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The Facts

In December 2010, the FSA commenced proceedings against three defendants – Sinaloa Gold plc (“Sinaloa”), PH Capital Invest and Mr Glen Hoover – whom it alleged had arranged for a fraudulent offer and sale of shares in Sinaloa.  The FSA pointed to the fact that no prospectus was approved for the offer of shares to the public as required by section 85 of the Financial Services and Markets Act 2000 (“FSMA”) and that the proceeds of the sale of shares had been wrongly filtered through to parties unconnected to Sinaloa.

As a consequence, the FSA was granted a freezing order which prohibited any further sales of shares in Sinaloa and prevented each of the defendants from any disposals or dealings with their worldwide assets.

On 6 January 2011, the FSA then applied to the High Court to extend the freezing order against the defendants and to vary their undertaking in the order to pay only the reasonable costs (and no other losses) incurred by any innocent third parties in complying with the injunction, should it transpire that the injunction was wrongly granted.  At this point in the proceedings, Barclays Bank plc – an affected third party – intervened and argued that the proposed injunction should contain a wider cross-undertaking from the FSA which would cover both their costs of compliance and any losses suffered as a result of the injunction being wrongly granted.

Legal Issues

The key area of dispute was the extent of the undertaking to be given by the FSA. The question for the court was whether it could require the FSA to undertake to compensate an innocent third party for both the reasonable costs of compliance and other consequential losses attributable to the granting of the freezing order.  In actions between private individuals, a claimant is required to enter into a standard form cross-undertaking under which it agrees to compensate any innocent third parties for losses suffered in relation to a wrongly granted injunction.  However, the legal position differs slightly when injunctive relief is sought by a public authority as part of its enforcement of the law (such as the FSA exercising its powers under FSMA).  In such situations, the court, under the ‘dispensation rule’, has discretion to allow public authorities to provide an undertaking only for the costs incurred by a third party in complying with an order and not for any additional losses suffered by the third party.  The case therefore rested on whether an innocent third party was afforded the same protection from an injunction when it is sought by a public authority in the enforcement of the law as it is when sought in a private dispute.

Decision in High Court

After considering the issue, the High Court held that the FSA was required to give a cross-undertaking in favour of the innocent third party which would compensate the costs of compliance and other losses of the third party.  The High Court took the view that the better position was to require the cross-undertaking in the first instance (notwithstanding the ‘dispensation rule’), and then to use its discretion when enforcing the undertaking in a given situation.

Decision in Court of Appeal

On appeal from the High Court by the FSA, Patten LJ in the Court of Appeal held that public authorities should compensate third parties for the limited costs of identifying assets in compliance with an order but that they should not be required to provide the kind of ‘blank cheque’ as foreseen by Neuberger J in Miller Brewing Company v Mersey Docks & Harbour Company [2003] All ER (D) 362 (May) that would cover a third party’s unknown losses.  The court, in agreement with Patten LJ, overturned the High Court decision and removed the additional obligation to compensate a third party’s losses from the FSA’s undertaking.

Comments

Barclays Bank plc has appealed the decision of the Court of Appeal and the case was heard in the Supreme Court in December 2012 with judgment now awaited. It will be of particular interest to banks and asset holders as it will determine the level of protection they are afforded as an innocent third party to an injunction sought by the FSA.

The outcome of the case in the Supreme Court may also have far-reaching consequences for the enforcement powers of public authorities such as the FSA.  Depending on the outcome, such bodies may be more reluctant to seek injunctive relief if a potential consequence and liability is to compensate third parties for losses suffered as well as costs of compliance.