Arguable case of dishonesty needed for freezing order where dishonesty alleged in support of dissipation

Charlotte Bamford

A recent High Court decision (Metropolitan Housing Trust Ltd v Taylor and others) has rendered the general test of a good arguable case insufficient to justify a freezing order where dishonesty is alleged and argued to be – in and of itself – evidence of a risk of dissipation of assets. In such cases, the court has held that an arguable case of dishonesty must be demonstrated.

The ruling is most succinctly summarised at paragraph 369 of the judgment of Mr Justice Warren, where he states:

“It is the case, I appreciate, that the test of good arguable case for the purposes of the applicable tests for the grant of a freezing order does not require there to be good arguable case of dishonesty. However, where alleged dishonesty is relied on as part of the case in support of dissipation, it is important to consider whether a good arguable case of dishonesty is established in relation to the conduct relied on. If a good arguable case of dishonesty is not established, that conduct is not relevant to the argument that there is risk of dissipation because of the alleged dishonesty of [the defendants]”.

Background

The case emerged after the claimant company sought freezing orders against two of the defendants: Mr Taylor (formerly Oracle Applications Manager at the claimant) and Mr Ladhur, (director of the third defendant company, Informatrix Enterprise Solutions Limited). The present judgment relates to an application by Mr Ladhur to have the freezing order discharged.

The claimant had made a number of allegations against the defendants in relation to the IT services which Mr Ladhur and the third defendant company had (or had claimed to) supply to the claimant.  In particular, it was alleged that the third defendant had dishonestly overcharged the claimant for (a) projects which had not been delivered; (b) projects which were overpriced; (c) projects which were charged at rates which exceeded those agreed in the contracts; and (d) mark-ups on the cost of consultants.

It was shown that Mr Taylor was closely connected to Mr Ladhur; that they together had assets and bank accounts in Spain; that Mr Ladhur had provided funds to Mr Taylor personally (as opposed to as a recipient of fees for his work with the claimant); that Mr Ladhur had paid the school fees of one of Mr Taylor’s children and that some double charging had occurred.  It was alleged that Mr Taylor had facilitated Mr Ladhur’s relationship with the claimant and that both parties were exploiting this relationship for financial gain.

Mr Justice Warren’s findings

Mr Justice Warren found that Mr Ladhur could satisfactorily justify many of the payments and connections between himself and Mr Taylor.  For example, the accounts in Spain were said to relate to a property which Mr Taylor and Mr Ladhur had bought there, the two of them having become friends whilst they were students.  The payment of Mr Taylor’s son’s school fees was said to have been a charitable act between friends.  And many other acts and payments were explained in a similar vein.  On this basis, Mr Justice Warren found that:

  • the claimant had failed to make out a good arguable case; and consequently,
  • the claimant had obtained the freezing order on the basis of incomplete disclosure (as no evidence, nor suggestion, was afforded to the judge who granted the order to the effect that Mr Ladhur may have an innocent explanation for any of the acts or payments).

In a number of instances Mr Justice Warren held that, whilst a good arguable case could be demonstrated, the claimant had failed to show that the conflict emerged as a result of Mr Ladhur’s dishonesty.  For example, at paragraph 361 of the judgment, Mr Justice Warren held that “the first project and the second project overlapped with consequential double charging by the Company”, however he followed this conclusion by saying “but there can be no complaint that the Company misled MHT and is therefore involved in any dishonesty”.  Again at paragraph 363, Mr Justice Warren found that there were “some other claims where there may be disputes about the amount which it was appropriate for the Company to claim and recover”, adding in brackets “so that there is a good arguable case”, but noting that, nonetheless, “MHT has not established a good arguable case of dishonesty” (emphasis added).

Furthermore, even where Mr Justice Warren found both an arguable case and a good arguable case of dishonesty, he often held that, regardless of these points, there was no evidence of a risk of dissipation. The claimant had argued that its evidence, which included evidence of:

  • false declarations / concealment;
  • false invoices;
  • payments made indirectly to participants; and
  • involvement in offshore jurisdictions for no obvious commercial reason,

was itself sufficient to provide for an inference that dissipation of assets was a risk. Mr Justice Warren, however, disagreed. He observed:

I accept, of course, that if the claims…demonstrated clear fraud on the part of Mr Ladhur, that might be sufficient to justify a conclusion that there is a real risk of dissipation and that a freezing order should then be made”.

However, he did not consider that this was such a case: “the case is far from a clear one of fraud and there may well be an innocent explanation”.

On the sum of all evidence, therefore, he determined that the freezing order was unjustified and that it should be discharged.

Take away points

This case emphasises the importance of proving a risk of dissipation when pursuing a freezing injunction.  Mr Justice Warren’s findings make clear that merely demonstrating that funds may have been misappropriated will not suffice.  Nor will it suffice to show that an individual has been dishonest, unless that dishonesty naturally lends to an inference of dissipation.  A helpful quote cited in the judgment is the following (Flaux J in Madoff Securities International Ltd v Raven [2011] EWHC 3102 (Comm)):

“…the court has to scrutinise with care whether what is alleged to have been dishonesty justifies the inference [of dissipation]. That is not, therefore, a judgment to the effect that a finding of dishonesty (or, in this case, an allegation of dishonesty) is insufficient to found the necessary inference. It is merely a welcome reminder that in order to draw that inference it is necessary to have regard to the particular allegations of dishonesty and to consider them with some care”.

Other points raised in obiter include that:

  • Complete disclosure is necessary with a without-notice application and the courts will not look kindly upon a misleading or biased presentation of the facts.
  • Although delay in bringing an application for discharge may cause problems and raise negative inferences, it need not be fatal to the application: “that he has taken so long to launch his application may make me slightly more circumspect in my consideration of the prejudice which he says the FO is causing him…it would….be entirely contrary to the overriding objective to refuse his application in limine”.
  • Affidavits should ideally be presented by those closest to the facts and not by superiors to whom the facts have been relayed.

Metropolitan Housing Trust Ltd v Taylor and others [2015] EWHC 2897 (Ch)

Post By Charlotte Bamford (4 Posts)

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