts [1993] 1 WLR 1545 the Court of Appeal had to consider the principles to be applied by the court in deciding whether to enforce a cross-undertaking. The decision emphasises the essentially discretionary nature of the power to order enforcement but its relevance for the purposes of this appeal lies in the court’s analysis of the nature of the cross-undertaking. Neill LJ at page 1550H said that:

“When granting an injunction of an interlocutory nature it is the usual practice of the court to require the plaintiff to give an undertaking as to damages. The use of the word 'damages' is perhaps inappropriate because it might suggest that the grant of the injunction involved a breach of some legal or equitable rights of the defendant. The undertaking is given to the court and is intended to provide a method of compensating the party enjoined if it subsequently appears that the injunction was wrongly granted.

…

From the authorities the following guidance can be extracted as to the enforcement of a cross-undertaking in damages.

(1)

Save in special cases an undertaking as to damages is the price which the person asking for an interlocutory injunction has to pay for its grant. The court cannot compel an applicant to give an undertaking but it can refuse to grant an injunction unless he does.

(2)

The undertaking, though described as an undertaking as to damages, does not found any cause of action. It does, however, enable the party enjoined to apply to the court for compensation if it is subsequently established that the interlocutory injunction should not have been granted.

(3)

The undertaking is not given to the party enjoined but to the court.

(4)

In a case where it is determined that the injunction should not have been granted the undertaking is likely to be enforced, though the court retains a discretion not to do so.

(5)

The time at which the court should determine whether or not the interlocutory injunction should have been granted will vary from case to case. It is important to underline the fact that the question whether the undertaking should be enforced is a separate question from the question whether the injunction should be discharged or continued….”

To the same effect in C T Bowring & Co (Insurance) Ltd v Corsi & Partners Ltd [1994] BCC 713 Dillon LJ (at page 721G) described the cross-undertaking in these terms:

“The cross-undertaking is the price which the plaintiff has to pay for obtaining an injunction before the action can be finally tried and decided; (2) the damages under the cross-undertaking are not strictly damages but compensation to the defendant for loss suffered if it is subsequently established that the interlocutory injunction should not have been granted; and (3) there is no separate cause of action for the damages and it can only be enforced by application in the action in which the injunction was granted.”

The absence of any cause of action for the loss on the part of the defendant and the fact that the enforcement of the cross-undertaking depends on an exercise of discretion by the court make it impossible in my view to regard any ultimate liability of the claimant on the undertaking as one in damages in the conventional meaning of that term. The enforcement of the undertaking will lead to an order to pay compensation but not to a liability in damages for breach of the defendant’s legal rights. So, unless one construes paragraph 19 very liberally and in a non-technical way, it seems to me that Mr Handyside QC must be right in his submission that the statutory indemnity does not in terms operate to nullify the effect of any cross-undertaking given to his client. This was certainly the view of Morritt J in Securities and Investments Board v Lloyd-Wright who had to consider the indemnity contained in s.187(3) of the Financial Services Act 1986 which was, so far as material, in identical terms to the one now contained in paragraph 19.

Mr Handyside relies upon this decision not only as a correct interpretation of the phrase “liable in damages” in its statutory context but also as the foundation for his argument that under the Barras principle (Barras v Aberdeen Steam Trawling and Fishing Co, Ltd [1933] AC 402) it is to be presumed that the use of a term previously interpreted by the courts is to bear the same meaning in the subsequent legislation as it did in the earlier statute. I think this is probably right and it has not been contended by Mr Vineall QC on behalf of the FSA that there was any extension in the scope of the statutory immunity when the FSA took over from the Securities Investment Board as the financial services regulator under the FSMA. The position therefore is that paragraph 19 does not render unenforceable a cross-undertaking in favour of a defendant or third party and the issue as to whether to impose one remains a matter of discretion for the court.

Barclays’ central argument is that if Parliament did not exclude the requirement of a cross-undertaking either under s.380 or under Schedule 1, paragraph 19 of the FSMA then it must follow that the court ought to exercise its powers in the case of a freezing order (and perhaps other types of injunction) in a way which ensures that innocent third parties are protected against loss. The fact that a claimant such as the FSA is a public body seeking to enforce the law does not, they say, render the case exceptional and the existence of the statutory immunity which was a significant factor in the exercise of the court’s discretion in Securities and Investments Board v Lloyd-Wright is only one factor to be taken into account when deciding whether a cross-undertaking should be given. The fact that the FSA has no statutory power of its own to freeze assets and must resort to the court for assistance means that it must comply with the rules and conditions which the court has developed in relation to the grant of such relief. In the case of third parties this will ordinarily involve the giving of a full cross-undertaking in the form required by the judge in this case.

It seems to me that the proper starting point is a rather narrower one than that. The line of authority beginning with the decision of the House of Lords in Hoffman-La Roche and culminating in the decision of this court in United States Securities and Exchange Commission v Masterfield has established that the general practice of the court is not to require a cross-undertaking in favour of a defendant from a public authority when it seeks an injunction as part of its law enforcement functions. Although there may be exceptional cases, this is not one of them and the proper treatment of a freezing order application as part of the law enforcement process is, as a matter of authority, established at Court of Appeal level by United States Securities and Exchange Commission v Masterfield. As stated earlier, no cross-undertaking in favour of the defendants would have been imposed in this case even though in a private action it would have been routine and the only question is whether the position of third parties requires or justifies a different approach.

The failure of Parliament to make express provision about cross-undertakings in the FSMA is not in my view surprising not least because of the practice of the court in law enforcement cases since Hoffman-La Roche. I do not therefore accept that the retention by the court of a discretion somehow carried with it an implied direction by Parliament about the proper treatment of third parties in such cases. The reality is that it was left to the court to develop its own rules and practice on the matter.

In the case of defendants that is now clear. The well-established principle that a defendant who is made subject to a freezing order (or any form of interlocutory injunction) should be protected by a cross-undertaking has been significantly modified in the case of law enforcement actions. Third parties are obviously in a different position in the sense that they are innocent participants in a dispute for which they are not responsible. But that in itself does not alter the two significant factors relied on in Securities and Investments Board v Lloyd-Wright as determining the proper exercise of the court’s discretion: i.e. the nature of the proceedings and the existence of a statutory immunity from suit contained in s.187 of the 1986 Act.

The FSA submits that these factors support a general practice that a public authority should not be required to give cross-undertakings in law enforcement cases and that no distinction should be drawn between defendants and third parties for this purpose. Neither defendants nor third parties would be entitled to sue the FSA for an invasion of their rights and if the existence of the indemnity is relevant to the exercise of the court’s discretion (as it clearly is) it must therefore operate to relieve the FSA from being required to give a cross-undertaking of any kind.

They also rely on a number of other distinguishing factors such as the deterrent effect which a requirement to give cross-undertakings would have on the FSA’s law enforcement role but the strength of these is more difficult to assess on a theoretical basis and I prefer to concentrate for the moment on the main issue of whether some kind of exception should be made for third parties in a law enforcement case.

It is clear from the speeches in Hoffman-La Roche that the pre-1947 practice of never requesting the Crown to give a cross-undertaking in damages was intended to recognise its ordinary immunity from liability in damages. As with the FSA, this was not because the immunity from suit prevented the court from requesting such an undertaking. It was simply that to impose such a condition was inconsistent with the immunity which it enjoyed. That same inconsistency exists in this case. To require the FSA to provide a cross-undertaking in damages which is only likely to be enforced if the action turns out to be ill-founded is to create a potential liability which would not be achieved by an action brought by the defendant or third party whose rights were affected by the order. This undoubtedly influenced Morritt J to refuse the application for a cross-undertaking made in Securities and Investments Board v Lloyd-Wright.

The logic of applying the same principle to third parties is compelling. If the refusal to impose a cross-undertaking is intended to give effect by analogy to the statutory immunity under paragraph 19, I cannot see why any distinction should be made between defendants and third parties when none is made in paragraph 19 itself. The exception for which Barclays contends cannot therefore be justified on any basis other than it would be unjust to deprive them as innocent parties of compensation for loss which in an ordinary case the claimant would undoubtedly be required to provide.

The judge thought that the adverse effect on third parties of freezing orders and other injunctions outweighed the general rule of practice or policy that in law enforcement proceedings no cross-undertaking should be required but I disagree. The existence of the paragraph 19 immunity is a strong pointer in favour of the FSA being allowed to seek injunctive relief in aid of this law enforcement function without being required to compensate third parties for the effect of their actions. The rules governing the imposition of cross-undertakings for the benefit of third parties particularly in relation to freezing orders were not formulated with these considerations in mind and cases such as Z Ltd v A-Z are not authorities which govern the situation in this case. It is self-evident that any form of law enforcement action is likely to have adverse consequences for some third parties. The grant of a pre-judgment freezing order is no different in this respect from a final judgment for a restitution order or the exercise of the FSA’s statutory powers to shut down or impose asset requirements on authorised entities under the FSMA. Once one recognises the grant of the injunctions in the present case as part of a law enforcement process the principle that no cross-undertaking should be required ought to apply without exception.

For these reasons the judge was wrong in my view to say that the usual practice should be for the FSA to give a cross-undertaking in favour of third parties covering both the costs of compliance and other losses. The FSA is willing to cover the costs and expenses of compliance and that is not therefore an issue on this appeal. As a general rule public authorities should be prepared to meet such expenditure. But I do not agree with the judge that no distinction can sensibly be drawn between those costs and other losses. There seems to me to be a world of difference between the limited costs of identifying assets in compliance with the order and the kind of blank cheque referred to by Neuberger J in Miller Brewing Company v Mersey Docks & Harbour Company which would be the consequence of imposing the form of cross-undertaking required by the judge.

I would therefore allow the appeal; set aside the undertaking contained in paragraph (3) of Schedule B to the judge’s order; and substitute for it the undertaking in respect of costs set out in paragraph 10 of Mr Phelan’s first affidavit.

I agree.

I also agree.