Lendy Ltd v Brooke & Ors

Freezing orders require a good arguable case, a real risk of dissipation and a conclusion that relief is just and convenient. Dishonesty alone is insufficient to establish dissipation risk, but deception, sham transactions, concealed connections and offshore structures may cumulatively do so. Delay will not necessarily defeat relief where the application reasonably requires substantial preparation. A worldwide order may be justified by evidence of assets abroad and insufficient assets within the jurisdiction. A proprietary injunction requires an arguable link between misappropriated funds and identified property, together with a favourable balance of convenience. The Duomatic principle may not provide a defence where ratification would facilitate an unlawful act beyond the company’s capacity.

The applicant company, in administration, sought a worldwide freezing order against two former directors and proprietary injunctions against those directors and two connected companies. It alleged that more than £6.5 million had been misappropriated through payments supported by false invoices and retrospectively created service agreements, including payments to connected offshore companies.

The application raised questions about the arguability of the underlying claims, possible shareholder ratification, the risk of dissipation, delay, the territorial scope of relief, and the connection between the alleged misappropriated funds and three English properties.

1. The freezing order was granted. There was a good arguable case that the first and second defendants had misappropriated funds exceeding £6.5 million through payments made without proper purpose and supported by false or retrospective documentation. The possible defence based on the Duomatic principle did not prevent relief at this interlocutory stage. There was at least a good arguable case that the principle did not apply where the purpose of ratification was to commit an unlawful act beyond the company’s capacity, such as defrauding the Revenue. The decision in Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWHC 257 (Comm) supported that conclusion, although its appeal had concerned a different issue.

2. The Court of Appeal’s treatment of the possible no-loss argument in Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWCA Civ 2291 showed that the issue was sufficiently arguable to preclude summary judgment. The contrary position was also reasonably arguable. That issue did not affect the proprietary claim to traceable proceeds.

3. There was a real risk of dissipation. Dishonesty alone was insufficient, but the alleged deception through sham invoices, alleged lies about connections with offshore companies, and the use and concealment of offshore companies, trusts and accounts cumulatively established the necessary risk.

4. Delay did not justify refusing relief. Applying the principles identified in Madoff Securities International Ltd v Raven [2011] EWHC 3102, the period taken was not excessive given the preparation necessarily required. Evidence of assets abroad and insufficient assets within England justified the worldwide scope. It was just and convenient to grant the order.

5. The proprietary injunction was also granted. There was a serious issue to be tried and prima facie evidence linking the alleged misappropriated funds to the acquisition of three English properties. A company has a proprietary interest in funds misappropriated by a director because the director is treated as having committed a breach of trust. The balance of convenience favoured preserving the properties or sale proceeds.