UK: Freezing Injunction During Winding Up Should Be Obtained By Provisional Liquidators

This recent case held that the court has jurisdiction to grant freezing orders against third parties pending a winding-up petition but such orders should be obtained by provisional liquidators and not petitioning creditors.

HM Customs petitioned for the winding-up of C&E Enterprises UK Limited on the basis of outstanding VAT liability in excess of £35million arising out of a VAT carousal fraud. To protect the company's assets, Customs obtained freezing orders against four respondents believed to be implicated in the fraud (despite customs absence of a cause of action against the respondents). The respondents were the sole director of the company and the directors and shareholder of a second company involved in transactions with the company at the time. Customs applied for the relief directly against the respondents, as the first respondent had disappeared and was suspected to have taken with him the company's books and records, which was thought to have made the appointment of a provisional liquidator pointless.

Customs were seeking continuation of the freezing orders pending the appointment of a liquidator. The respondents sought to defend the continuation alleging lack of jurisdiction of the court to make orders against third parties, or in the event of jurisdiction being established, that those orders should not have been made, nor continued, as a matter of discretion (the argument being that the correct procedure was the appointment of a provisional liquidator).

The court has jurisdiction to grant freezing orders to protect company assets. What was not clear prior to this case was whether that jurisdiction extends to the granting of freezing orders against third parties and in particular whether such orders could be granted to petitioning creditors.

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This recent case held that the court has jurisdiction to grant freezing orders against third parties pending a winding-up petition but such orders should be obtained by provisional liquidators and not petitioning creditors.

HM Customs petitioned for the winding-up of C&E Enterprises UK Limited on the basis of outstanding VAT liability in excess of £35million arising out of a VAT carousal fraud. To protect the company’s assets, Customs obtained freezing orders against four respondents believed to be implicated in the fraud (despite customs absence of a cause of action against the respondents). The respondents were the sole director of the company and the directors and shareholder of a second company involved in transactions with the company at the time. Customs applied for the relief directly against the respondents, as the first respondent had disappeared and was suspected to have taken with him the company’s books and records, which was thought to have made the appointment of a provisional liquidator pointless.

Customs were seeking continuation of the freezing orders pending the appointment of a liquidator. The respondents sought to defend the continuation alleging lack of jurisdiction of the court to make orders against third parties, or in the event of jurisdiction being established, that those orders should not have been made, nor continued, as a matter of discretion (the argument being that the correct procedure was the appointment of a provisional liquidator).

The court has jurisdiction to grant freezing orders to protect company assets. What was not clear prior to this case was whether that jurisdiction extends to the granting of freezing orders against third parties and in particular whether such orders could be granted to petitioning creditors.

Despite the arguments put forward by the defendants, the court held that it does have jurisdiction to grant such orders on the application of a petitioning creditor for the following reasons:

• The petitioning creditor could assert that its cause of action was conferring jurisdiction on the court to grant the orders in order to protect company assets

• If assets are beneficially owed by the company subjected to winding-up proceedings and those assets are in the possession of or controlled by the respondents, creditors are entitled to prevent the respondents dissipating those assets (this test now has a broader application and is not limited to proof of control or possession at the time the order is sought)

• The liquidator appointed on the granting of a winding-up order would have direct claims against the respondents on behalf of the company or in his own right

For a court to exercise its jurisdiction to grant freezing orders it must be satisfied that there is a real risk that the respondents may dissipate the assets of the company. The respondents did not appear to put forward any argument that there was no risk of this arising and that the orders should not have been made. They only argued that the orders should have been obtained by a provisional liquidator.

The court satisfied itself that it did have jurisdiction to grant freezing orders of this type to petitioning creditors however it should do so with great reluctance owing to the preferred statutory route of appointing a provisional liquidator. It would require strong arguments to divert from the preferred course and grant relief to petitioning creditors.

The court supported the view that third party freezing orders should be obtained by provisional liquidators for the following reasons:

• The power to pursue litigation vests in the officeholder and obtaining a freezing order comes with the commitment of establishing a claim against the respondents. The most a petitioning creditor could do is use its best endeavours to persuade a liquidator to bring its claim.

• The officeholder is in a position to make an independent assessment whether to issue proceedings as guardian of the company’s assets

• Interim relief obtained by a petitioning creditor is temporary and incurring of additional costs when the liquidator applies himself for relief. Relief obtained by a provisional liquidator will continue on the appointment of a liquidator.

The courts decision to continue the relief in this case was due to the significantly short period of time between the continuation orders and the hearing of the petition and the fact that the defendants argument was in relation to the appointment of a provisional liquidator, not the orders themselves. It would also have been open to the creditors to immediately appoint a provisional liquidator to obtain mirrored relief at extra cost. Save for these points, the orders would have been discontinued. The case was exceptional.

The decision suggests that whilst the courts have jurisdiction to grant third party freezing orders to petitioning creditors, they will not do so unless the circumstances are such as to make the appointment of a provisional liquidator impossible or impracticable. Petitioning creditors should therefore pursue the course of appointing a provisional liquidator in order to preserve company assets.

Further reading: HM Revenue & Customs v Clayton Egleton (1) Trade Eazy Limited (2) Shaheed Vali (3) and Frakhhameed Rahman (4) [2006] EWHC 2313 (Ch).

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 29/09/2006.