UK: Monies Paid Into Joint Account to Discharge Freezing Injunction Do Not Create Any Security Right

The recent Court of Appeal decision in Flightline Limited v Edwards & another [2003] EWCA Civ 63 has considered the status of monies paid by the defendants, Swissair Schweizerische Luftverkehr-Aktiengesellshaft ("Swissair"), into a joint account for the purposes of discharging a freezing injunction over its assets. The court concluded that these monies do not create any entitlement to payment as a matter of right in the event of a successful judgment in the action.

The standard form of freezing injunction contains an express provision that it will cease to have effect if the respondent provides security (in a sum to be specified in the order), either by means of a payment into court or by some other agreed method. Although the freezing injunction obtained by Flightline contained no such express provision the Court of Appeal did not, in the event, consider this to be a relevant factor. The judgment also therefore appears to apply equally to monies paid to discharge freezing injunctions which do contain the standard wording.

Following the collapse of the Swissair Group in October 2001, Swissair repudiated its arrangements with Flightline. Flightline commenced proceedings on 16 January 2002 in which it claimed some £4.2 million. At the same time it obtained a freezing injunction to prevent Swissair from dealing with its assets in England and Wales up to a maximum of £4.2 million. Upon being given notice of the freezing injunction, Swissair indicated its intention to make an application to discharge the freezing injunction.

Flightline and Swissair then agreed that a sum in excess of £4.2 million, which Swissair was shortly to receive from a third party, should be paid into an account opened in the joint names of Flightline and Swissair’s solicitors. It was agreed that, to the extent the balance exceeded £4.2 million, it could be paid out to Swissair and that thereafter the freezing injunction should cease to have effect.

Subsequently the parties agreed on the smaller sum of £3.335 million being held in the joint bank account. The terms of this agreement were incorporated in a Consent Order of 13 March 2002. This Order was made on Swissair’s undertaking set out in a schedule to the order:

On 4 April 2002, the appellants were appointed provisional liquidators of Swissair. On 28 May 2002, Flightline issued an application pursuant to Section 130(2) of the Insolvency Act 1986 for leave to continue its action against the company. Section 130(2) provides as follows: -

The liquidators accepted that if Flightline had a charge over the monies in the joint account, leave to continue the action should be granted. Flightline accepted that if it did not have a charge over the monies, no leave should be given.

At first instance, Mr Justice Neuberger found that the effect of the March Order was that the money was to be held in the joint account, subject only to what the court might order. Therefore, he considered the money was beyond the reach of Swissair, unless or until the court ordered otherwise. He considered the parties must have agreed that the freezing injunction was no longer necessary because Flightline now had security for its claim. Notwithstanding the absence of the standard provision in the freezing injunction in question, in circumstances where the standard form wording provided that a freezing injunction would cease to have effect if a respondent provided "security", Mr Justice Neuberger considered the natural inference was that the payment made into the joint account would be security for the claim. Mr Justice Neuberger also considered there was no intrinsic reason why a claimant, who has obtained a freezing injunction and in the process has incurred risk and expense, should not be put in a better position than other creditors, either by being paid or by having the benefit of security. The liquidators appealed.

The Court of Appeal allowed the appeal, relying on the Privy Council’s decision in Palmer v Carey [1926] AC 703, which held that in order for an equitable charge to be created over a specific fund, it is necessary to find not merely a restriction on disposal of the fund by the debtor but also an obligation on the debtor to pay the debt out of the fund. The Court of Appeal considered this statement of principle to apply directly to consent orders and also indirectly to other court orders. Therefore, the Court of Appeal considered the relevant question to ask was whether one could construe into the terms of the March Order a provision that if Flightline was successful in obtaining judgment, it would be entitled to payment out of such monies as a matter of right. The Court of Appeal did not consider this was the case and considered the terms of the March Order entirely consistent with the continuance of interim protection of a "freezing" nature until trial or further order.

Whilst it is trite law that a freezing injunction does not give a claimant proprietary rights over a defendant’s assets, this decision makes clear that a payment made by a defendant into court or elsewhere and paid with the specific purpose of enabling a freezing injunction to be discharged will not give a claimant security over those funds notwithstanding the reference to provision of security in the freezing injunction. Accordingly, the claimant will be in no better position than other creditors or potential creditors of the defendant. If a claimant seeks a charge over such funds then very clear wording would have to be used, and it might also be necessary to register that charge. It is difficult to see that there would be any incentive for a defendant to give such security to a claimant.

Article by Sonya Leydecker

© Herbert Smith March 2003

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