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

The Court of Appeal considered whether a public regulator (the FSA) should be required to give a third-party cross-undertaking in damages as part of a freezing injunction obtained in aid of law enforcement. The court held that Schedule 1 paragraph 19 of the Financial Services and Markets Act 2000 did not render cross-undertakings unenforceable because such undertakings are obligations to the court, exercised by the court in its discretion, rather than conventional liabilities in damages. Nevertheless, established authority and the public interest in effective law enforcement mean that, as a general rule, a public enforcement body acting under statutory powers should not be required to give a broad cross-undertaking exposing it to potential compensation liabilities; a limited undertaking to meet reasonable costs of third parties in complying with the order is appropriate.

The Financial Services Authority (the FSA) brought without-notice proceedings and obtained a freezing injunction against Sinaloa Gold plc, PH Capital Invest and Mr. Glen Hoover, alleging an unlawful offer of shares and other breaches of the Financial Services and Markets Act 2000 (including s.85, ss.19 and 21). The FSA applied for relief to restrain further sales and to secure funds for restitution under ss.380(2) and 382(2).

The original without-notice freezing order contained the standard third-party cross-undertaking in the form used in freezing orders (covering both costs of compliance and consequential loss). After disclosure and interlocutory hearings the FSA indicated it would not continue the full third-party undertaking and proposed instead a limited undertaking to meet reasonable costs of compliance. Barclays Bank, an affected third party, intervened and argued for retention of the full form third-party undertaking; HHJ Hodge QC retained the broader standard undertaking and granted permission to appeal on that point.

The Court of Appeal framed two principal issues: (i) whether the statutory immunity in Schedule 1 paragraph 19 of the FSMA made a cross-undertaking in damages unenforceable against the FSA; and (ii) as a matter of judicial discretion whether third parties should, as a general rule, be protected by the full third-party cross-undertaking in law enforcement proceedings. The court surveyed the historical origins of cross-undertakings, the development of third-party undertakings in Mareva/freezing order practice (including Z Ltd v A-Z), and authority addressing public authorities seeking injunctive relief (including Hoffman-La Roche, Kirklees, Morritt J in Securities and Investments Board v Lloyd-Wright, and United States SEC v Masterfield).

The court concluded that (i) paragraph 19 does not render a cross-undertaking unenforceable because the undertaking is a discretionary obligation to the court and not a conventional cause of action in damages; and (ii) notwithstanding that, precedent and the public interest in law enforcement justify a general practice of not requiring public enforcement bodies to give the broad third-party cross-undertaking. The FSA should nevertheless give an undertaking to meet reasonable costs of third parties in complying with the order. Applying these principles the Court of Appeal allowed the appeal, set aside the broad third-party undertaking in the judge's order and substituted a limited undertaking to meet reasonable costs of compliance as proposed in the FSA's affidavit.

Appeal allowed. The court held that Schedule 1 paragraph 19 of the FSMA does not render a cross-undertaking in damages unenforceable because such undertakings are obligations to the court and not conventional liabilities in damages; however, as a matter of discretion and having regard to authority on law enforcement applications, public authorities like the FSA will generally not be required to give the broad third-party cross-undertaking in freezing order cases. The broad undertaking was set aside and replaced by a limited undertaking to meet reasonable costs of compliance.

Appeal to the Court of Appeal from the High Court of Justice, Chancery Division (HHJ David Hodge QC sitting as a deputy judge). Earlier without-notice freezing order made (Mr Kevin Prosser QC), continued by David Richards J pending further hearing; HHJ Hodge continued the injunction with the standard third-party undertaking and granted permission to appeal. This appeal determined in the Court of Appeal [2011] EWCA Civ 1158.