The petitioners brought a petition under article 7 of the Insolvent Partnerships Order 1994 (SI 1994/2421) to wind up B, a company, in which they had invested large sums of money, on the basis that B was an insolvent partnership between the respondent and P. Without notice applications were granted for the appointment of a provisional liquidator and freezing orders. The applicant was appointed as provisional liquidator, the petitioners having given a cross-undertaking in damages subject to a limit of £200,000. The liquidator was granted immediate freezing orders against the respondent and P, specifying the maximum sum as £19 million and gave a cross-undertaking in damages, but in a restricted form. The cross-undertaking stated that if the court later found that the order had caused loss to the respondent, and decided that he should be compensated for that loss, the liquidator would comply with any order, save that the undertaking should be limited to the amount of monies and the net realizable value of the unpledged assets of B (in provisional liquidation) taken into the custody or under the control of the liquidator in the course of the liquidation less the costs, expenses or other disbursements of the liquidation. The petitioners presented bankruptcy petitions against the respondent and P and subsequently obtained permission to amend the petition in respect of B to include reference to the petitions relating to the respondent and P. Those were stated to have been issued pursuant to article 8 of the 1994 Order. On 17 November 2022, the Deputy Insolvency and Companies Court Judge (“the Deputy ICC Judge”), after a hearing in respect of the winding-up and bankruptcy petitions and the respondent’s application to set aside a statutory demand on the grounds that he had never been a partner in B, dismissed the winding-up petition and the bankruptcy petition against the respondent and also set aside the statutory demand served on him on the grounds that (i) the evidence demonstrated a dispute on substantial grounds as to whether the respondent was a partner in B, and (ii) the petitioners had not complied with the requirements of article 8 of the 1994 Order. At a subsequent hearing on 15 December 2022, the Deputy High Court Judge (“the judge”) determined that, under the terms of the order appointing the liquidator, he remained provisional liquidator until the Deputy ICC Judge had dealt with consequential matters arising from her judgment. The judge ordered that the freezing orders against the respondent and P should continue, finding that although there were some areas in which criticisms could be made of the way in which the application had been presented, none of them were, either taken on their own or looked at cumulatively, sufficiently material to amount to a breach of the duty to provide full and frank disclosure; that there was a good arguable case that the defendant was a partner in B, and it followed that there was a good arguable cause of action against the defendant, being his liability to contribute to any shortfall in the assets of B; that there was a good arguable case that, although he might not have had access to the investors’ funds, he was aware of and assisted in a Ponzi scheme; that it could be inferred that there was a real risk of dissipation of his assets particularly in the light of the evidence that both he and companies with which he was connected had received significant sums from B; and that the balance of convenience lay in favour of continuing the freezing orders despite the fact that the cross-undertaking in damages was of limited value. On the same day, the Deputy ICC Judge dealing with the consequential matters, stayed the dismissal of the winding-up petition against B and ordered that the appointment as provisional liquidator should continue pending an application by the petitioners for permission to appeal against her judgment. The respondent appealed against the decision of the deputy High Court judge of 15 December 2022, contending, inter alia, that the judge was wrong to accept a limited cross-undertaking from the applicant liquidator and should have set aside the freezing order and refused further relief on account of breaches of the duty of full and frank disclosure.
On the respondent’s appeal—
Held, appeal allowed. (1)The burden was on an applicant for a freezing order to show why it was appropriate to depart from the “default position” that an unlimited cross-undertaking in damages was required. It was incumbent on the applicant to explain why the judge should make a freezing order without his giving such an undertaking. The fact that the applicant was acting in the interests of all creditors, of whom the petitioners were a minority, did not constitute a sufficient reason to depart from the “default position” that an applicant should give an unlimited cross-undertaking in damages. The judge did not seem to have kept in mind the need for the liquidator to justify any departure from that default position. His decision on the cross-undertaking issue was wrong in principle and could not stand. Exercising the discretion afresh, since the liquidator had not shown any sufficient reason to depart from the default position his cross-undertaking in damages was inadequate. The the freezing order against the respondent would be set aside (paras 30–33, 37–38, 54, 55, 58).
(2) What counsel for the liquidator said to the judge making the freezing order about the proposed cross-undertaking was not adequate and was misleading. Liquidators were sometimes excused from giving unlimited cross-undertakings, but counsel for the liquidator overstated the position when he told the judge that it was “usual” for the undertaking required of a provisional liquidator to be limited to the assets in the estate. The deficiencies in what the judge making the freezing order was told about the cross-undertaking did not however by itself mean that the freezing order against the respondent should be discharged on account of breach of the duty of disclosure. While even an innocent non-disclosure could justify the setting aside of a freezing order, the fact that, as here, a failure to comply with the duty of disclosure was not deliberate was an important consideration. Further, the duty was breached only in relation to the cross-undertaking, and not a wider basis. On balance it was not in the interests of justice to discharge the order which the judge had made (paras 46–48, 50, 55, 58).
Per curiam. It may be that the court should be slower to make a freezing order in favour of a provisional liquidator where no separate claim is being initiated by him and, in particular, in circumstances such as those in the present case where not only is the provisional liquidator issuing no originating process himself, but the petition relates to a partnership and it would be open to the petitioners to make direct claims against the partners individually and to obtain freezing orders against them in those proceedings. Where it is proposed that a provisional liquidator of a partnership should be granted a freezing order, thought needs to be given to whether the terms of the order for the provisional liquidator’s appointment permit that, and any uncertainty in that regard should be brought to the attention of the judge hearing the application (paras 52, 53, 55, 58).
John Machell KC and Dan McCourt Fritz KC (instructed by Thursfields Solicitors, Worcester) for the respondent.
Christopher Brockman and Phillip Gale (instructed by Francis Wilks & Jones) for the liquidator.