Lakatamia Shipping Company Ltd v Su & Ors

This is an appeal against an interlocutory order made by Burton J on 6 June 2013. It raises a question as to the appropriateness of modifying a freezing order in standard form so as to impose a notice requirement in respect of dealings with assets which cannot at the interlocutory stage be shown to be either legally or beneficially owned by the defendant but where however it is clear that such dealings could have the effect of diminishing the defendant’s assets by diminishing the value of shareholdings of which he is the legal or beneficial owner.

The facts are uncontentious. I take them, gratefully, from the Appellants’ skeleton argument prepared for the appeal.

Pursuant to a contract involving the sale and purchase of exchange traded freight derivatives (FFAs), the Respondent Claimant claims US$48,824,440.24 from the Defendants as damages or seeks restitution of this sum. The Appellant Defendants deny the Claimant’s entitlement to this or any other sum and counterclaim restitution of approximately US$ 40 million alternatively approximately US$ 26 million.

On 6 October 2011 Beatson J continued a worldwide freezing injunction (“the Injunction”) in support of the Claimant’s claim. The key provisions of the injunction whose meaning and effect are the subject of this appeal are as follows:-

“2.

The Defendants must not –

(1)

Remove from England and Wales any of their assets which are in England and Wales up to the value of US$48,824,440.24; or

(2)

In any way dispose of, deal with or diminish the value of any of their assets whether they are in or outside England and Wales up to the same value.

3.

Paragraph 2 applies to all of the Defendants’ assets whether or not they are in their own names and whether they are solely or jointly owned. For the purpose of this Order, the Defendants’ assets include any asset which they have the power, directly or indirectly, to dispose of or deal with as if it were their own. The Defendants are to be regarded as having such power if a third party holds or controls the asset in accordance with their direct or indirect instructions.

4.

(1) If the total value free of charges or other securities (“total unencumbered value”) of the Defendants’ assets in England and Wales exceeds US$48,824,440.24, the Defendants may remove any of those assets from England and Wales or may dispose of or deal with them so long as the total unencumbered value of the Defendants’ assets still in England and Wales remains above US$48,824,440.24.

(2)

If the total unencumbered value of the Defendants’ assets in England and Wales does not exceed US$48,824,440.24, the Defendants must not remove any of those assets from England and Wales and must not dispose of or deal with any of them. If the Defendants have other assets outside England and Wales, they may dispose of or deal with those assets outside England and Wales so long as the total unencumbered value of all their assets whether in or outside England and Wales remains above US$48,824,440.24.

. . . .

6.

Exceptions to this Order:

(1)

This Order does not prohibit the Defendants from spending a reasonable sum on living expenses and legal advice and representation. But before spending any money the Defendants must tell the Claimant’s solicitors where the money is to come from.

(2)

This Order does not prohibit the Defendants from dealing with or disposing of any of their assets in the ordinary and proper course of business.

Paragraphs 2 and 3 of the Injunction are the focus of this appeal. It is convenient to note that:-

(1)

these paragraphs are identical, save for being rendered appropriate to more than one defendant, to the “narrow” form of paragraphs 5 and 6 of the standard form of freezing injunction set out in Appendix 5 to the Commercial Court Guide (White Book 2014 Vol 2 pp 513-518);

(2)

this “narrow” form omits an additional qualification (referred to as the “Commercial Court words”) of the definition of assets which is designed to catch assets of which the Defendants have legal but not beneficial ownership. If the words “. . . whether they are solely or jointly owned and whether the respondent is interested in them legally, beneficially or otherwise” had been included at the end of the first sentence of paragraph 3, the Injunction would have a wider scope to include assets of which the defendants were mere legal owners (JSC BTA Bank v Solodchenko (“Solodchenko”) [2011] 1 WLR 888).

(3)

the final two sentences of paragraph 3 of the Injunction (and of paragraph 6 of the Commercial Court standard form) are referred to as the “Extended Definition”.

The expressions “the Commercial Court words” and “the Extended Definition” were aptly coined by Christopher Clarke J in JSC BTA Bank v Ablyazov and Others (5) [2012] EWHC 1819 (Comm), [2012] 2 All ER (Comm) 1243.

The question which fell to be decided by Burton J and which is now the subject of this appeal is whether the Injunction had the direct effect of freezing the assets of three non-defendant companies or NDs (“F3”, “F5” and “IM3 Co”) of which the First Defendant (“Mr Su”) is the direct or indirect 100% shareholder and a director. Mr Su is the sole director of at least F3 and F5.

On 6 June 2013, in an extempore judgment (“the Judgment”) [2013] EWHC 1814) Comm) Burton J held that the assets of the NDs were directly affected by the Injunction.

The judge expressed this conclusion at paragraph 16 of his judgment in this way:-

“16.

I have no doubt whatever that the factual scenario which I have described, namely that the First Defendant effectively controls, and indirectly owns, the companies F3, F5 and IM3, which own the assets, the vessel and the shares which I have described, brings the position plainly, and intendedly, into the definition of paragraph 3 of the Order. It does not cause any offence against Salomon v Salomon for two reasons. First of all, this is, of course, only an interlocutory order, but, in any case, it depends upon a perfectly traditional analysis of company law provisions, where the owner of a company can, by resolution at the general meeting or otherwise, particularly if he is also the sole or controlling director by reference to decisions at board meetings or otherwise, access and direct the fate of the assets of the companies which he thus owns or controls.”

By coincidence on the very same day, 6 June 2013, handing down his reserved judgment in an unrelated case (Group Seven Ltd v Allied Investment Corporation Ltd (“Group Seven”) [2014] 1 WLR 735), Hildyard J reached the opposite conclusion to that reached by Burton J on this issue. The Defendants (and apparently also the Claimant and the judge) were unaware of this at the hearing.

Mr John Jarvis QC for the Appellants suggests that paragraph 16 of the judgment of Burton J is heretical and that we should take this opportunity to say so. He also suggests that adoption of this reasoning led Burton J to make an inappropriate order which is incompatible with the important principles of corporate identity enshrined in Salomon v A Salomon and Co Limited, [1897] AC 22, recently reaffirmed in Prest v Petrodel Resources Limited [2013] UK SC 34; [2013] 3 WLR 1. A legally incorporated company must be treated like any other independent person with its rights and liabilities appropriate to itself, whatever may have been the ideas or schemes of those who brought it into existence – see per Lord Neuberger in Prest at paragraph 66. A company’s property is not the property of its shareholders. If it were, there would be no need ever to consider piercing of the corporate veil, still less for the extensive jurisprudence on that subject.

By the end of the hearing of the appeal it seemed that Mr Jarvis was more concerned with establishing the error in Burton J’s reasoning than in maintaining his challenge to the terms of the Order which he came close to accepting, if he did not actually accept, could be justified albeit in a different manner. However by a letter to us delivered the following morning he clarified his opposition to the parts of Burton J’s Order imposing notice requirements in respect of dealings with the assets of the NDs, F3, F5 and IM3 Co.

For reasons not relevant to this appeal, the Royal Bank of Scotland Plc (“RBS”) held (and currently still holds) security over assets belonging to F3 Capital (“F3”), F5 Capital (“F5”) and Iron Monger 3 Co Ltd (“IM3 Co”). These assets are referred to as “the RBS Assets”. The most significant assets concerned are:

Save for the US$1.635 million which is in an English bank account, each asset is outside the jurisdiction.

Mr Su is the 100% legal and beneficial owner of F3 and F5. Both are Cayman Island companies and Mr Su’s shareholding in those companies is held in the Cayman Islands.

Mr Su is the ultimate 100% legal and beneficial owner of IM3 Co but indirectly. IM3 Co is owned by Great Elephant Corporation (“Great Elephant Corp”). 67% of the shares in Great Elephant Corp are owned by Mr Su, the remainder are owned by another company (“TMT Energy”) of which Mr Su is the 100% legal and beneficial owner. All of the companies are incorporated outside the jurisdiction and all issued shares are held outside the jurisdiction. In particular, Mr Su’s shares in Great Elephant Corp are held in Taiwan and Mr Su’s shares in TMT Energy are held in the Marshall Islands.

The judge found that Mr Su “effectively controls . . . the companies F3, F5 and IM3”. This is accepted only so far as Mr Su’s control flows from his shareholding or directorships under the ordinary principles of company law.

RBS became obliged to release the securities which it held but, before doing so, in February 2013 it asked the Claimant to confirm that it had no objection based on the Injunction. The Claimant refused to agree. This prompted the Defendants’ application which was determined by Burton J on 6 June 2013. The judge held that the Injunction did not prevent RBS from releasing its securities.

In view of the Claimant’s attitude, the Defendants also applied for declarations that the assets of F3, F5 and IM3 Co might be used in any way their directors saw fit. The application was on the following basis.

Burton J decided that the assets of the three NDs were “covered” by the freezing order. This is not of course a conclusion that the Injunction had the direct effect of freezing these assets. I will revert to this later. The judge’s principal reason for this conclusion was that set out at paragraph 16 of his judgment which I have reproduced above. He had two further reasons for his conclusion, as follows:-

“17.

In any event, there is a second and further way of looking at the position, namely that, if he, being subject to a freezing order, controlling or owning such company, participates in or allows the sale by that company of its assets, then he is in any event diminishing the value of his asset, namely his shareholding in the companies which have thus disposed of their assets.

18.

There is a third approach to the appropriateness of the Order and of this paragraph, which has been discussed in authorities, to which again I was referred in part by Mr Jarvis. He referred me to "The Mahakam" Parbulk II AS v PT Humpuss [2012] 2 All ER (Comm) 513, a decision of Gloster J, in which she referred to and relied upon a persuasive judgment of Chadwick LJ (as he no longer was) sitting in the Court of Appeal of the Cayman Islands Algosaibi v Saad Investment Co Limited, 15 February 2011 (unreported). That dictum/decision of Sir John Chadwick, President of that Court, was not only followed in The Mahakam, but has also been referred to and relied upon by Christopher Clarke J in Ablyazov (No.5) to which I have already referred, and by me in JSB VTB Bank v Skurikhin [2012] EWHC 3916 (Comm), 4 December 2012. The analysis is that, in the event that a claimant, who has the benefit of a freezing order, becomes a judgment creditor, then in execution of the judgment he will be able to appoint a receiver, legal or equitable, of the interests of the judgment debtor in the companies which the judgment debtor controls, as here F3, F5 and IM3, and thus be able to execute against the assets of those three companies, being the shares in question in Vantage and Starbulk and the vessel, a right which should be protected by the freezing order.”

Burton J’s judgment continues:-

“19.

For all those reasons I have no doubt whatever that the RBS Assets all fall within the terms of the Order of Beatson J and properly so. In those circumstances they are covered by the Order and I am not asked, as I have indicated, at any rate today, by Mr Jarvis to say that they can be used, either by reference to the alleged extra-jurisdictional non-limitation or the alleged right to use the assets, notwithstanding the Order, in the ordinary course of business.

. . .

21.

The question then arises as to what should be done with these assets. As Mr Casey has submitted, I have no doubt that I should bear in mind, as he wishes me to, the fact that the declared purpose of the First Defendant in this case was to use these assets either completely untrammelled, or certainly in the course of the transactions and the use for transactions, (sic, possibly for the use of transactions) which, on Mr Casey's submission, would not be in the ordinary course of business, and he submits that there must be some added risk of a breach of the Order and of dissipation by virtue of the disappearance from the scene of RBS.

22.

I agree that there should be some form of protection substituted for the involvement of RBS, but not the stringent protection for which Mr Casey was urging, not least because, as Mr Jarvis submitted, this might have sought to convert the Claimant into what they are not, namely secured creditors.

23.

I conclude that the right course is to follow the course which in fact Mr Jarvis did not oppose, namely that the dividend to which I have referred, recently paid by Starbulk, should be paid over to CYK and held by CYK together with the 7.6 million which it presently holds and subject to the same undertakings.

24.

So far as the Vantage shares are concerned, there are 3 million Vantage shares which would fall to be added to the very much larger quantity of shares which are already held by F3 in circumstances which I have described. The evidence by the First Defendant is that, at any rate at present, he has no wish or intention to sell any Vantage shares, because he wishes to retain the percentage interest in Vantage, which is a large international company, which he gains by having that percentage (I think 33 per cent) at the moment. It seems to me that to add the relatively small number of shares presently secured by RBS to the total of shares which F3 otherwise holds is not going to add in any way materially to the risk of dissipation on the one hand, or to the right of the First Defendant to act in the ordinary course of business in relation to them if he so chooses and if he chooses to take that risk.

25.

It seems to me that the other two assets, the IM3 vessel, which it is proposed, it seems, to sell because it is languishing at the moment in poor condition in Dubai, and the shares in Starbulk, now freed from RBS, although of course subject to the Order, should be subject to some kind of replacement limitation on the freedom of the First Defendant, and I conclude that the right course is that neither the vessel nor the shares should be disposed of nor charged nor otherwise dealt with, without the First Defendant giving 14 days' notice to the solicitors for the Claimant.”

The judge therefore made an Order in the following terms:-

“IT IS ORDERED AND DECLARED THAT

1.

The Royal Bank of Scotland (“RBS”) may release the securities listed in Ashurst’s letter to Hill Dickinson LLP dated 20 February 2013 without infringement of the injunction granted by Beatson J in these proceedings on 6 October 2011 (“the Injunction”).

2.

MV Iron Monger 3 may not be disposed of, charged or otherwise dealt with by Iron Monger Three Co Ltd without 14 days’ notice being given to the solicitors for the Claimant.

3.

The 200,000 shares in Star Bulk Carriers Corporation owned by F5 Capital (and which were pledged to RBS) may not be disposed of, charged or otherwise dealt with by F5 Capital without 14 days’ notice being given to the solicitors for the Claimant.

4.

The sum of US$1,635,000 (and any interest due thereon) known as “the Star Bulk Dividend” must be paid to a Cooke, Young and Keidan LLP (“CYK”) client account where it is to be held subject to CYK’s undertaking that those funds will not be used other than with agreement of the Claimant or order of the court.

5.

The Defendants’ application for the declarations set out in paragraphs (a) to (c) below does not succeed and these declarations are not granted.

(a)

Iron Monger Three Co Ltd may sell MV Iron Monger 3 and may use the proceeds of sale in any way that the directors of Iron Monger Three Co Ltd deem appropriate.

(b)

F5 Capital may use its assets, particularly the Star Bulk Dividend and its 200,000 shares in Star Bulk Carriers Corporation in any way that the directors of F5 Capital deem appropriate.

(c)

F3 Capital may use the 12,142,858 shares it holds in Vantage Drilling Company and which were pledged to RBS in any way that the directors of F3 Capital deem appropriate.”

Before us Mr Jarvis did submit that the NDs should be free to use their assets in the ordinary course of business, but that was in the context a somewhat academic point. The matter had come before Burton J not on that footing but on the footing that the directors of the NDs should be at liberty to use their assets in any way that the directors deemed appropriate, including it would seem the making of inter-company loans or transfers to different companies owned or controlled by the First Defendant, Mr Su, so as to cause the richer companies to pay off the debts of the poorer companies. Mr Jarvis did not argue either before the judge or before us that this would be in the ordinary course of business. He also accepted that sale of the principal or sole asset of a company would not usually be in the ordinary course of its business. Since he accepted too that Mr Su was not entitled to procure a diminution in the value of his assets, the debate was, in my judgment, a little unreal. Were Iron Monger 3 to be sold and the proceeds of sale applied in discharge of the indebtedness of another company or otherwise than in the purchase of a compensating asset for IM3 Co, the value of Mr Su’s shareholdings in Great Elephant Corporation and TMT Energy would be impermissibly diminished.

Of course in making these submissions Mr Jarvis was not accepting that the freezing order applied directly to the NDs or to their assets. As appears hereafter, he was in my view right in this approach. Since the NDs are not themselves the subject of the order, they have no need to avail themselves of the exception to it. What he was however impliedly if not expressly recognising was the point made by Sir Bernard Rix in his judgment at paragraph 43 below. Where, as here, the owner of a non-defendant company is subject to an injunction restraining any diminution in the value of this shareholding in that company, he is restrained from procuring the company to make a disposition likely to result in such a diminution. For practical purposes, as Sir Bernard points out, that is likely to mean that dispositions other than in the ordinary course of business are enjoined. That is not because the non-defendant companies are obliged to bring themselves within an exception to an order to which they are not subject. It is simply because transactions in the ordinary course of business of a company do not ordinarily result in a diminution in the value of shareholdings in that company.

It follows that Mr Jarvis accepted the second of the judge’s reasons for considering the assets of F3, F5 and IM3 Co to be “covered by” the freezing injunction – the judge having summarised the first submission of Mr Jarvis before him as being that “the RBS assets are not covered by the Order”. In my view, for the reasons given by the judge at paragraphs 21-25 of his judgment, there was ample justification for imposing the notice requirement contained in paragraphs 2, 3 and 4 of the judge’s Order, and the judge was quite right to decline to make the declarations at paragraph 5 of his Order. In his letter to us following the hearing Mr Jarvis suggested that if we are satisfied that some additional restraint is justified over and above the personal restraint imposed by the freezing order on Mr Su, no greater restraint can be justified than that imposed by Burton J. Mr Casey for the Claimant did not suggest that it could.

The appeal could therefore be simply disposed of on this basis. Appeals are against orders, not against judgments, and it is avowedly against the reasoning of Burton J that the fire of Mr Jarvis was principally directed, not against the Order itself. However, I accept that in this context the reasoning underlying the making of the order is of more than usual importance. A freezing order attracts penal consequences. It is important that the basis upon which such an order is made is capable of being clearly understood, as an understanding of the reasoning underlying the making of the order is likely to render it easier for those to whom the order is directed to understand what it enjoins them from doing.

For this reason therefore I do consider that we should take the opportunity to say that the reasoning in paragraph 16 of the judge’s judgment cannot be supported. On reflection I am not sure whether in his last sentence in that paragraph Burton J was referring to the assets or the companies as being “thus owned or controlled”. If he meant the former it is not strictly accurate, but it is a solecism of which I have myself often been equally guilty. A shipping lawyer would unhesitatingly describe Mr Su as the beneficial owner of the vessel Iron Monger 3. For most purposes that is an adequate, if inaccurate, description. Moreover the question which Burton J was addressing at paragraph 16 of his judgment was whether the RBS assets were “covered by” the freezing order, to which the answer was yes, for the reasons already discussed. However I agree with Mr Jarvis that it is not correct to say that the vessel and the shares in Vantage and Star Bulk are plainly and intendedly within the definition of assets in paragraph 3 of the Order. They are not. They are “covered by” the Order because dealing with them has the potential to diminish the value of the shareholdings of Mr Su in F3, F5, Great Elephant and TMT Energy. That this is so has already, I think, been decided by this court, impliedly if not expressly, in JSC BTA Bank v Solodchenko and Others [2010] EWCA Civ 1436; [2011] 1 WLR 888.

The manner in which the wording of paragraph 6 of the standard form freezing order has developed over time is discussed by Hildyard J in Group Seven Limited v Allied Investment Corporation Limited [2013] EWHC 1509 (Ch); [2014] 1 WLR 735. That case concerned a debt owing to a company “Wealthstorm” of which Mr Sultana was 100% shareholder and sole director. In making disclosure pursuant to a freezing order in standard form Mr Sultana listed the debt owing to Wealthstorm as one of his assets. Subsequently Mr Sultana, acting on behalf of Wealthstorm, compromised its claim for recovery of the debt, discounting it from US$500,000 to US$200,000. An application was made to commit him for contempt. The application was made solely on the basis that the chose in action which the benefit of the debt comprised was an asset of Mr Sultana within the meaning of paragraph 6 of the standard form freezing order which in that case, like this, did not include the Commercial Court words. It is perhaps important to note that the application was not made on the basis that Mr Sultana’s contempt lay in his having diminished the value of his shareholding in Wealthstorm.

The application for committal was refused, notwithstanding the judge concluded that having listed the debt as one of his assets, Mr Sultana and his advisers had been unwise to proceed as they did. Furthermore, the judge thought that it would be appropriate to vary the freezing order by including within it wording which did extend to any dealing with the assets and liabilities of Wealthstorm, which appeared to have no trading activities. However, in a penetrating judgment Hildyard J pointed out that the assets of a company of which a single person is the sole director and shareholder are not assets of that person as defined in paragraph 6 of the standard form freezing order. His conclusions appear most clearly from the following paragraphs of his judgment:-

“64.

Perhaps surprisingly, there appears to be no case directly on the point here: in particular, there appears to be no direct authority on what I consider to be at the nub, which is whether the last two sentences of paragraph 9 of the Freezing Order (paragraph 6 of the standard CPR form) apply to the exercise of power vested in the respondent in right of the company of which he is sole director and shareholder. Put another way: does a company which has a sole director, who also owns all its shares, hold or control its assets in accordance with that sole director and shareholder’s “direct or indirect instructions” within the meaning of that paragraph?

65.

In my judgment, settled principles of company law, as explained in the judgments of Rimer and Patten LJJ in the decision of the Court of Appeal in Prest v Prest and others [2013] 2 WLR 557 (Thorpe LJ dissenting on the true scope of section 24(1)(a) of the Matrimonial Causes Act 1973 and its interplay with those company law principles, which he did not doubt), mandate the answer: which is “No”. This response may dilute the efficacy of the standard CPR form of freezing order, and surprise and unsettle not a few; but to my mind, there is no escape from it.”

In an earlier paragraph Hildyard J distilled from the authorities ten propositions:-

“. . .

(1)

As indicated above, and as is well known, a freezing order is “designed to prevent injustice to a successful claimant by preserving assets and funds and guarding so far as possible against the risk that they will be disposed of or dissipated before a judgment is satisfied so as to render ineffective the claimant’s attempts to recover what is due to him”: per Mummery LJ in Federal Bank of the Middle East Ltd v Hadkinson and Others [2000] 1 WLR 1695 at 1709G-H.

(2)

Without more, and in everyday usage, the expression “his assets” refers “to assets belonging to that person, not to assets belonging to another person” (the Hadkinson caseat 1709F): and assets belonging, or at the time of the freezing order assumed to belong, beneficially to someone other than the defendant, will not be assets available to satisfy a claim against that defendant, and without words clearly extending the scope of the phrase “his assets”, such assets will not be subject to the freezing order: the Hadkinson caseat 1709H.

(3)

That said, a freezing order is a precautionary measure taken urgently to protect the claimant against the risk of dissipation, disposal, reduction in value, or loss of assets pending a fuller examination as to what assets would in reality be available to the claimant for the purposes of enforcing a judgment. Accordingly, it may be perfectly consistent with the objectives of such relief to extend the scope of the phrase “his assets” to assets which the defendant may not appear to own but which may in truth be available to him for the purposes of enforcement; however, words extending the ordinary meaning will be strictly construed, and so as not to invest a meaning that the words cannot reasonably bear: thus, the wording must be clear and free of ambiguity: the Hadkinson case, at 1710 A-B.

(4)

If the words are ambiguous, or admit of a more restrictive interpretation, so that it is arguable whether or not the assets in question fall within their scope, the court is unlikely to treat a dealing with such assets as a contempt of court: ibid. at 1711 D-E; and see also per Neuberger J (as he then was) in Cantor Index Ltd v Lister [2002] CP Rep 25.

(5)

Since the Hadkinson case, words to extend the meaning of “his assets” have been introduced into the standard CPR form: these are the words in paragraph 6 of the standard CPR form and paragraph 9 of the Freezing Order. Those words extend the meaning of “his assets” to cover assets which are not in the legal ownership of the defendant but in respect of which the defendant “retains the power to direct how the assets should be dealt with”: per Patten LJ in JSC BTA Bank v Solodchenko and others [2011] 1 WLR 888 898, paragraph 26, per Patten LJ.

(6)

Thus, where that form is used, the phrase “his assets” is extended to include also “assets held by a foreign trust or a Liechtenstein Anstalt when the defendant retains beneficial ownership or effective control of the asset”: the Solodchenko case [2011] 1 WLR 888, para 26.

(7)

However, it is clear that those words in the standard form do not extend to assets of which the defendant remains the legal owner but holds for the benefit of someone else: the Solodchenko case paragraph 26.

(8)

If it is desired and found appropriate to extend the scope of the injunction to assets held in trust (for example, in cases where a strong prima facie case is demonstrated that the trust is a façade or sham), additional wording must be included to make that clear: the Commercial Court now has a standard form including such wording, though the Court of Appeal made clear in the Solodchenko case that its use should be exceptional and sparing.

(9)

As to piercing or lifting the corporate veil: ownership and control of a company are not themselves sufficient to provide justification for that course, even when no unconnected third party is involved and it might be perceived that the interests of justice would be served by it: see VTB Capital plc v Nutritek International Corp [2012] EWCA Civ 808 at paragraph 78. It is always necessary to show impropriety in the sense of a misuse of the company as a device or façade to conceal wrongdoing: see the VTB Capital plc case, para 78.

(10)

Even where the circumstances are such as to justify the exceptional step of piercing or lifting the corporate veil the effect is not to alter the beneficial ownership of the company’s assets: it is simply to provide for such asset to be available in defined circumstances to the claimant: see per Eder J in Caterpillar Financial Services (UK) Limited v Saenz Corporation and Others [2012] EWHC 2888 (Comm) per Eder J.

I am inclined to think that the point which Hildyard J identified at paragraph 64 of his judgment was, as I have already indicated, at least impliedly decided by this court in the Solodchenko case. The issue in Solodchenko was, admittedly, different. The second defendant contended that he was not obliged by a standard form freezing order to disclose property held by him as a trustee or nominee for a third party and in which he had no beneficial interest. It was held that he was obliged to disclose such property because the freezing order there included the Commercial Court words thus extending the assets to which it applied to include those in which the second defendant was interested whether legally, beneficially or otherwise. However, an argument was addressed to the court that the second and third sentences of paragraph 6 of the standard form freezing order, the “Extended Definition”, had the effect of including within its sphere of direct application assets which the respondent to the order holds as a trustee or nominee for a third party. In rejecting this argument Patten LJ dealt with the circumstances in which the Extended Definition came into being and with its apparent intention. After dealing with what Patten LJ described as the archaeology of the two sentences of the Extended Definition added in the Autumn 2002 edition of the White Book, he said this:-

“25.

Para 6 of the form is intended, as it says, to describe and explain which of the “respondent’s assets” para 5 applies to. Those are “his assets” which this court construed in the Hadkinson case as meaning the assets belonging to him beneficially and the first sentence of para 6 repeats the formula which the Court of Appeal considered and ruled upon in that case.”

Pausing there, that alone is sufficient to indicate that the Extended Definition of a defendant’s assets was not intended to include the assets of another person, here relevantly of a company controlled by the defendant. The two added sentences had a different purpose, as Patten LJ went on to explain:-

“26.

The two following sentences are still in terms concerned with "the Respondent's assets" but go on to include an asset which he has power, directly or indirectly, to dispose of or deal with as if it were his own. That would be both an odd and an inaccurate way in which to describe a trustee's power to deal with trust assets given his fiduciary obligations to the beneficiaries but it also ignores the last sentence of paragraph 6. This makes it clear that the power to deal with or dispose of the asset as if it were his own is a reference to a case where the legal owner is not the defendant but a third party yet it is the defendant who retains the power to direct how the asset should be dealt with. This is not, in my view, a partial definition of the preceding words. It is a comprehensive one. And it makes it clear that "the Respondent's assets" can include assets held by a foreign trust or a Liechtenstein Anstalt when the defendant retains beneficial ownership or effective control of the asset. It does not extend to assets of which the defendant remains the legal owner but holds for the benefit of someone else.”

Patten LJ went on to deal with the Commercial Court words, which he concluded, at paragraph 46 of his judgment, were intended to expand the type of asset which paragraph 5 of the standard form freezing order would otherwise include to include also assets held by the defendant as trustee or nominee for a third party.

There is therefore no basis upon which it can be asserted that the language of paragraph 6 of the standard form freezing order, whether with or without the Commercial Court words, is either intended to have the effect or does have the effect of bringing within the definition of a defendant’s assets the assets of a company which he controls, and such assets are not “directly affected” by such an order. It can no doubt be both surprising and unsettling to be reminded of these first principles. For the reasons I have already given however the assets of such a company will ordinarily be indirectly affected by the Order because of the effect of disposition upon the value of the defendant’s assets consisting in his direct or indirect shareholding in the relevant company. The orthodox position is explained by Gloster J in JSC VTB Bank v Skurikhin [2012] EWHC 3116 (Comm) at paragraph 35:-

“As I indicated during the course of the hearing, I am not prepared to order the provision of the further disclosure sought fromPerchwell, namely the nature and value of the assets held by its wholly-owned subsidiaries, Cegasa, Promanda and Tunnelson. The injunction made against Perchwell restrained it from disposing of its assets whether it was interested in them “legally, beneficially or otherwise” including any asset “which it has the power, directly or indirectly, to dispose of or deal with as if it were its own.” The injunction also provided that Perchwell was to be regarded as having such power “if a third-party holds or controls the asset in accordance with its direct or indirect instructions”. But the assets caught by the injunction were Perchwell’s legal ownership of the shares in the three subsidiaries, not the underlying assets of those subsidiaries themselves. There was no evidence before me providing any justification for me to disregard the separate corporate legal personalities of the underlying subsidiaries, namely Cegasa, Promanda and Tunnelson, or to suggest that their assets were held or controlled in accordance with Perchwell’s “direct or indirect instructions”. On the contrary, the evidence showed that the shares in the subsidiaries were held pursuant to the nominee agreement to the account of Shawnee. Moreover there was no evidence to suggest that the three companies were not genuine holding or commercial companies in their own right. For example Tunnelson had been the holding company of the SAHO group companies since March 2009. In my judgment, to have made such an order would not only have extended beyond the legitimate jurisdictional ambit of this court’s powers as articulated in Uden, supra, but would have also disregarded the principle enshrined in Salomon v A Salomon & Co Ltd [1897] AC 22. ”

Further light is shed on this question by the judgment of Popplewell J in PJSC Vseukrainskyi Aktsionernyl Bank v Maksimov & Ors, [2013] EWHC 422 (Comm). There Popplewell J had to consider what is usually called the Chabra jurisdiction, see T.S.B. Private Bank International SK v Chabra [1991] 1 WLR 231, pursuant to which a freezing order may be made against companies such as F3, F5 and IM3 Co against whom there is no substantive cause of action but in circumstances where there is good reason to suppose that their assets may in truth be the assets of the defendant against whom a cause of action is asserted. Popplewell J summarised the jurisdiction thus:-

“7.

. . .

(1)

The Chabra jurisdiction may be exercised where there is good reason to suppose that assets held in the name of a defendant against whom the claimant asserts no cause of action (the NCAD) would be amenable to some process, ultimately enforceable by the courts, by which the assets would be available to satisfy a judgment against a defendant whom the claimant asserts to be liable upon his substantive claim (the CAD).

(2)

The test of “good reason to suppose” is to be equated with a good arguable case, that is to say one which is more than barely capable of serious argument, but yet not necessarily one which the Judge believes to have a better than 50% chance of success.

(3)

In such cases the jurisdiction will be exercised where it is just and convenient to do so. The jurisdiction is exceptional and should be exercised with caution, taking care that it should not operate oppressively to innocent third parties who are not substantive defendants and have not acted to frustrate the administration of justice.

(4)

A common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD. Such assets will be treated as in truth the assets of the CAD if they are held as nominee or trustee for the CAD as the ultimate beneficial owner.

(5)

Substantial control by the CAD over the assets in the name of the NCAD is often a relevant consideration, but substantial control is not the test for the existence and exercise of the Chabra jurisdiction. Establishing such substantial control will not necessarily justify the freezing of the assets in the hands of the NCAD. Substantial control may be relevant in two ways. First, evidence that the CAD exercises substantial control over the assets may be evidence from which the Court will infer that the assets are held as nominee or trustee for the NCAD as the ultimate beneficial owner. Secondly, such evidence may establish that there is a real risk of dissipation of the assets in the absence of a freezing order, which the claimant will have to establish in order for it to be just and convenient to make the order. But the establishment of substantial control over the assets by the CAD will not necessarily be sufficient: a parent company may exercise substantial control over a wholly owned subsidiary, but the principles of separate corporate personality require the assets to be treated as those of the subsidiary not the parent. The ultimate test is always whether there is good reason to suppose that the assets would be amenable to execution of a judgment obtained against the CAD.”

Of course Mr Jarvis is right to remind us that no attempt has here (yet) been made to invoke the Chabra jurisdiction.

“Whether assets legally vested in a company are beneficially owned [I add, in the strict sense] by its controller is a highly fact-specific issue” – see per Lord Sumption in Prest v Petrodel at paragraph 52.

It is also important to remember that at the stage of obtaining a freezing order the question whether assets held by a NCAD are in truth the assets of the CAD may be unclear. Thus, as I have already mentioned above, in the Group Seven case Hildyard J considered that there may be circumstances in which the standard form freezing order should be varied so as to restrain dealings in the assets of a body corporate wholly owned and controlled by the defendant, i.e. the CAD. He said this:-

“79.

More generally, my conclusion that the standard form of freezing order does not, ordinarily and without more, extend to restrain dealings in the assets of a body corporate wholly owned and controlled by the respondent, invites consideration whether, and if so in what circumstances, a variation of the standard form (which is not, of course, a prescribed form, and is often modified to suit the particular case) may be appropriate. I appreciate (as was strongly urged on me by Counsel for the Claimant) that the use of wholly owned and controlled bodies corporate, not as a trading vehicle but in effect as a convenient wallet or pocket, is not uncommon.

80.

In my view, it may well be that where there is, or emerges in the context of disclosure, strong evidence that the respondent has or is likely to have assets in a non-trading body corporate which he wholly owns and controls, which do not have any active business, and which are in truth no more than pockets or wallets of that respondent, an extension to the ordinary form of order may be justified. Since it may be that the assets held within those corporate pockets may ultimately be required to be made available for the purposes of enforcement, relief specifically designed to preserve (or more accurately, perhaps, prevent the dissipation of) such assets may be appropriate. Exceptional circumstances would still have to be demonstrated; in many cases, restraint on any transactions diminishing the value of the respondent’s shares may well suffice.

81.

In such exceptional circumstances, until at least the return date, and after disclosure of all shareholdings, the order might be crafted to restrain dealings in assets of bodies corporate having no or no substantial trading activities and which are wholly owned and controlled by the respondent. The claimant may then determine whether to seek relief directly against such bodies corporate under or by analogy with the so-called Chabra jurisdiction (see TSB Private Bank International S.A. v Chabra [1992] 1 WLR 231 (Mummery J, as he then was) and the commentary in Civil Procedure, vol. 2 (2013) para. 15-63), or the continuation of the original restriction, with any appropriate exceptions (in either case) to enable any trading in the ordinary course which is demonstrated.”

Beatson LJ in JSC BTA Bank v Ablyazov (5) [2013] EWCA Civ 928, 2014 1 Lloyd’s Law Reports 195 at paragraph 47 described this as “a . . . pragmatic approach where there is strong evidence that the defendant against whom a freezing order is sought has or is likely to have assets in a company which he wholly owns and controls”. Hildyard J’s judgment in Group Seven was handed down after the conclusion of argument in the Court of Appeal in Ablyazov (5). Nonetheless, I think that Beatson LJ’s treatment of it can be taken as tacit acceptance of the correctness of Hildyard J’s underlying analysis, which analysis rendered necessary the adoption of a pragmatic approach where there is reason to believe that the assets of a company may ultimately be required to be made available for the purposes of enforcement against its controller. Hildyard J himself referred to the uncertainty which may obtain at the interlocutory stage – at paragraph 85 of his judgment he said this:-

“Of course, at the interlocutory stage of a freezing order, it may not be necessary (and in most cases is likely to be impossible) to demonstrate that the veil is certain to be pierced or lifted; a real likelihood may suffice. But that likelihood must be demonstrated; for it is (as it seems to me) only the likelihood of the Court at the end of the day piercing the veil so as to make the assets in a company available for the purposes of enforcement which can justify an extension of a freezing order to capture dealings in the assets of bodies corporate wholly owned and controlled by a respondent.”

All of these considerations in my view militate strongly in favour of the notice requirements here imposed by Burton J, which fall far short of the pragmatic approach discussed by Hildyard J.

There was some discussion before us as to what was said by Burton J at paragraph 18 of his judgment about the potential powers of a Receiver appointed over Mr Su’s assets. I have no doubt that the judge was using shorthand language. It was common ground that the appointment of a Receiver over the shareholdings of Mr Su in F3, F5, Great Elephant and TMT Energy represents a route whereby the value of the assets of the underlying companies might potentially be made available to meet unsatisfied obligations of Mr Su. In my judgment that prospect too militates in favour of the notice requirements imposed by the judge.

The final point made by Mr Jarvis was that the restraints should in any event be rephrased so as to apply to Mr Su rather than, apparently, to companies not before the court. I do not think that this is necessary. The restraints apply to the Defendants named in the Order. It is axiomatic that Mr Su, a named Defendant, will potentially be in contempt in the event that there is non-compliance.

I would dismiss this appeal.

I also agree that this appeal is to be dismissed for the reasons contained in the judgment of Lord Justice Tomlinson, as emphasised in the judgment of Lord Justice Rimer.

As for the interpretation of paragraph 3 of the present order, the upshot is that the language to be found there is not sufficient without more to cover assets of a company in which a director or shareholder of that company does not have a beneficial interest, even if the director is a sole director or the shareholder is a 100% shareholder: Salomon v. Salomon and Co Limited [1897] AC 22. The order as a whole is directed to a defendant’s assets, that is to say to the assets in which a defendant is beneficially interested. Although the language of the second sentence may look as if it extends much more widely, because of the expression “as if it were their own”, I am satisfied that what that language is primarily concerned with is the situation described in the third sentence of that paragraph, namely a form of trust where a third party holds or controls assets in accordance with a defendant’s instructions. However, it does not extend to a company’s assets just because of the powers which a director or shareholder may be able to exercise over them as such. The language “holds or controls the asset in accordance with their direct or indirect instructions” does not well fit the relationship of a company director or shareholder, even a sole director or 100% shareholder, to a company’s assets.

Therefore, if a claimant wishes to freeze company assets of a non-defendant, he must either be prepared to make a sufficient case that the company concerned is just the money-box of the defendant and holds assets to which the defendant is beneficially entitled, and/or it has to make that company a defendant itself under the Chabra jurisdiction. Where a defendant’s alleged liability is not merely that in the ordinary way of a party liable in debt or damages but is said to arise out of the misappropriation of funds or some such dishonesty, as in the Ablyazov litigation, it will often be possible to request the court to make orders in wider terms and/or to make the defendant’s corporate creatures defendants themselves. But in the more ordinary case, even where a freezing order is justified under its standard rationale, that does not extend to freezing the assets of other parties or corporate non-defendants.

However, as my Lords have shown, even under the order’s existing wording, a company owner will not be permitted to deplete the assets of his companies, thereby diminishing the value of his own assets in the form of his shareholdings, unless he can bring such dispositions within an order’s exception for the ordinary course of business. It is unlikely however to be within the ordinary course of business for a shareholder to act so as to diminish the value of his shareholdings. In case of doubt, the matter can of course be debated before the court.

I too would dismiss this appeal. I would, however, do so only on the ground that the fortification of the freezing order achieved by paragraphs 2 to 4 of Burton J’s order sealed on 12 June 2013 was justified by the reasons given by Burton J in paragraph 17 of his judgment (quoted by Tomlinson LJ in paragraph 19 of his). Burton J was correct to hold that Mr Su’s control of three companies was such as to enable him to achieve dealings with their assets that could or would cause a diminution in the value of his shareholdings (direct and indirect) in those companies, whereas any such diminution was enjoined by paragraph 2(2) of the freezing order. Insofar, however, as Burton J also justified his order on the grounds explained in paragraphs 16 and 18 of his judgment (quoted by Tomlinson LJ in his paragraphs 8 and 19), I consider, with respect, that he was in error.

Paragraph 16 of Burton J’s judgment says two things. The first is that Beatson J’s freezing order was ‘only an interlocutory order’. That is true but Burton J does not explain, nor do I understand, its supposed relevance. Burton J’s main point in paragraph 16 is, however, that Mr Su’s control of the three companies meant that he was able to ‘access and direct the fate of the assets of the companies which he thus owns or controls’ and therefore such assets were caught by paragraph 3 of the freezing order. Tomlinson LJ, in his paragraph 25, questions whether in the quoted words Burton J was saying that it was the companies or their assets that Mr Su owned or controlled. I regard it as plain that he was referring to the assets. There was no dispute that Mr Su owns or controls the companies, and the ‘thus’ reflects Burton J’s view that that control also gave Mr Su the control or ownership of their assets so as to bring such assets within the reach of the freezing order. With respect to Burton J, I regard that reasoning as wrong.

The point of freezing orders is to restrain dealings by the defendant with assets which, if judgment is obtained, will be available to satisfy the judgment. It is obvious, therefore, that the assets targeted by such an order are assets that belong beneficially to the defendant, since only such assets will be so available. Thus assets held by the defendant as a trustee for others will not, in the absence of words expressly extending the order to them, be caught by the order. That was made clear by the Court of Appeal in Federal Bank of the Middle East Ltd v. Hadkinson and Others [2000] 1 WLR 1695. The mere fact that a defendant controls assets is not sufficient to bring them within the reach of a freezing order unless the order expressly so provides.

The form of order in that case (the relevant part is set out by Nourse LJ at 1713D) was equivalent to paragraph 2 of the freezing order in this case, plus the first sentence of paragraph 3. It did not include the equivalent of the second and third sentences of paragraph 3. The question which those sentences might be said to raise is whether they operate to extend the definition of the defendant’s ‘assets’ to include not just assets beneficially owned by him, but also assets not so owned.

The answer is that they do not. The sole purpose of the two sentences is to spell out that a defendant’s assets will include assets held by others that the defendant is entitled to dispose of as his own. Such spelling out was probably unnecessary, but lawyers often spell out the unnecessary. In this context, the decision of the Court of Appeal in JSC BTA Bank v. Solodchenko and others [2011] 1 WLR 888 is instructive. The freezing order in that case was in the like form as that in this, save that the first sentence of what in our case is paragraph 3 included what Tomlinson LJ in his paragraph 5 describes as ‘the Commercial Court words’. Those words were held to extend the reach of the freezing order to trust assets held by the defendant, including, I presume, trust assets in which he had no beneficial interest.

The present interest of the decision is that Patten LJ considered an argument that, even if the Commercial Court words were not included in the order, the second and third sentences of what, in our case, is paragraph 3 extended the reach of the order to assets held by the defendant as a trustee or nominee for a third party. Patten LJ rejected that argument. He said, in paragraph 31, that the language of provisions in the form of our paragraph 3 ‘is, as a matter of construction, plain and does not include assets held by a defendant in which he retains no beneficial interest’. I also interpret what Patten LJ said in paragraph 26 as meaning that the third sentence of paragraph 3 will again extend only to assets held by a third party where the defendant is beneficially entitled to them and so can give instructions for them to be dealt with or disposed as he wishes.

The assets that Burton J was considering in paragraph 16 were the assets of the companies. There is no suggestion that such assets belonged beneficially to anyone other than the companies; and it is trite law that a company’s assets so held do not belong beneficially to their shareholders, not even to a shareholder in the position of Mr Su who is, for all practical purposes, the sole owner of the companies. This was explained, by reference to high authority, by the majority of the Court of Appeal in Prest v. Prest [2013] 2 WLR 537, to which Burton J was referred, but which, when he came to paragraph 16, he overlooked. He preferred the heretical view that because the sole owner of a company is in a position to control the destiny of its assets, the company’s assets are his assets within the meaning of paragraph 3 of the order.

That is wrong. The owner is of course able to control the destiny of the company’s assets. But that does not make them his assets; and paragraph 3 is concerned only with assets which are his assets. Nor is any help the other way to be derived from the third sentence of paragraph 3 of the order. First, that is still only concerned with dispositions of assets belonging beneficially to the defendant, which these assets do not. Secondly, Mr Su has no authority to instruct the companies how to deal with their assets. All he has is the power, as an agent of the company, to procure the company to make dispositions of its assets. Such dispositions, when made, are made in consequence of decisions made by the organs of the company. They are not dispositions made by the company in compliance with instructions from Mr Su. That may seem to be a somewhat formal distinction. But it is a valid one: only the companies have authority to deal with and dispose of their assets. Gloster J (as she then was) explained the position accurately in JSC VTB Bank v. Shurikhin [2012] EWHC 3116 (Comm), at paragraph 35, which Tomlinson LJ has cited. So did Hildyard J in Group Seven Ltd v. Allied Investment Corpn Ltd and others [2014] 1 WLR 735, at paragraphs 64 to 70.

I would therefore disagree with Burton J’s reasoning in paragraph 16 of his judgment, just as I would disagree with his proposition in paragraph 18 that, if judgment were obtained against Mr Su, a receiver would be able to execute the judgment against the assets of the companies. The receiver would not be able to do that. He might be in a position to deploy his rights over Mr Su’s shareholdings to achieve a winding up of the companies and, in consequence, a distribution to himself of the surplus assets of the companies. But such a possibility still does not mean that the assets of the companies are assets of Mr Su so as to fall within the terms of the freezing order.

All that said, I would uphold Burton J’s order on the narrow ground that it was a justifiable fortification of the order restraining Mr Su from diminishing the value of his shareholdings in the companies. I too would dismiss the appeal.