HM Revenue & Customs v Egleton & Ors

On 28^th July 2006 Her Majesty’s Revenue & Customs (“Customs”) presented a creditors’ petition for the winding up of C&E Enterprises UK Limited (“C&E”) based upon unpaid VAT amounting in aggregate to £35,876,065.67. That petition is due for hearing before the Companies Registrar on 20^th September 2006.

In anticipation of the presentation of that petition, Customs sought and obtained on a without notice application before Pumfrey J. freezing orders against four named respondents. The first, Clayton Egleton, was the sole director and person in control of C&E at the material time. The second, Trade Eazy Limited (“Trade Eazy”) is a company which had significant dealings with C&E at the material time. The third and fourth respondents a Mr Shaheed Vali and a Mr Frakhhameed Rahman were both directors of Trade Eazy, and Mr Rahman was also a shareholder of Trade Eazy.

In bare outline, Customs’ case was and is that C&E’s VAT liability arose in consequence of its participation in a large scale VAT missing trader and/or carousel fraud, and that each of the respondents were in various ways improperly implicated in that fraud, with the consequence that C&E has substantial claims against each of them which would be likely to be pursued by a liquidator of C&E if it is ordered to be wound up, and that such a liquidator would also have his own claims against them, in particular under section 213 of the Insolvency Act 1986. Customs did not allege that it had any direct claims of its own against any of the respondents and, although it gave a cross undertaking in damages, Customs did not propose, still less undertake, to commence any proceedings of its own against them.

On 7^th September 2006 (the return date) Etherton J. continued the freezing orders against the respondents pending an adjournment until the first available date on or after 11^th September, expressly without prejudice to a submission then made in outline by counsel on behalf of the second, third and fourth respondents that the freezing orders should not have been made and should not be continued against them on the basis that they were made without jurisdiction or alternatively that they ought not to have been made as a matter of discretion. The matter came before me on 14^th September, and the issues as to jurisdiction and discretion were fully argued by Mr Peter Shaw on behalf of Customs and by Miss Marion Smith on behalf of the second, third and fourth respondents. The first respondent was not present or represented, but the further continuation of the freezing order as against him raises similar issues to those which have been argued on behalf of the others.

At the conclusion of the hearing I indicated that I would deliver a reserved judgment, notwithstanding the urgency of the matter, because of the important points of principle and practice disclosed by the arguments presented.

This case is the first, so far as I or counsel are aware, in which the petitioner in a creditors’ winding up petition has obtained, and sought to have continued in the face of reasoned opposition, freezing orders against persons whose only alleged liabilities are to the company the subject matter of the petition, or to the liquidator under statutory claims arising only in the event of liquidation. The case therefore necessarily tests in a particular context the precise boundaries of the jurisdiction to grant freezing orders against persons who are not defendants to the claim in the context of which the orders are sought, persons who may for convenience be classified as third parties. The particular context, namely that of pending creditors’ winding up proceedings, is not merely one in which such freezing orders have not previously been obtained, but also one in which there exists specific statutory measures designed to protect or preserve the effectiveness of the process to be carried out pursuant to a winding up order including provisions for the invalidation of transactions entered into after the presentation and/or advertisement of the petition, and provision for the appointment of a provisional liquidator pending the making of a winding up order with duties to get in and to preserve (but not to distribute) the subject company’s assets, including its legal claims, pending the making of a compulsory order and the appointment of a liquidator.

It is necessary to summarise Customs’ allegations, but only in bare outline, because no part of Miss Smith’s submissions invited the court to consider whether, upon a detailed examination of the affidavit evidence, a sufficiently arguable case of liability on the part of the respondents to C&E or the liquidator, or of a propensity to dissipate assets, was disclosed. Sensibly in my judgment, Miss Smith confined her submissions to jurisdiction and to other matters going to discretion, principally the existence of an established alternative means for the preservation of the effectiveness of a winding up order once made.

In outline therefore Customs’ case is that during a very short period between 14^th March and 3^rd April 2006, C&E undertook an enormously large series of purchases of electrical goods from suppliers in other EU States pursuant to transactions effectively zero rated for VAT purposes and simultaneous re-sales in the UK on terms which obliged C&E to charge and collect VAT from its customers, and account for it to Customs. It is alleged that C&E and those visibly (and covertly) behind it and responsible for its affairs had no intention of either collecting or paying the relevant VAT to Customs, and in particular (and this is a hallmark of missing trader or carousel fraud) arranged for its customers to pay for the goods to third parties rather than to C&E, thereby ensuring that on the inevitable demise of C&E, there would be no assets available for payment of VAT to Customs.

Customs then alleged, on substantial grounds which have of course yet to be tested, that each of the respondents was aware of and participated in the intended fraud on Customs and, more importantly for present purposes, thereby all incurred liabilities to C&E and its liquidator. In the case of Mr Egelton it is said that he acted in breach of trust and/or fiduciary duty to C&E by arranging or permitting the purchase and sale transactions to be carried out in the manner adopted. As to the remaining respondents it is said that they each dishonestly assisted Mr Egleton in his breach of duty and were his co-conspirators. As against Trade Eazy it is also alleged that insofar as it failed to make direct payment to C&E for its purchases, those debts remain outstanding. Finally it is alleged that a liquidator would be entitled under section 213 of the Insolvency Act 1986 to pursue fraudulent trading claims against all of the respondents.

I turn to the legal principles regulating the extent of the court’s jurisdiction to grant freezing orders. They are a sub-set of the principles governing the court’s jurisdiction to grant interim relief generally, conferred by section 37(1) of the Supreme Court Act 1981, “in all cases in which it appears to the court to be just and convenient to do so”.

The purpose of a freezing order which, by contrast with some injunctions, is essentially interim in its nature, is, in the words of Lord Diplock in Siskina(Owners) –v- Disdos S.A. [1979] 1 AC 210 at 253D:

“…to ensure that there will be a fund available within the jurisdiction to meet any judgment obtained by a Plaintiff in the High Court against a Defendant who does not reside within the jurisdiction and has no place of business here.”

Subsequent cases have made it clear that the purpose extends also in relation to defendants resident or carrying on business within the jurisdiction. In the words of Aikens J. in C Inc. –v- L [2001] 2 Lloyds Law Reports 459 at 467, the purpose “remains the protection of assets so as to provide a fund to meet a judgment obtained by the claimant in the English Courts”. More generally, its purpose is so that the court can “ensure the effective enforcement of its orders”: per Sir Thomas Bingham MR in Mercantile Group (Europe) AG –v- Aiyela [1994] QB 366 at page 377E.

Although in the overwhelming majority of cases freezing orders are sought and obtained against the very defendants from whom the claimant seeks monetary compensation in his existing or anticipated proceedings, it is now well established that such orders may also be made against persons in relation to whom the claimant asserts no cause of action and seeks no money judgment, but in relation to whom there is an arguable case that assets held in their name or under their control are in truth beneficially owned by the defendant against whom the claim is made: see TSB Private Bank International S.A. –v- Chabra [1992] 1 WLR 231, and the other cases cited in paragraph 37 of the judgment of Aikens J. in C Inc. –v- L (supra).

The question acutely raised in C Inc. –v- L was whether the jurisdiction to make freezing orders against third parties goes further than that established in the Chabra line of cases, and if so, subject to what defining criteria. In that case the claimant had already obtained enforcement of an undoubted cause of action against the defendant (a Mrs L) and sought a post judgment freezing order both against her and her husband, who was alleged not to hold assets on her behalf but to be liable to indemnify her for her liability incurred on his behalf. In the present case Miss Smith points to an additional supposed difficulty in the way of Customs, namely that it seeks no money judgment against anyone, but rather an order for the compulsory winding up of a debtor owing an undisputed debt which, if made, would permit Customs to prove as a creditor in that company’s liquidation.

Miss Smith therefore advances two distinct submissions in support of her case that the court has no jurisdiction to make or continue freezing orders against her clients. The first is that Customs is pursuing no cause of action for a money judgment for the effective enforcement of which a freezing order would preserve a fund. The second is that her clients (and for that matter the first respondent) are not alleged to hold or to have custody over any assets belonging to C&E, the respondent to the winding up petition, sufficient to invoke the Chabra form of extended jurisdiction. I shall deal with each of these objections in turn.

Miss Smith is of course correct to submit that although the purpose of a creditors’ winding up petition is for the creditor ultimately to obtain payment in whole or in part of the debt owed by the company, and although it is not infrequently misdescribed as a form of debt enforcement, it does not seek a money judgment. If successful, it merely brings into existence a statutory scheme for the getting in and distribution of the company’s assets among its stakeholders, of whom the petitioner is no more than a member of a particular class, namely an unsecured creditor. But in my judgment the particular nature of the relief sought by means of the presentation of a creditors’ winding up petition does not disable the petitioner from asserting that it is pursuing a cause of action for the purpose of conferring jurisdiction upon the court to grant appropriate interim relief, whether by way of freezing order or otherwise.

In Re: Premier Electronics (GB) Limited [2002] 2BCLC 634, the petitioners in a petition under section 459 of the Companies Act 1985 obtained freezing orders both in relation to the property of the subject company and in relation to the assets of its two executive directors up to the value of £500,000 each. On the adjourned return day Pumfrey J. discharged the orders in relation to the executive directors on the grounds that the petition disclosed no cause of action against them sufficient to confer jurisdiction to grant or continue such orders. The question whether the petition disclosed a cause of action against the company itself does not appear to have been argued in any detail, because by the adjourned return date it appeared that sufficient protection against the dissipation of the company’s assets was in place to make the continuation of a freezing order in relation to the company’s assets unnecessary: see page 636d. But at page 638d-e Pumfrey J. said this:

“In the context of a s459 petition I can well understand that it may be appropriate to grant Mareva relief against the company itself, in order to preserve the value of the interests of the members of the company. The petition, if it has a respondent, is primarily the company itself.”

I consider it implicit in that passage that Pumfrey J. must have thought that a section 459 petition, which is no more in essence a monetary claim than a creditors’ winding up petition, was nonetheless based on a sufficient cause of action to give the court jurisdiction to grant interim relief, including a freezing order. It is a curiosity of that case that although it was alleged that the executive directors had misappropriated some £250,000 worth of the company’s money, the court was not referred to any of the Chabra line of authorities, most but not all of which had by then already been reported. But that curiosity relates to the second rather than the first of Miss Smith’s objections.

More recently, in Re: Ravenhart Service (Holdings) Limited [2004] EWHC 76 (Ch) [2004] 2 BCLC 376, petitioners in a combined section 459 and contributories’ winding up petition sought interim relief of a type similar to but not quite identical with an ordinary freezing order but which was designed specifically to prevent the assets of the company from dissipation, and similar relief against certain of the company’s subsidiaries. Relying on Re: Premier Electronics (GB) Limited (Supra), counsel for the respondents submitted that the application for that interim relief was fatally flawed because the petition did not assert any cause of action for restitution or other monetary payment, but rather an order for the purchase of the petitioner’s shares by one or more of the respondents, or alternatively an order for compulsory winding up.

The continuation of relief against the subsidiaries appears to have been abandoned by consent, but Etherton J. rejected counsel’s submissions based upon Premier Electronics. It is clear from paragraph 102 of his judgment, in which he expressly adopted Pumfrey J’s. conclusion that a section 459 petition asserted a sufficient cause of action against the company to justify Mareva relief, that an interim order preventing the dissipation of the company’s assets pending the hearing of the petition was well within the court’s jurisdiction as a means of preserving the effectiveness of any order which might be made upon the hearing of the petition.

It is of course correct, as Miss Smith submitted, that neither of those cases concerned a creditors’ petition. Both concerned section 459 petitions and the Ravenhart case was also concerned with a contributories’ winding up petition. But that is in my judgment a distinction without a difference. It is a common feature of winding up petitions both by creditors and contributories and of section 459 petitions that none of them is concerned in essence with the obtaining of a monetary judgment by the petitioner (albeit that there may be circumstances in which such an order might be made on the hearing of a section 459 petition). All three types of proceedings consist of an invocation of the power of the court to intervene in the affairs of a company for the benefit of its different classes of stakeholder. For my part, using the analysis of Sir Thomas Bingham MR to which I have already referred, I can see no reason why the grant of appropriate interim relief, including if necessary orders freezing the assets of the company itself should not in a proper case be made so as to ensure the effective enforcement of the court’s orders.

Furthermore, if Miss Smith’s first objection were correct, it would apparently follow, as she indeed conceded, that although in the case of a disputed debt, the creditor would be asserting a cause of action sufficient to found an application for interim relief, both before and after judgment, a case in which the absence of any dispute as to the debt meant that the only necessary proceedings consisted of a creditors’ winding up petition would fall into a curious lacuna in which because of the absence of a cause of action, interim relief was wholly unavailable. That seems to me an irrational and unjust result and one which the court should avoid unless compelled to do otherwise. The authorities on interim relief in relation to company petitions have, happily, led me to the opposite conclusion, and therefore Miss Smith’s “no cause of action” objection fails. The reason why freezing orders are not in practice sought or obtained in relation to the assets of companies the subject of creditors’ winding up petitions is probably that statutory provisions such as those invalidating transactions after the presentation and/or advertisement of the petition generally afford appropriate protection to the company’s creditors.

I turn therefore to the second of Miss Smith’s objections, namely that the orders made and sought to be continued in this case constitute an illegitimate attempt to extend the limited jurisdiction to make freezing orders against third parties. In this context, three authorities need to be considered, two English and one Australian. Taking them chronologically, the first is the decision of Hirst J. in Aiglon Limited & anr –v- Gau Shan Co. Limited [1993] BCLC 1321. In that case the defendants obtained world-wide Mareva injunctions in support of substantive proceedings by way of their counterclaim to enforce an arbitration award against the plaintiffs under section 26 of the Arbitration Act 1950. The orders were made against two companies, Aiglon Limited and L’Aiglon SA (a Swiss company). I shall refer to them, as did Hirst J., as “Limited” and “SA”.

Having concluded that there was no basis under section 26 for enforcement of the arbitration award against SA, the question arose whether any other basis for a freezing order against SA existed, having regard to the fact that the defendants’ only contractual entitlement was against Limited. Hirst J. concluded that there were two bases. The first was that it was well arguable that a transfer of assets from Limited to SA fell foul of section 423 of the Insolvency Act 1986, thereby giving the defendants a direct cause of action against SA as victims of the transaction. Secondly and more importantly, he concluded that since an administrator or liquidator of Limited (if appointed) could apply to set aside the relevant transaction under section 238 of the Insolvency Act 1986 with the consequence that SA would hold the assets transferred as trustee for Limited, the case fell within the Chabra jurisdiction since it was arguable that SA held assets beneficially belonging to Limited, against which the defendants had a good cause of action: see page 1329e to 1330f. It did not appear to matter to Hirst J. that Limited’s arguable beneficial interest in assets transferred to SA was contingent both upon the appointment of an administrator or liquidator of Limited, and the successful pursuit by the officeholder of a claim under section 238.

The second relevant authority is the decision of the High Court of Australia in Cardile –v- LED Builders PTY Limited [1999] HCA 18. In October 1993 the respondent (“LED”) commenced proceedings in the Federal Court against Eagle Homes PTY Limited (“Eagle Homes”) for infringement of LED’s copyright in certain building plans. Further proceedings were instituted in December 1994. Arguably in anticipation of those proceedings the only shareholders and controllers of Eagle Homes, Mr and Mrs Cardile, procured the declaration and payment of a dividend to them by Eagle Homes of $400,000, and after the hearing of the infringement actions in March 1996, but before judgment in July, procured the declaration and payment by Eagle Homes to them of a further dividend of $658,977.12, again, arguably with the intention of putting assets of Eagle Homes beyond the reach of LED.

LED obtained freezing orders against Mr and Mrs Cardile, and they sought to have them set aside on appeal on the grounds that there was no case against them of receipt and retention of any property of Eagle Homes, nor any other basis for the grant of a freezing order against them in favour of LED.

After a comprehensive review of the nature and rationale of the jurisdiction to grant interim relief and freezing orders in particular, based largely but not exclusively on English authority which included reference to the Aiglon case, the High Court (Gaudron, McHugh, Gummow, Kirby and Callinan JJ.) set out their opinion as to the principle determining whether Mareva relief should be granted in relation to the activities of third parties in the following concise paragraph 57:

“What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word ‘may’, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:

(i)

the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including ‘claims and expectancies’ , of the judgment debtor or potential judgment debtor; or

(ii)

some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.”

Applying that statement of principle to Mr and Mrs Cardile, the majority concluded that there were two bases upon which the court had jurisdiction to grant a freezing order against them on the application of LED. The first was that it was arguable that the declaration and payment of the dividends was an alienation of property with intent to defraud creditors, voidable at the instance of any person thereby prejudiced, within the meaning of section 37A of the Conveyancing Act, sufficient to give LED a direct cause of action against Mr and Mrs Cardile as a person thereby prejudiced.

The second basis was that the declaration and payment of both dividends were voidable transactions within the meaning of Part 5.7B Divider 2 of the Corporations Law, and therefore liable to be set aside on application by a liquidator appointed at the instance of LED by way of enforcement of a quantified judgment for damages at the conclusion of its infringement proceedings. As they put it in paragraph 69 of their judgment: “A liquidator probably appointed on the initiative of LED but acting on behalf of all creditors, would be entitled to pursue and recover those funds” (meaning the dividends).

It will readily be apparent that the literal application of the second limb of the principle set out in paragraph 57(ii) of the judgment of the majority of the High Court is potentially of extremely wide application. It appears to contemplate that jurisdiction exists to make a freezing order against any potential debtor of an individual or company against whom the claimant has a cause of action, upon the footing that since enforcement of a judgment against the defendant may lead to its liquidation or (if an individual) bankruptcy, and since a liquidator or trustee in bankruptcy may then be able to pursue claims against third parties, then jurisdiction exists to enable the plaintiff to seek a freezing order against any such third parties, always assuming that the other discretionary considerations, such as a risk of dissipation of assets, are satisfied.

By contrast, the application of that principle to the particular facts of that case went no further than Hirst J. had gone in the Aiglon case in which the two bases upon which he considered that a freezing order against third parties was appropriate were, apart only from the different manner in which English and Australian insolvency legislation expresses the relevant principles, precisely the same.

In a concurring but separate judgment, Kirby J. said this at paragraph 121:

“To secure an asset preservation order in a case such as the present, it will be necessary for the party seeking it to show, in addition to the conditions ordinary to the grant of relief injunctive in nature that (1) there is a danger that the non-party will dispose of relevant assets or property in its possession or under its control; and (2) that the affairs of the actual or potential judgment debtor and the non-party are closely intermingled and that the actual or potential judgment creditor has a vested or accrued cause of action against the non-party or may otherwise become entitled to have recourse to the non-party, its property and assets to meet the claim. Clearly, on the preliminary findings made by the primary judge, these preconditions were established in the present case.”

His second requirement, that the affairs of the actual or potential judgment debtor and the non-party are closely intermingled, is not to be found in the main judgment, but his requirement that the potential judgment creditor may otherwise become entitled to have recourse to the non-party to meet the claim must I think have been a reference to the voidable transaction route, corresponding with section 238 of the English Insolvency Act 1986: i.e. an entitlement to an indirect recourse via a liquidator or other office holder.

The third relevant authority is the C Inc. –v- L case to which I have already referred, in which Aikens J. carried out his own thorough analysis of the rationale and origin of the freezing order jurisdiction, concluding with a detailed citation, with approval, of the Cardile case. The essential facts in C Inc. –v- L were that Mrs L had exchanged unlimited liabilities as a Lloyds Name for specific obligations to subscribe for shares in CPLC, and had defaulted on those obligations. The claimant obtained a default judgment, and then a post judgment freezing order on Mrs L and, after her statement that she held the relevant shares as a trustee or agent of her husband, against him as well.

At paragraph 50 of his judgment, Aikens J. summarised his opinion as to the effect of the Cardile case as follows:

“It seems to me that the High Court of Australia has stated that, in Australia, the assets of a third party can be frozen in aid of enforcing a pending or actual judgment, even where those assets are not beneficially owned by the actual or potential judgment debtor. The necessary precondition for power to make a freezing order over the third party’s assets is that the actual or potential judgment creditor should have some legal right to get at the third party’s funds. However, on my reading of the judgments, particularly pars. 57 and 121, the High Court of Australia is stating that there must be some casual link between the fact that the claimant has obtained a judgment against the principal defendant and thus has a legal right, as a consequence of the liability giving rise to the judgment, to go against the assets of the third party. I will delay deciding whether English law permits the exercise of the freezing order jurisdiction where there is such a casual link until I have considered the remaining two factors I have identified. ”

Aikens J’s. identification of the critical requirement for the existence of a causative link between the claimants’ cause of action and the third party’s liability to the defendant was ideally suited for the resolution of the issue before him, since he found that it was arguable that Mr L as Mrs L’s principal would be liable to indemnify her, pound for pound, in respect of any judgment liability incurred by her in favour of the claimant. Accordingly, his liability as third party was precisely caused by and equivalent to his wife’s liability as defendant to the claim.

After further analysis of the difficulties caused by the absence of any direct claim by C Inc. against Mr L, Aikens J. returned to the third party issue in the following part of paragraph 75 of his judgment:

“(5)

If there is a claim for substantive relief by A against B (whether or not in the English Court), or A has obtained a judgment against B (in the English Court), then the English Court can grant a freezing order against the assets of C. But, generally, it must be arguable that those assets, even if in C’s name, are, in fact, beneficially owned by B.

(6)

The crucial question is whether the Court can go one stage further. Does it have the power to grant a freezing order against the assets of C when: (i) A has a substantive right against B (e.g. in the form of a judgment); (ii) the assets of C are not, even arguably, beneficially owned by B. The answer, to my mind, depends on how one interprets the phrases ‘ancillary’ and ‘incidental to and dependent upon’ used by Lords Browne-Wilkinson and Mustill in the Channel Tunnel case. In the Cardile case the High Court of Australia has, effectively, given those phrases a broad interpretation. But, critically, the High Court of Australia held that the right of A to a freezing order against C is dependent upon A having a right against B and that right itself giving rise to a right that B can exercise against C and its assets. Therefore the freezing order sought by A against C is ‘incidental to’ A’s substantive right against B and it is also ‘dependent upon’ that right.”

Miss Smith submitted that the second limb of the statement of principle in paragraph 57 of the Cardile case should not, despite Aikens J’s. approval of it, be recognised as a further extension of the English Court’s jurisdiction to grant freezing orders against third parties. Alternatively she submitted that Aikens J’s. identification of a causation requirement was not satisfied in this case. By contrast Mr Shaw submitted that the statement of principle in the Cardile case was clear and based upon a powerful analysis of prior English authority, and he criticised Aiken J’s. identification of a causation requirement as too narrow. Consistent with the judgment of Kirby J., he submitted that the true condition was only that there should be some close connection between the claimant’s claim against the defendant and the defendant or its liquidator’s claim against the third party. That connection he submitted might be afforded by a chain of causation as it was in the C Inc. –v- L case, but it might equally be afforded, as on the facts of the Cardile case, by evidence that the actionable wrongdoing by the third party as against the defendant was closely connected with the plaintiff’s claim in some other way such as an illegitimate attempt to defeat the claimant’s claim by rendering the defendant judgment proof or, as in the present case, because the third party’s conduct gave rise to the claimant’s claim against the defendant in the first place. After initially conceding that a strict causation test of the type identified by Aikens J. was not satisfied in the present case, Mr Shaw submitted as a last resort that the existence of Customs’ undisputed debt and its consequential right to wind up C&E was a sufficient cause of one of the claims against the respondents, namely the liquidator’s potential claim under section 213 of the Insolvency Act 1986.

Save for the last one, I have considerable sympathy with all those rival submissions. First, I am reluctant to differ from the closely reasoned decision by Aikens J. to treat as applicable in England the powerful and (on the general principle) unanimous decision of the High Court of Australia reached after a thorough analysis of relevant English authority, to the effect that the jurisdictional borderline for the grant of freezing orders against third parties is not strictly confined by the Chabra requirement to show an arguable case that the third party already has or controls assets belonging to the defendant. But secondly, I am greatly troubled (as I suspect was Aikens J. himself) that the uncontrolled extension of that jurisdiction to any third party whom the claimant might persuade the defendant’s liquidator or trustee in bankruptcy to sue in the future would open a Pandora’s box of satellite litigation which the courts and court users would in due course come to regret.

Thirdly, I am not myself persuaded, as Aikens J. apparently was, that a causation condition of the type which he identified is to be discerned from the reasoning of the main judgment in Cardile, or for that matter from the analysis of Kirby J. which I have quoted. But the corollary is that the “sufficient connection” test extracted by Mr Shaw from Kirby J’s. judgment is not to be found in the main judgment either. Further, no greater assistance is to be found by an analysis of the application by the High Court of Australia of the principles enunciated in the two judgments to the facts of that case. As I have said, the outcome went no further than the conventional application of the Chabra principle by Hirst J. in Aiglon.

Fourth, there is as Mr Shaw submitted plainly the closest possible connection between the alleged wrongs committed by the respondents in this case against C&E, and C&E’s as yet undisputed debt to Customs. The one is the perpetration and the other the consequence of an alleged serious fraud in which it is well arguable that the respondents must have appreciated throughout that Customs was the likely victim. But finally, I consider that Mr Shaw’s initial concession, albeit later withdrawn, that a strict causation test is not satisfied on the facts of this case was well made. The respondents are alleged to have diverted not merely the VAT element but the whole of the purchase price payable to C&E by paying it to third parties. Their alleged wrongs against C&E are the cause of C&E’s unpaid debt to Customs, not the other way around.

The conclusions to which I have come on the question of jurisdiction are as follows. First, that the time has come for the English Courts to recognise, consistently with the carefully considered conclusion of the High Court of Australia, that the jurisdiction to grant freezing orders against third parties is not rigidly restricted by the Chabra requirement to show that, at the time when the order is sought, the third party is already holding or in control of assets beneficially owned by the defendant. However attractive that test is as a bright and focused boundary-line, it does not seem to me to accord with the dictates of justice and commonsense. To take a simple example, it would operate so as to distinguish between a case in which the third party misappropriated an asset of the defendant and held on to it and a case in which in otherwise identical circumstances the third party misappropriated the asset and dissipated it. It makes no sense that the first of those third parties should be amenable to the freezing order jurisdiction whereas the second, however separately wealthy, should not. In both cases the defendant or its officeholder would have an equally viable restitutionary personal claim, the frustration of which by yet further asset dissipation by the third party would in turn detract from the efficacy of any order for the winding up or bankruptcy of the defendant and from any prior judgment for which winding up or bankruptcy was a means of enforcement.

Secondly, it seems to me that once the relatively clear Chabra boundary line is breached, there is no wider boundary which has any sufficient clarity to serve as a workable condition to the existence of jurisdiction, than the broad confines of the second limb of the principle in paragraph 57 of the main judgment in Cardile. In particular, it seems to me that a rigid causation test is too narrow and potentially unjust, in particular because it would protect third party fraudsters who had in reality caused the claimant’s loss from exposure to a freezing order while exposing honest third parties such as Mr L in the C Inc. case because the claimant’s claim was the cause of their exposure. By contrast, the supposed “sufficient connection” test which Mr Shaw sought to extract from the minority judgment in Cardile, while having much to say for it in terms of justice and commonsense, and being similar to the test which identifies the circumstances in which a third party may because he has become mixed up in the defendants’ wrong doing, be obliged to assist the claimant with the provision of information, is by its nature so subjective and unfocused as to make it quite unsuitable as the boundary for the existence of jurisdiction. It may however be a valuable tool in the analysis of the question of discretion.

It follows that with all the misgivings attendant upon the opening of a potential Pandora’s box, I reject the submission that the court had no jurisdiction to grant the freezing orders against the respondents in this case, or to continue them pending the appointment of a liquidator of C&E.

I therefore turn to the question of discretion, assuming in the absence of any submission to the contrary that there is an arguable case that each of the respondents is liable to pay very substantial sums to C&E and/or its liquidator, and that there is a real risk that unless restrained, each of them may dissipate their assets so as to frustrate the enforcement of any judgment against them by the liquidator.

In that context I should briefly mention a submission made by Miss Smith, to the effect that Mr Rahman the fourth respondent stands in a distinct position from the others to the extent that the case against him ought to be regarded as of insufficient weight to warrant a freezing order. Miss Smith’s point was that he resigned as a director of Trade Eazy Limited very shortly after that company was sent by Customs a warning of the risks of making third party payments, and before Trade Eazy was notified of C&E’s deregistration for VAT purposes. In my judgment, while those factors may mean that the case against Mr Rahman is weaker than the case against the other respondents, it still easily satisfies the required test for the grant of a freezing order against him. In particular, Mr Rahman remained a shareholder of Trade Eazy and was one of those responsible for its incorporation. It is well arguable that Trade Eazy was incorporated from the outset as a vehicle for the alleged fraud.

Miss Smith’s submission on discretion was that even if I were to be satisfied, as I have been, that there exists jurisdiction to make a freezing order upon the application of a petitioning creditor against potential judgment debtors of the company or its liquidator, there are powerful reasons why orders of that kind should be granted with the greatest of reluctance, the main one being that statute provides alternative protection to petitioning creditors in the form of their ability in an appropriate case to seek the appointment of a provisional liquidator and the conferring upon him of sufficient powers (including application for freezing orders) to protect the company’s claims against third parties during the twilight period between the presentation of the petition and the appointment after a winding up order of a full time liquidator.

Mr Shaw readily acknowledged both to me and to Pumfrey J. on the without notice application that the ordinary course adopted by Customs in similar cases of suspected VAT missing trader or carousel fraud was indeed to seek the appointment of a provisional liquidator, and for him to obtain freezing orders against relevant third parties prior to the advertisement of the petition. The reason why it had not been done in this case, so it was said, was that the disappearance of the first respondent, together (so it was anticipated) with any surviving books and records of C&E, made the appointment of a provisional liquidator a waste of time and cost, since he would be deprived of the usual advantages obtained from inspection of company records and interview of its officers during the period prior to the making of a winding up order. But, submitted Mr Shaw, it was as easy for Customs to obtain freezing orders as it would be for a provisional liquidator, so there was no reason to incur that additional expense.

I consider however that there are powerful reasons why, if freezing orders are to be obtained against potential judgment debtors of the company pending the making of a winding up order, it should be a provisional liquidator rather than a petitioning creditor who seeks and obtains them. The first reason is that generally, the obtaining of a freezing order necessitates a commitment not merely to freeze the assets of a potential wrongdoer, but to proceed diligently with the establishment of a claim against him, and the obtaining of a judgment to be satisfied out of those frozen assets. In any case where a freezing order is obtained against an intended defendant, the court as a matter of routine extracts an undertaking to issue a claim form and a claimant who is dilatory in pursuing that claim runs the risk of having the freezing order set aside without regard to the merits of his claim. In the present context, the person with the duty and the power to decide and to resolve to pursue litigation against potential judgment debtors of the company is the officeholder, not the petitioning creditor. True it is that the petitioning creditor may have a powerful influence if he has a sufficient majority on any creditors’ committee, and that his financial support may be a sine qua non to the prosecution of hostile litigation against third parties by the officeholder. But the most that he can offer as part of the price for the grant of a freezing order is a promise to use his best endeavours to persuade the officeholder to institute the substantive proceedings, rather than an undertaking to do so. By contrast, if the applicant for the freezing order is the provisional liquidator then, in the likely event that if there is a winding up order he will be appointed as liquidator, the same difficulty does not arise.

Secondly, and closely related to the first point, is the point that it is the officeholder rather than the creditor who as the guardian of the interests of all the company’s stakeholders is best placed to make an independent judgment as to the wisdom of bringing proceedings against third parties, and as to the appropriateness of obtaining interim measures including freezing orders pending the conclusion of those proceedings. Of course there will be cases, and the present is one, where the petitioning creditor is itself a responsible body performing a public function, and may be the only creditor of substance. But in general, this second point will militate against the grant of freezing orders on the application of creditors rather than officeholders.

Thirdly, there will be an inevitable element of duplication involved in any application for a freezing order by a creditor rather than an officeholder, because of the creditor’s inability to bring the substantive proceedings. His freezing order will always be temporary, designed merely to hold the fort until the officeholder decides to apply for a freezing order himself. By contrast, proceedings instituted on the company’s behalf by a provisional liquidator will simply continue after the winding up order, even if a different liquidator is thereafter appointed.

For all of those reasons I consider that where an application is made by a petitioning creditor for a freezing order in advance of the hearing of a winding up petition the court should in general require cogent reasons why that course is to be preferred to the ordinary and well established alternative of seeking the appointment of a provisional liquidator. I do not regard the supposedly wasteful incurral of an extra layer of costs advanced in the present case to Pumfrey J. and to me as coming anywhere near a cogent reason for departing from the normal course, in favour of the grant of freezing orders to the petitioning creditor. It follows that, after hearing argument not presented to Pumfrey J., I consider that no such freezing order should have been granted, and that were it not for the factor which I am about to mention, the orders ought to be discharged rather than continued.

The factor which persuades me otherwise is that there is now less than a week before the hearing of the winding up petition. Mr Shaw has made it clear that in the event that I were to rule against the continuation of the freezing orders obtained by Customs, either on jurisdictional grounds or because the provisional liquidator alternative was preferable, Customs would be in a position immediately to seek the appointment of a provisional liquidator (the intended appointee apparently being present during the hearing) and very shortly thereafter for him to apply for freezing orders in his own right or on behalf of the company. Since it was an important aspect of Miss Smith’s submissions that that would have been the appropriate course in the first place, and since she did not advance any persuasive reasons why an application by a provisional liquidator ought to have been refused, I consider that I should assume that my discharge of the present orders would very shortly thereafter be followed by the obtaining by a provisional liquidator of more or less identical orders against the same respondents. Accordingly no useful purpose would be achieved by the respondents in securing the discharge of the present orders (other than perhaps in relation to costs) and by requiring that process to be undertaken so as to protect the companies’ claims for an exceedingly short period, I would indeed be imposing an unnecessary layer of additional costs.

It follows that, for that reason alone, I consider that I should exercise my discretion in favour of the short term continuation of the present freezing orders. By short term I mean until such time as any liquidator appointed after the making of a winding up order next week (if that should occur) has had the opportunity to consider and if thought fit to commence substantive proceedings against those respondents and seek freezing orders for the protection of the efficacy of any money judgment to be sought.

It follows that my affirmative conclusion should be regarded as entirely exceptional. In the ordinary course, creditors should not expect to be able to obtain freezing orders against potential judgment debtors of the company sought to be wound up, save in entirely exceptional cases (and I cannot envisage what they might be) where the ordinary course of the appointment of a provisional liquidator with the duty and power to make those decisions on behalf of the company and all its stakeholders is either impossible or impracticable.