In the recent case of Orange Grape Spirit Limited v Nueva IQT [2020] EWHC 1837 (Ch), the Court of Appeal has clarified that, in the absence of an established pattern of trading, expenditure pursuing a fledgling business is unlikely to fall within the “ordinary and proper course of business” exception to freezing injunctions.

The court can however exercise its discretion to sanction expenditure falling outside the “ordinary and proper course” exception on a case-by-case basis.  In the Orange Grape Spirit case, the Court of Appeal examined the principles applicable to the exercise of this discretion and was ultimately persuaded that it was appropriate to sanction expenditure pursuing the relevant new business.

Kevin Kilgour, a Senior Associate in our disputes team, considers the decision further below.

Background

The dispute arose from the transfer of €12 million from the respondent, a Spanish company (“Nueva”) to the appellant, a newly incorporated British company (“OGSL”) under an alleged loan transaction.  At the time the money was advanced, OGSL was a new business without any pattern of trading.  OGSL’s owner gave evidence that he had begun to invest (and intended to continue to invest) the sums advanced pursuing a new alcoholic drinks business.

Shortly after the money had been advanced, new directors were appointed to Nueva’s board who disputed the validity of the loan.

At first instance, Nueva obtained a worldwide freezing injunction from the English High Court under section 25 of the Civil Jurisdiction and Judgments Act 1982 in support of intended proceedings in Spain which would determine the validity of the loan.

When continuing the injunction at the return date, Morgan J considered whether OGSL should be permitted to continue to spend the money it had received from Nueva pursuing its new business venture. While there was no suggestion that the money would be spent in bad faith, the judge considered that the new business venture was “speculative” and that there was a real risk it would fail, leaving Nueva with no assets against which it could enforce a judgment.  On this basis, the judge decided to include express wording in the freezing order clarifying that expenditure on the new business fell without the “ordinary and proper course” exception and was not otherwise permitted by the injunction.

In so doing, Morgan J relied heavily on Harrison Partners Construction Pty Ltd v Jevena Pty Ltd [2005] NSWSC 1225, a New South Wales case, in which the court had reached the same decision in very similar circumstances.  In that case, the court had said that it was “difficult to see … why honest blundering in dealing with assets by a defendant should be permitted to the detriment of a plaintiff’s ability to achieve and the court’s ability to do justice” and that, when deciding to restrict expenditure on trading activities, “[i]t will suffice to establish that there is a real risk that the defendant will deal with the assets in a manner calculated, or liable, to produce the result that a judgment in the favour of the plaintiff would not be satisfied”.

The Court of Appeal’s decision

OGSL did not challenge Morgan J’s decision to continue the injunction, but appealed against the decision to include specific wording in the freezing injunction preventing expenditure on its new business venture.

The Court of Appeal (Lord Justice Newey giving the main judgment) allowed OGSL’s appeal. The court explained that, even in cases where a freezing injunction is appropriate, it will not restrain all conduct which could prejudice a defendant’s ability to satisfy a judgment.  The court went on to say that, absent a proprietary claim, a defendant’s assets “belong to him” and that a freezing order is not “intended to give a claimant security for what he alleges to be due to him”. Rather, the court’s concern is to prevent disposals of assets which are improper or unjustified.  The court’s starting point was that expenditure on living expenses and business would not generally be regarded as improper or unjustified.

That said, the Court of Appeal agreed with Nueva that OGSL’s proposed business activities could not fall within the “ordinary and proper course” exception because, being a new business, there was no established pattern of trading against which to judge any particular transaction.  The court agreed that the “protection afforded by a freezing order could be significantly eroded if the defendant could claim that transactions fell within the “ordinary and proper” business exception when there was no benchmark against which the activities could be assessed”.

The court however explained that, even where expenditure falls outside the “ordinary and proper course” exception, such expenditure can be sanctioned on a case by case basis by the court or the claimant.  In this case, the Court of Appeal decided to exercise its discretion to amend the language of the freezing order so as to make it clear that expenditure on OGSL’s new business would be permitted.

In so doing, the court provided guidance as to how the discretion to permit business transactions should be exercised.  In particular, the court said that the test for the exercise of that discretion formulated in the Harrison Partners case (relied on by Morgan J) did not represent the law in England.  To restrict expenditure on business, it is not enough simply that the business venture is “speculative” or that there are “question marks” about the prospects of success of the business.  Permission for business transactions should only be refused where it appears that (a) the defendant is not acting in good faith and in fact intends to enter the transaction “with the object of putting his assets beyond reach”, or (b) the defendant is carrying on a business which has no reasonable prospect of success (such that the transaction would not be proper).

In OGSL’s case, there was no allegation that the expenditure would be made in bad faith or for any purpose other than the building of its new business, and the court was not in a position to judge the prospects of success of that business.  In those circumstances, the fact that the business venture appeared speculative was not sufficient to prevent OGSL from pursuing it.

Kevin Kilgour
Kevin Kilgour
Senior Associate, London