High Court refuses permission for unissued contempt application where breach of freezing order only technical

In Pharmagona Limited v Taheri,(1) the High Court refused to seal and issue a contempt application as the breach, if it had occurred, was only technical, and it was therefore inappropriate for the application to succeed.

Facts

The claimant alleged that some of its employees, the defendants, had committed fraud by using fake invoices to misappropriate company funds. The defendants argued that they were whistle-blowers and that the fraudulent transactions were actually carried out by one of the company directors to illegally export goods to Iran. A freezing order was granted against the defendants in February 2018 to prevent them from disposing of or dealing with assets located within the jurisdiction up to a value of £500,000. The claimant was also awarded judgment in its favour on the main claim in January 2020.

Following this, it came to the claimant's attention that unilateral notices had been registered against the defendants' property by two individuals. These individuals, who were friends of the defendants, had entered into loan agreements with the defendants at their request to assist their families living in Iran. The defendants agreed to repay the loans with interest, but were unable to do so, resulting in the notices against their property for repayment. When the claimant became aware of the notices, it threatened to bring contempt proceedings on the grounds that the defendants had breached the freezing order by entering into the loan agreements.

The claimant originally raised a contempt application in draft form before the court in July 2020. At the time, the judge struck the unissued application out on the basis that it was intended to harass the defendants and amounted to an abuse of process. The claimant appealed the decision but the Court of Appeal refused it, directing that they apply instead to the High Court again to vary or set aside the order.

Decision

The High Court refused the claimant's application to seal and issue the contempt application. The judge decided that any breach of the freezing order by the defendants was merely technical, as the defendants were, in reality, unable to use the monies freely. The judge made the following key points:

• The loan agreements designated the monies advanced for a specific purpose (to provide financial assistance to the defendants' families in Iran) and so were not at the defendants' disposal to use in any other way. Indeed, the judge suggested that it was "perfectly arguable as a matter of law" that the monies subject to the loan agreements would not be caught by the freezing injunction at all as the defendants were not free to use them as they wished.

• In addition, the defendants had been made bankrupt by their own petition since the notices had been registered against them and a trustee in bankruptcy had been appointed. Under the Insolvency Act 1986, this meant that the defendants' estates immediately vested in the trustee, so they would be unable to deal with or dispose of their assets.

Moreover, the judge emphasised the principle set out in Sectorguard plc v Dienne plc that contempt applications would be construed as an abuse of process if their potential outcome (if successful) was so small in value to the claimants "to make the exercise pointless, viewed against the expenditure of court time and the parties' time and money".(2) As the defendants did not have assets at their disposal, and the claimants were not contending that the loan agreements were for any purpose other than to assist the defendants' families, then there would be no real benefit to granting the contempt application to force the defendants' compliance with the freezing order. The judge did not make a decision on the claimant's motive behind the application but had in mind the findings of the judge in the first instance decision, who had decided that the application had been brought vindictively, without a legitimate aim, and with the intention of harassment.

Given the technical nature of the alleged breach, and the principles governing contempt proceedings, the judge felt that it would be inappropriate to seal and issue the claimant's contempt application.

Comment

This decision illustrates that the courts will likely view contempt applications through a "real world" lens and will be reluctant to allow such applications where the relevant breach is technical and of no real effect. Those making contempt applications should therefore be careful to present a strong case, and not pursue mere technical breaches. Further, while not explicitly decided here, the courts will likely attach weight to the motive behind a contempt application: where it amounts to harassment of the defendant, the courts may not look kindly upon such behaviour.

(1) Pharmagona Limited v Taheri & Anor [2021] EWHC 2537
(2) Sectorguard plc v Dienne plc [2009] EWHC 2693 (Ch)