JSC BTA Bank v Ablyazov [2015] UKSC 64

The Supreme Court considered whether a defendant's rights under loan agreements, and the proceeds thereof, fell within a standard form freezing order. The Bank held US$4.4 billion in unpaid judgments against Mr Ablyazov. The Court held the right to draw down was not an 'asset' but the loan proceeds were caught by the extended definition.

Facts

JSC BTA Bank (“the Bank”) obtained judgments totalling approximately US$4.4 billion against Mr Mukhtar Ablyazov, its former chairman and majority shareholder, in respect of allegations that he had misappropriated over US$10 billion of the Bank’s monies. None of these judgments had been satisfied. A freezing order had been made by Teare J on 12 November 2009 (“the Freezing Order”) in the standard Commercial Court form set out in Appendix 5 of the Admiralty and Commercial Courts Guide.

Mr Ablyazov entered into four loan facility agreements (each for £10m) with two BVI companies, Wintop Services Limited and Fitcherly Holdings Limited. Clause 1.12 of each agreement provided that the proceeds were to be used at the borrower’s sole discretion and that the borrower could direct the lender to transfer the proceeds to any third party. The loans were fully drawn down, with directed payments including over US$16m to Mr Ablyazov’s former solicitors, around US$500,000 in relation to a London property, and sums to corporate services providers and to lawyers for other defendants. The Bank contended these payments would not have been permitted had Mr Ablyazov used his own money under the limited exceptions in paragraph 9 of the Freezing Order (£10,000 per week living expenses and reasonable legal expenses).

The Bank applied for declarations that the rights under the Loan Agreements were assets within the Freezing Order. Christopher Clarke J dismissed the application, and the Court of Appeal (Rimer, Beatson and Floyd LJJ) dismissed the appeal. The Bank appealed to the Supreme Court. Mr Ablyazov, having been found in contempt and having left the United Kingdom, was not represented; the Court was assisted by Mr Jonathan Crow QC and Mr Adam Holliman as advocates to the Court.

Issues

The three issues identified in the agreed statement of facts and issues were:

1. Whether the respondent’s right to draw down under the Loan Agreements is an “asset” within the meaning of the Freezing Order;
2. If so, whether the exercise of that right by directing the lender to pay the sum to a third party constitutes “disposing of” or “dealing with” or “diminishing the value” of an “asset”; and
3. Whether the proceeds of the Loan Agreements were “assets” within the meaning of the extended definition in paragraph 5 of the Freezing Order on the basis that the respondent had power “directly or indirectly to dispose of, or deal with [the proceeds] as if they were his own”.

Arguments

The Bank

The Bank argued primarily that all choses in action, including the right to borrow under the Loan Agreements, fall within the definition of “assets”. In the alternative, it contended that the proceeds of the Loan Agreements were “assets” within the extended definition in paragraph 5, because Mr Ablyazov had power directly or indirectly to dispose of or deal with the proceeds as if they were his own. The Bank relied on authorities including CBS United Kingdom Ltd v Lambert and Templeton Insurance Ltd v Thomas, and on the flexibility with which the freezing jurisdiction has been developed.

The Advocate to the Court

Mr Crow submitted that the flexibility principle has no role in construing an order already made; that orders of this kind must be strictly construed because of their penal consequences; and that the historical context established a settled understanding that borrowings were not covered by the standard form. He invited the Court to adopt the reasoning of Christopher Clarke J, who had held that Mr Ablyazov had no right of ownership or control in respect of any particular asset and made no disposal of his own assets.

Judgment

Lord Clarke, giving the judgment with which Lord Neuberger, Lord Mance, Lord Kerr and Lord Hodge agreed, dismissed the appeal on issues 1 and 2 but allowed it on issue 3.

Approach to construction

The Court accepted that the question was solely one of construction of the Freezing Order. Both parties agreed, and the Court endorsed, that the flexibility principle has no role in construing an order already made: it concerns the formulation of new orders to meet new avoidance measures. Orders are to be strictly construed in accordance with the strict construction principle articulated by Beatson LJ in the Court of Appeal, given the penal consequences of breach and the risk of oppression. Lord Clarke quoted with approval the formulation set out by Beatson LJ:

The third principle follows from the ‘fundamental requirement of an injunction directed to an individual that it shall be certain’: Z Ltd v A-Z and AA-LL [1982] QB 558, 582 per Eveleigh LJ. It is that, because of the penal consequences of breaching a freezing order and the need of the defendant to know where he, she or it stands, such orders should be clear and unequivocal, and should be strictly construed.

Neuberger J’s observation was also cited:

A freezing order, which has been referred to as a nuclear weapon, should … be construed strictly

Issues 1 and 2: right to draw down

The Court held that the right to draw down under the Loan Agreements was not an “asset” within the original wording of the Freezing Order. Although choses in action can in ordinary legal parlance be regarded as assets, the historical context of the Mareva jurisdiction, the enforcement principle (the order’s purpose being to preserve assets available to satisfy a judgment, not to give security), and a settled understanding reflected in cases such as Cantor Index Ltd v Lister and leading texts (Hoyle, Gee, Biscoe) and the White Book, demonstrated that borrowings were not covered by the standard form. To borrow money increases indebtedness but does not dispose of, deal with, or diminish the value of the borrower’s assets. The Court declined to depart from this long-settled position, given the importance of clarity and certainty in penal orders. It followed that the exercise of the right to draw down was not a prohibited disposal or dealing.

Issue 3: extended definition

The Court reached a different conclusion on the extended definition in the second and third sentences of paragraph 5. That paragraph provides:

For the purpose of this Order the respondents’ assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own. The respondents are to be regarded as having such power if a third party holds or controls the assets in accordance with their direct or indirect instructions.

Lord Clarke held that the whole point of these sentences was to catch rights that would not otherwise have been caught: assets the respondent did not own legally or beneficially, but over which he had control. Under clause 1.12 of the Loan Agreements, Mr Ablyazov had an unfettered discretion to use the proceeds and to direct the lender to transfer them to any third party. Clause 1.11 made the lender’s obligations legally binding. The clause 1.2 reference to disbursement “in a form agreed” concerned only the form of disbursement and was irrelevant; the cancellation right in clause 1.6 was inoperative unless and until exercised.

The Court rejected each of the Court of Appeal’s reasons for refusing the Bank’s alternative argument. There was no “bootstraps” problem because the premise of paragraph 5 was precisely to extend the order to assets not otherwise owned by the respondent. The extended definition was not confined to trust assets. The fact that Mr Ablyazov incurred a liability to reimburse the lender was immaterial. The third sentence of paragraph 5 was expansionary, not restrictive of the second.

Disposition

The appeal was dismissed on issues 1 and 2 but allowed on issue 3. The parties were invited to make written submissions on the form of order and costs.

Implications

The decision provides important clarification of the scope of the standard Commercial Court form freezing order:

• A defendant’s right to draw down under an unsecured loan facility agreement is not an “asset” within the unextended language of the standard freezing order, and the act of borrowing and directing payment to a third party does not constitute disposing of, dealing with or diminishing the value of the defendant’s assets in that sense. This reaffirms the long-settled position reflected in earlier authorities and texts.
• However, where the extended definition (the second and third sentences of paragraph 5) applies, loan proceeds over which the defendant has power to dispose of or deal with as if they were his own — for example by directing the lender to make payments to third parties — will be caught. The extended definition is not limited to trust or nominee assets but reaches assets which the respondent neither legally nor beneficially owns but over which he has effective control.
• The Court reaffirmed that freezing orders must be strictly construed in favour of the addressee, given their penal consequences and potentially draconian effect. The “flexibility principle” applies only to the formulation of fresh orders, not to the construction of orders already made. If the perceived scope of the standard form proves inadequate, the appropriate course is to amend the form going forward, not to expand its meaning through interpretation.
• The judgment is of practical significance to litigants, solicitors and judges concerned with freezing relief, particularly in complex international fraud litigation. It indicates that, to capture conduct involving loan facilities funded by entities under the defendant’s control, claimants should rely on (and where necessary draft) the extended definition language; without it, the right to borrow is not within the order.

The decision was reached on the assumed basis that the Loan Agreements were genuine third-party loans, a premise the Bank did not in fact accept. The Court’s reasoning is therefore tied to the construction of the order rather than to any finding about the genuineness of the loan arrangements.

Verdict: The Supreme Court dismissed the Bank’s appeal on issues 1 and 2 (holding that the respondent’s right to draw down under the Loan Agreements was not an “asset” within the meaning of the Freezing Order and that its exercise did not constitute disposing of, dealing with, or diminishing the value of an asset), but allowed the appeal on issue 3, holding that the proceeds of the Loan Agreements were “assets” within the extended definition in paragraph 5 of the Freezing Order because the respondent had the power directly or indirectly to dispose of or deal with them as if they were his own.

Source: JSC BTA Bank v Ablyazov [2015] UKSC 64