Novoship (UK) Ltd v Mikhaylyuk

The Court of Appeal allowed the defendant's appeal against the judge's refusal to vary a freezing order and against the making final of a third party debt order without provision for repayment to a small unsecured creditor (the defendant's daughter). The court held that the trial judge had mis-exercised his discretion under CPR Part 72 by failing to take sufficient account of the full factual and equitable background: in particular the role of the daughter's loans in preserving the property and enhancing its sale price, the prior consent to repayment of a £40,000 loan out of sale proceeds, and the relative prejudice to the parties. The court ordered that the third party debt order be subject to repayment of £8,336.23 to the daughter before the order became final.

This was an appeal from an order of Christopher Clarke J of 18 January 2013, made after a Commercial Court trial in which the judge had found the appellant liable to the claimants for breaches of fiduciary duty and awarded in excess of US$82 million ([2012] EWHC 3586 (Comm)). The appellant and his wife had sold their home and the net sale proceeds were divided equally; the appellant's share was held in an RBS account subject to a freezing order and an interim third party debt order. The appellant sought variation of the freezing order to permit repayment, from his share of the sale proceeds, of loans totalling £16,672 which his daughter alleged she had made to her parents; he sought permission to repay 50% (£8,336.23) from his share. The claimants obtained an interim third party debt order and applied to make it final without provision for repayment to the daughter.

The issues for the court included (i) whether the trial judge erred in the exercise of his discretion under CPR Part 72 in making the interim third party debt order final without safeguarding repayment to the daughter, (ii) whether the sums in the appellant's account were held on trust for repayment to the daughter, and (iii) the balancing of prejudice between a small unsecured creditor (the daughter) and very large judgment creditors. The trial judge assumed, for present purposes, that the loans had been made but concluded that making the order final without allowing repayment would not be inappropriate because the daughter was an unsecured creditor and the appellant faced substantial judgment creditors; he regarded repayment as a wrongful preference.

The Court of Appeal held that the judge had not given adequate weight to relevant circumstances arising before and after the interim order, including the daughter's repeated and documented payments which had prevented mortgage enforcement and had improved the eventual sale price, and the earlier consent to a £40,000 loan being repaid from sale proceeds. The court concluded that a proper exercise of the discretion required doing equity between the parties and that the third party debt order should be made subject to repayment of £8,336.23 to the daughter before the order became final. The court therefore allowed the appeal and directed that repayment proviso.

Appeal allowed. The Court of Appeal concluded that the judge had mis-exercised his discretion under CPR Part 72 by failing to take adequate account of the prior history and equitable considerations — notably the daughter’s contributions in preventing a forced sale and improving the sale proceeds and the respondents' earlier consent to repayment of a loan from proceeds — and ordered that the third party debt order be made subject to repayment of £8,336.23 to the daughter prior to finalisation of the order.

Appeal from the High Court of Justice, Queen's Bench Division, Commercial Court (Christopher Clarke J). The underlying trial judgment was handed down on 14 December 2012 ([2012] EWHC 3586 (Comm)). The judge made the order under appeal on 18 January 2013; permission to appeal was later granted on paper. This Court of Appeal determination is reported at [2014] EWCA Civ 252. Earlier, Teare J heard a prematurity application on 30 March 2012 and dismissed it as premature (transcript of 30 March 2012 referenced in the judgment).