Marco Piacquadio & Anor (as Joint Liquidators of Smith & Partner LTD) v Luke Sparkes & Ors

A freezing order requires a good arguable case on the merits, a real risk of unjustified dissipation assessed objectively, and it being just and convenient to grant relief. The merits threshold is higher than bare arguability but does not require a greater-than-50% prospect of success. The interlocutory hearing should not become a mini-trial. A good arguable case of dishonesty does not by itself establish dissipation, but dishonesty involving misappropriation of assets may do so. Offshore structures are relevant but are not independently sufficient. Allegations of non-disclosure must be clear, material and proportionate. Even where non-disclosure is established, the court retains a discretion to continue the injunction where the interests of justice require it.

The liquidators of Smith & Partner Ltd sought continuation of freezing and proprietary injunctions granted without notice against the former director and shareholder, a company controlled by him, and an alleged former de facto director or senior employee.

The liquidators alleged that the company operated a fraudulent art investment scheme, misrepresented its role as broker and the basis on which it made profits, sold prints at grossly inflated prices, and misappropriated company funds. The respondents challenged the merits, risk of dissipation, and the liquidators’ compliance with the duty of full and frank disclosure.

The central issues were whether the requirements for continuation of the injunctions were satisfied and whether any alleged non-disclosure required discharge of the orders.

1. Freezing-order criteria. The applicants had to establish a good arguable case on the merits, an objectively assessed real risk that a future judgment would be defeated by unjustified dissipation, and that relief was just and convenient. The merits test was that in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft GmbH (The Niedersachsen): more than a case barely capable of serious argument, but not necessarily a case with more than a 50% chance of success. The hearing should not become a mini-trial.
2. Good arguable case. The marketing material and investor evidence supported an arguable case that the company held itself out as a broker or intermediary, would advise on purchases and resales, and made its money through stated commissions. There was also an arguable case that it instead made substantial undisclosed mark-ups, that there was no genuine secondary market or resale activity, and that buy-backs were used to encourage further investment. The first respondent’s knowledge of the alleged wrongdoing was sufficiently arguable. The claims under sections 212 and 213 of the Insolvency Act 1986 therefore comfortably met the threshold.
3. Risk of dissipation. Dishonesty alone was insufficient. Here, however, the alleged fraud and misappropriation were directly connected with the respondents’ acquisition of assets. The first respondent’s continued benefit from the company after knowing of mis-selling, the unexplained transfer of £100,000, and the suspicious use and delayed disclosure of offshore structures supported a real risk of dissipation. The factors were to be assessed cumulatively.
4. Full and frank disclosure. The respondents’ wide-ranging, scatter-gun allegations were disproportionate. The applicants had made reasonable enquiries and had disclosed the material valuation evidence and the competing explanation for the storage values. The criticisms did not establish material non-disclosure. In any event, any failure would have been innocent and immaterial. The interests of justice would have required continuation of the injunction to protect investors even if some failure had been established.
5. Disposition. The freezing orders, including the proprietary injunctions, were continued until trial or further order.