JSC BTA Bank v Kythreotis & Ors [2010] EWCA Civ 1436

[2010] EWCA Civ 1436Case No A3/2010/2337IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
MRS JUSTICE PROUDMAN
HC10C0262
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 14 th December 2010
Before
THE RIGHT HONOURABLE LORD JUSTICE LONGMORETHE RIGHT HONOURABLE LORD JUSTICE AIKENSTHE RIGHT HONOURABLE LORD JUSTICE PATTEN
Between
JSC BTA BANKAppellantKYTHREOTIS & OTHERSRespondent
Mr Paul Stanley QC (instructed by Byrne and Partners LLP) for AppellantMr Stephen Smith QC and Ms Emily Gillett (instructed by Hogan Lovells International LLP) for RespondentsHearing Hearing date : 18 th November 2010
Judgment

Introduction

[1]This appeal raises a short but important point of construction about the meaning of the words “his assets” as they appear in the standard form of freezing order set out in Appendix 5 to the current edition of the Commercial Court Guide. In short, that issue is whether those words include assets which the respondent to the order holds as a trustee or nominee for a third party. If that is the correct construction of the order it means that subsequent amendments to the published forms of freezing order have considerably enlarged the scope of the injunction following the decision of this court in Federal Bank of the Middle East v Hadkinson [2000] 1 WLR 1695 that the expression “his assets and/or funds” in the standard form of freezing order appended to CPR 25 PD did not include assets which, though held in the name of the respondent, were owned beneficially by someone else.

The background to the order

[2]JSC BTA Bank (“the Bank”) is a joint stock company incorporated under the laws of Kazakhstan. In February 2009 it was effectively nationalised by the Kazakh government when a national wealth fund acquired some 75.1% of the Bank’s share capital. The acquisition of the Bank is said to have been necessitated by the actions of the Bank’s former directors and shareholders who are alleged to have defrauded the Bank of significant assets leaving it in a precarious financial state.[3]The first defendant, Mr Solodchenko, was until dismissed the chairman of the Bank’s management board and a member of its board of directors. He is currently residing in London. In these proceedings the Bank claims that Mr Solodchenko engineered a fraud under which AAA-rated investments (“the investments”) with a value of some US$300m were misappropriated from the Bank and transferred on Mr Solodchenko’s instructions to five BVI companies who are the fourth to eighth defendants. The investments were transferred ostensibly to provide some form of security for the payment by a third party (Alfa Equity Investments Limited (“Alfa”)) to the BVI defendants in the abovementioned sum. What then seems to have happened is that in January 2009 they were used by the BVI defendants to satisfy their obligations to Alfa under a futures contract entered into in June 2008 under which the BVI defendants were paid US$300m for the sale of AAA-rated investments identical to those transferred from the Bank. The US$300m received by the BVI defendants was, in large part, paid to the ninth to twelfth defendants shortly afterwards.[4]The Bank claims that neither the security nor the January 2009 transfer were of any commercial benefit to the Bank and amounted to the unlawful misappropriation of its assets by Mr Solodchenko. The second defendant, Mr Kythreotis, was a director of the fourth and the eleventh defendants. The third defendant, Mr Hercules, was a director of the eighth defendant. The claim against the second and third defendants is that they dishonestly assisted Mr Solodchenko to carry out the fraud on the Bank and are accordingly liable for its loss.[5]It is not necessary for the purposes of this appeal to analyse the claim against the second and third defendants in any more detail. But it is relevant to refer to what took place prior to the application for a freezing order which was made to Henderson J on 26th July 2010. On 15th February 2010 the Bank obtained a Norwich Pharmacal order from Bannister J in the BVI against Alfa and Totalserve Trust Company Limited (“Totalserve”) which acts as the registered agent for each of the BVI defendants. Amongst the documentation obtained pursuant to the order was a declaration of trust in the name of Valen Limited, executed by Mr Kythreotis as a director, under which the shares in the fourth defendant and all rights attaching to them were held on trust and as a nominee for a Mr Vladimir Kovalenko. The declaration of trust includes an appointment of the beneficiary as Valen’s attorney with power to transfer or charge the shares on its behalf.[6]There is a similar declaration of trust made in favour of Mr Kovalenko by Mr Hercules in respect of the shares in the eighth defendant.[7]Mr Smith QC said that the Bank’s solicitors had contacted Mr Kovalenko who told them that he has no beneficial interest in or association with the fourth or the eighth defendant and had not given instructions in respect of the declarations of trust.[8]Mr Kythreotis is a British citizen who resides in Cyprus. He owns and operates the Starport group of companies which provide nominee and other corporate services. Mr Hercules works with him and is the company secretary of Starport Secretaries Limited, a company within the Starport group. Mr Kythreotis has made an affidavit in which he describes the nature of his business. He says that Starport acts for hundreds of companies (later verified as 902). It acts under instructions and does not initiate the transactions it is asked to carry out or even necessarily understand their commercial purpose. He and Mr Hercules act as nominee service providers including as nominee directors and simply execute the documents provided to them. His evidence is that the instructions in respect of the corporate defendants came from Eastbridge Capital Limited (“Eastbridge”), an English company with offices in the City of London, Cyprus and Moscow, which drafted the documents disclosed under the Norwich Pharmacal orders. The information about Mr Kovalenko came from them. He had no contact with Mr Kovalenko and did not attempt to verify either his signature or his passport details.[9]The position which the Bank took at the hearing before Henderson J (which Mr Smith says is not altered by Mr Kythreotis’s subsequent evidence) is that the question of the beneficial ownership of the BVI companies was extremely uncertain and that the judge was therefore asked to make an order which was sufficiently widely drawn as to extend to all of the possible arrangements disclosed in the declarations of trust. To this end, the Bank’s solicitors and counsel chose to ask for an order in the form appended to the Commercial Court Guide rather than the specimen form of freezing order referred to (but no longer contained) in the Practice Direction to CPR 25: see 25 APD 6.1.

The order under appeal

[10]Henderson J granted a freezing order against Mr Kythreotis, Mr Hercules and the corporate defendants in this form which, so far as material, is in these terms:- “5. Until after the Return Date or further order of the court, the Freezing Respondent must not, except with the prior written consent of the Applicant’s solicitors:(a) remove from England and Wales any of its assets which are in England and Wales up to the following values: Respondent Amount (2) Kythreotis US$68,286,517.36 (3) Hercules US$50 million (4) Bubris (Celina) US$68,286,517.36 (5) Granta (Shoreline) US$70 million (6) Nafazko US$58,963,708.33 (7) Olofu US$50 million (8) Kyma (Mymana) US$50 million or(b) in any way dispose of, deal with or diminish the value of any of its assets, whether they are in or outside England and Wales, up to the same value. 6. Paragraph 5 applies to all the Freezing Respondent’s assets whether or not they are in its own name and whether they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise. For the purpose of this order the Freezing Respondent’s assets include any asset which it has the power, directly or indirectly, to dispose of or deal with as if it were its own. The Freezing Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with its direct or indirect instructions. … 12. (1) Unless sub-paragraph (2) applies, the Freezing Respondent must within 7 working days of service of this order and to the best of its ability after making all reasonable enquiries: (a) inform the Applicant’s solicitors in writing of all of its assets worldwide exceeding in value ₤10,000, whether in its own name or not and whether solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise, giving the value, location and details of all such assets. For the purpose of this order the Freezing Respondent’s assets include any asset which it has the power, directly or indirectly, to dispose of or deal with as if it were its own. The Freezing Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with its direct or indirect instructions; ….”[11]The asset values in the order against Mr Kythreotis and Mr Hercules correspond to those in relation to the fourth and eighth defendants. On 6th August 2010 Newey J continued the injunctions until trial or further order without any material variations.[12]Mr Kythreotis failed to comply with the disclosure obligations contained in paragraph 12(1) of Henderson J’s order. Therefore on 26th August 2010 the Bank issued and served an application seeking his committal. That application came on for hearing before Proudman J on 21st September when Mr Kythreotis apologised and gave assurances that he would comply with the order. The judge adjourned the application to 29th September. On 28th September Mr Kythreotis served the Bank with a large volume of documentation and the affidavit I have referred to. But he maintained in correspondence and in his affidavit that he was not required by the order to disclose property which he held as a trustee or nominee for a third party and in which he had no beneficial interest.[13]In order to clarify the scope of his disclosure obligations under the order (and consequently the scope of the freezing order itself) Proudman J at the hearing on 29th September was invited to decide the point of construction now under appeal. She held that the words “whether the Respondent is interested in them legally, beneficially or otherwise” were effective to cover assets held by Mr Kythreotis merely as a trustee or nominee. He now appeals against her judgment.[14]As part of this appeal we have been provided with a transcript of the hearing before Henderson J but it is not in my view necessary to refer to it. I say that for two reasons. The first is that the proper construction of the order cannot depend on the particular circumstances of this case or on what Henderson J intended his order to achieve. He was asked to make the order in the Commercial Court form for the reasons I have stated but if it is necessary to identify a draftsman for the purposes of ascertaining the meaning of the order then we have to concentrate on those responsible for the Commercial Court Guide rather than on the Bank’s counsel who prepared the draft order in this case or the judge who granted it. Both the standard form order in the Guide and the order in this case which is based upon it must bear the same meaning. That is the way in which Proudman J approached the matter and she was right to do so. The second reason is that we are not concerned on this appeal with any questions as to whether Henderson J or Newey J were right to grant the injunctions in that form. The only issue raised in the grounds of appeal is whether Proudman J was right to construe the orders in the way that she did.[15]The judge, after setting out the arguments, expressed her conclusion quite shortly. She said:
“In my judgment, the order is in terms expressed to cover any asset in which the respondent has a legal or beneficial interest, that expression being construed disjunctively. That is apt to cover an interest as nominee and I so hold.”
[16]The focus of the argument before her was on the phrase “whether the Respondent is interested in them legally, beneficially or otherwise” and she based her decision on the construction of those words. But before us Mr Smith has widened the Bank’s argument to include not only the words considered by the judge but also the last two sentences of paragraph 6 of Henderson J’s order beginning with the words “For the purpose of this order”. Both these parts of paragraph 6, he submits, either alone or together extend the order so as to include assets held by the defendant as a trustee or nominee for a third party.[17]In order to put the arguments into context it is necessary to say something about the history of what might be termed the standard forms of freezing orders and to explain how they evolved into the current forms of order. One can conveniently begin with the position under the CPR up to 2002. The Practice Direction to CPR Part 25 had annexed to it two examples of freezing injunctions. One was an injunction freezing assets within the jurisdiction. The other was a worldwide freezing order. In both orders the injunction restrained the defendant from disposing of or dealing with “his assets” … “whether in his own name or not and whether solely or jointly owned” but did not include the more elaborate description of assets contained in the last two sentences of paragraph 6 of the order in this case or the additional words (“whether the Respondent is interested in them legally, beneficially or otherwise”) which now appear in the form of freezing order contained in the Commercial Court Guide.[18]In Federal Bank of the Middle East v Hadkinson (“Hadkinson”) the Court of Appeal had to decide whether this standard form of freezing order without additional words was effective to cover assets held in the defendant’s name but which belonged beneficially to third parties. It held that it was not. Mummery LJ (at page 1709) said that:
“I start from the position that in everyday usage the expression “his assets” refers to assets belonging to that person, not to assets belonging to another person. I recognise that everyday usage does not always reflect precisely the shades of meaning that an expression may have in the context of a legal document, such as a court order. It is necessary to examine the context in which the expression is used and, in particular, to identify the purpose of making the freezing order. A freezing order is only available in cases where the claimant can show that there is a real risk that the defendant will dissipate his assets. The application and the order are often made on incomplete information about the nature, extent, location and value of the assets and funds which the defendant may have. The order is designed to prevent injustice to a successful claimant by preserving assets and funds and guarding so far as possible against the risk that they will be disposed of or dissipated before a judgment is satisfied so as to render ineffective the claimant's attempts to recover what is due to him. Ancillary orders may be made in reinforcement of the freezing order by requiring full disclosure of the nature, location and value of assets and funds and the dealings with them. In my judgment, the language of the freezing order, read in context and with regard to the object of the order, naturally refers to assets and funds belonging to the defendant and which are and should remain available to satisfy the claim against him. Assets and funds which belong, or, as in this case, are assumed to belong, beneficially to someone else would not be available for that purpose. I fully appreciate the force of the point that the meaning of “his assets” may be coloured by the fact that a freezing order is a precautionary measure taken urgently to protect the claimant against a risk of dissipation and disposal of assets pending a fuller investigation by the claimant and the court to determine who is the beneficial owner of the assets. That is not, however, a sufficient reason for giving the expression a meaning which it cannot reasonably bear. The order should, when appropriate, be made in a different form. ….. I conclude that the “hallowed” or standard form of freezing order referring to “his assets or funds” is not apt, without the addition of words clearly extending its effect, to cover an unidentified bank account held in the name of and under the control of Mr Hadkinson,but which is assumed not to be his beneficially. Even if the Bank intended that the order should be effective to cover all bank accounts, such as the unknown Barclays Bank account in the name of Mr Hadkinson in Jersey, the language of the order does not achieve that result.”
[19]In his judgment Nourse LJ said that:
“As a matter of ordinary language assets or funds, in reference to an individual, cannot be said to be “his” unless they belong to him or, in legal parlance, are assets or funds to which he is beneficially entitled. When Iago, affecting to prize only his good name, says to Othello: “Who steals my purse, steals trash; 'tis something, nothing; 'Twas mine, 'tis his, and has been slave to thousands . . .,” though a modern restitution lawyer might conjecture that the thief becomes a constructive trustee of the purse, Iago himself will have none of it. “'Tis his”
. So far as he is concerned, the purse now belongs to the thief. Assets which are held by someone for the benefit of another do not belong to him and are not his. Mrs Justice Arden said that bare legal ownership is nonetheless a form of ownership. So indeed it is. But that does not make the assets “his”. I turn to the expression “his assets/funds” in the context of the 1997 Order. Not only is there nothing in that context to deprive the words of their ordinary meaning; there is everything to confirm it. First and most significantly, the purpose of every freezing order is to prevent the person against whom it is made from disposing of assets which would otherwise be available to satisfy a judgment against him. Assets which he holds for the benefit of another are not assets which can be resorted to for that purpose. So, in the absence of a specific provision to that effect, the order cannot be taken to extend to such assets. Secondly, both (a) and (b) of para 1.1 of the 1997 Order refer to [his] assets and/or funds “whether in [his] own name or not”. Those words recognise that assets or funds may be “his” if they are held for the defendant's benefit by another. That is a formidable confirmation of the view that, if the order had been intended to extend to assets and funds held by the defendant for the benefit of another, it would have said so. In my view there is no ambiguity in the order. … It may be that the standard form of freezing order is one of imperfect operation. But unless and until it includes the words “and whether held for his own benefit or for the benefit of others” or the like, the imperfections will persist. For myself, I would think that such words could only be properly included in an exceptional case. But whether that be right or wrong, the imperfections cannot be cured by giving the standard form of order a meaning it will not bear.” “Who steals my purse, steals trash; 'tis something, nothing; 'Twas mine, 'tis his, and has been slave to thousands . . .,”[20]I shall return to some of the reasoning behind this decision when I come to consider the arguments on construction in relation to the order we have to consider. For the moment it is enough to observe that the decision in Hadkinson settled the construction of the words “his assets” in the then standard form of freezing order including the phrase “whether in his own name or not” and recognised that an order in this form would include assets belonging beneficially to the defendant but held in the name of some other entity on his behalf. The key criterion was beneficial ownership. The decision is also significant insofar as it recognised the possibility of including trust assets belonging beneficially to a third party as an exceptional form of order subject to the inclusion of additional express words such as “whether held for his own benefit or for the benefit of others” or the like. The issue on this appeal is whether either of the subsequent changes in the standard form of order contain words which are similar in effect to the wording suggested by Nourse LJ.[21]The first significant change in the standard form of freezing order was the addition of the two sentences now relied on by Mr Smith as extending the scope of the injunction to cover assets held by the defendant for the benefit of third parties. This form of order first appeared in the Autumn 2002 edition of the White Book which contained in 25 PD.13 a new and composite form of injunction which could be adapted to cover both assets within the jurisdiction and those worldwide. This included the extended description of “his assets” contained in paragraph 6 which continued unamended in both the White Book and in the Commercial Court Guide until the latter version was amended to add the words on which Proudman J was asked to rule. The 2002 form remains unamended as the CPR specimen form of freezing order up to this day.[22]Mr Smith submits that the new paragraph 6 had the effect of bringing trust assets (by which I mean assets held on trust by the defendant rather than for him) within the scope of the order. He accepts that the first sentence of paragraph 6 repeats the pre-2002 wording and is therefore covered by the decision in Hadkinson. But the remaining words are wider, he says, and include any asset which a defendant may dispose of or deal with “as if it were his own”. This can, as a matter of language, include assets of which he is the legal owner but holds for the benefit of a third party.[23]In support of this argument he referred us to the decision of the Court of Appeal in Raja v Van Hoogstraten [2004] EWCA Civ 968, [2008] 4 All E.R. 793 in which Chadwick LJ ventured the suggestion that the new parts of paragraph 6 were, as he put it, a response to the decision in Hadkinson. There is no indication in his judgment of the basis for this view nor was the point or the construction of paragraph 6 in issue in that appeal. However, the same view has been expressed by Mr Steven Gee QC in the supplement to the Fifth Edition of his work on Commercial Injunctions and by Sir Anthony Colman in his own book: The Practice and Procedure of the Commercial Court (6th edition). Both writers appear to base their views on what was said by Chadwick LJ in Raja v Van Hoogstraten.[24]I do not accept Mr Smith’s submission that these changes to the CPR form of order had the effect of including trust assets within the injunction. I reach that conclusion on a consideration both of the language of paragraph 6 and of the circumstances in which the change came to be made.[25]Paragraph 6 of the form is intended, as it says, to describe and explain which of the “Respondent’s assets” paragraph 5 applies to. Those are “his assets” which this Court construed in Hadkinson as meaning the assets belonging to him beneficially and the first sentence of paragraph 6 repeats the formula which the Court of Appeal considered and ruled upon in that case.[26]The two following sentences are still in terms concerned with “the Respondent’s assets” but go on to include an asset which he has power, directly or indirectly, to dispose of or deal with as if it were his own. That would be both an odd and an inaccurate way in which to describe a trustee’s power to deal with trust assets given his fiduciary obligations to the beneficiaries but it also ignores the last sentence of paragraph 6. This makes it clear that the power to deal with or dispose of the asset as if it were his own is a reference to a case where the legal owner is not the defendant but a third party yet it is the defendant who retains the power to direct how the asset should be dealt with. This is not, in my view, a partial definition of the preceding words. It is a comprehensive one. And it makes it clear that “the Respondent’s assets” can include assets held by a foreign trust or a Liechtenstein Anstalt when the defendant retains beneficial ownership or effective control of the asset. It does not extend to assets of which the defendant remains the legal owner but holds for the benefit of someone else.[27]This view was shared by the editors of the notes to the 2003 White Book under CPR Part 25 which, despite the change in the form of the order, continued to state (and still continue to state) that:
“Assets held by a defendant as a bare trustee, and in which he had no beneficial interest, are not “his assets” and therefore do not come within the scope of a freezing injunction made in the standard form; orders made in more specific terms might cover bank accounts in which a defendant had no beneficial interest but which were in his name and under his control (Federal Bank of the Middle East v Hadkinson [2000] 1 WLR 1695; [2000] 2 All E.R. 395, CA.).”
[28]This is consistent with what we know of the reasons for the change. It is within my own knowledge that in 2001 a number of the judges of the Chancery Division heard applications for freezing orders designed to catch assets held by the defendant in what were described as sham trusts. These were cases in which assets owned or controlled by the defendant were held by third parties in a trust or other similar entity ostensibly for the benefit of a third party. Concern was expressed that the forms of order prepared for the applications contained additional words which, on one view, would extend the order to cover assets held by the defendant merely as a trustee for a genuine third party or by some third party for the benefit of persons other than the defendant.[29]It was clear from the earlier decision of Robert Walker J in International Credit and Investment Co (Overseas) Ltd v Adham [1998] BCC 134 that the court would in appropriate cases extend an order to include assets held in an offshore trust or company but which were believed to be the assets of the defendant. But there was concern that orders designed for this purpose should not be framed so as to catch assets which did not belong to the defendant beneficially at all.[30]To this end, a draft in the form of what are now the last two sentences of paragraph 6 was approved by the judges of the Chancery Division and, after consultation with the Judge in charge of the Commercial list, was forwarded to the Civil Procedure Rules Committee for possible inclusion in the re-drafted form of freezing order which was then under consideration. It was included without amendment in the new form of specimen order published in the 2002 White Book.[31]I have referred to this piece of archaeology in order to demonstrate that Chadwick LJ was wrong to infer that these changes to the specimen order were intended to extend the scope of the injunction and, in effect, to reverse the decision of this court in Hadkinson by making the inclusion of trust assets the normal form of order. On the contrary, the change was designed to preserve the ruling in Hadkinson but to make it clear that “his assets” include assets held by a third party in respect of which the defendant retains beneficial ownership or control. Although a proposed form of words may not always succeed in having the effect which was intended, this is not such a case. For the reasons I have explained, the language of paragraph 6 is, as a matter of construction, plain and does not include assets held by a defendant in which he retains no beneficial interest.[32]There is no comparable history to the amendment of the Commercial Court Guide and we are left to construe the words added to the standard freezing order in the 8th edition of the Guide (published in April 2009) without any knowledge of the circumstances giving rise to the change. The starting point of Mr Stanley QC’s argument that the judge was wrong to construe the Commercial Court form as including trust assets is essentially the same as the appellant’s argument in Hadkinson. The purpose of a freezing order is to prevent the dissipation by a defendant of assets which would otherwise be available to satisfy a judgment in favour of the claimant. The order can therefore include assets to which the defendant is beneficially entitled (regardless of whether he is also the legal owner) and can even extend in appropriate cases to the assets of a third party which the defendant does not own but against which he has some legal right of recourse which, if exercised, would make those assets available to his own judgment creditors: see e.g. C Inc plc v L [2001] 2 AER (Comm) 446. But there is no justification in principle for freezing assets held by a defendant for the benefit of a third party which could never be used to satisfy a judgment in favour of the claimant.[33]That argument was accepted by this court in Hadkinson and forms the basis of the decision in that case that the then standard form of freezing order did not extend to trust assets. But the court recognised that it would be possible to frame an order in a way which did have the effect of freezing trust assets and that in exceptional circumstances it might be appropriate to make an order in that form. The real issue for us is therefore a narrower one. Did the draftsman of the Commercial Court Guide intend the additional words to include trust assets as part of the usual or standard form of order even though it is clear that the specimen order provided under the CPR does not have this effect?[34]The most cogent part of Mr Stanley’s argument is, I think, the absence of any obvious reason why the alleged change in meaning and effect should have been introduced in what would inevitably become a standard or usual form of order both in the Commercial Court and elsewhere unheralded as it is by any indication in the Guide itself of a radical departure from the statement by Nourse LJ in Hadkinson that trust assets held by the defendant should usually be included only in exceptional circumstances.[35]Mr Stanley submits that there is nothing known to suggest that there has been a sudden rise in the number of defendants pretending to hold assets as trustees or nominees for third parties when they in fact belong beneficially to themselves. And he points out that if that were the case then the asset in question would be included in the order without the addition of the new words because it would, on any view, be an asset of the defendant.[36]Part of the argument in Hadkinson in favour of construing the order so as to include assets of which the defendant was a trustee centred on the need to deal with the dishonest defendant who would be inclined to conceal his own assets by pretending that they were held by him only as a trustee or nominee for another person. Once served with an order which included trust assets a defendant who was genuinely only a trustee could apply to vary the injunction so as to exclude the asset on proof that his interest was not a beneficial one. The court has power to decide issues of this kind as part of its jurisdiction to grant freezing order relief: see S.C.F. Finance Co Ltd v Masri [1985] 1 WLR 876.[37]That argument failed to carry the day for the claimant in the Court of Appeal in Hadkinson not because it was regarded as unrealistic but simply because the language of the order under consideration made it impossible to accept that it should be given the wide effect contended for. All the members of the court were agreed that the practical consequences of making a limited order against a dishonest defendant could not outweigh the clear meaning of the words used.[38]Mr Stanley took issue even with the argument that the dishonest defendant was likely to seek to avoid the consequences of the freezing order by masquerading his own assets under the guise of assets held for a third party and that the wider form of order was justified in such cases. The dishonest defendant was, he said, unlikely to comply with any order of this kind. The claimant was therefore no better off with a more detailed order freezing both assets held in trust for third parties and the defendant’s own assets than he would be if the order only applied in terms to the latter. The only basis for the grant of any order is the assumption that the defendant will comply with it. On that basis, the usual order would suffice to catch all assets of the defendant which in truth were his.[39]I am not persuaded by that. It seems to me that a defendant who has gone to the trouble of disguising his own assets as those held under a trust for a named third party will have done so with a view to resisting applications of this kind. He is therefore likely to utilise the disguise he has invented rather than merely to abandon it and ignore the order. The wide form of order, for which the Bank contends, is therefore likely in many cases to provide it with an opportunity of investigating the truth of the claim that the assets are held on trust before they are released from the injunction and its accompanying disclosure obligations.[40]That therefore brings us back, as it did in Hadkinson, to considering the words which have been used. Mr Stanley’s argument about it being unlikely that the judges of the Commercial Court should have elected, without more, to frame the standard form of Commercial Court freezing order in these terms really comes into play in informing the construction of the words used particularly if on an ordinary reading of those words they appear to be ambiguous.[41]Mr Stanley submits that the judge’s primary mistake was to start at the wrong end of the first sentence of paragraph 6. She concentrated, he says, on the words “whether the Respondent is interested in them legally, beneficially or otherwise” in isolation from the opening words of paragraph 6. Those words confirm that the whole of the first sentence (and indeed the whole of paragraph 6) is an expanded description of what is meant by “its assets” in paragraph 5. Since those words have been construed in Hadkinson to mean assets in which the defendant has a beneficial interest, they effectively set the limits of what paragraph 6 is intended to include. The Bank’s construction of paragraph 6 involves treating the additional words in the first sentence of paragraph 6 as extending and altering the meaning of “its assets” in paragraph 5 so as to cover trust assets. The correct approach is to read them simply as words of clarification. The words “legally, beneficially or otherwise” serve to emphasise that the order includes assets of which the defendant is the legal owner (but in respect of which no one apart from him has any beneficial interest) as well as those in which he is beneficially interested but in which legal ownership is vested in a third party.[42]One of Mr Smith’s criticisms of this construction of paragraph 6 is that it involves recognising that the new words were an unnecessary addition. If they do not extend the scope of the order so as to include trust assets then the amendment had no purpose. The already expanded description of “its assets” in paragraph 6 was sufficient to encompass any assets in which the defendant had a beneficial interest including those of which the defendant was also the legal owner. Mr Stanley’s response to this is that the new words do serve a useful purpose by making it clear to defendants (who will often hold assets under foreign systems of law where the distinction between legal and beneficial ownership is not recognised) that the order includes all kinds of assets, however held, which belong to the defendant.[43]I have not found this an easy question to resolve. Until the addition of the new words in the latest edition of the Commercial Court Guide the specimen or standard form of freezing order did not include assets held by the defendant for the benefit of a third party. For the reasons explained earlier, the changes in the form of the order made in 2002 did not alter the position. Paragraph 6 did no more than to spell out the different classes of assets which would be covered by the order because they belonged to the defendant.[44]The words in the first line of paragraph 6: “all the Freezing Respondent’s assets” clearly had the same meaning as “its assets” in paragraph 5. The immediately following words: “whether or not they are in its own name and whether they are solely or jointly owned” do not alter the meaning of “the Freezing Respondent’s assets”: see the decision in Hadkinson. It is therefore less than perfect drafting on the part of the Commercial Court Guide to add what, in their context, might seem to be purely descriptive words of a similar kind if they were in fact intended to effect a significant change in the meaning of “its assets” in paragraph 5.[45]There were also no other changes in the form of the order to deal with the potential consequences of such a change. If the Bank is right it must follow that an injunction in this form would prevent a trustee from continuing to deal with trust assets under his control without a variation of the order. Where the trust assets include shares and other quoted securities which form part of a managed portfolio the inability of a trustee to dispose of shares at the time of his choosing could have disastrous financial consequences in a changing market. The cross-undertaking in damages gives the beneficiary no direct rights of recovery against the claimant in these circumstances and the ability of the defendant as trustee to obtain compensation on the beneficiary’s behalf will depend on the court deciding that the injunction was wrongly granted: see Yukong Line Ltd v Rendsburg Investments Corporation [2000] EWCA Civ 358, [2001] 2 Lloyd’s Rep. 113. This may be difficult to resolve if there were reasonable grounds for granting the extended form of injunction at the time but the bona fides of the trust arrangements was subsequently established.[46]I was, for all these reasons, doubtful whether what was introduced as an almost routine updating of the Commercial Court form of freezing order was intended to effect such a radical change in what is presented as a standard form of order. But, in the end, I have been persuaded that the words used did have that effect. A description of assets held “legally, beneficially or otherwise” does draw a distinction between assets held legally and those held beneficially. As the judge put it, the words are disjunctive. That is only a meaningful distinction if legal ownership means something different from beneficial ownership. By the same token, there is a meaningful distinction of the same kind between assets held beneficially and those held otherwise than beneficially which are all within the new words. I do not accept Mr Stanley’s submission that one can read all three categories as forms of beneficial ownership even though I accept that the inclusion of the words where they are is a potential source of confusion. If the new words were intended only to confirm that the order includes assets held by the defendant legally (and beneficially) as well as only beneficially then they were unnecessary because the opening words of paragraph 6 (“whether or not they are in its own name”) have precisely that effect. Any assets owned both legally and beneficially will be held by the defendant in his own name. Therefore, assuming as I do that the new words were added for a purpose, I can only conclude that paragraph 6 effects an expansion of the type of asset which paragraph 5 of the order would otherwise include. Assets held by the defendant as a trustee or nominee for a third party are included by an order which contains the new words.

The appropriateness of this form of order

[47]As mentioned earlier, we are not concerned on this appeal with whether Henderson J or Newey J were right to grant the freezing order in this form. But we did invite the parties to make limited submissions as to whether this form of order was an appropriate one and in what circumstances. Some of these submissions were also, as I have indicated, part of Mr Stanley’s case as to why the order should be more narrowly construed.[48]On reflection, I have come to the view that it would be unwise for us on this appeal to attempt to lay down some kind of definitive guidance as to when, if at all, it is appropriate to make this kind of order as opposed to one (in the CPR specimen form) which does not include trust assets. This is a developing area of the law and the form of order will inevitably be dictated by the facts and circumstances of the particular case. That said, it would, I believe, be useful to set out a number of points which are not, I think, controversial and which may be helpful to judges dealing with applications for orders in the new Commercial Court form.[49]They are these:(1) Nothing in this judgment is intended to cast any doubt upon the established principles which underlie the grant of all freezing orders. I refer in particular to the fact that the only purpose of such an injunction is to prevent the dissipation of assets which would otherwise be available to meet a judgment. The inclusion of trust assets is therefore only justifiable if there are proper grounds for believing that assets ostensibly held by the defendant on trust or as a nominee for a third party in fact belong to him (or to another person whose assets are also frozen). Absent such circumstances, I can see no possible justification for including in the order assets which belong beneficially to a third party and are not therefore the property of the defendant;(2) A judge who is asked to grant an injunction in this form should be concerned to minimise the impact of the order on third party beneficiaries under genuine trusts. This will require expedition in resolving any issues of title on an application by a defendant or beneficiary to vary the order and active consideration being given to the form of the cross-undertaking. It will usually be appropriate for the cross-undertaking to be extended in terms to cover the purported beneficiary for any loss which is caused by an injunction which is subsequently varied or discharged in respect of the trust assets;(3) The authors of the Commercial Court Guide should make it clear in the Guide that the effect of the current form of order is to include trust assets. There should also be active consideration as to whether it is appropriate for the specimen CPR freezing order and the Commercial Court Guide form of order to remain materially different;(4) I also venture to suggest that if the standard form of Commercial Court order is to continue to include trust assets it should be re-drafted so as to make it absolutely clear to any reader that it does extend to assets held by the defendant as a trustee or nominee for a third party.[50]For these reasons, I would dismiss the appeal.[51]I agree that this appeal should be dismissed for the reasons given by Patten LJ. I agree with the points he makes at [49]. I also agree with the judgment to be delivered by Longmore LJ.[52]Freezing injunctions are now an accepted part of our legal landscape. They can only be granted when the claimant has a good arguable case and there are reasonable grounds to suppose that a defendant may dissipate his assets before judgment is pronounced. The purpose of the injunction is to preserve a defendant’s assets, subject to dealings in the ordinary course of business so that, if and when a judgment is pronounced, the defendant still has assets to meet that judgment. The injunction provides no security; if, after judgment, the defendant’s assets, as preserved, are less than his liabilities, a judgment creditor has no greater call on those assets than any other unsecured creditor.[53]International fraud is nowadays of increasing concern in the international community. If anything it has grown in recent years. In International Credit and Investment Co (Overseas) Ltd v Adham [1998] BCC 134 Robert Walker J said:- “…. It has become increasingly clear, as the English High Court regrettably has to deal more and more often with major international fraud, that the court will, on appropriate occasions, take drastic action and will not allow its orders to be evaded by the manipulation of shadowy offshore trusts and companies formed in jurisdictions where secrecy is highly prized and official regulation is at a low level.”[54]It is said by the claimant bank that this is just such a case. The first defendant on his own authority but in collaboration with others is said to have transferred US$300 million worth of the claimant’s bonds to unknown transferees. It is said that the second defendant, Mr Kythreotis and the fourth defendant, a company of which he is the shareholder and director were parties to that fraudulent collaboration. There is a good arguable case to that effect and it is not, therefore, surprising that the bank sought and obtained a freezing injunction against, among others, Mr Kythreotis to ensure that his assets are preserved pending the civil proceedings brought against him.[55]It is, by no means, uncommon for defendants in cases such as the present, to wish to avoid the consequences of any court order and to be reticent in saying what assets they have and what their interest in them is. An important part of the freezing order is, therefore, a requirement that the defendant identify what his assets are so that the claimant can know whether there will be assets (and, if so, what assets) available to meet a judgment. The standard form of injunction in use for the last quarter of the last century only required the defendant to identify “his” assets. That phrase was held by this court in Federal Bank of the Middle East v Hadkinson [2000] 1 WLR 1695 not to include assets of which the defendant was a trustee (with legal ownership) but held in trust for other persons such as (in that case) clients who had allegedly given him the funds for investment.[56]The majority of the court (Mummery and Pill LJJ) did not find that an easy decision to reach because they recognised the possible repercussions of their construction on the effectiveness of the standard form of freezing order (1709E). It had been submitted by Mr Lawrence Cohen QC for the bank in that case (1707D-E) that, if the order did not apply to assets held in trust by the defendant,:- “… an unscrupulous defendant of the kind against whom freezing orders are usually directed could undermine and nullify the object of the order by simply saying that he did not believe that he was the beneficial owner of the fund or assets in question. He could then withhold its existence from his disclosure affidavit and secretly deal with it. The defendant would in effect be given licence to decide for himself whether or not an asset or fund belonged to himself or to a third party. This was unrealistic, impractical and contrary to the rationale of the jurisdiction to make freezing orders.” In spite of this powerful submission this court nevertheless concluded that, on the true construction of the order, assets held by Mr Hadkinson in trust for others were not caught by the order, did not have to be disclosed to the claimant and could be dealt with and disposed of.[57]The same question now arises on the construction of the orders made by Henderson J and Newey J in the present case. But here the wording of the order is different because paragraph 6 states in terms what the assets are, which are caught by the order. I agree with Patten LJ that, although the words added to the standard form of freezing order in July 2002 are not apt to include assets of which the defendant is merely the legal owner, the words added in the form which is now Appendix 5 to the 8th edition of the Commercial Court Guide are so apt. I agree therefore that the appeal should be dismissed.[58]I also agree with the points set out by my Lord in para 49. I agree in particular with what I understand to be the thrust of sub-para (2). Counsel applying for an order which applies to assets held in trust and judges making such an order should be aware of the need, on the ex parte application, for the cross-undertaking to extend to cover any beneficiary, who is truly a third party, for any loss caused by any injunction which is subsequently varied or discharged in respect of any assets held in trust.

Cited in 16 later judgments

and 7 more of the most senior