HM Revenue & Customs v Egleton & Ors

A creditors’ winding-up petition is a sufficient proceeding to support interim relief, including a freezing order, although it seeks no money judgment. The jurisdiction to freeze a third party’s assets is not confined to assets arguably beneficially owned by the company. It extends where an enforceable process may oblige the third party to disgorge property or contribute to the company’s funds.

As a matter of discretion, a petitioning creditor should ordinarily seek the appointment of a provisional liquidator. The office-holder can assess and pursue the company’s claims for all stakeholders. A creditor must provide cogent reasons for departing from that course. Direct relief at the creditor’s instance will be exceptional.

HM Revenue & Customs petitioned to wind up C&E Enterprises UK Ltd for unpaid VAT exceeding £35 million. It alleged that the company had participated in missing trader or carousel fraud. Customs obtained without-notice freezing orders against the company’s director, a trading company and that company’s directors. It alleged that they would be liable to C&E or a future liquidator, including for fraudulent trading under Insolvency Act 1986.

Customs asserted no direct claim against the respondents and did not undertake to commence substantive proceedings against them. The respondents challenged the orders for want of jurisdiction and as a matter of discretion. The central issues were whether a winding-up petition could support interim relief, whether third-party freezing jurisdiction extended beyond assets beneficially owned by the company, and whether a petitioning creditor should obtain such relief instead of seeking a provisional liquidator.

1. The freezing orders were continued for a short period. A creditors’ winding-up petition supplies a sufficient cause of action or substantive proceeding for interim relief under section 37(1) of the Supreme Court Act 1981. Although the petition seeks no money judgment, its purpose is to invoke a statutory process for collecting and distributing the company’s assets. Interim relief may preserve the effectiveness of the resulting court orders. The contrary view would irrationally deny relief where a debt was undisputed while permitting it where the creditor first had to obtain judgment.

2. The jurisdiction over third parties is not rigidly confined to the principle in TSB Private Bank International SA v Chabra, under which the third party arguably holds assets beneficially owned by the defendant. The court adopted the broader second limb stated by the High Court of Australia in Cardile v LED Builders Pty Ltd [1999] HCA 18. Jurisdiction may exist where a process enforceable through the courts could require the third party to disgorge property or contribute to the assets of the actual or potential judgment debtor.

3. A rigid requirement that the claimant’s right against the defendant must cause the defendant’s right against the third party was too narrow. It could protect a third-party wrongdoer whose conduct caused the claimant’s loss. A free-standing “sufficient connection” test was also too uncertain to define jurisdiction, although the closeness of the connection could be relevant to discretion.

4. The respondents were arguably liable to pay substantial sums to C&E or its liquidator, and there was an assumed real risk of dissipation. The case against the fourth respondent remained sufficiently arguable despite matters said to weaken it.

5. As a matter of discretion, a petitioning creditor should ordinarily seek a provisional liquidator where the company’s potential claims require protection. The office-holder can independently decide, for all stakeholders, whether to bring substantive proceedings and seek freezing relief. A creditor cannot ordinarily undertake that those proceedings will be brought, and creditor-led relief creates duplication. Cogent reasons are therefore required before the established course is displaced.

6. No cogent reason had justified the original creditor-led orders. Nevertheless, the winding-up hearing was less than a week away. Discharge would probably have been followed immediately by the appointment of a provisional liquidator and an application for materially identical orders. To avoid pointless duplication and cost, the orders were continued exceptionally until any liquidator had an opportunity to consider substantive proceedings and replacement freezing orders.

• High Court (Chancery Division): On the without-notice application, Pumfrey J granted freezing orders against the four respondents.
• High Court (Chancery Division): On 7 September 2006, Etherton J continued the orders to an adjourned hearing, without prejudice to jurisdictional and discretionary objections.
• High Court (Chancery Division): Briggs J rejected the jurisdictional objections but held that a provisional liquidator should ordinarily have sought the relief. He continued the orders temporarily because discharge would probably produce an immediate, duplicative application for materially identical relief.