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HHJ Hodge QC has granted what are essentially freezing injunctions in favour of joint trustees in bankruptcy over the businesses and assets of a number of corporate respondents. He also granted injunctions restraining individual respondents from dealing with shares in any of the corporate respondents. These corporate entities had been interposed to shelter assets belonging to the bankrupt in question (the first respondent) and the court was satisfied that there was a real risk of dissipation of further company monies by the bankrupt. Therefore, it was necessary effectively to pierce the corporate veil. The relief was granted on a without notice application as the risk of dissipation by the bankrupt, who had to date consistently evaded disclosure obligations, would be exacerbated if notice were given of the relief sought. The applicants were required to give a limited cross-undertaking in damages.
Wood v Baker  EWHC 2536 (Ch)
For obvious reasons, the granting of a freezing order is not undertaken lightly by the court and specific requirements need to be met. This case dealt with a bankrupt who had consistently sought to evade disclosing information as to assets. As a consequence, the court gave slightly more latitude than normal, being a case in which the court considered it legitimate to pierce the corporate veil to enable it to identify the activities and assets of the corporate respondents which the bankrupt owned and controlled. Practitioners need to be aware that such cases are rare and that such relief will be regarded by the court as a remedy of last resort. Grant of the freezing order was balanced with the cross-undertakings, though limited, which were given.
The case involved the complex and protracted bankruptcy of Timothy Baker (the first respondent), petitioned in 2005. There have been a succession of trustees in bankruptcy, all trying to trace, track down and unravel the bankrupt's property and affairs while he has made concerted efforts (to the point of imprisonment) to conceal his assets, evade his obligations and avoid co-operating with the trustees.
The current joint trustees were appointed relatively recently with renewed intention to realise assets for the petitioning creditor. This momentum and the application were assisted by recent information from HM Revenue and Customs regarding tax malpractices at some of the corporate respondents which were apparently 'payroll' companies.
The draft application notice sought declarations that the business and assets of the corporate respondents were being held on trust by them for the bankrupt, or were otherwise owned by him, and were therefore subject to the Insolvency Act 1986, s 307 (IA 1986) (which allows the trustee in bankruptcy to formally claim such property for the benefit of the estate). If the application were granted, and a s 307 notice served on the bankrupt as soon as practicable, the effect would be to immediately vest ownership of the corporate assets in the joint trustees.
His Honour Judge Hodge QC was satisfied on the evidence that the joint trustees had demonstrated a good arguable case for the injunctive relief. There was a real risk of dissipation of further company monies and assets by the bankrupt and that risk would be further compounded if notice were given to the bankrupt of the application.
Re Q's Estate  1 All ER (Comm) 499
HHJ Hodge QC was initially concerned as to whether, prior to the s 307 notice being served, the joint trustees had any accrued cause of action, which is a pre-requisite (long established in The Veracruz). It is possible to seek to alleviate this, where legitimate, by indicating the court's willingness to grant a freezing injunction once the notice has been served (Re Q's Estate). Then as soon as there is evidence that the bankrupt is in breach of the notice (and a cause of action has accrued) the injunctive relief can be obtained immediately(The Veracruz  1 Lloyd's Rep 353).
However, in this case the trustees sought an interim order for the preservation of relevant property, which was the subject of, or as to which a question might arise on, a claim under CPR 25.1. The judge agreed that this was justified by the form of the declaratory relief sought.
Prest v Petrodel Resources  UKSC 34,  4 All ER 673
It is possible for the court to pierce the corporate veil so as to identify the activities and assets of the corporate respondents which the bankrupt owns and controls. Such cases are rare and such relief should be regarded as a remedy of last resort (see the Supreme Court case of Prest). However, where a company has been interposed so as to enable an individual to wrongfully evade or frustrate his existing legal obligations, the principle of piercing the corporate veil may be invoked. In Prest, Lord Sumption described this as 'the evasion principle':
'...the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement and a company is interposed so that the separate legal personality of the company will defeat the right...'
Ben Hashem v Al Shayif  EWHC 2380 (Fam)
Lord Sumption went on to say that the principle was a limited one as, in practice, the facts will normally show a legal relationship between the company and its controller which makes it unnecessary to pierce the veil. If it is unnecessary, it is not appropriate to do so as there is no public policy reason to justify it (Ben Hashem).
The joint trustees successfully argued that the evasion principle was the most compelling basis for their application. The bankrupt had remained subject to an existing obligation to disclose assets acquired after the petition (IA 1986, s 333) and had interposed the corporate respondents to evade the consequences of that obligation and avoid further assets passing to the trustees. As such, it was appropriate to grant the injunctive relief sought.
HHJ Hodge QC decided that the trustees must give an undertaking limited to the amount of the monies and net realisable value of the unpledged assets in the bankrupt's estate.
JSC Mezhdunarodniy Promyshlenniy Bank v Sergei Viktorovich Pugachev  EWCA Civ 139
In considering the undertaking, the judge attempted to strike a balance between the interests of the trustees and those of the respondents, who were not represented before him. The essential test was one of fairness, rather than likelihood of loss (Pugachev). While HHJ Hodge QC acknowledged that an unlimited undertaking by the trustees would be fatally onerous, he declined to ringfence the trustees' costs and expenses of the bankruptcy. He considered the undertaking should be looked at afresh at return dates going forward.
Costs of the application were reserved.
Court: High Court, Chancery Division
Judge: His Honour Judge Hodge QC sitting as a judge of the High Court
Date of judgment: 31 July 2015
First published by Lexis PSL Dispute Resolution
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