Novoship (UK) LTD & Ors v Vladimir Mikhaylyuk

The discretion to make an interim third-party debt order final is broad and fact-sensitive. The court must consider all relevant circumstances, before and after the interim order, and do equity among the judgment creditor, judgment debtor and other unsecured creditors. A judgment creditor’s priority, the absence of security or a proprietary claim, and the absence of insolvency proceedings do not exhaust that inquiry. Where an unsecured family loan preserved a mortgaged property, enabled its sale at full value and thereby enhanced the judgment creditor’s recovery, equity may require repayment from the debtor’s share of the proceeds. An appellate court may exercise the discretion afresh where the first-instance judge failed to consider those matters.

This was an appeal by Vladimir Mikhaylyuk against an order of Christopher Clarke J dated 18 January 2013. The judge had refused to vary a freezing order to permit repayment of £8,336.23, representing half of loans allegedly made by Mr Mikhaylyuk’s daughter to meet mortgage liabilities, and had made final a third-party debt order over £211,519.06 held in his bank account.

The application arose after the underlying trial, at which Mr Mikhaylyuk was found liable for substantial sums for dishonest breaches of duty and contract; the merits judgment is reported at [2012] EWHC 3586 (Comm). The central issue was how the court’s discretion should balance the judgment creditors’ position against the daughter’s unsecured repayment claim, particularly where her loans had helped preserve and realise the property.

1. Appeal allowed. Lady Justice Gloster, with Lord Justice Floyd agreeing, held that the exercise of discretion by the judge below was flawed. The relevant discretion under rule 72 of the Civil Procedure Rules 1998 had to be exercised afresh.
2. The governing principles, summarised in Roberts Petroleum v Bernard Kenny Ltd [1982] All ER 685, required consideration of all relevant circumstances arising before or after the interim order and an equitable outcome for the judgment creditor, judgment debtor and other unsecured creditors. The discretion remained heavily dependent on the facts. The principles were not displaced by the House of Lords decision at [1983] AC 192.
3. The judge had focused on the daughter’s lack of security or proprietary claim, the supposed preference over judgment creditors, the absence of bankruptcy and the size of the judgment debt. He failed to consider the wider history and the balance of equity. The daughter’s earlier and later loans had prevented mortgage enforcement, avoided a forced sale and enabled the property to be sold at full market value. Those matters enhanced the recovery available to the Respondents.
4. The Respondents had accepted in principle that the daughter’s £40,000 loan could be repaid from the net sale proceeds before division between the parents. There was no material difference in character between that loan and the other mortgage-related loans. The fact that the Respondents obtained judgment before the application was heard did not determine the outcome. The Angel Bell principle, Iraqi Ministry of Defence v Arcepey [1981] 1QB 65, was also a relevant consideration.
5. The daughter’s loan was informally secured in the practical sense that repayment was to be made from the net sale proceeds before distribution of the parents’ shares. The fact that the mother was jointly and severally liable did not require the daughter to recover from her, where the mother had no separate funds and would otherwise bear the debt. Any third-party debt order over the account was therefore to be subject to repayment of £8,336.23 before the order became final.

• Court of Appeal (Civil Division) — Allowed the appeal and directed that any final third-party debt order be subject to repayment of £8,336.23 to Miss Mikhaylyuk.
• High Court of Justice, Queen’s Bench Division, Commercial Court — Christopher Clarke J’s order dated 18 January 2013 refused the variation application and made the third-party debt order final. The underlying merits judgment was reported at [2012] EWHC 3586 (Comm).