Technocrats International Inc v Fredic Ltd

This judgment is concerned with the status of £700,000 held by the defendants’ solicitors on the terms of an order made by consent on 26 August 2004, whereby on the solicitors’ receipt of the money a freezing order made on 11 August 2004 was discharged. This turns on the meaning of ‘security’ in paragraph 16 of the latter order, which was in the standard form. The claimant asserts that it has a charge over the monies, which takes priority over the rights of the administrator of the first defendant, Mr Stephen Cork, who was appointed on 3 November 2004.

On 4 February 1998 the first defendant, Fredic Limited, completed the purchase of Hampton Court House for £3,075,000. Fredic is controlled by the second and third defendants, Alexander Houstoun-Boswall and Lady Eliana Houstoun-Boswall. Lady Eliana is the mother of Alexander. Following the purchase disputes arose between the Houstoun-Boswalls and others involved with the purchase as to what those others should receive in recompense for their trouble. Those others included Mr George James and Mr Asad Meerza. Mr Meerza controls the claimant company, Technocrats Limited. As part of the resolution of those disputes an agreement dated 20 April 1998 was made between Fredic and Mr James which provided for the payment of commission to Mr James on a resale of the property. Subsequently Mr James assigned his rights under the commission agreement to Technocrats, and Mr Meerza made payments totalling £350,000 as the consideration. The Houstoun-Boswalls established a school at Hampton Court House, which is run by Hampton Court House Limited. In 2002 Technocrats commenced proceedings against Fredic, claiming that commission had become payable under the commission agreement. Following a trial Field J. delivered a judgment on 1 April 2004, in which he dismissed the claim for commission and made a declaration as to the effect of clause 4 of the commission agreement. It was, in short, that Fredic was obliged to accept the first genuine offer to buy Hampton Court House for over £7 million, which offer was made before 30 June 2004, and that Technocrats would then be entitled to commission as defined by the agreement. On 1 April 2004 Technocrats made an offer to purchase the property for £7,000,100. This led to Field J having to rule whether an offer made by Technocrats could fall within clause 4. In his judgment delivered on 25 May he held that it could. By letter of 22 June Technocrats gave notice to Fredic that, unless its offer was accepted by close of business on 29 June, it would treat Fredic as being in breach of contract. Fredic did not accept the offer and on 1 July the present action was commenced. Fredic was the sole defendant. In it Technocrats claim damages for breach of clause 4 by failing to accept its offer of 1 April, the damages being the commission which would have been payable on completion of the sale if the offer had been accepted. That commission is calculated as £660,000.

The events since 29 June 2004 can best be set out in the form of a chronology. 30 June A freezing order was made against Fredic by Morland J. in the sum of £700,000. The return date was 7 July. Paragraph 8 provided:

Upon GSC Solicitors informing the Applicant’s solicitors in writing that they have received the sum of £700,000 from the Respondents to be held as security for the Applicant’s claims pursuant to the aforementioned undertaking (with the word “security” being used in the same sense as in the above-mentioned undertaking), the Order shall be discharged without prejudice to any claim that the Respondents may have in relation to or arising out of the making of the Order.

The return date of 8 September shall be vacated and a full day be fixed ….. for the hearing of the Applicant’s application for the continuance of its freezing injunction and any application of the Respondents relating to the making of the Order or the discharge of the above-mentioned undertaking (“the applications”).

At the hearing on 5 November Mr Romie Tager QC submitted on behalf of Technocrats that I should grant permission pursuant to paragraph 43(6) of Schedule B1 to the Insolvency Act 1986 for the action to proceed and that I should hear the application for summary judgment. That was resisted on behalf of the administrator. I adjourned all applications to 12 November so that the administrator could inform himself and give instructions. At the hearing on 5 November Mr Tager stated that Technocrats contended that it had an enforceable security interest in the £700,000 held by GSCS under the terms of the consent order of 26 August.

On 12 November the administrator was represented by Mr John Brisby Q.C. and Mr Nicholas Lavender, instructed by GSC. Alexander and Lady Eliana Houstoun- Boswall were represented by Miss Clare Hoffman also instructed by GSC. Mr Tager and Mr Mendoza instructed by Haynes Phillips represented Technocrats as before. Mr Brisby accepted on behalf of the administrator that, notwithstanding the assignment to the Chancery Division of the issue whether permission should be given for the action to proceed (by section 61 and paragraph 1(j) of Schedule 1 to the Supreme Court Act 1981), in the circumstances it was appropriate that I should grant permission under paragraph 43(6) of Schedule 1B for the summary judgment proceedings to proceed. He did not accept that it was appropriate for any step as to enforcement to proceed. He asked that the court should determine whether Technocrats was right in its assertion that it had an interest in the £700,000. I accepted that as a judge of the High Court sitting in the Queen’s Bench Division I have jurisdiction to grant such permission despite the assignment to the Chancery Division: I refer to the notes to section 61 in the Supreme Court Practice. I also accepted that in the particular circumstances it was appropriate for me to grant permission at least for the summary judgment application to be heard and to enable the status of the £700,000 to be established. I formally grant that permission.

I therefore heard submissions on those two matters and as to what should happen hereafter. I rejected the application for summary judgment and gave my reasons in a short ex tempore judgment. I reserved my judgment as to the status of the £700,000 and consequent orders.

It was agreed between Mr Tager and Mr Brisby that the issue which the £700,000 raised did not turn on the particular wording of the consent order of 26 August because that makes it clear that “security” has the same meaning as in paragraph 16 of the order of 11 August, which is in the standard and prescribed form. The issue thus turns on the effect of the standard form of words used in freezing orders. Paragraph 16 provided:

Mr Tager submitted that these words gave Technocrats a security interest in the money, which gave them priority over any other creditor. In his oral submissions he said that this was by way of a contingent equitable interest in the nature of a charge. Mr Brisby submitted that the wording did not give Technocrats any interest in the money. He submitted that ‘security’ was used to mean security against the risk of assets being dissipated: when a sum was held in court, or as here held subject to an undertaking, the risk of dissipation was removed up to the amount of the sum.

It is important to appreciate that the argument is about what should happen in what I can broadly call an insolvency situation, where creditors are striving for priority. It appears that here Alexander and Lady Eliana Houstoun-Boswall have debentures to cover their lending to Fredic, they having financed Fredic with bank borrowings made by them and perhaps also with their own monies. So, if Technocrats succeed in the action and there is a shortfall, unless Technocrats can establish a preferential right to the £700,000, its judgment may go wholly or partly unsatisfied. Where there is not an insolvency situation, if a claimant succeeds and money has been provided as ‘security’ under a freezing order, then ordinarily he will be able to ask the court to order the release of the money or the appropriate part of it to him in satisfaction of his claim. No difficulty will arise. It does not, however, follow that a claimant has any rights over the money prior to such an order. Whether he does is what I have to determine.

The jurisdiction to make freezing orders was first established in Nippon Yusen Kaisha v Karageorgis [1975] 1 WLR 1093, and in the Mareva case itself [1975] 2 Lloyd’s Rep. 509 which for a long time gave its name to the order. The nature of the order was considered in Cretanor Maritime Co. Ltd. v Irish Marine Management Ltd. [1978] 1 WLR 966. There judgment creditors had obtained a freezing order in the sum of US$700,000. The debtor’s debenture holder appointed a receiver. The sole asset within the jurisdiction of the court was £70,494 in a London Bank account. The receiver applied for the injunction to be discharged. The Court of Appeal considered the form in which orders had been commonly granted up to that time. The order in that case restrained the debtors from removing or disposing out of the jurisdiction assets up to a sum. The court noted the practice sometimes to name particular assets which were not to be disposed of. In the course of his judgment Buckley LJ stated (at page 976F):

The Cretanor case established the in personam principle which has been followed ever since. In Iraqi Ministry of Defence v Arcepey [1980] 1 All E R 480 the defendants wished to use money in the jurisdiction for a legitimate purpose, but the claimants, who had obtained a freezing order, objected. Robert Goff J. stated at 486d

In the time available the researches of counsel have not found when the practice of including a provision in freezing orders to the effect of paragraph 16 of the order of 11 August first became established. It has certainly been the practice for many years.

If the provision in a freezing order which forbids removal or dissipation of the defendant’s assets (up to a limit) acts in personam only and gives no rights which improve a claimant’s position in the event of an insolvency, should the payment of a sum into court from those assets give the claimant a right over it? It seems to me that it is more consistent with the nature and purpose of the freezing order jurisdiction that it should not. It seems to me more consistent that it stands as security simply against the risk that the defendant may remove or dissipate his assets. For if a sufficient sum is in court, or otherwise stands as security in that sense, the danger of the claimant being unable to satisfy his judgment because assets have been removed from the jurisdiction or dissipated within the jurisdiction has gone.

Turning from the general to the particular, here the monies paid to GSC were part of the monies borrowed by Alexander held by him on trust for Hampton Court House Limited. They were expressly referred to in the order of 11 August. First, I see no need for the purpose of the freezing order jurisdiction to construe the order of 26 August as providing Technocrats with a security interest in the monies. Second, that would seem to me to be contrary to the principle established in Cretanor. By paying the money to GSCS, security has been provided to Technocrats against the risk of the assets of Fredic being dissipated. That is all Technocrats is entitled to.

Before coming to authority I should refer to a submission that Mr Tager made as to the provision of a bank guarantee to secure the discharge of the freezing provision of an order. Mr Tager submitted that ‘security’ must mean the same in sub-paragraphs (a) and (b) of the order. I agree. He said that a bank guarantee might be given under (b), and that if it was that would mean that the claimant had achieved security for his claim in the sense of having a secure means of payment. That may well be so when a guarantee is given. It must depend upon the wording of the guarantee. Nonetheless I do not think that it follows from this that payment is to be construed as having that effect. The guarantee will also provide protection against the risk of assets being dissipated.

Reference was made to the effect of a guarantee or a bond by Lord Donaldson M.R. in Polly Peck International Plc v Asil Nadir [1992] 2 Lloyd’s Rep 238 at 249.2, where he stated:

So, approaching the matter as one of principle, I would hold that clause 16 and the standard ‘security’ provision in a freezing order give security only against the risk of removal or dissipation of assets and do not give security against the insolvency of the defendant.

I come now to the only authorities which were cited to me, the decisions of Neuberger J and of the Court of Appeal in Flightline Ltd v Edwards and Smith [2002] EWHC 1648, [2002] 1 WLR 2535 and [2003] EWCA Civ 63, [2003] 1 WLR 1200. Here it was provided by an order called the February order that a freezing order should cease to have effect on the payment of a sum into a bank account in the joint names of the parties’ solicitors:

Neuberger J held that the claimant was a secured creditor and granted permission to proceed with the claim. He held that the position was similar to that where money is paid into court as a condition of being permitted to defend a claim, or is held by solicitors for that purpose, or is paid into court under Part 36 by way of an offer to settle which, if not accepted, can be relied on as to costs. In these situations the money in court is charged to secure payment of the claim. As to the former, see in re Ford, ex parte the Trustee [1900] QB 211, Halvanon Insurance Co Ltd v Central Reinsurance Corpn [1988] 1 WLR 1122 and in re Mordant [1996] 1 FLR 334; as to the latter, see Sherratt Ltd v John Bromley (Church Stretton) Ltd [1985] QB 1038. He also relied on the reference to security in the standard form of freezing order, although - as is stated in paragraph 7 of the judgment - the relevant paragraph had not been included in the original order in that case. He held that the natural inference from the standard wording was that the payment would be security for the claim – paragraph 31 of the judgment.

The leading judgment in the Court of Appeal was delivered by Jonathan Parker LJ. He applied the passage in the decision of the Privy Council in Palmer v Carey [1926] AC 703 at 706-7 ‘to the effect that in order for an equitable charge to be created over a specific fund it is necessary to find not merely a restriction on disposal of the fund by the debtor but also an obligation on the debtor to pay the debt out of the fund’ – paragraph 36 of his judgment. His actual decision is contained in paragraphs 47 to 51:

The decision is authoritative as to the approach to be taken. But it may not provide the answer in the present case because nowhere in the documents to be considered in that case were the words ‘as security’. Paragraph 51 refers to that. The manner in which the paragraph is worded suggests that, unexpectedly, the absence of the words had been suggested by counsel to aid the construction that there was a security interest – the opposite of the position taken by Neuberger J. Paragraph 51 is to be read with paragraphs 35 and 42, which record the relevant submissions. In the former Jonathan Parker LJ referred to the submission of counsel for the liquidators that ‘it was nothing to the point’ that the freezing order did not include the standard wording relating to the provision of security. In paragraph 42 he referred to the submission of counsel for the claimant that if the March order had been simply a substitute for the freezing order it would have said so. Both of those submissions are consistent with the position that the standard wording does not give rise to a security interest. But whatever the explanation of the precise words used in paragraph 51, it expresses the view the absence of the standard wording as to security made no difference to the conclusion that there was no charge in that case. It does not follow as a matter of inevitable logic that the court considered that their presence would have made have made no difference either: but that was probably the case. There is, however, no express consideration of the effect of the standard wording.

Taking the approach of the Court of Appeal in Flightline I do not find in the terms of the consent order of 26 August read with the order of 11 August a provision, whether or not spelt out in express terms, to the effect that Fredic must satisfy any judgment obtained by Technocrats out of the money held by GSC. I think that ‘security’ is to be read in the sense of security against the risk of removal or dissipation, as I have already set out. I consider that this conclusion receives some support from paragraph 51 of the judgment of Jonathan Parker LJ. I therefore hold that Technocrats do not have any security interest by way of a right in the money held by GSC.

I should mention that in the Flightline case the Court of Appeal was asked to hear submissions that any charge was void for non-registration. This had not been raised before Neuberger J. As the Court of Appeal reached the conclusion that there was no charge, it was unnecessary for it to hear those submissions. No such submissions were addressed to me.

I turn next to what orders I should make in the light of my conclusion. Mr Brisby submitted that now the administrator has been appointed there is no risk of dissipation and a freezing order would be inappropriate. He also submitted that there was no obligation on Fredic or GSC to continue the undertaking beyond the return date, 12 November. Mr Tager submitted that protection of Technocrats’ position was still required in the light of the history on the defendants’ side and the conduct of the administrator in the brief time he had been appointed, in particular his apparent acceptance that Alexander and Lay Eliana Houstoun-Boswall had valid debentures and were owed by Fredic £1 million and £2.3 million respectively. Mr Tager submitted that the freezing order should be continued against Alexander and Lady Eliana Houstoun-Boswall and that they should be restrained from enforcing their debentures. That was resisted by Miss Hoffman.

In my judgment the solution appropriate to the circumstances is as follows. GSC should be released from their undertaking and the order of 26 August should be set aside, on the payment by them of the sum they hold including interest to the administrator, provided that the administrator undertakes to the court, subject to further order, not to do anything with the money other than to place it in a suitable interest bearing account unless he has first given Technocrats’ solicitors 10 days written notice of what he intends to do and for what purpose. That will give Technocrats the opportunity to apply to the court for an order restraining the administrator if they consider that his intended action is inappropriate. The action will be transferred to the Chancery Division because I think that this will facilitate such further proceedings as there may be. Such transfer will, of course, be subject to my reserving to myself any matters which are outstanding as to the applications which I have heard. I do not consider that in the circumstances any order against Alexander and Eliana Houstoun-Boswall is now appropriate. Orders to the effect I have set out seem to me to be in accordance with the conclusion reached in a not dissimilar situation by Harman J in Capital Cameras Ltd v Harold Line Ltd [1991] 3 All E.R.389, though I should record that counsel did not have an opportunity to address me on that case.