Court of Appeal provides helpful clarification on key test for obtaining injunctions

Chances are litigation is not something your business actively seeks out. However, there will be occasions when disputes cannot be resolved, and steps need to be taken to protect the commercial and often reputational interests of the organisation. This is particularly in the face of the fraudulent or dishonest behaviour of a third party where the ability to act quickly and decisively can be paramount.

It is vital therefore that those responsible for deciding what to do are aware of the tools available to assist the business in such situations, and when and how they can be deployed. These include, in particular, the ability to obtain a civil injunction against the perpetrator - whether that be an errant director or employee, an unscrupulous customer, or a cyber-criminal.

One of the most powerful and effective of these is a worldwide freezing injunction. As the name suggests, this is a court order which prevents a defendant from dealing with or dissipating assets pending either the determination of court proceedings being brought by the business or the enforcement of any subsequent judgment in its favour. Coupled with the fact that a breach of such injunctions can amount to a contempt of court and expose the defendant in turn to the risk of a fine or even imprisonment, it is clear why they are often seen as one of the nuclear weapons in a claimant’s litigation arsenal. In many cases, the existence and successful policing of such injunctions is instrumental in obtaining a favourable and early outcome for the victim of the fraud.

In what circumstances therefore can a business obtain a freezing inunction? The key is to be able to show that there exists what is known as a "real risk of dissipation". This was the subject of a recent Court of Appeal decision in Les Ambassadeurs Club Ltd v Yu [2021].

The Case

The facts of the case are straightforward. The appellant was the owner of a club which operated a casino in Mayfair. Mr Yu was a wealthy businessman who made use of a facility granted to him by the club to purchase £19 million worth of chips using a series of cheques which were tendered as security. As you may have guessed, Mr Yu lost the money gambling at the club and his cheques were subsequently dishonoured.

Mr Yu therefore still owed a significant sum of money to the club, and the parties entered into a settlement agreement under which Mr Yu agreed to repay the debt in instalments. However, he failed to comply with its terms and court proceedings were then brought against him. He consequently repaid a large part of the debt, but no further sums were forthcoming, and the club obtained summary judgment against Mr Yu for the sums outstanding plus interest and costs. The total judgment debt was just over £10 million.

This was still not paid, and the club then applied for a post judgment worldwide freezing injunction against Mr Yu. This was refused though by the Court and the club therefore appealed.

The appeal focused of the test for, and the reasons underlying the requirements to show, a real risk of dissipation. In this regard the Court of Appeal had this to say:

• The purpose of a freezing injunction is to ensure that a judgment (that may be or has been obtained) will not go unsatisfied by reason of assets that would otherwise be available to satisfy it being dealt with in a manner that will make them unavailable by the time the judgment comes to be enforced.

• The test is whether the court concludes, on the whole of the evidence before it, that the refusal of a freezing injunction would involve a real risk that a judgment in favour of a claimant would remain unsatisfied.

• It was not necessary though for a claimant to show that it was more likely than not that the risk would materialise. The Court of Appeal referred to previous cases where it had been held that “it is not difficult to imagine situations in which justice and equity would require the granting of an injunction to prevent dissipation of assets….even though the risk of such dissipation may be assessed as being somewhat less probable than not”.

• The test for establishing a real risk of dissipation applied equally to both pre and post judgment cases.

• In relation to the requirement to show a real risk of dissipation, it was not necessary to show nefarious intent, in the sense that the defendant would deal with his or her assets with the object, and not just the effect, of putting them out of the claimant’s reach. Nor was it necessary to prove previous dissipation or dishonesty.

• If a defendant had not availed himself of the opportunity to remove assets once he knows that the creditor had started proceedings (or had obtained judgment against him) and it would be easy for him to move them (as it would be with money in a bank account) it would be much harder to draw the inference that there was a real risk that he would remove them unless prevented from doing so by an injunction.

• The risk of dissipation must be real and not fanciful (although if it not much above the level of fanciful that would be relevant to the court’s ultimate discretion as to whether to grant or refuse an injunction application.

• However, whilst a “real” risk clearly meant something which is “more than fanciful”, there was a danger that putting such a gloss on the well-established test would create the impression that the threshold is lower than it actually is.

• “Ultimately the focus should be on whether, on the facts and circumstances of the particular case, the evidence adduced before the court objectively demonstrates a risk of unjustified dissipation which is sufficient in all the circumstances to make it just and convenient to grant a freezing injunction. Plainly a risk which is theoretical, fanciful or insignificant will not meet the threshold; but the judge should be addressing the question whether he or she is satisfied that the alleged risk is real, and that does not require any comparative exercise to be carried out, or the attaching of some of the label to a risk which faults short of the threshold”.
• Finally, there was an important distinction to be drawn between a defendant who can pay but refuses to pay his debts until he is forced to do so, and a defendant who is so determined not to pay that he would take active steps to frustrate the recovery of sums due to creditors by transferring or concealing assets or by some other form of unjustified dissipation. Before Granting therefore the “nuclear remedy” of a freezing order "there must be cogent evidence from which it can at least be inferred that the defendant falls into the latter category”.

Next Steps

So what did the Court of Appeal make of Mr Yu's case? Applying the above principles, it upheld the decision of the original judge who it said had been entitled to conclude that the evidence (a) showed no more than a suspicion or fear that Mr Yu would dissipate his assets and (b) did not demonstrate that he fell into a different category from any other debtor who simply did not want to pay his debts.

In this regard, it has been relevant that there was no evidence that Mr Yu had tried to move any of his money after the Club had obtained judgment against him (despite him having the means by which to do so).

It was also relevant that this was not the usual case where a defendant had pretended that he was prepared to pay a pre-existing debt by tendering cheques which were subsequently dishonoured. In this case, the dishonoured cheques were drawn as security for the original loans, and there was both a settlement agreement and substantial partial repayment of the debt after they were dishonoured.

If you or your business has any questions about the contents of this article, or if you wish to discuss a fraud which you know or suspect that your business may have been subjected to, then at first instance please contact Steven Richards, the head of Foot Anstey's Fraud and Cybecrime practice.