Quasi-proprietary claims: use of disputed funds to pay legal costs

In Kea Investments Ltd v Eric John Watson, the High Court considered to what extent a defendant should be permitted to use funds subject to a freezing injunction to fund its legal expenses where the claimant advances a quasi-proprietary claim over those funds

Background

In July 2018, following a 3-month trial of claims of fraud, deceit and breach of fiduciary duty, Kea Investments Ltd (Kea) obtained a significant judgment against Mr Watson; Mr Watson was liable to pay Kea in excess of £40m. Whilst Kea was able to identify, and compel payment from, various assets, and thus obtained comparatively small sums towards the judgment debt it was still owed the vast majority. This was particularly frustrating for Kea as Mr Watson had formerly allowed himself to be represented as one of New Zealand's wealthiest men, but now claimed to be impecunious.

However, Kea identified that a Mr Gibson who was, by his own account, Mr Watson's "right hand man" and had previously worked for Mr Watson, appeared to have access to valuable assets, including a Hong Kong trust which held a BVI company (Ivory Castle), which in turn held valuable assets and interests.

Kea obtained an injunction to restrain the payment to Ivory Castle of certain sums due to it (the Aegean Monies). The terms of the injunction also required Ivory Castle to notify Kea of dealings with any other of its assets. Kea obtained the injunction on the basis that assets held by Ivory Castle were in truth held by it for Mr Watson as bare trustee or nominee, or on terms that they could be made available to him or were otherwise amenable to execution of Kea's judgment debt against him. Kea later obtained a notification injunction against Mr Gibson personally. Each of the injunctions included the usual provisions for Ivory Castle and Mr Gibson to spend money on legal advice.

This article focuses on the application made by Ivory Castle to vary the injunction so as to allow the Aegean Monies to be paid out to fund its own, and Mr Gibson's, legal costs. This raised the issue of whether Ivory Castle and Mr Gibson were obliged to utilise Mr Gibson's own assets to fund their legal costs before resorting to those of Ivory Castle.

Kea's argued that Mr Gibson should be required to spend his own money before spending assets in the name of Ivory Castle, or in his own name, which Kea claimed were held as nominee for Mr Watson and so should remain available to Kea to execute against.

Relevant Principles

It is well established that the "ordinary rule" in a standard (i.e. non-proprietary) freezing injunction generally entitles the defendant to use frozen assets in order to finance a defence, subject to demonstrating they do not have other assets with which to do so, as the injunction only concerns their own assets.

In proprietary injunctions, the position is different as the basis of a proprietary claim is that the particular asset in question is said to belong to the claimant. Accordingly, there is no presumption in favour of the defendant being entitled use that asset(s) to finance its defence.

The parties did not dispute that, where a proprietary injunction is obtained, the relevant principles to be applied to the question of legal costs were:(1)

• Does the claimant have arguable ground for claiming the money/asset?
• Does the defendant have arguable ground for claiming the money/asset?
• Has the defendant shown that he has no other funds available to him for this purpose?
• Whether the injustice of permitting the use of the funds held by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may, in course, turn out to be a successful defence.

The question in this case was whether Kea's injunctions should be considered as "proprietary", and so whether Ivory Castle and Mr Gibson had to satisfy the more onerous test for use of proprietary assets before being able to access the Aegean Monies.

Standard or Proprietary Injunction

The Court considered two previous conflicting decisions on this issue.

On the one hand, Begum(2). In this case the High Court found that there was a clear and principled distinction between freezing injunctions made in respect of proprietary and non-proprietary claims; accordingly it rejected the idea that there could be a sub-category of "quasi-proprietary" claims in considering the scope of exceptions which should be made for the payment of legal costs.

By contrast, in Ablayzov(3), the High Court found that a claimant could have a claim that is not a proprietary claim but analogous to one, such that the defendant must then satisfy the more onerous four-stage test set out above, before being able to use the disputed funds to meet legal costs.

In deciding which approach to follow, the Court considered the nature of Kea's substantive action, in which it not only brought a claim designed to resolve the ownership of the disputed fund, but also claimed for the appointment of a receiver by way of equitable execution over the fund. Accordingly, if Kea's claim was successful, it would not just obtain relief in the form of a simple money judgment but would obtain actual possession of the fund (through the medium of the receiver).

The Court also considered that the frozen assets were not the undisputed property of the ostensible owner (here Ivory Castle) but were assets the beneficial ownership in which was actively disputed. Therefore, if Kea were to win the substantive action, it would become apparent that the assets were not Ivory Castle's at all, and it therefore will be shown to have had no right to spend them, on legal expenses or anything else.

The Court in this case preferred the approach in Ablyazov and found that a "quasi-proprietary" claim could exist (distinguishing this case from the approach in Begum) and that, in those circumstances it was appropriate to apply the approach used in proprietary freezing injunctions; whilst Kea did not strictly advance a proprietary claim, it was very close to one as "the very gist of the action is to assert a right to possession of the disputed fund".

Quasi-Proprietary Claims: Use of disputed funds to pay legal costs

Applying the principles set out above, the Court concluded: 

• Kea had an arguable proprietary claim to the money (treating Kea's claim that the Aegean Monies are Mr Watson's as analogous to a proprietary claim for this purpose).
• Ivory Castle had arguable grounds for claiming the money itself.
• Ivory Castle had shown that it had no other funds available to it for payment of legal costs (save for a £30,000 required minimum bank balance, which it could utilise, albeit with some inconvenience)
• The fourth question, whether the injustice of permitting the use of the funds held by the defendant is outweighed by the possible injustice to the defendant if it is denied the opportunity of advancing what may turn out to be a successful defence, was the most complex one, particularly as this was very much a matter of the Court's discretion and requires a "careful and anxious judgment"(4).

On this fourth question, it was material that Ivory Castle and Mr Gibson's position in the litigation was entirely aligned; Kea assert that Ivory Castle is a nominee for Mr Watson; and Ivory Castle and Mr Gibson assert (as did Mr Watson), that Ivory Castle is the owner of the assets. The real dispute in economic terms was therefore between Kea and Mr Gibson. That Ivory Castle was technically a corporate body held by a trust for Mr Gibson's benefit did not make any significant difference. Where the rights to the entirety of Ivory Castle's assets are disputed, the Court found that it was "plainly more just" that the interests of the Defendants should be defended at the cost of Mr Gibson, rather than at the cost of the monies in dispute which is the very subject matter of the proceedings.

The Court then considered the value and nature of Mr Gibson's assets, which were said to be substantial but not readily realisable (and not replaceable if he was successful) – for example, works of art and jewellery. It was suggested that forcing Mr Gibson to realise such items would be unjust. The Court accepted that there would likely be practical difficulties in Mr Gibson raising funds from the non-cash assets, although he could ask a family trust to draw down on a loan facility or raise sums against properties owned by the same trust. Separately, the Court was also satisfied that Mr Gibson's investment in a family member's start-up was not likely to be easy to realise.

A Pragmatic Solution

The Court suggested (but did not order) that the parties should agree an arrangement whereby Mr Gibson or Ivory Castle could have access to the Aegean Monies but only once Mr Gibson undertook a personal liability direct to Kea to pay an equivalent sum, together with interest, if Kea's claims in relation to the disputed assets succeed (to be fortified by adequate security over his, or his family trust's, assets). That would allow Mr Gibson access to funds to defend himself, but on terms that if he lost the costs of his defence would fall on his assets rather than on the disputed monies. The Court adjourned to allow the parties to discuss this proposal.

Whilst it is the practice of the Court in a standard freezing injunction not to cap or limit the amount that the defendant can spend on legal costs, in a "quasi-proprietary" claim, the defendant is not asking to spend what is accepted to be its own money. Accordingly the Court indicated that it would expect the defendants to exercise a measure of control over the quantum of costs that could be spent and that those costs should be reasonable and proportionate.

Comment

This decision provides helpful guidance on the analysis of "quasi-proprietary" claims and the circumstances in which claimants will then be able to insist that defendants meet a more onerous test before using disputed monies over which the claimant asserts ownership to fund their defence.

Balancing the respective rights of the parties in these circumstances raised issues of "some difficulty". However, the Court's suggested solution provides pragmatic guidance as to how that balance might be struck. 

 

(1) Independent Trustee Services Ltd v GP Noble Trustees Ltd [2009] EWHC 161 (Ch) at [6]

(2) HM Revenue & Customs v Begum [2010] EWHC 2186 (Ch)

(3) JSC BTA Bank v Ablyazov [2015] EWHC 3871 (Comm)

(4) Independent Trustee Services Ltd v GP Noble Trustees Ltd [2009] EWHC 161 (Ch) at [6]