Commercial litigation: Asset-stripping and judgment avoidance

In a judgment that will be of interest to judgment creditors and debtors alike, in Marex Financial Ltd v Sevilleja Garcia [2017] EWHC 918 (Comm), Mr Justice Knowles considered whether a shadow director who had allegedly dissipated the companies’ (debtors’) assets had committed the tort of inducing or procuring the companies to act in wrongful violation of the claimant’s rights under an existing judgment.

In 2013, the claimant (Marex) brought claims against Creative Finance Limited and Cosmorex Limited. In the usual way, the judge released a draft of his ruling on 19 July 2013, awarding judgment in favour of Marex in excess of $5m. The judgment in final form was handed down on 26 July 2013. A freezing order was obtained by Marex against the companies on 14 August 2013. The companies made disclosure of their assets pursuant to the freezing order, stating assets of only $4,392.48.Marex alleged that, after the draft judgment was released, the defendant (Sevilleja), who himself described the companies as his principal trading vehicles, and who Marex alleged was the ultimate beneficial owner and shadow director of the companies, stripped assets from the companies so they would be unable to pay the judgment.

In particular, Marex claimed damages against Sevilleja for: (1) inducing or procuring the violation of Marex’s rights under the judgment, and/or (2) intentionally causing loss to Marex by unlawful means.

In opposition, Sevilleja challenged the court’s jurisdiction on the basis that: (1) the tort of inducing a breach of Marex’s judgment rights does not exist; (2) the unlawful means were not in reality unlawful; and (3) the rule against reflective loss precluded Marex’s claim.

Knowles J dismissed the jurisdiction challenge, and held that Sevilleja’s actions amounted to a wrongful violation of Marex’s rights under the judgment. Typically a party making itself judgment-proof by dissipating assets before a freezing order is obtained does not commit an actionable wrong in and of itself (Law Debenture Trust Corporation v Ural Caspian Oil Corporation Ltd [1995] Ch 152).

However, Knowles J concluded that, whereas in Law Debenture Trust the claimant had no right to payment prior to the granting of the injunction, here Marex had a right before judgment to be paid a contractual sum, and after judgment to be paid the judgment sum. Further, and having regard to the level of control the defendant exerted over the companies, there was sufficient evidence to conclude Sevilleja did indeed induce and procure the companies not to pay the judgment debt, rather than merely preventing payment.

On one level at least, this judgment arguably creates a new tort of inducing or procuring the violation of a party’s rights under an existing judgment. At a minimum, the judgment certainly appears to extend the tort of procuring a breach of contract to procuring a violation of rights under a judgment, and indicates that deliberately dissipating a judgment debtor’s assets, even by a third party, can give rise to a cause of action against that third party. This is, potentially, a further useful tool for those pursuing enforcement.

Leigh Callaway is a senior associate in the commercial litigation team at Fladgate and president of the Junior London Solicitors Litigation Association

www.lsla.co.uk/junior