Omniway Properties Ltd v Fairlamb & Ors

The Court of Appeal granted permission to appeal against parts of a freezing order made by Floyd J on 11 January 2008. The order contained a specific provision (paragraph 10.1(d)) authorising the third respondent to pay the legal costs of the first and second respondents, subject to an indemnity to the third respondent. The court considered it reasonably arguable that the judge had exercised his discretion without adequate provision for verification, monitoring or review of the proportions to be borne by the directors and without sufficient clarity as to the terms and security of the indemnity.

Because those defects could amount to an unauthorised or unjustified transfer of the third respondent’s assets (a possible "quasi-loan") and might amount to an inappropriate exercise of the court’s powers in the context of serious allegations, permission to appeal was granted and paragraph 10.1(d) was stayed (with exceptions for sums authorised by a Chancery judge or agreed by the parties).

Background and parties: The claimant alleged that the first and second defendants (respondents here) had extracted funds from the claimant in breach of duty. The third respondent had received some of those sums and was potentially liable only for part of the total claim of £6 million. The first defendant held unencumbered assets including a house and personal chattels (a gun collection said to be worth £25,000), the second defendant had assets of about £64,000 and the third respondent had free assets said to be about £790,000 against a claim of £1.5 million (with a proprietary element of £590,000).

Procedural history to this court: Floyd J in the Chancery Division made freezing orders on 11 January 2008 preventing the respondents from disposing of assets that would reduce them below £6.8 million, and the order included paragraph 10.1(d) authorising the third respondent to pay legal expenses of the first and second respondents subject to an indemnity. Permission to appeal from that order was refused on paper by Lloyd LJ. The matter came before the Court of Appeal (Arden LJ) on 12 February 2008; the respondents did not appear.

Nature of the application: The appellant sought permission to appeal the judge’s order and, in particular, questioned the propriety and scope of paragraph 10.1(d) which effectively authorised the third respondent to fund the legal costs of the directors subject to an indemnity.

Issues framed by the court: (i) Whether there was authority in the law of freezing orders for a court to authorise a respondent (the third respondent) to pay the legal costs of other respondents (the first and second), effectively creating a "quasi-loan"; (ii) whether the judge’s order unfairly assumed that an equal one-third share would always be appropriate without any mechanism for verification, review or adjustment; (iii) lack of clarity as to the terms, repayment timing and security for the indemnity given by the first and second respondents; and (iv) whether the court should exercise its role in supervising such arrangements where serious wrongdoing is alleged.

Reasoning and disposition: Arden LJ considered it reasonably arguable that the judge had not provided adequate safeguards or clarity in paragraph 10.1(d), and that these issues were appropriate for fuller consideration on appeal. Leave to appeal was granted and the appellant was permitted to amend grounds. A stay was granted of paragraph 10.1(d), subject to exceptions for payments authorised by a Chancery Division judge or agreed by the parties, and the court encouraged parties to seek agreed variations to avoid delay.

Permission to appeal was granted and the appellant was permitted to amend the grounds of appeal. The Court of Appeal considered it reasonably arguable that the Chancery judge had exercised his discretion in relation to paragraph 10.1(d) of the freezing order without adequate safeguards (notably lacking review or clarity of the indemnity), and therefore a stay was granted of paragraph 10.1(d) except for payments authorised by a Chancery judge or agreed by the parties. The court emphasised the need for prompt hearing of the interim appeal.

Floyd J (Chancery Division) made freezing orders on 11 January 2008 including paragraph 10.1(d). Permission to appeal was refused on paper by Lloyd LJ. The Court of Appeal (Arden LJ) on 12 February 2008 granted permission to appeal, allowed amendment of grounds and granted a stay of paragraph 10.1(d) with limited exceptions.