The Financial Services Authority v Sinaloa Gold Plc (t/a PH Capital Invest Glen & Ors

When a public authority seeks an injunction as part of law enforcement, the usual practice is not to require a cross-undertaking in damages. That principle extends to innocent third parties affected by a freezing order. Statutory immunity from liability in damages is a strong factor supporting that approach, but it does not make a cross-undertaking legally unenforceable. The undertaking is given to the court, and compensation depends on a later discretionary order. The court should distinguish reasonable compliance costs from consequential losses. Public authorities should generally meet compliance costs, but need not give the standard indemnity for third-party losses unless exceptional circumstances justify it.

The Financial Services Authority brought proceedings under the Financial Services and Markets Act 2000 against defendants alleged to have operated a boiler-room fraud involving the sale of shares. A without-notice worldwide freezing order was made. Its standard third-party undertaking covered both compliance costs and losses. The FSA sought to limit its undertaking to compliance costs, relying on its statutory immunity and the law-enforcement nature of the proceedings.

HH Judge Hodge QC declined to vary the undertaking. Barclays Bank intervened. The central issues were whether the usual protection for innocent third parties should be modified where the applicant was a statutory regulator, and whether paragraph 19 of Schedule 1 made a cross-undertaking unenforceable.

The Court of Appeal allowed the appeal. Lord Justice Patten gave the judgment, with which Lord Justice Mummery and Mr Justice Hedley agreed. The undertaking in paragraph (3) of Schedule B to the judge’s order was set aside and replaced by the FSA’s undertaking to meet compliance costs.

1. The power to grant an injunction on terms is discretionary under section 37 of the Senior Courts Act 1981. The court must consider the relevant circumstances. There is no implied direction in the Financial Services and Markets Act 2000 requiring a particular approach to third parties.
2. The authorities establish a general practice that a public authority seeking an injunction in the exercise of law-enforcement functions is not required to give a cross-undertaking in damages to the defendants. The principle applies equally to innocent third parties affected by a freezing order. This followed the approach in Hoffman-La Roche and Kirklees, and the treatment of Mareva relief in Securities and Investments Board v Lloyd-Wright and United States Securities and Exchange Commission v Masterfield: [1975] AC 295; [1993] AC 227; [1993] 4 All ER 210; [2009] EWCA Civ 27.
3. A freezing order supporting statutory restitution or recovery for investors is part of the law-enforcement process. Its classification is not changed by the breadth of the order or its adverse effect on third parties.
4. Paragraph 19 of Schedule 1 to the Financial Services and Markets Act 2000 does not make a cross-undertaking unenforceable. A cross-undertaking is given to the court, creates no independent cause of action, and permits compensation only if the court later exercises its discretion to enforce it. The resulting payment is compensation under a court order rather than conventional damages: Cheltenham and Gloucester Building Society v Ricketts and C T Bowring & Co (Insurance) Ltd v Corsi & Partners Ltd, [1993] 1 WLR 1545; [1994] BCC 713.
5. The statutory immunity was nevertheless a strong factor against imposing a full undertaking. No distinction could properly be drawn between defendants and innocent third parties for this purpose. The ordinary third-party protection recognised in Z Ltd v A-Z was not controlling in a public law-enforcement case. The FSA should meet reasonable costs of compliance, but the standard undertaking covering consequential losses was not required.

High Court of Justice, Chancery Division: On 24 January 2011 HH Judge Hodge QC continued the freezing orders but declined to replace the standard third-party undertaking with the FSA’s limited costs undertaking. Permission to appeal was granted.

Court of Appeal (Civil Division): Appeal allowed. The existing third-party undertaking was set aside and replaced by an undertaking limited to compliance costs.