Case Comment: JSC BTA Bank v Ablyazov [2015] UKSC 64
22 Tuesday Dec 2015
Sam Claydon, Olswang LLP Case Comments
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The Supreme Court has recently handed down judgment in the case of JSC BTA Bank v Ablyazov, which is part of the long-running litigation between the two parties in which the claimant Bank has had judgment entered against Mr Ablyazov for an aggregate sum of $4.4 billion. The questions to be addressed in these proceedings were related to the construction and meaning of the freezing order insofar as it related to Mr Ablyazov’s rights to draw down under a series of loan agreements.
The two important elements of the judgment are that (i) freezing orders must be construed strictly with the aim of ensuring clarity in their interpretation; and (ii) the fact of control over assets (when considering the extended definition of “assets” in the post-2002 Commercial Court standard form of freezing order) is the focus of the court’s inquiry. This case has shown that the respondent need not have any legal or beneficial title in those assets.
A practical tip is to ensure that the wording of a freezing order is sufficiently wide to capture the respondents’ assets that are intended to be subject to it. The Supreme Court’s decision emphasises that the term “assets” is unlikely to be given its ordinary, wide meaning and that it is not enough to rely upon past interpretations of certain concepts at law (e.g. choses in action) when determining the scope of a freezing order.
Background
Following the making of the freezing order against him, Mr Ablyazov entered into four loan agreements, each of which provided for a loan facility of £10 million and each of which is now fully drawn down. Each loan agreement included the following term:
“The proceeds of the Loan Facility shall be used at the Borrower’s sole discretion. The Borrower may direct the Lender to transfer the proceeds of the Loan Facility to any third party”.
Mr Ablyazov had directed the lenders under the loan agreements (the “Lenders”) to make payments to various parties from the proceeds of these loans, the majority of the sum going to his former solicitors for payment of outstanding fees. In earlier stages of the proceedings, the Bank had contended that the Lenders were simply Mr Ablyazov’s conduits, but the litigation ultimately proceeded on the basis that the loans were arm’s-length transactions.
The standard Commercial Court form of freezing injunction
The Supreme Court appeal concerned the wording of paragraph 5 of the freezing order made against Mr Ablyazov. Paragraph 5 provided as follows:
“Paragraph 4 applies to all the respondents’ assets whether or not they are in their own name and whether they are solely or jointly owned and whether or not the respondent asserts a beneficial interest in them. For the purpose of this Order the respondents’ assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own. The respondents are to be regarded as having such power if a third party holds or controls the assets in accordance with their direct or indirect instructions” (emphasis added).
This wording was based on paragraph 6 of the standard Commercial Court form of freezing order. It should be noted that the underlined wording (referred to in this case as the “extended definition”) did not appear in the standard form order before 2002, and as a result it is not considered in much of the case law before 2002.
The questions to be considered by the Supreme Court
There were three main questions that fell to be addressed by the Supreme Court in relation to the wording of the standard form freezing order, which are essentially questions of construction of the order:
- whether a right to draw down funds under a loan agreement constitutes an “asset” under the terms of the freezing order;
- whether ordering the Lenders to pay the money to a third party constitutes “disposing of”, “dealing with” or “diminishing the value of” an “asset”; or
- whether the proceeds of the loan agreements were “assets” within the meaning of the extended definition in paragraph 5 of the freezing order on the basis that the respondent had power “directly or indirectly to dispose of, or deal with [the proceeds] as if they were his own”.
The first instance decision
At first instance the Bank sought a declaration that the loan monies were “assets” and would therefore be caught by the freezing order. The application was refused. The court held that the Bank failed on questions 1 and 2, noting that although a right to drawn down under a loan agreement is a chose in action and under the law constitutes an asset, such a classification in the context of a freezing order would produce odd effects and give rise to difficult questions on valuation.
Even if the Bank was correct on question 3, the court held that the wording of the order was sufficiently ambiguous that it should be construed in favour of the respondent so as not to expose him to a penal sanction.
The Court of Appeal judgment
Lord Justice Beatson gave the leading judgment in the Court of Appeal. He identified three important legal principles relevant for construing freezing orders:
- Enforcement. The purpose of a freezing order is not to give the claimant security for his claim (as that is obtained by other means) but simply to prevent the defendant from dissipating his assets that may later be subject to enforcement if the claimant is successful in its claim.
- Flexibility. The courts should exercise their jurisdiction flexibly when making freezing orders so as to deal with novel situations and ensure that those subject to freezing orders cannot find ways to circumvent that jurisdiction.
- Strict construction. Freezing orders must be construed strictly in light of the penal sanction for their breach, as part of which the respondent must be clear about what he is prevented from doing.
The Court of Appeal agreed with the first instance decision on the principal ground that although rights to draw down under loan agreements have historically been considered to be choses in action, the standard form freezing order does not make such choses in action “assets” within the order. This was despite Lord Justice Beatson’s view that he had no principled objection to the classification of draw-down rights as assets. The Court of Appeal also declined to extend the ambit of the meaning of “assets” on the basis of the purpose of the freezing order, the fact that it did not expressly refer to choses in action, and taking into account the context of the loan agreements.
Appeal to the Supreme Court
The Bank appealed again to the Supreme Court, which held that the issue was down to interpretation and ultimately found in favour of the Bank. Dismissing the first two questions on appeal, the Supreme Court held the the loan monies were “assets” within the meaning of the extended definition in the freezing order.
Lord Clarke gave the leading judgment. He found that the flexibility principle had no role in construing an order of the court – the court should not be tempted to interpret an order on the basis of the merits of either party’s case. Instead, he held that freezing orders should be construed restrictively, and for the important reason that there are draconian consequences for the respondent should he or she breach the order.
Lord Clarke thought that it was important as an interpretive aid to consider the historical development of freezing orders, and he went through the relevant case law:
- For a number of years (between the decisions in Mareva (in 1975) and Hadkinson (in 2000)), there had been no suggestion by the courts that the meaning of the terms “assets” or “funds” extended to sums not beneficially owned by the respondent. Lord Clarke found that Hadkinson was authority for construing freezing orders in their proper context, and that that position should not be reversed as it was a “sensible approach”. Both cases dealt with the pre-2002 version of the order, which did not include the extended definition.
- Nonetheless, Lord Clarke noted that the scope of “assets” could be wide, and that in ordinary legal language rights to draw down under loan agreements could be considered to be “assets”.
- However, Lord Clarke noted further that the meaning of the term “asset” in a historical context was a sum that would be part of a fund available to a judgment creditor, and that it was settled law that borrowings were not covered by the standard form freezing order.
Taking the above into account, Lord Clarke found that although the right to draw down monies under a loan agreement was arguably an “asset”, the authorities did not allow this interpretation in the context of a freezing order. He did not go as far to overturn these decisions and so the appeal on the first question failed.
Lord Clarke was also at pains to emphasise the need for certainty and clarity in freezing orders, given the draconian consequences for the respondent if they are breached. He held that the respondent’s right to draw down under the loan agreements could only constitute an asset by reference to the extended definition under paragraph 5 of the freezing order and therefore the appeal on question 2 must fail. On the basis of that construction, Lord Clarke held that the actions of the respondent had not disposed of, dealt with or diminished the value of the “assets” as that word is construed in the original form of the freezing order (i.e. without reference to the extended definition).
Lord Clarke allowed the appeal on the third question. He accepted the Bank’s argument that the the respondent had the power to direct the Bank to do what he instructed with the funds that were contractually available to him under the loan agreements. This was despite the fact that the facility was subject to the Lenders’ consent and also subject to the Lenders not cancelling the facility (which was behind the Court of Appeal’s reasoning for not allowing the appeal on question 3). The Lenders were subject to binding legal obligations that enabled the respondent to direct them to make transfers to third parties, and the respondent was able to use the proceeds of the loans at his sole discretion.
Lord Clarke further held that under the extended definition of the freezing order, the assets covered extended to those that the respondent did not own legally or beneficially (as in the case of the sums under the loan agreements) but those over which the respondent had control. It was irrelevant that, upon instructing the Lenders to make any transfer, the respondent incurred a corresponding liability.