Courts slower to allow limited cross-undertaking in damages given by insolvent estate office holders

Handing down its decision in Hunt v Ubhi (22 pages / 253KB PDF), the court held that, even where the applicant is acting as an office holder of an insolvent estate, the burden remains on them to demonstrate why the default position should be departed from. Accordingly, the Court of Appeal disagreed that office holders should automatically be permitted to give a cross-undertaking in damages capped at the company’s assets, and therefore set aside the freezing order.

This case serves as a reminder to insolvency practitioners that they must put in evidence as comprehensively as possible to persuade the court to depart from the default position – the full and frank disclosure principle. It also highlights the obstacles faced by office holders where there are no funds in the insolvent estate that could be offered up as part of the cross-undertaking.

Background

The appeal arises out of a petition to wind up Black Capital, a general partnership between Ravneet Ubhi and others. The petitioning creditor claimed to be owed £18 million. At the same time the petition was issued, a without notice application was made for the appointment of Stephen Hunt as provisional liquidator, and on the basis that there was evidence that the partnership operated a Ponzi scheme.

Hunt was appointed as provisional liquidator after the petitioning creditors gave a cross-undertaking in damages subject to a limit of £200,000 to cover any potential damages arising from the without notice provisional liquidation appointment. Hunt also applied for and obtained freezing orders against the partners for a maximum of £19m and gave a cross-undertaking in damages, but this was limited to the net realisations in the partnership’s insolvent estate.

Ubhi appealed against the judge’s decision to grant the freezing orders due to, among other things, the restricted nature of Hunt’s limited cross-undertaking in damages. When an interim injunction such as a freezing order is granted, the person applying for such an order will be required to give an undertaking to the court to compensate the respondent if the court later finds that the interim injunction had been wrongly granted and the respondent suffered loss as a result.

Decision

In this case, the Court of Appeal set out the steps which an office holder will be expected to take before a limited cross-undertaking will be acceptable. Referring to the 2015 dispute between JSC Mezhdunarodniy Promyshlenniy Bank and Sergei Pugachev – the owner and founder of the bank – the Court of Appeal emphasised that the default position is that a person applying for an interim injunction must give an unlimited cross-undertaking in damages.

The burden remains on the office holder to persuade the court to depart from this default position, such as when:

• there are numerous small creditors, or it is unclear who the creditors are, and it would be impractical for the office holder to obtain an indemnity; or
• the possibility of obtaining insurance by the office holder had been explored and exhausted.

More importantly, the court will unlikely depart from the default position solely by virtue of the office holder’s appointment. Applying the principle in the case against Pugachev, the court set aside the freezing order made against Ubhi on the basis that, among other things:

• the petitioning creditors of Black Capital had only given a cross-undertaking limited to £200,000 and did not offer an equivalent limited undertaking given by Hunt;
• little evidence was given by Hunt that he had sought, or at least attempted to seek, an indemnity from the petitioning creditors or insurance; and
• there was no suggestion that Hunt needed to obtain injunctive relief in a hurry and was therefore not in a position to obtain an indemnity from the petitioning creditors or insurance.

Interestingly, the court said that, to the extent that the first instance judge had attached significance to the fact that Ubhi had not identified any specific losses likely to result from the freezing order, the first instance judge was mistaken in doing so. Newey LJ, from the Court of Appeal, referred to the comments of Lewison LJ in the Pugachev case, where he said it is “fairness rather than likelihood of loss that leads to the requirement of a cross- undertaking.” Newey LJ observed: “While probability of loss may strengthen the case for a cross-undertaking, absence of it cannot be a justification for dispensing with one.”

This case is a useful reminder for insolvency practitioners and their advisers that when applying for interim injunctions they should consider in the first instance whether it is possible or practical to obtain an indemnity from the petitioning creditors or insurance in respect of the giving of cross-undertaking, or whether they are otherwise required to put in evidence to reflect this to persuade the court to depart from the default position.

The case also casts uncertainty as to whether insolvency practitioners, on appointment as provisional liquidators of a general partnership, have a cause of action to apply for a freezing order against the partners’ personal assets, given that powers under such an appointment are essentially only limited to preserving the assets of the partnership pending a winding up order. Insolvency practitioners may also wish to consider this point when dealing with partnership liquidations.

Co-written by Andres Chau of Pinsent Masons.