Organic Grape Spirit Ltd v Nueva IQT, SL

A freezing order restrains unjustified dissipation, not every transaction that may reduce assets or expose a claimant to non-recovery. A trading company should normally be free to incur ordinary and proper business expenditure, even where the venture is risky or speculative. A fledgling business without an established trading pattern cannot rely on that exception and must seek specific authorisation. Authorisation should be refused for bad faith, an object of putting assets beyond reach, no reasonable prospect of success, or failure to meet acceptable commercial standards. Mere uncertainty, substantial risk, youth, inexperience, or possible asset depletion is insufficient. The court should not balance the claimant’s recovery risk against the defendant’s commercial risk.

Nueva IQT, a Spanish company, brought proceedings in Spain challenging the validity of a €12 million loan to Organic Grape Spirit Ltd. It sought a worldwide freezing order under section 25 of the Civil Jurisdiction and Judgments Act 1982 in support of those proceedings.

Nugee J initially permitted expenditure on the proposed start-up business. Morgan J later continued the order but prohibited Organic Grape from using its assets to develop the business, holding that the expenditure carried a substantial risk of reducing assets available for enforcement. Organic Grape appealed against that restriction. The central issues were whether the expenditure was in the ordinary and proper course of business and, if not, whether it should nevertheless have been authorised.

Lord Justice Newey gave the leading judgment. Lord Justice Arnold and Lord Justice David Richards agreed.

1. The appeal was allowed. Paragraph 4(4) of the freezing order was deleted, as was the word “not” in the second sentence of paragraph 10(2). The words “any new business or enterprise including but not limited to” were also deleted from paragraph 10(2).
2. A freezing order is concerned with unjustified dissipation. It may be granted where refusal would create a real risk that a judgment would remain unsatisfied, but the claimant need not prove that the defendant is likely to act with the object of putting assets beyond reach. The order is not security for the claim and does not restrain every disposal which may reduce the defendant’s assets.
3. Expenditure in the ordinary and proper course of business should normally be permitted, even where it involves substantial risk or speculation. “Ordinary” and “proper” are separate and cumulative requirements. The ordinary-business exception has a narrow meaning. A company which has not established a pattern of trading cannot rely on it for a fledgling enterprise and must seek specific authorisation.
4. When considering authorisation of non-ordinary transactions, the court should refuse permission where the defendant acts in bad faith, intends to put assets beyond reach, proposes a business with no reasonable prospect of success or prospects so poor that trading would fall below acceptable standards of commercial behaviour. The court should not prohibit a venture merely because it is risky or speculative, assess its commercial reasonableness, or balance the claimant’s recovery risk against the defendant’s business risk.
5. The approach in Harrison Partners Construction Pty Ltd v Jevena Pty Ltd [2005] NSWSC 1225 did not accord with the law of England and Wales. A real risk that honest investment might leave insufficient assets to satisfy judgment was not enough. The creditor-fraud analogy was also unhelpful: under section 423 of the Insolvency Act 1986, the transaction must be at an undervalue and entered into for the specified purpose of putting assets beyond reach or prejudicing a claimant.
6. Morgan J had made no finding of bad faith, an intention to defeat enforcement, or a business with no reasonable prospect of success. “Question marks”, substantial risk and the possibility of immediate asset depletion therefore provided inadequate reasons for prohibiting the proposed trading. The prohibition might itself crystallise the depletion it was intended to prevent.

• Court of Appeal (Civil Division) allowed the appeal and amended the freezing order.
• High Court, Business and Property Courts, Business List (ChD) Morgan J continued the freezing order and prohibited expenditure on the proposed business: [2020] EWHC 1837 (Ch).