Flightline Limited -v- Edwards and another [2002] EWHC 1648 (Ch)

As a general rule, freezing orders do not give the party who obtains the order any proprietary rights to the assets frozen: the order is given only to prevent those assets being dissipated pending a future judgment. However, in certain circumstances, a creditor of a company may find that he is able to “upgrade an order freezing the company’s assets, to effective security over those assets.

The facts

The claimant, Flightline Limited (“Flightline) claimed that it was owed approximately £4.7 million by one of the Swissair group of companies. The company in question was incorporated in Switzerland; insolvency proceedings had been commenced against the group in the Swiss courts in October 2001. In January 2002 the applicant obtained a freezing order from the UK courts, restraining the company from disposing of those of its assets which were in England or Wales up to the value of the claim.

In February, the parties agreed that part of a debt owed to the company by the International Air Transport Association (“IATA), up to the value of the claim, should be paid into a bank account in the joint names of the solicitors of the applicant and the company. Once this had been done, the freezing order would cease to have effect. The monies were duly paid into the bank account, and by a consent order of 13th March, the parties agreed the discharge of the freezing order. It was, however, a term of the order that the company undertook not to withdraw or in any way dispose of or deal with or encumber its interest in the monies in the account, up to a limit of £3.325m, without further order of the court or agreement between the parties.

In March, the applicant served proceedings on the company, which were automatically stayed in April when provisional liquidators, who were the respondents to this application, were appointed over the company by the High Court, on the company’s own petition.

The issue

Although the application was for leave to continue with the proceedings against the company, pursuant to section 130(2) Insolvency Act 1986, the court was effectively asked to decide whether the monies held in the solicitors’ joint account constituted security for the monies which it was alleged were owed to the applicant, or whether the money was subject to no such security because the account had been opened in substitution for a freezing order which gave no proprietary rights to the money (in which case the monies should be paid out to the respondents, and the applicant would be left to prove in the liquidation with the other unsecured creditors).

The decision

The Judge, Mr Justice Neuberger, decided that the applicant was a secured creditor in respect of the monies, to the extent that the claim succeeded. His reasoning was as follows:

1. The general principle remains that a freezing injunction does not confer on the person who obtains it any security in respect of his claim. On the other hand, money which is paid into court , for example under CPR part 36 (a payment into court to protect the party on costs), or in compliance with CPR part 24 (as a condition of the defendant being allowed to defend the claim), is likely to constitute security.

2. The question of whether money in a joint account is security, will depend in part on established principle and in part on the intentions of the parties and the court; accordingly, cases will turn on their particular facts. This particular case was a hybrid, because on the one hand the money was in the control of the court, while on the other, the money was paid to discharge a non-proprietary court order (ie: a freezing order).

3. The crucial factor in the present case was that the money remained under the control of the court; it had been effectively “sterilised and was beyond the reach of the company, unless and until the court ordered otherwise. It was also essential to the decision that proceedings were already underway.

4. The standard form of freezing order contained in the relevant practice direction includes a provision that the defendant may get the order discharged if it “provides security by paying a particular sum (usually the value of the claim) into court, or makes provision for security in that sum by another method agreed with the applicant. Although this paragraph was missing from the freezing order in this case, by agreeing the payment into the joint account in exchange for the discharge of the freezing injunction, the company was in effect granting Flightline security for its claim.

5. The claimant had in a sense earned its enhanced rights over the company’s assets, by taking steps which involved it in more risk and expense than other unsecured creditors; Flightline had been prepared to bring proceedings to enforce its claim, and indeed had gone further and obtained a freezing injunction. There was no reason why such a creditor should not be better off, as a result of its actions.

6. It was not necessary for the parties to have intended the claimant to become a secured creditor, as it is possible for persons to reach an agreement which has legal consequences which differ from what they expected. This principle was clearly stated by the House of Lords in Re Cosslett (Contractors) Limited.

Summary

· For the party with the benefit of a freezing order to become a secured creditor, there must be ongoing court proceedings and the monies paid to discharge the freezing order must be under the court’s control (even if only to the extent that the parties cannot themselves reach agreement), whether by a payment into court, or into a solicitors’ joint account held subject to an order of the court;

· Such a payment is analogous to a payment into court under CPR part 36; that is, the monies will be treated as security for any judgment the claimant might obtain;

· Although the intention of the parties is one of the factors to be considered, it is not definitive;

· Claimants should give this case careful consideration when conducting negotiations for the discharge of a freezing order. In particular, claimants may be deterred from compromising such issues before issuing court proceedings, as they may lose the chance to obtain security over the defendant’s assets.

For further information, please contact Sophie Elboz at [email protected] or on +44 (0)20 7367 2958