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Proceeds of loan caught by Commercial Court freezing order

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15 December 2015

The proceeds of four loan agreements entered into by the respondent (as borrower) were caught by the expanded definition of "asset" contained in the current standard form of Commercial Court freezing order which includes "any asset which [the respondent] has the power, directly or indirectly, to dispose of or deal with as if it were his own". In a unanimous decision in JSC BTA Bank v Ablyazov [2015] UKSC 64, the Supreme Court overturned the decisions of the High Court and the Court of Appeal.

The appellant was one of Kazakhstan's four systemic banks (the Bank). The respondent, Mr Ablyazov was the chairman and majority shareholder of the respondent between 2005 and 2009. The Bank accused Mr Ablyazov of presiding over the misappropriation of USD 10 billion of its monies for his own personal benefit whilst chairman and commenced 11 sets of proceedings against him in England (where he had fled following the nationalisation of the Bank). The Bank went on to obtain judgment against Mr Ablyazov in four of these cases in an aggregate sum of over USD 4.4 billion.
The Freezing Order
The Bank had obtained a worldwide freezing order over Mr Ablyazov's assets (the Freezing Order).
Paragraph 5 of the Freezing Order followed the standard form of the order that has been set out in the Admiralty and Commercial Court Guide since 2002. The final two sentences (in bold below) were added in 2002:
"5. 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]
The Loan Agreements
Mr Ablyazov had entered into four loan agreements (the Loans) as the borrower. The Loans each contained the following clause
"1.12 Use of Proceeds. 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 fully drawn down under each of the Loans and had directed that monies be paid directly to third parties, including to his former solicitors, corporate service providers and to lawyers acting for his co-defendants. According to the Bank's counsel, Mr Ablyazov used the proceeds of the loan agreements to make payments without reference to the restrictions contained in the Freezing Order (which permitted payment of his legal fees only to the extent that they were reasonable, limited his weekly expenditure and would have required the consent of the Bank or the court to payments to, for example, his co-defendants).
The Bank applied for a declaration that if the Loans were valid agreements: (a) Mr Ablyazov's rights under them were assets for the purposes of the Freezing Order; and (b) any drawings under the Loans could only lawfully be made pursuant to the exceptions set out in the Freezing Order.
Issues before the Supreme Court
The issues to be decided by the Supreme Court were:
  1. whether Mr Ablyazov's right to draw down under the Loans was an "asset" within the meaning of the Freezing Order;
  2. if so, whether the exercise of that right by directing the lender to pay the sum to a third party constituted "disposing of" or "dealing with" or "diminishing the value" of an "asset"; and
  3. whether the proceeds of the Loans were "assets" within the meaning of the extended definition in paragraph 5 of the Freezing Order on the basis that Mr Ablyazov had the power "directly or indirectly to dispose of, or deal with [the proceeds] as if they were his own".
The Supreme Court dismissed the Bank's appeal on issues (1) and (2) but allowed the appeal on issue (3).
Extended description of assets
Lord Clarke emphasised that the Freezing Order differed from the pre-2002 form of freezing order as it contained an extended description of "assets" in the last two sentences of paragraph 5, and the words "whether the respondent is interested in them [the assets] legally, beneficially or otherwise".
It is noted in the Commercial Court Guide that whether this wider wording should be included in relation to the order and/or the provision of information under it will be considered by the court when granting the order on a case by case basis.
Lord Clarke stated that the standard pre-2002 form of freezing order does not prevent a party borrowing money and spending it and held that it would be inappropriate to reverse previous decisions which did not support the proposition that Mr Ablyazov's right to draw down under the loan was an "asset" within the meaning of the standard form of freezing orders as originally drafted (which excludes the extended definition).
On issue (1), Lord Clarke held that the right to draw down loans did not constitute an "asset" for the purposes of the standard pre-2002 form of freezing order; the expanded wording (shown in bold above) is required to achieve this. In light of this, and in respect of issue (2), Lord Clarke did not think that anything Mr Ablyazov had done amounted to "disposing of" or "dealing with" or "diminishing the value" of an "asset".
In respect of issue (3), the Supreme Court held that the proceeds of the Loans were "assets" within the meaning of the extended definition in paragraph 5. He noted that the Loans contained: (i) a provision that the loan proceeds would be used at Mr Ablyazov's sole discretion, and (ii) a power to direct the lender to transfer the proceeds to any third party (at clause 1.12, set out above). Accordingly, an instruction by Mr Ablyazov to the lender to pay the lender's money to a third party did constitute Mr Ablyazov dealing with the lender's assets as if they were his own and thereby these proceeds fall within the extended definition.
In his judgment, Lord Clarke explained that the extended definition is designed to catch assets which are not owned legally or beneficially by the respondent but over which the respondent has control; it therefore did not matter that the respondent did not own the proceeds of the Loan, nor that he had incurred a liability at some stage to reimburse the lender. Lord Clarke also made clear that the entire purpose of the extended definition is to extend the meaning previously given to "assets" and to widen the scope of the Freezing Order to catch assets which would not otherwise have been caught.
This judgment is of interest not only to those who may need to draft a freezing order (as it demonstrates the importance of taking care when drafting to ensure that the definition of "assets" catches all the assets the respondent is suspected of having) but also to third parties who have lent funds to a respondent to a freezing order. The Supreme Court's judgment makes clear that, depending on the definition of "assets", a freezing order is capable of attaching to the proceeds of a loan. However, it does not comment on how a lender might enforce its right to be repaid or exercise its security in circumstances where loan proceeds have been frozen. This judgment does not appear to affect the current state of the law in this area, whereby pre-existing liabilities to third parties will be respected, albeit the particular terms of the order should be considered in each case to determine what steps can and cannot be taken with a respondent's assets. In many circumstances, it is likely that the terms of a freezing order may need to be varied to allow the repayment of a third party.
By allowing the Bank's appeal on issue (3) in this case, the Supreme Court can be seen to have closed one loophole which a "wily operator" (in the words of the Court of Appeal) may have used to manoeuvre around the restrictions imposed by a freezing order. However, in his judgment, Lord Clarke also made clear that the court will take a restrictive, not expansive, approach when construing freezing orders:  he emphasised that the only real question for the court when construing an order is what the freezing order as drafted actually means. Therefore, in circumstances where it is desirable to give a broader meaning to the order, the correct approach is for the court to vary the order appropriately for the future, rather than exercise its jurisdiction in a "flexible and adaptable manner" and give the order a meaning that it does not have.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey, or tel +44 20 3088 3710.