Are you going to be left high and dry? – Asset stripping to avoid paying

In the recent case of Marex Financial Limited v Sevilleja, the High Court considered the defendant’s applications challenging the basis of the case and the jurisdiction of England and Wales. The case revolved around the defendant’s actions, as beneficial owner, of stripping assets from two companies post judgment and prior to a freezing order being granted, and his personal liability after allegedly stripping the assets for his own gain.

Facts

The claimant obtained a judgment against two companies incorporated in the British Virgin Islands for the sums due under a contract in excess of US$5 million. On 14 August 2013, the court granted a freezing order against the two companies.

Pursuant to the freezing orders, the two companies disclosed their assets which were much less than expected and fell significantly below the amount ordered by the judge. The assets of the two companies came to a total of US$4,392.48. As a result, the two companies went into liquidation.

The claimant submitted that, post-judgment, the defendant, who was the ultimate beneficial owner, controller, agent and de factor director, had breached his fiduciary duty and transferred substantial sums out of the companies’ accounts into his own personal control. The claimant therefore sought damages against the defendant for inducing and procuring the violation of its rights under the judgment and intentionally causing the companies to cause the claimant loss by unlawful means.

The defendant contended that (1) there was no such tort of knowingly inducing or procuring another to act in violation of rights under a judgment, (2) that, due to the rule of reflective loss, there was no completed cause of action in tort and (3) that the correct jurisdiction is in the British Virgin Islands and not England and Wales.

Decision

Tort of knowingly inducing or procuring the companies to act in violation of the claimant’s rights

The court held that “tortious interference was recognised as a cause of action where there was a violation of rights in contract” and as such there was a “good arguable case” for the existence of the tort applied for by the claimant. The judge held that non-payment of a judgment debt was clearly an actionable wrong. The court held that the defendant had in fact induced and procured the companies not to pay the judgment debt.

Intentionally causing loss by unlawful means

The court held that there could also be a case of intentionally causing loss by unlawful means as a result of the defendant’s breach of fiduciary duties and breach of the company legislation in the British Virgin Islands through misappropriating the companies’ funds to his own benefit.

The court held that the claimant had “the better argument on all the points of law” and had established “completed causes of action in tort to the requisite standard”.

The judge stated that the defendant had stripped the companies of their assets for the only reason of taking away the companies’ ability to meet their obligations under the judgment.

Reflective loss

The court held that the reflective loss did not apply where the claimant sued the defendant for knowingly inducing or procuring a third party to act in violation of the claimant’s rights. The focus of these torts are the loss to the claimant and not to the third party company.

Jurisdiction

CPR 6.37(3) provides that the court will not give permission to serve a claimant outside of the jurisdiction “unless satisfied that England and Wales is the proper place in which to bring the claim”. The court held that as Marex were relying on the companies’ actions in relation to a draft judgment of a court of England and Wales, jurisdiction was “clearly and distinctly England and Wales”.

Summary

The decision in this case shows that the person who strips a company of its assets to stop it from complying with a judgment can be liable under the tort of knowingly inducing or procuring a company to act in violation of the claimant’s rights.

Practically, this situation could be avoided by ensuring that a freezing order application is made in good time. Usually this is prior to the judgment being given by the courts to stop defendants from attempting to strip companies of their assets.

Claimants should be aware of the need to be pro-active in protecting their potential damages and should take steps to restrict the movement of defendant assets as soon as possible.

For more information please contact Sarah Farish.