Edwards & Anor v Flightline Ltd.

A restriction preventing a debtor from dealing with a specified fund does not, without more, give the creditor an equitable charge. A charge requires an obligation that the debt or judgment be satisfied from that fund.

Money placed in a joint account as a substitute for freezing relief therefore remains unsecured where the governing order provides only interim protection and court control. The court’s ability to direct payment to the claimant does not itself confer a right to payment. Clear language or a necessary implication must establish that the fund stands as security for the claim.

Flightline obtained a freezing order in an action against Swissair Schweizerische Luftverkehr-Aktiengesellshaft. By consent orders, £4.2 million was placed in a joint solicitors’ account and the company undertook not to deal with £3.325 million of that fund. The freezing order was discharged.

After provisional liquidators were appointed, Flightline sought leave under section 130(2) of the Insolvency Act 1986 to continue its action. Neuberger J held that Flightline had a charge over the joint account and granted leave: [2002] 1 WLR 2535.

The liquidators appealed. The decisive question was whether the consent arrangements merely continued freezing protection or obliged the company to satisfy any judgment from the joint account, thereby creating security.

1. Appeal allowed. The March consent order did not confer a security right on Flightline. It continued interim protection of a freezing nature and did not oblige the company to satisfy any judgment from the joint account.

2. An equitable charge over a specified fund requires more than a restriction upon the debtor’s use of that fund. There must also be an obligation in favour of the creditor that the debt be paid from it. The court applied the principle stated in Palmer v Carey [1926] AC 703 and adopted by the House of Lords in Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584.

3. A freezing order creates no proprietary security because it does not require a judgment debt to be paid from the restrained assets. It provides an effective means of preventing misapplication, but the claimant acquires no beneficial interest. By contrast, procedural arrangements such as payments into court may create security where their clear purpose is to secure satisfaction of the claim.

4. The March order contained no express or implied provision entitling Flightline, as of right, to payment from the joint account following judgment. Court control of the account was insufficient. The undertaking not to withdraw, dispose of, deal with or encumber the money was consistent with continuing freezing protection until trial or further order.

5. The February order formed part of the admissible background and reinforced that construction. It had plainly done no more than preserve interim freezing protection until the adjourned hearing. Neither the description of the account as an “escrow” account, the reduction from £4.2 million to £3.325 million, the company’s financial difficulties, nor the wording omitted from the original freezing order justified an inference that security had been created.

6. The court did not determine whether any charge would have been void for non-registration under sections 395 and 396 of the Companies Act 1985. Having found that no charge existed, it allowed the appeal and refused permission to appeal to the House of Lords.

1. Court of Appeal (Civil Division): The appeal was allowed by the judgment of the court: [2003] EWCA Civ 63. The court held that the consent order created no security right and refused permission to appeal to the House of Lords.

2. High Court, Chancery Division: Neuberger J held that Flightline had a charge over £3.325 million in the joint account and granted leave under section 130(2) of the Insolvency Act 1986 to continue its action: [2002] 1 WLR 2535.