In Financial Services Authority v Sinaloa Gold plc and others (Respondents) and Barclays Bank plc (Appellant)  UKSC 11, the UK Supreme Court held that there is no general rule that an authority such as the FSA, seeking an injunction in the course of its public functions, should be required to give a cross-undertaking in damages in favour of third parties affected by the injunction, and that there were no particular circumstances why it should be required to do so in the present case.
The decision will be of particular interest to banks and other financial institutions which hold client assets, since it limits the protection afforded to them as innocent third parties who may potentially suffer loss or expense following the grant of an injunction in favour of the FSA.
On 20 December, the FSA brought proceedings against Sinaloa Gold plc (Sinaloa), a person or persons trading as PH Capital Invest, and a Mr Glen Lawrence Hoover, on the basis that:
- Sinaloa was promoting the sales of shares without being authorised to do so and without an approved prospectus, contrary to sections 21 and 85 of FSMA
- PH Capital Invest and Mr Hoover were knowingly engaged in this activity, and
- PH Capital Invest was carrying on regulated activities without authorisation in breach of section 19 of FSMA in various other respects.
On 17 December, before issue of the proceedings, the FSA had obtained (without notice) an injunction freezing the defendants’ assets under sections 380(3) of FSMA and/or 37(1) of the Senior Courts Act 1981. Barclays, with whom Sinaloa had six bank accounts, in respect of all of which Mr Hoover was the sole authorised signatory, was notified of the order on 20th December 2010.
Although Schedule B to the injunction stated that the FSA gave no cross-undertaking in damages, under Schedule B, the FSA had, inadvertently, undertaken to cover losses, as well as costs, incurred by third parties as a result of the injunction. The FSA accordingly applied to have the undertaking to cover third party losses removed. Barclays – with whom Sinaloa Gold plc had six bank accounts – intervened to oppose the application. Although the application to have the undertaking removed was refused in the High Court, the Court of Appeal decided to preserve the undertaking in respect of third party costs but eliminate the undertaking in respect of third party losses.
Barclays appealed to the Supreme Court, which dismissed the appeal.
The court recognised a general distinction still exists between private claims and law enforcement actions:
- in a private claim, a claimant seeking an injunction will usually be expected to give a cross-undertaking in damages to the defendant(s) and to third parties – such a claimant should be prepared to back its own interest with its own assets against the possibility that it obtains the injunction unjustifiably with the result that harm is caused to the interest of another party;
- in law enforcement actions, however, where a public authority is seeking to enforce the law in the interests of the public generally, often in pursuance of a public duty to do so, with the resources assigned to it for its functions, public authorities cannot generally be expected to back their legal actions with the public funds with which they are entrusted for the purpose of undertaking their functions – this might inhibit them from fulfilling their public duties for fear of exposing public funds to claims for compensation.
A pragmatic distinction can be drawn between an undertaking in respect of costs and an undertaking in damages. Public authorities should be able to enforce the law without being inhibited by the fear of cross-claims and the exposure of their resources, and this applies with particular force to any open-ended undertaking in respect of third party loss. It does not apply with the same force to a more limited cross-undertaking in respect of third party costs.
Where the FSA takes positive action to shut down allegedly unlawful activity, it does not, in doing so, assume any responsibility towards, or liability for breach of a duty of care enforceable at the instance of, third parties.
Given that the FSA has power to freeze the assets of a permitted person (without making any application to a court) under Part IV of the FSMA, in relation to which it benefits from the statutory immunity set out in paragraph 19 of Schedule 1 to FSMA, making the FSA accept potential liability in cases concerned with the activities of unauthorised persons seems unbalanced.
Some further observations
Lord Mance considered that the starting position – whether in an application without notice or on notice – should be that no cross-undertaking should be required unless circumstances appear which justify a different position. To require a blanket undertaking in favour of third parties at the without notice stage would provide no incentive to third parties who are or fear being adversely affected by an injunction obtained under section 380(3) to come forward.
Where a third party suffers or may loss or expense through the grant of an injunction, the Court’s expectation is that they should come forward, explain the loss feared and apply for any continuation of the injunction to be made conditional on such cross-undertaking, if any, as the court may then conclude should in all fairness be required to meet that situation. Lord Mance noted whenever the court is considering whether to order an interim injunction without any cross-undertaking, it should bear in mind that this will mean that the defendant or an innocent third party may as a result suffer loss which will be uncompensated, even though the injunction later proves to have been unjustified.
Where the cross-undertaking is not given (which will now be in the majority of such cases), whenever it receives this kind of freezing order, a third party recipient must whether it will be exposed to a risk of loss. The court will not have jurisdiction to grant relief for any loss caused by that risk manifesting itself, unless it is asked to vary the order, either at the return hearing or by a further application, before a loss is actually suffered.
For large financial institutions, this means consideration may need to be given to putting systems in place to assess and monitor the risk of loss posed by these freezing orders in every case. This additional burden could have the effect of increasing the costs of complying with these freezing orders, costs which the Supreme Court has held the FSA should still be required to reimburse.