Court of Appeal refuses request to vary freezing order to meet living and legal expenses

Tom Pritchard

In Frederic Marino v FM Capital Partners Ltd, the Court of Appeal upheld a decision not to vary a proprietary freezing order to allow the defendant recourse to proprietary assets in order to meet his living and legal expenses.  The case can be viewed as a restatement of the principle that the subject of a freezing order who is requesting a variation on the basis that he would otherwise be unable to pay his living and legal expenses must satisfy the court that the other assets he owns cannot be used to fund his expenses.

Facts

The defendant, Mr Marino, had worked for the claimant, FM Capital Partners Ltd (“FMCP”), as an employee. During that time Mr Marino had misappropriated company funds.  While some of those funds had been spent, the majority of the funds were still under Mr Marino’s control and it was uncontested that FMCP had a good arguable case to be the owner of these proprietary funds in equity.

On 12 November 2015, a freezing order was made against Mr Marino that provided for:

  1. a general freezing of his assets up to the value of US$20 million; and
  2. a specific freezing of the proprietary assets (the misappropriated funds).

The freezing order was subject to the usual proviso that Mr Marino was allowed to spend reasonable sums on living expenses and legal expenses out of his general assets. He could not use the proprietary assets for these purposes.

Mr Marino’s non-proprietary assets included US$18,000 worth of shares in JP Morgan and a share of his house worth £800,000.

As the case progressed, Mr Marino continued to incur substantial unpaid legal fees. It was known that Mr Marino had outstanding legal fees £470,000 and that an impending case management conference would likely cost another £50,000.  With this in mind, Mr Marino sought to vary the terms of the freezing order to allow him recourse to the proprietary assets for the purpose of paying his reasonable living expenses and legal expenses.  He did this on the basis that he would undertake to replace the funds taken out of the proprietary assets by using the proceeds of the sales of his JP Morgan shares and the house.

Decision

At first instance, Mr Andrew Baker QC was not persuaded by the arguments put forward by Mr Marino’s counsel. The application to vary the order relied upon distinguishing the present case from the case of Ostrich Farming Corporation Limited v Ketchell (unreported, 10 December 1997) in which a restrictive test was adopted to granting permission to draw on assets subject to a proprietary freezing order for the purpose of meeting living and legal expenses.  The purported distinguishing element was that Mr Marino was offering to replenish the assets from the sale of the shares and house.

This argument was rejected for two reasons:

  1. Replenishing the proprietary assets with sale proceeds would defeat “any true proprietary interest the claimant presently has in the monies that will go out of one door without [having] created satisfactorily [an] equivalent interest in the future top up funds that come back in through the other door“; and
  2. Mr Marino did not offer to grant a second charge over his interest in his house (HSBC had the first charge under a mortgage).

Furthermore, Mr Marino would have the means to meet his living and legal expenses if he just proceeded with the sale of the non-proprietary assets (the judge even went so far as to note that perhaps Mr Marino should lower the asking price for the assets).

In the Court of Appeal, however, Lord Justice Sales (who gave the leading judgment, with which the other judges agreed) relied on the principles laid down in two different cases.

Firstly, relying on Fitzgerald v Williams [1996] QB 657, Lord Justice Sales noted that the ordinary position was that “a defendant who has resources of his own which are not affected by a good arguable claim by the claimant that they are his (the claimant’s) property should be required to use those unaffected resources to finance his legal defence and to meet his living expenses“.  He observed that the position was more difficult where a claimant had a good arguable proprietary claim and the defendant had no, or inadequate, other assets unaffected by such proprietary claims from which he could fund his legal and living expenses.  There, the court would have to weigh up the balance of justice to decide whether the defendant should be permitted to have recourse to the proprietary assets.  The onus would be on the defendant to establish that he had no assets unaffected by such proprietary claims on which he could draw to meet his expenses.

Secondly, the proper approach was set out in the four-part test espoused in Independent Trustee Services Ltd v GP Noble Trustees Ltd [2009] EWHC 161 (Ch):

  1. Does the claimant have an arguable proprietary claim to the funds in issue?
  2. If yes, does the defendant have arguable grounds for denying that claim?
  3. If yes, has the defendant demonstrated that without the release of the funds in issue he cannot effectively defend the proceedings (or, it may be added, meet his legitimate living expenses)?
  4. If yes, where does the balance of justice lie as between, on the one hand, refusing to allow the defendant to expend funds which might belong to the claimant and, on the other hand, refusing to allow the defendant to expend funds which might belong to it?

Mr Marino had argued that the court should adapt this approach to take account of his proposal to replenish any proprietary assets he might draw upon with the eventual proceeds of sale of the shares and house. The Court of Appeal agreed with the first instance judge that this should not be the case.

Applying the above test to the facts, Lord Justice Sales found that Mr Marino had failed to satisfy the third question. Consequently, the application to vary the order could not succeed.  After Mr Marino had put in evidence which showed that he owned sufficient non-proprietary assets, the onus was on him to explain why those assets could not be used to fund his living and legal expenses, a test which he did not satisfy.

Implications

This decision provides a reminder that subjects of freezing orders will not be let off lightly where they have sufficient assets to fund their living and legal expenses. Should they cover the necessary expenses, defendants may have to go as far as selling their homes and their last remaining assets.  It also makes clear that the court is unlikely to alter its approach to an application seeking access to proprietary assets merely because the respondent proposes to replenish those funds through the sale of non-proprietary assets at a later date.

Frederic Marino v FM Capital Partners Ltd [2016] EWCA Civ 1301

Post By Tom Pritchard (2 Posts)

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