Frozen out

In a recently published judgment on Perry v Princess International Sales & Services Ltd & ors (2004), Mr Justice Clarke made some important observations about freezing injunctions over real property.

The case concerned Maggie, a Princess 65 motor cruiser purchased by Albert Perry for just short of £1m. A now defunct company called Porsche Marine had installed a stern thruster to the boat, attaching it to the bathing platform. Then something went catastrophically wrong. Somehow, the stern thruster fell out, the water came in and the boat sank. There was a dispute about the contractual arrangements, and who was to blame for the sinking. Perry sued Princess, who, in turn, sued various others.

John Passmore of Hardwicke Building, counsel for Princess, had attended Mr Justice Silber’s home in the evening to seek an emergency freezing injunction over the assets of Clive Taylor, one of the part 20 defendants and a former director of Porsche Marine.

The injunction was granted in the sum of £850,000. Taylor is a property magnate and the bulk of his assets are made up of real property. Immediately, Princess applied to place restrictions on the Land Register against those properties.

At the return date, it was argued on behalf of Taylor that the court should be very slow to grant a freezing order over real property; houses could not be sold quickly so there would almost never be a real fear that the assets would be dissipated so as to defeat enforcement of a judgment.

Passmore said that the situation should be treated with care because the properties were heavily financed, as investment portfolios often are, and because there was always a risk of Taylor mortgaging his unencumbered property.

The judge agreed with the arguments advanced on behalf of Taylor. First, he rejected the suggestion that Taylor could be suspected of any dishonesty. Then he went on to say: “The assets of Mr Taylor’s business consist, by definition, of real estate, not intended for short-term disposition but for long-term investment. I do not doubt that it is possible to dissipate real estate as well as personalty, but the likelihood of someone so doing is inherently less.”

Turning to the idea that mortgaging property counts as wrongful “dissipation”, the judge said that he was not persuaded “that someone who seeks to mortgage his house in order to secure funds for his business should be regarded for present purposes as acting otherwise than in the ordinary course of business”.

Taking those factors together, the judge could find no risk of dissipation and discharged the order.

As far as the facts of that case were concerned, that was the end of the matter, but the judge considered that he could not leave the matter there.

On behalf of Taylor, it had been argued that Princess could not be permitted to place restrictions on the register because that would extend an already powerful weapon in a way that the courts cannot have intended and because it was inconsistent with the terms of the standard freezing order, which are ambulatory in effect and permit a respondent to dispose of their assets as they see fit, so long as they maintain an estate above the frozen amount. It would mean turning something analogous to a floating charge into something akin to a fixed charge.

The Land Registration Act 2002 sets out the registrar’s general power to enter a restriction in Section 42(1). They may do so upon the application of someone with “a sufficient interest” if it appears to them that it is necessary or desirable for the purpose of “preventing invalidity or unlawfulness in relation to dispositions of a registered estate of charge”.

There is nothing unlawful about a respondent disposing of assets above the frozen amount.

In response, Passmore pointed to the Land Registration Rules, which were enacted under the 2002 act, and submitted that Rule 93 permitted a person with the benefit of a freezing order to apply for a restriction because such a person does have a “sufficient interest”.

The judge noted the obvious difficulty presented by the rule if he had continued the injunction. Adopting the submission made for Taylor about the ambulatory effect of a freezing injunction, he noted: “As it seems to me, the result of the imposition of the prescribed restriction may be to fetter the owner’s right to dispose of his estate in a manner which it was not the purpose of the freezing order to require.

“Since I propose not to continue the freezing order that tension between the provisions of the act and the ambit of the order is no longer material to the present case. But it may be necessary in the future to consider whether any and, if so, what restriction should be imposed upon the applicant for a freezing order as to the extent to which he may thereafter cause a restriction to be entered in the register to avoid a situation where the effect of the prescribed restriction is to achieve a result which is not the result which the court designs to achieve by the form of the freezing order which it makes”.

If it had been required, Clarke J might well have gone further and held that the rules were ultra vires, because they provide for a restriction to be made by someone who has no rights over property that could rightly be seen as being incapable of protection in that way. He did not have to go that far because he discharged the injunction and, had he done so, his comments would not have been binding in any event. However, the point remains live and it is unlikely to be long before parties will argue it in a future case where a judge decides to maintain the injunction.

What certainly will have to be addressed in future is the terms of the standard freezing order – they should be amended in the case of injunctions over real property to make it clear that the applicant is either permitted or forbidden from placing a restriction on the register. If a party obtains a freezing order without informing the court of its intention to register it against the title of real property, there is a substantial risk that a swift application to discharge the injunction may be successful. It is also possible that once the injunction is discharged, the cross undertaking in damages will be enforced. Enforcement of a cross undertaking in damages given to a property magnate is likely to lead to very substantial damages.

In our view, only where the freezing injunction is fixed on a particular item of real property or the dissipation of real property would take the value of the estate below the frozen amount, could the courts properly consider allowing a restriction to be registered. Otherwise, the applicant will get more protection than they could conceivably be seen as entitled to and the obstruction of a respondent’s normal domestic or, in the case of property magnates such as Taylor, business affairs would be verging on the oppressive.

Paul Reed and James Watthey are insurance, marine and construction specialist barristers at Hardwick Building