In contrast to a freezing injunction, a proprietary injunction prevents a defendant from dealing with the claimant's assets in their possession pending trial. A claimant's argument in this situation is that the money is not in fact the defendant's money but is held on trust for the claimant.
A proprietary injunction is a discretionary remedy and the power to grant such an injunction is derived from its equitable jurisdiction in s.37(1) of the Senior Courts Act 1981.
In general, proprietary injunctions do not contain a legal and living expenses exception. The starting point is that the assets to be preserved belong, at least arguably, to the claimant. There is, therefore, no presumption that the defendant should be allowed to have access to those assets in order to fund their living and/or legal expenses.
In 2023, however, the High Court permitted the release of funds within the ambit of a proprietary injunction obtained by consent, for the payment of legal fees. Liz Mulley, Managing Associate at Trowers, has taken a closer look at the decision of Miles J in AB v CD [2023] EWHC 2353 (Ch) and his reasons for ordering funds to be released to cover two of the defendants' legal expenses.
Case summary
In AB v CD [2023] EWHC 2353 (Ch), the Claimants' position is that the First Claimant raised sums of over £230 million from retail investors, on the basis that those sums would be invested in small and medium UK companies following due diligence into their trading prospects and with security. The Claimants allege that around 60% of the monies raised by the First Claimant were paid directly, or indirectly, to the First to Tenth Defendants.
In particular, the Claimants' position is that the Second and Tenth Defendants (who are married) received between them over £23 million of the funds raised by the First Claimant from investors. The claims against the Second Defendant include allegations of dishonesty. The claims against the Tenth Defendant are only to recover the traceable proceeds of some of the monies.
In a related Serious Fraud Office (SFO) investigation, criminal restraint orders (CROs) had been made against the Defendants, including the Second and Tenth Defendants (referred to below as "the Defendants"). On 8 February 2021, when the Defendants were the beneficiaries (with others) of a £10 million directors and officers (D&O) insurance policy (the Policy), the Defendants had consented to proprietary freezing orders (the PFOs) covering the proceeds of specific payments and containing no legal expenses exception. The Policy was available to be drawn on for legal proceedings and so the Defendants used the funds from the Policy to pay their legal expenses.
The SFO later agreed to vary the CROs to allow legal fees of about £1 million to be paid. One of the Claimants, however, would not agree to release to the Defendants more than £450,000 of frozen funds covered by the PFOs, which the Defendants considered insufficient. The Defendants issued an application for the release of funds subject to the PFOs. The projected legal fees and expenses to fund the defence through to trial were estimated as £3.75 million by those representing the Defendants.
Key considerations
Mr Justice Miles adopted a staged approach when considering the Defendants' application (Miles J considered, in particular, Marino v FM Capital Partners Limited [2016] EWCA Civ 1301 and the helpful summary of principles in paragraph 22 of Kea Investments Limited v Watson [2020] EWHC 472 (Ch)). Given that the basis of a claimant's proprietary claim is that the particular asset in question is said to belong to the claimant, the question is not whether the defendant should be able to use his own assets but whether he should be permitted to use assets, which may actually turn out to be those of the claimant.
Miles J addressed the following questions in particular:
- Whether the claimant has an arguable proprietary claim to the money;
- Whether the defendant has arguable grounds for claiming the money himself;
- Whether the defendant has shown that he has no other funds available to him for this purpose; and
- Whether the Court should exercise its discretion to vary the injunction to permit the release of funds for the payment of legal fees.
Miles J also considered whether there was a possible prejudice to the Claimants if the Defendants were allowed access to the funds. If the funds were released and the Claimants succeeded, the Defendants would in effect have been allowed to litigate at the Claimants' expense. He also considered, however, the Court's and the Defendants' interests in professional representation in such a large, complex case.
Miles J noted that the PFOs were made by consent and the Defendants accepted that they had to show a change in circumstances to justify a departure from them, with no exception for legal fees.
Miles J's decision
Having taken into account the above key considerations, Miles J granted the Defendants' application in part. He permitted the release of £1.7 million (being some of the funds sought by the Defendants but not all). In order to protect the Claimants from undue prejudice, there was to be no release of funds from the frozen assets for the Defendants' accrued fees. No clear breakdown of those accrued amounts had been provided, as compared with future costs. The sum of £1.7 million ordered was in respect of costs since the date of the Defendants' application; not in respect of costs accrued before that. That sum was intended to cover the period until the end of trial.
Miles J considered that, in this situation, the Court had to approach things with a relatively broad brush and could not carry out anything approaching a scientific analysis of the costs. This is because it is seeking to balance the interests of the Defendants in obtaining as much representation as they can against the interests of the Claimants in seeking to protect as much as the funds as they can, so that they are available if their claims succeed.
Miles J accepted that the Defendants had demonstrated that the funds under the D&O policy had been exhausted and that constituted a material change in circumstances since the date when the PFOs had been made by consent. The D&O policy was not simply a fund over which the Defendants had control. It's continuing availability for their costs depended on the actions of other parties and their lawyers.
Finally, Miles J considered that it would be a very difficult task for the Defendants to represent themselves and would be much assisted by professional legal representation (coupled with serious allegations of fraud and dishonesty to be tried). It was also clearly in the Court's own interests to have parties professionally represented.
Concluding thoughts
The decision of Miles J in the case of AB v CD [2023] EWHC 2353 (Ch) is a clear example of the careful balancing act that the Court must perform between the parties' interests when considering whether frozen funds subject to a PFO should be released to pay a defendant's legal expenses.
Although it is not usual for a proprietary injunction to contain a legal and living expenses exception, there are certain cases (this case being one of these) where the Court may consider it appropriate to vary an existing PFO to allow frozen funds to be released to allow a defendant to pay their legal expenses. Claimants should be mindful of this, particularly where there may have been a material change in the defendants' circumstances since the PFOs were made and the PFOs were made by consent.
