Freezing out

One of the principles of the English court’s jurisdiction to grant a freezing injunction (FI) is that an order can be obtained against a third party against which the claimant doesn’t have a substantive cause of action. This applies if a party appears to hold assets on behalf of a defendant and there is reason to suppose that the assets truly are the defendant’s (TSB Private Bank International SA v Chabra [1992] 1 WLR 231).

The recent case of Lemos v Lemos and Church Bay Trust Company Limited [2016] EWCA Civ 1181 highlights both the difficulties and advantages for a claimant of using the Chabra jurisdiction to gather information about the assets of non-parties.

Ownership question

In Lemos, the Court of Appeal heard an appeal following the setting aside of an FI (which was granted so the claimant could enforce a judgment against the first defendant, her brother) over a property legally owned by the second defendant trust.

The key issue was whether Mr Lemos (now bankrupt) and others intended that his wife be the sole beneficiary of the trust that owned the property. (The interest was transferred via a declaration of trust (DOT) in 1994 from a company of which Mrs Lemos was allegedly the sole shareholder.) While most documentation, including the 1994 DOT, suggested Mrs Lemos was sole owner/beneficiary, this was inconsistent with other evidence that implied Mr Lemos had an interest.

Mr Justice Cooke held that any common intention of the Lemoses had to be the trustees’ intention, which couldn’t be shown unless the trust was a sham. This was so unlikely as to not be seriously arguable. He held there was no realistic chance of success of the claimant’s application under section 423 of the Insolvency Act 1986 that Mr Lemos’s disposition of the property in favour of his wife by the 1994 DOT should be avoided. He therefore discharged the FI.

New evidence

Following judgment, further evidence emerged, and was admitted by the court. This was:

• A judgment showing Mr Lemos’s obstructive approach to his trustee in bankruptcy; and

• Documentation from solicitors’ files from 1994 to1997 casting doubt on the defendants’ evidence, implying the property was put in trust to protect it from claims against Mr Lemos.

Lord Justice Longmore stated the new evidence made it arguable that Mr Lemos did have an asset in 1994 that he disposed of to move the asset beyond the reach of a future creditor. Even if that wasn’t the case, it called for proper investigation, as ‘the situation is not nearly so transparent as it appeared to the judge’.

The Court of Appeal ordered the section 423 issue be remitted for determination and the FI would be maintained until the disposal of proceedings.

This case shows both the opportunity and difficulties offered by the Chabra jurisdiction.

There are certainly challenges for the court in assessing ownership, as the evidence before it may be incomplete where defendants deliberately make non-transparent arrangements. The onus then moves back to the claimant to conduct the proper investigation, which must go much further than simply showing a reason to suppose the defendants’ ownership.

While it can be burdensome, it allows the claimant to investigate more widely than just the defendants’ own affairs, and where successful can provide access to assets against which a judgment can be enforced.

Elaina Bailes is an associate at Stewarts Law and a committee member of the Junior London Solicitors Litigation Association

www.lsla.co.uk/junior